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STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 29, 2000
WARBURG PINCUS EMERGING GROWTH FUND
WARBURG PINCUS SMALL COMPANY GROWTH FUND
WARBURG PINCUS SMALL COMPANY VALUE FUND
This combined Statement of Additional Information provides information about
Warburg Pincus Emerging Growth Fund (the "Emerging Growth Fund"), Warburg Pincus
Small Company Growth Fund (the "Small Company Growth Fund") and Warburg Pincus
Small Company Value Fund (the "Small Company Value Fund" and collectively with
the Emerging Growth Fund and the Small Company Growth Fund, the "Funds") that is
contained in the combined Prospectus for the Common Shares of the Funds and the
Prospectuses for the Advisor Shares of the Funds, each dated February 29, 2000.
Each Fund's audited annual report dated October 31, 1999, which either
accompanies this Statement of Additional Information or has previously been
provided to the investor to whom this Statement of Additional Information is
being sent, is incorporated herein by reference.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectuses. Copies of the Prospectuses and the Annual
Report can be obtained by writing or telephoning:
Common Shares Advisor Shares
Warburg Pincus Funds Warburg Pincus Advisor Funds
P.O. Box 9030 P.O. Box 9030
Boston, Massachusetts 02205-9030 Boston, Massachusetts 02205-9030
800-WARBURG Attn: Institutional Services
800-222-8977
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TABLE OF CONTENTS
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INVESTMENT OBJECTIVES AND POLICIES............................................................................... 1
Options, Futures and Currency Exchange Transactions..................................................... 1
Securities Options...................................................................................... 1
Securities Index Options................................................................................ 4
OTC Options............................................................................................. 4
Futures Activities...................................................................................... 5
Currency Exchange Transactions.......................................................................... 7
Hedging Generally....................................................................................... 9
Asset Coverage for Forward Contracts, Options, Futures and Options on Futures........................... 10
Additional Information on Other Investment Practices.................................................... 11
U.S. Government Securities.............................................................................. 11
Money Market Obligations................................................................................ 11
Convertible Securities.................................................................................. 12
Structured Securities................................................................................... 12
Debt Securities......................................................................................... 16
Below Investment Grade Securities....................................................................... 17
Zero Coupon Securities.................................................................................. 18
Securities of Other Investment Companies................................................................ 18
Lending of Portfolio Securities......................................................................... 18
Foreign Investments..................................................................................... 19
Short Sales............................................................................................. 22
Warrants................................................................................................ 24
Non-Publicly Traded and Illiquid Securities............................................................. 24
Borrowing............................................................................................... 26
Reverse Repurchase Agreements and Dollar Rolls.......................................................... 26
When-Issued Securities and Delayed-Delivery Transactions................................................ 27
REITs................................................................................................... 27
Small Capitalization and Emerging Growth Companies; Unseasoned Issuers.................................. 28
Special Situation Companies............................................................................. 28
Strategy Available to the Emerging Growth Fund.......................................................... 28
Non-Diversified Status.................................................................................. 28
INVESTMENT RESTRICTIONS.......................................................................................... 28
All Funds............................................................................................... 28
Emerging Growth Fund.................................................................................... 29
Small Company Growth Fund............................................................................... 30
Small Company Value Fund................................................................................ 32
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PORTFOLIO VALUATION.............................................................................................. 34
PORTFOLIO TRANSACTIONS........................................................................................... 35
PORTFOLIO TURNOVER............................................................................................... 37
MANAGEMENT OF THE FUNDS.......................................................................................... 38
Officers and Board of Directors............................................................................... 38
Directors' Total Compensation................................................................................. 42
Portfolio Managers............................................................................................ 43
Investment Advisers and Co-Administrators..................................................................... 43
Custodians and Transfer Agent................................................................................. 46
Organization of the Funds..................................................................................... 46
Distribution and Shareholder Servicing........................................................................ 47
Distributor................................................................................................... 47
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................................................... 50
Automatic Cash Withdrawal Plan................................................................................ 51
EXCHANGE PRIVILEGE............................................................................................... 51
ADDITIONAL INFORMATION CONCERNING TAXES.......................................................................... 51
The Funds and Their Investments............................................................................... 52
Passive Foreign Investment Companies.......................................................................... 54
Dividends and Distributions................................................................................... 55
Sales of Shares............................................................................................... 55
Backup Withholding............................................................................................ 56
Notices....................................................................................................... 56
Special Tax Matters Relating to Zero Coupon Securities........................................................ 56
Other Taxation................................................................................................ 56
DETERMINATION OF PERFORMANCE..................................................................................... 57
INDEPENDENT ACCOUNTANTS AND COUNSEL.............................................................................. 59
MISCELLANEOUS.................................................................................................... 59
FINANCIAL STATEMENTS............................................................................................. 61
APPENDIX - DESCRIPTION OF RATINGS................................................................................ A-1
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INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each Fund's
investment objective and policies in the Prospectuses. There are no assurances
that the funds will achieve their investment objectives.
The investment objective of the Emerging Growth Fund is maximum capital
appreciation.
The investment objective of the Small Company Growth Fund is capital
growth.
The investment objective of the Small Company Value Fund is long-term
capital appreciation.
Unless otherwise indicated, all of the Funds are permitted to engage in
the following investment strategies, subject to any percentage limitations set
forth below. Any percentage limitation on a Fund's ability to invest in debt
securities will not be applicable during periods when the Fund pursues a
temporary defensive strategy as discussed below.
The Funds are not obligated to pursue any of the following strategies
and do not represent that these techniques are available now or will be
available at any time in the future.
Options, Futures and Currency Exchange Transactions
Securities Options. Each Fund may purchase options and write covered or
collateralized options on securities, securities indices and, to the extent the
Fund is authorized to invest in foreign securities, currencies for both hedging
purposes and to increase total return. Up to 25% of a Fund's total assets may be
at risk in connection with investing in options on securities, securities
indices and, if applicable, currencies. The amount of assets considered to be
"at risk" in these transactions is, in the case of purchasing options, the
amount of the premium paid, and, in the case of writing options, the value of
the underlying obligation. These options may be traded on an exchange or
over-the-counter ("OTC").
Each Fund realizes fees (referred to as "premiums") for granting the
rights evidenced by the options it has written. A put option embodies the right
of its purchaser to compel the writer of the option to purchase from the option
holder an underlying security at a specified price for a specified time period
or at a specified time. In contrast, a call option embodies the right of its
purchaser to compel the writer of the option to sell to the option holder an
underlying security at a specified price for a specified time period or at a
specified time.
The potential loss associated with purchasing an option is limited to
the premium paid, and the premium would partially offset any gains achieved from
its use. However, for an option writer the exposure to adverse price movements
in the underlying security or index is potentially unlimited during the exercise
period. Writing securities options may result in substantial losses to a Fund,
force the sale or purchase of portfolio securities at
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inopportune times or at less advantageous prices, limit the amount of
appreciation the Fund could realize on its investments or require the Fund to
hold securities it would otherwise sell.
The principal reason for writing covered options on a security is to
attempt to realize, through the receipt of premiums, a greater return than would
be realized on the securities alone. In return for a premium, a Fund as the
writer of a covered call option forfeits the right to any appreciation in the
value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). A Fund that
writes call options retains the risk of a decline in the price of the underlying
security. The size of the premiums that a Fund may receive may be adversely
affected as new or existing institutions, including other investment companies,
engage in or increase their option-writing activities.
In the case of options written by a Fund that are deemed covered by
virtue of the Fund's holding convertible or exchangeable preferred stock or debt
securities, the time required to convert or exchange and obtain physical
delivery of the underlying common stock with respect to which the Fund has
written options may exceed the time within which the Fund must make delivery in
accordance with an exercise notice. In these instances, a Fund may purchase or
temporarily borrow the underlying securities for purposes of physical delivery.
By so doing, the Fund will not bear any market risk, since the Fund will have
the absolute right to receive from the issuer of the underlying security an
equal number of shares to replace the borrowed securities, but the Fund may
incur additional transaction costs or interest expenses in connection with any
such purchase or borrowing.
Additional risks exist with respect to certain of the securities for
which a Fund may write covered call options. For example, if the Fund writes
covered call options on mortgage-backed securities, the mortgage-backed
securities that it holds as cover may, because of scheduled amortization or
unscheduled prepayments, cease to be sufficient cover. If this occurs, the Fund
will compensate for the decline in the value of the cover by purchasing an
appropriate additional amount of mortgage-backed securities.
Options written by a Fund will normally have expiration dates between
one and nine months from the date written. The exercise price of the options may
be below, equal to or above the market values of the underlying securities at
the times the options are written. In the case of call options, these exercise
prices are referred to as "in-the-money," "at-the-money" and "out-of-the-money,"
respectively. Each Fund may write (i) in-the-money call options when Credit
Suisse Asset Management, LLC ("CSAM"), each Fund's investment adviser, expects
that the price of the underlying security will remain flat or decline moderately
during the option period, (ii) at-the-money call options when CSAM expects that
the price of the underlying security will remain flat or advance moderately
during the option period and (iii) out-of-the-money call options when CSAM
expects that the premiums received from writing the call option plus the
appreciation in market price of the underlying security up to the exercise price
will be greater than the appreciation in the price of the underlying security
alone. In any of the preceding situations, if the market price of the underlying
security declines and the security is sold at this lower price, the amount of
any
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realized loss will be offset wholly or in part by the premium received. To
secure its obligation to deliver the underlying security when it writes a call
option, each Fund will be required to deposit in escrow the underlying security
or other assets in accordance with the rules of the Options Clearing Corporation
(the "Clearing Corporation") and of the securities exchange on which the option
is written.
Prior to their expirations, put and call options may be sold in closing
sale or purchase transactions (sales or purchases by a Fund prior to the
exercise of options that it has purchased or written, respectively, of options
of the same series) in which the Fund may realize a profit or loss from the
sale. An option position may be closed out only where there exists a secondary
market for an option of the same series on a recognized securities exchange or
in the OTC market. When a Fund has purchased an option and engages in a closing
sale transaction, whether the Fund realizes a profit or loss will depend upon
whether the amount received in the closing sale transaction is more or less than
the premium the Fund initially paid for the original option plus the related
transaction costs. Similarly, in cases where a Fund has written an option, it
will realize a profit if the cost of the closing purchase transaction is less
than the premium received upon writing the original option and will incur a loss
if the cost of the closing purchase transaction exceeds the premium received
upon writing the original option. A Fund may engage in a closing purchase
transaction to realize a profit, to prevent an underlying security with respect
to which it has written an option from being called or put or, in the case of a
call option, to unfreeze an underlying security (thereby permitting its sale or
the writing of a new option on the security prior to the outstanding option's
expiration). The obligation of a Fund under an option it has written would be
terminated by a closing purchase transaction (a Fund would not be deemed to own
an option as a result of the transaction). So long as the obligation of a Fund
as the writer of an option continues, the Fund may be assigned an exercise
notice by the broker-dealer through which the option was sold, requiring the
Fund to deliver the underlying security against payment of the exercise price.
This obligation terminates when the option expires or the Fund effects a closing
purchase transaction. A Fund cannot effect a closing purchase transaction with
respect to an option once it has been assigned an exercise notice.
There is no assurance that sufficient trading interest will exist to
create a liquid secondary market on a securities exchange for any particular
option or at any particular time, and for some options no such secondary market
may exist. A liquid secondary market in an option may cease to exist for a
variety of reasons. In the past, for example, higher than anticipated trading
activity or order flow or other unforeseen events have at times rendered certain
of the facilities of the Clearing Corporation and various securities exchanges
inadequate and resulted in the institution of special procedures, such as
trading rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that similar
events, or events that may otherwise interfere with the timely execution of
customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. Moreover, a Fund's ability to
terminate options positions established in the OTC market may be more limited
than for exchange-traded options and may also involve the risk that securities
dealers participating in OTC transactions would fail to meet their obligations
to the Fund. Each Fund, however, intends to purchase OTC options only
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from dealers whose debt securities, as determined by CSAM, are considered to be
investment grade. If, as a covered call option writer, the Fund is unable to
effect a closing purchase transaction in a secondary market, it will not be able
to sell the underlying security and would continue to be at market risk on the
security.
Securities exchanges generally have established limitations governing
the maximum number of calls and puts of each class which may be held or written,
or exercised within certain time periods by an investor or group of investors
acting in concert (regardless of whether the options are written on the same or
different securities exchanges or are held, written or exercised in one or more
accounts or through one or more brokers). It is possible that the Funds and
other clients of CSAM and certain of its affiliates may be considered to be such
a group. A securities exchange may order the liquidation of positions found to
be in violation of these limits and it may impose certain other sanctions. These
limits may restrict the number of options a Fund will be able to purchase on a
particular security.
Securities Index Options. Each Fund may utilize its total assets to
purchase and write exchange-listed and OTC put and call options on securities
indexes. A securities index measures the movement of a certain group of
securities by assigning relative values to the securities included in the index,
fluctuating with changes in the market values of the securities included in the
index. Some securities index options are based on a broad market index, such as
the NYSE Composite Index, or a narrower market index such as the Standard &
Poor's 100. Indexes may also be based on a particular industry or market
segment.
Options on securities indexes are similar to options on
securities except that (i) the expiration cycles of securities index options are
monthly, while those of securities options are currently quarterly, and (ii) the
delivery requirements are different. Instead of giving the right to take or make
delivery of securities at a specified price, an option on a securities index
gives the holder the right to receive a cash "exercise settlement amount" equal
to (a) the amount, if any, by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of exercise, multiplied by (b)
a fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the securities index upon which the option is based being
greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the index and the exercise price of the option times a
specified multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Securities index options may
be offset by entering into closing transactions as described above for
securities options.
OTC Options. Each Fund may purchase OTC or dealer options or
sell covered OTC options. Unlike exchange-listed options where an intermediary
or clearing corporation, such as the Clearing Corporation, assures that all
transactions in such options are properly executed, the responsibility for
performing all transactions with respect to OTC options rests solely with the
writer and the holder of those options. A listed call option writer, for
example, is obligated to deliver the underlying securities to the clearing
organization if the option is exercised, and the clearing organization is then
obligated to pay the writer the exercise price of
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the option. If a Fund were to purchase a dealer option, however, it would rely
on the dealer from whom it purchased the option to perform if the option were
exercised. If the dealer fails to honor the exercise of the option by the Fund,
the Fund would lose the premium it paid for the option and the expected benefit
of the transaction.
Exchange-traded options generally have a continuous liquid market while
OTC or dealer options do not. Consequently, a Fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when a Fund writes a dealer
option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to which the Fund originally wrote the option. Although each Fund will seek to
enter into dealer options only with dealers who will agree to and that are
expected to be capable of entering into closing transactions with the Fund,
there can be no assurance that the Fund will be able to liquidate a dealer
option at a favorable price at any time prior to expiration. The inability to
enter into a closing transaction may result in material losses to a Fund. Until
the Fund, as a covered OTC call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) used to cover the written option until the option expires or is
exercised. This requirement may impair a Fund's ability to sell portfolio
securities or, with respect to currency options, currencies at a time when such
sale might be advantageous.
Futures Activities. Each Fund may enter into futures contracts and
options on futures contracts on securities, securities indices and, to the
extent that a Fund may invest in foreign securities, currencies for both bona
fide hedging and speculative purposes. These futures contracts are standardized
contracts for the future delivery of a non-U.S. currency, an interest rate
sensitive security or, in the case of index futures contracts or certain other
futures contracts, a cash settlement with reference to a specified multiplier
times the change in the index. An option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract.
These transactions may be entered into for "bona fide hedging"
purposes, as defined in regulations of the Commodity Futures Trading Commission
("CFTC"), and other permissible purposes including hedging against changes in
the value of portfolio securities due to anticipated changes in currency values,
interest rates and/or market conditions and increasing return. Aggregate initial
margin and premiums (discussed below) required to establish positions other than
those considered to be "bona fide hedging" by the CFTC will not exceed 5% of the
Fund's net asset value after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into. Each Fund reserves
the right to engage in transactions involving futures contracts and options on
futures contracts to the extent allowed by CFTC regulations in effect from time
to time and in accordance with the Fund's policies. There is no overall limit on
the percentage of Fund assets that may be at risk with respect to futures
activities.
Futures Contracts. A foreign currency futures contract
provides for the future sale by one party and the purchase by the other party of
a certain amount of a specified non-
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U.S. currency at a specified price, date, time and place. An interest rate
futures contract provides for the future sale by one party and the purchase by
the other party of a certain amount of a specific interest rate sensitive
financial instrument (debt security) at a specified price, date, time and place.
Securities indexes are capitalization weighted indexes which reflect the market
value of the securities represented in the indexes. A securities index futures
contract is an agreement to be settled by delivery of an amount of cash equal to
a specified multiplier times the difference between the value of the index at
the close of the last trading day on the contract and the price at which the
agreement is made.
No consideration is paid or received by a Fund upon entering into a
futures contract. Instead, the Fund is required to deposit in a segregated
account with its custodian an amount of cash or liquid securities acceptable to
the broker, equal to approximately 1% to 10% of the contract amount (this amount
is subject to change by the exchange on which the contract is traded, and
brokers may charge a higher amount). This amount is known as "initial margin"
and is in the nature of a performance bond or good faith deposit on the contract
which is returned to a Fund upon termination of the futures contract, assuming
all contractual obligations have been satisfied. The broker will have access to
amounts in the margin account if the Fund fails to meet its contractual
obligations. Subsequent payments, known as "variation margin," to and from the
broker, will be made daily as the currency, financial instrument or securities
index underlying the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"marking-to-market." A Fund will also incur brokerage costs in connection with
entering into futures transactions.
At any time prior to the expiration of a futures contract, a Fund may
elect to close the position by taking an opposite position, which will operate
to terminate the Fund's existing position in the contract. Positions in futures
contracts and options on futures contracts (described below) may be closed out
only on the exchange on which they were entered into (or through a linked
exchange). No secondary market for such contracts exists. Although each Fund
intends to enter into futures contracts only if there is an active market for
such contracts, there is no assurance that an active market will exist at any
particular time. Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the day. It is possible that futures contract prices could move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions at an advantageous
price and subjecting the Fund to substantial losses. In such event, and in the
event of adverse price movements, the Fund would be required to make daily cash
payments of variation margin. In such situations, if a Fund had insufficient
cash, it might have to sell securities to meet daily variation margin
requirements at a time when it would be disadvantageous to do so. In addition,
if the transaction is entered into for hedging purposes, in such circumstances
the Fund may realize a loss on a futures contract or option that is not offset
by an increase in the value of the hedged position. Losses incurred in futures
transactions and the costs of these transactions will affect a Fund's
performance.
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Options on Futures Contracts. Each Fund may purchase and write put and
call options on foreign currency, interest rate and stock index futures
contracts and may enter into closing transactions with respect to such options
to terminate existing positions. There is no guarantee that such closing
transactions can be effected; the ability to establish and close out positions
on such options will be subject to the existence of a liquid market.
An option on a currency, interest rate or securities index futures
contract, as contrasted with the direct investment in such a contract, gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract at a specified exercise price at any time prior to the
expiration date of the option. The writer of the option is required upon
exercise to assume an offsetting futures position (a short position if the
option is a call and a long position if the option is a put). Upon exercise of
an option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
futures contract. The potential loss related to the purchase of an option on a
futures contract is limited to the premium paid for the option (plus transaction
costs). Because the value of the option is fixed at the point of sale, there are
no daily cash payments by the purchaser to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of a Fund.
Currency Exchange Transactions. The value in U.S. dollars of the assets
of a Fund that are invested in foreign securities may be affected favorably or
unfavorably by a variety of factors not applicable to investment in U.S.
securities, and the Fund may incur costs in connection with conversion between
various currencies. Currency exchange transactions may be from any non-U.S.
currency into U.S. dollars or into other appropriate currencies. Each Fund will
conduct its currency exchange transactions (i) on a spot (i.e., cash) basis at
the rate prevailing in the currency exchange market, (ii) through entering into
futures contracts or options on such contracts (as described above), (iii)
through entering into forward contracts to purchase or sell currency or (iv) by
purchasing exchange-traded currency options. Risks associated with currency
forward contracts and purchasing currency options are similar to those described
herein for futures contracts and securities and stock index options. In
addition, the use of currency transactions could result in losses from the
imposition of foreign exchange controls, suspension of settlement or other
governmental actions or unexpected events. Each Fund may engage in currency
exchange transactions for both hedging purposes and to increase total return.
Forward Currency Contracts. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract as agreed upon by the
parties, at a price set at the time of the contract. These contracts are entered
into in the interbank market conducted directly between currency traders
(usually large commercial banks and brokers) and their customers. Forward
currency contracts are similar to currency futures contracts, except that
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futures contracts are traded on commodities exchanges and are standardized as to
contract size and delivery date.
At or before the maturity of a forward contract, a Fund may either sell
a portfolio security and make delivery of the currency, or retain the security
and fully or partially offset its contractual obligation to deliver the currency
by negotiating with its trading partner to enter into an offsetting transaction.
If a Fund retains the portfolio security and engages in an offsetting
transaction, the Fund, at the time of execution of the offsetting transaction,
will incur a gain or a loss to the extent that movement has occurred in forward
contract prices.
Forward currency contracts are highly volatile, and a relatively small
price movement in a forward currency contract may result in substantial losses
to a Fund. To the extent a Fund engages in forward currency contracts to
generate current income, the Fund will be subject to these risks which the Fund
might otherwise avoid (e.g., through the use of hedging transactions).
Currency Options. Each Fund may purchase exchange-traded put and call
options on foreign currencies. Put options convey the right to sell the
underlying currency at a price which is anticipated to be higher than the spot
price of the currency at the time the option is exercised. Call options convey
the right to buy the underlying currency at a price which is expected to be
lower than the spot price of the currency at the time the option is exercised.
Currency Hedging. Each Fund's currency hedging will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward currency with respect to
specific receivables or payables of a Fund generally accruing in connection with
the purchase or sale of its portfolio securities. Position hedging is the sale
of forward currency with respect to portfolio security positions. No Fund may
position hedge to an extent greater than the aggregate market value (at the time
of entering into the hedge) of the hedged securities.
A decline in the U.S. dollar value of a foreign currency in which a
Fund's securities are denominated will reduce the U.S. dollar value of the
securities, even if their value in the foreign currency remains constant. The
use of currency hedges does not eliminate fluctuations in the underlying prices
of the securities, but it does establish a rate of exchange that can be achieved
in the future. For example, in order to protect against diminutions in the U.S.
dollar value of non-dollar denominated securities it holds, a Fund may purchase
foreign currency put options. If the value of the foreign currency does decline,
the Fund will have the right to sell the currency for a fixed amount in dollars
and will thereby offset, in whole or in part, the adverse effect on the U.S.
dollar value of its securities that otherwise would have resulted. Conversely,
if a rise in the U.S. dollar value of a currency in which securities to be
acquired are denominated is projected, thereby potentially increasing the cost
of the securities, the Fund may purchase call options on the particular
currency. The purchase of these options could offset, at least partially, the
effects of the adverse movements in exchange rates. The benefit to a Fund
derived from purchases of currency options, like the benefit derived from other
types of options, will be reduced by premiums and other transaction costs.
Because transactions in currency exchange are generally conducted on a principal
basis, no fees or commissions are generally involved. Currency hedging involves
some of the same risks and considerations as other transactions with similar
instruments. Although currency hedges limit the risk of loss due to a decline in
the value of a hedged currency, at the same time, they also limit any potential
gain that might result should the value of the currency increase. If a
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devaluation is generally anticipated, a Fund may not be able to contract to sell
a currency at a price above the devaluation level it anticipates.
While the values of currency futures and options on futures, forward
currency contracts and currency options may be expected to correlate with
exchange rates, they will not reflect other factors that may affect the value of
a Fund's investments and a currency hedge may not be entirely successful in
mitigating changes in the value of the Fund's investments denominated in that
currency. A currency hedge, for example, should protect a Yen-denominated bond
against a decline in the Yen, but will not protect the Fund against a price
decline if the issuer's creditworthiness deteriorates.
Hedging Generally. In addition to entering into options, futures and
currency exchange transactions for other purposes, including generating current
income to offset expenses or increase return, each Fund may enter into these
transactions as hedges to reduce investment risk, generally by making an
investment expected to move in the opposite direction of a portfolio position. A
hedge is designed to offset a loss in a portfolio position with a gain in the
hedged position; at the same time, however, a properly correlated hedge will
result in a gain in the portfolio position being offset by a loss in the hedged
position. As a result, the use of options, futures, contracts and currency
exchange transactions for hedging purposes could limit any potential gain from
an increase in the value of the position hedged. In addition, the movement in
the portfolio position hedged may not be of the same magnitude as movement in
the hedge. With respect to futures contracts, since the value of portfolio
securities will far exceed the value of the futures contracts sold by a Fund, an
increase in the value of the futures contracts could only mitigate, but not
totally offset, the decline in the value of the Fund's assets.
In hedging transactions based on an index, whether a Fund will realize
a gain or loss depends upon movements in the level of securities prices in the
stock market generally or, in the case of certain indexes, in an industry or
market segment, rather than movements in the price of a particular security. The
risk of imperfect correlation increases as the composition of a Fund's portfolio
varies from the composition of the index. In an effort to compensate for
imperfect correlation of relative movements in the hedged position and the
hedge, the Fund's hedge positions may be in a greater or lesser dollar amount
than the dollar amount of the hedged position. Such "over hedging" or "under
hedging" may adversely affect the Fund's net investment results if market
movements are not as anticipated when the hedge is established. Securities index
futures transactions may be subject to additional correlation risks. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions which
would distort the normal relationship between the securities index and futures
markets. Secondly, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market. Therefore, increased participation by speculators in the
futures market also may cause temporary price distortions. Because of the
possibility of price distortions in the futures market and the imperfect
correlation between movements in the securities index and
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<PAGE> 13
movements in the price of securities index futures, a correct forecast of
general market trends by CSAM still may not result in a successful hedging
transaction.
Each Fund will engage in hedging transactions only when deemed
advisable by CSAM, and successful use by the Fund of hedging transactions will
be subject to CSAM's ability to predict trends in currency, interest rate or
securities markets, as the case may be, and to predict correctly movements in
the directions of the hedge and the hedged position and the correlation between
them, which predictions could prove to be inaccurate. This requires different
skills and techniques than predicting changes in the price of individual
securities, and there can be no assurance that the use of these strategies will
be successful. Even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior or trends. Losses incurred in hedging
transactions and the costs of these transactions will affect a Fund's
performance.
To the extent that a Fund engages in the strategies described above,
the Fund may experience losses greater than if these strategies had not been
utilized. In addition to the risks described above, these instruments may be
illiquid and/or subject to trading limits, and a Fund may be unable to close out
a position without incurring substantial losses, if at all. The Funds are also
subject to the risk of a default by a counterparty to an off-exchange
transaction.
Asset Coverage for Forward Contracts, Options, Futures and Options on
Futures. Each Fund will comply with guidelines established by the U.S.
Securities and Exchange Commission (the "SEC") and other applicable regulatory
bodies with respect to coverage of forward currency contracts; options written
by the Fund on securities and indexes; and currency, interest rate and index
futures contracts and options on these futures contracts. These guidelines may,
in certain instances, require that the Fund segregate cash or liquid securities
with its custodian or a designated sub-custodian to the extent the Fund's
obligations with respect to these strategies are not otherwise "covered" through
ownership of the underlying security or financial instrument or by other
portfolio positions or by other means consistent with applicable regulatory
policies. Segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. As a result, there is a possibility that segregation of a large percentage
of a Fund's assets could impede portfolio management or the Fund's ability to
meet redemption requests or other current obligations.
For example, a call option written by a Fund on securities may require
the Fund to hold the securities subject to the call (or securities convertible
into the securities without additional consideration) or to segregate assets (as
described above) sufficient to purchase and deliver the securities if the call
is exercised. A call option written by a Fund on an index may require the Fund
to own portfolio securities that correlate with the index or to segregate assets
(as described above) equal to the excess of the index value over the exercise
price on a current basis. A Fund could purchase a put option if the strike price
of that option is the same or higher than the strike price of a put option sold
by the Fund. If a Fund holds a futures or forward contract, the Fund could
purchase a put option on the same futures or forward contract with a strike
price as high or higher than the price of the contract held. A Fund may
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<PAGE> 14
enter into fully or partially offsetting transactions so that its net position,
coupled with any segregated assets (equal to any remaining obligation), equals
its net obligation. Asset coverage may be achieved by other means when
consistent with applicable regulatory policies.
Additional Information on Other Investment Practices
U.S. Government Securities. The obligations issued or guaranteed by the
U.S. government in which a Fund may invest include: direct obligations of the
U.S. Treasury and obligations issued by U.S. government agencies and
instrumentalities ("U.S. Government Securities"). Included among direct
obligations of the United States are Treasury Bills, Treasury Notes and Treasury
Bonds, which differ in terms of their interest rates, maturities and dates of
issuance. Treasury Bills have maturities of less than one year, Treasury Notes
have maturities of one to 10 years and Treasury Bonds generally have maturities
of greater than 10 years at the date of issuance. Included among the obligations
issued by agencies and instrumentalities of the United States are: instruments
that are supported by the full faith and credit of the United States (such as
certificates issued by the Government National Mortgage Association ("GNMA"));
instruments that are supported by the right of the issuer to borrow from the
U.S. Treasury (such as securities of Federal Home Loan Banks); and instruments
that are supported by the credit of the instrumentality (such as Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") bonds).
Other U.S. Government Securities the Funds may invest in include
securities issued or guaranteed by the Federal Housing Administration, Farmers
Home Loan Administration, Export-Import Bank of the United States, Small
Business Administration, General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Intermediate Credit Banks,
Federal Land Banks, Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board and Student Loan Marketing Association.
Because the U.S. government is not obligated by law to provide support to an
instrumentality it sponsors, a Fund will invest in obligations issued by such an
instrumentality only if CSAM determines that the credit risk with respect to the
instrumentality does not make its securities unsuitable for investment by the
Fund.
Money Market Obligations. Each Fund is authorized to invest, under
normal market conditions, up to 20% of its total assets in domestic and foreign
short-term (one year or less remaining to maturity) and medium-term (five years
or less remaining to maturity) money market obligations and for temporary
defensive purposes may invest in these securities without limit. These
instruments consist of obligations issued or guaranteed by the U.S. government
or a foreign government, their agencies or instrumentalities; bank obligations
(including certificates of deposit, time deposits and bankers' acceptances of
domestic or foreign banks, domestic savings and loans and similar institutions)
that are high quality investments or, if unrated, deemed by CSAM to be high
quality investments; commercial paper rated no lower than A-2 by S&P or Prime-2
by Moody's or the equivalent from another major rating service or, if unrated,
of an issuer having an outstanding, unsecured debt issue then rated within the
three highest rating categories; and repurchase agreements with respect to the
foregoing.
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<PAGE> 15
Repurchase Agreements. The Funds may invest in repurchase agreement
transactions with member banks of the Federal Reserve System and certain
non-bank dealers. Repurchase agreements are contracts under which the buyer of a
security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under the terms of a typical repurchase agreement, a
Fund would acquire any underlying security for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the underlying
securities will at all times be at least equal to the total amount of the
purchase obligation, including interest. The Fund bears a risk of loss in the
event that the other party to a repurchase agreement defaults on its obligations
or becomes bankrupt and the Fund is delayed or prevented from exercising its
right to dispose of the collateral securities, including the risk of a possible
decline in the value of the underlying securities during the period in which the
Fund seeks to assert this right. CSAM monitors the creditworthiness of those
bank and non-bank dealers with which each Fund enters into repurchase agreements
to evaluate this risk. A repurchase agreement is considered to be a loan under
the Investment Company Act of 1940, as amended (the "1940 Act").
Money Market Mutual Funds. Where CSAM believes that it would be
beneficial to the Fund and appropriate considering the factors of return and
liquidity, each Fund may invest up to 5% of its assets in securities of money
market mutual funds that are unaffiliated with the Fund or CSAM. As a
shareholder in any mutual fund, a Fund will bear its ratable share of the mutual
fund's expenses, including management fees, and will remain subject to payment
of the Fund's management fees and other expenses with respect to assets so
invested.
Convertible Securities. Convertible securities in which a Fund
may invest, including both convertible debt and convertible preferred stock, may
be converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an investor
to benefit from increases in the market price of the underlying common stock.
Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. The value of convertible securities fluctuates in relation to
changes in interest rates like bonds and, in addition, fluctuates in relation to
the underlying common stock. Subsequent to purchase by a Fund, convertible
securities may cease to be rated or a rating may be reduced below the minimum
required for purchase by the Fund. Neither event will require sale of such
securities, although CSAM will consider such event in its determination of
whether a Fund should continue to hold the securities.
Structured Securities. The Funds may purchase any type of
publicly traded or privately negotiated fixed income security, including
mortgage-backed securities; structured notes, bonds or debentures; and
assignments of and participations in loans.
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<PAGE> 16
Mortgage-Backed Securities. A Fund may invest in mortgage-backed
securities, such as those issued by the Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA"), Federal Home Loan
Mortgage Corporation ("FHLMC") or certain foreign issuers. Mortgage-backed
securities represent direct or indirect participations in, or are secured by and
payable from, mortgage loans secured by real property. The mortgages backing
these securities include, among other mortgage instruments, conventional 30-year
fixed-rate mortgages, 15-year fixed-rate mortgages, graduated payment mortgages
and adjustable rate mortgages. The government or the issuing agency typically
guarantees the payment of interest and principal of these securities. However,
the guarantees do not extend to the securities' yield or value, which are likely
to vary inversely with fluctuations in interest rates, nor do the guarantees
extend to the yield or value of the Fund's shares. These securities generally
are "pass-through" instruments, through which the holders receive a share of all
interest and principal payments from the mortgages underlying the securities,
net of certain fees.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. The occurrence of mortgage prepayments is affected by various
factors, including the level of interest rates, general economic conditions, the
location, scheduled maturity and age of the mortgage and other social and
demographic conditions. Because prepayment rates of individual pools vary
widely, it is not possible to predict accurately the average life of a
particular pool. For pools of fixed-rate 30-year mortgages, a common industry
practice in the U.S. has been to assume that prepayments will result in a
12-year average life. At present, pools, particularly those with loans with
other maturities or different characteristics, are priced on an assumption of
average life determined for each pool. In periods of falling interest rates, the
rate of prepayment tends to increase, thereby shortening the actual average life
of a pool of mortgage-related securities. Conversely, in periods of rising rates
the rate of prepayment tends to decrease, thereby lengthening the actual average
life of the pool. However, these effects may not be present, or may differ in
degree, if the mortgage loans in the pools have adjustable interest rates or
other special payment terms, such as a prepayment charge. Actual prepayment
experience may cause the yield of mortgage-backed securities to differ from the
assumed average life yield. Reinvestment of prepayments may occur at higher or
lower interest rates than the original investment, thus affecting the Fund's
yield.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificate holders and to any guarantor, such as GNMA, and
due to any yield retained by the issuer. Actual yield to the holder may vary
from the coupon rate, even if adjustable, if the mortgage-backed securities are
purchased or traded in the secondary market at a premium or discount. In
addition, there is normally some delay between the time the issuer receives
mortgage payments from the
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<PAGE> 17
servicer and the time the issuer makes the payments on the mortgage-backed
securities, and this delay reduces the effective yield to the holder of such
securities.
Asset-Backed Securities. A Fund may invest in asset-backed securities,
which represent participations in, or are secured by and payable from, assets
such as motor vehicle installment sales, installment loan contracts, leases of
various types of real and personal property and receivables from revolving
credit (credit card) agreements. Such assets are securitized through the use of
trusts and special purpose corporations. Payments or distributions of principal
and interest may be guaranteed up to certain amounts and for a certain time
period by a letter of credit or a pool insurance policy issued by a financial
institution unaffiliated with the trust or corporation.
Asset-backed securities present certain risks that are not presented by
other securities in which the Fund may invest. Automobile receivables generally
are secured by automobiles. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities. Credit card receivables are
generally unsecured, and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. In addition, there is no assurance that the security interest in
the collateral can be realized.
Structured Notes, Bonds or Debentures. Typically, the value of the
principal and/or interest on these instruments is determined by reference to
changes in the value of specific currencies, interest rates, commodities,
indexes or other financial indicators (the "Reference") or the relevant change
in two or more References. The interest rate or the principal amount payable
upon maturity or redemption may be increased or decreased depending upon changes
in the applicable Reference. The terms of the structured securities may provide
that in certain circumstances no principal is due at maturity and, therefore,
may result in the loss of a Fund's entire investment. The value of structured
securities may move in the same or the opposite direction as the value of the
Reference, so that appreciation of the Reference may produce an increase or
decrease in the interest rate or value of the security at maturity. In addition,
the change in interest rate or the value of the security at maturity may be a
multiple of the change in the value of the Reference so that the security may be
more or less volatile than the Reference, depending on the multiple.
Consequently, structured securities may entail a greater degree of market risk
and volatility than other types of debt obligations.
Assignments and Participations. Each Fund may invest in assignments of
and participations in loans issued by banks and other financial institutions.
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<PAGE> 18
When a Fund purchases assignments from lending financial institutions,
the Fund will acquire direct rights against the borrower on the loan. However,
since assignments are generally arranged through private negotiations between
potential assignees and potential assignors, the rights and obligations acquired
by a Fund as the purchaser of an assignment may differ from, and be more limited
than, those held by the assigning lender.
Participations in loans will typically result in a Fund having a
contractual relationship with the lending financial institution, not the
borrower. A Fund would have the right to receive payments of principal, interest
and any fees to which it is entitled only from the lender of the payments from
the borrower. In connection with purchasing a participation, a Fund generally
will have no right to enforce compliance by the borrower with the terms of the
loan agreement relating to the loan, nor any rights of set-off against the
borrower, and the Fund may not benefit directly from any collateral supporting
the loan in which it has purchased a participation. As a result, a Fund
purchasing a participation will assume the credit risk of both the borrower and
the lender selling the participation. In the event of the insolvency of the
lender selling the participation, the Fund may be treated as a general creditor
of the lender and may not benefit from any set-off between the lender and the
borrower.
A Fund may have difficulty disposing of assignments and participations
because there is no liquid market for such securities. The lack of a liquid
secondary market will have an adverse impact on the value of such securities and
on a Fund's ability to dispose of particular assignments or participations when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the borrower.
The lack of a liquid market for assignments and participations also may make it
more difficult for a Fund to assign a value to these securities for purposes of
valuing the Fund's portfolio and calculating its net asset value.
A Fund may invest in fixed and floating rate loans ("Loans") arranged
through private negotiations between a foreign government (a "Borrower") and one
or more financial institutions ("Lenders"). The majority of the Fund's
investments in Loans are expected to be in the form of participations in Loans
("Participations") and assignments of portions of Loans from third parties
("Assignments"). Participations typically will result in the Fund having a
contractual relationship only with the Lender, not with the Borrower. A Fund
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the Borrower. In connection with
purchasing Participations, the Fund generally will have no right to enforce
compliance by the Borrower with the terms of the loan agreement relating to the
Loan, nor any rights of set-off against the Borrower, and the Fund may not
directly benefit from any collateral supporting the Loan in which it has
purchased the Participation. As a result, the Fund will assume the credit risk
of both the Borrower and the Lender that is selling the Participation. In the
event of the insolvency of the Lender selling a Participation, the Fund may be
treated as a general creditor of the Lender and may not benefit from any set-off
between the Lender and the Borrower. The Fund will acquire Participations only
if the Lender interpositioned between the Fund and the Borrower is determined by
CSAM to be creditworthy.
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<PAGE> 19
When a Fund purchases Assignments from Lenders, the Fund will acquire
direct rights against the Borrower on the Loan. However, since Assignments are
generally arranged through private negotiations between potential assignees and
potential assignors, the rights and obligations acquired by the Fund as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender.
There are risks involved in investing in Participations and
Assignments. A Fund may have difficulty disposing of them because there is no
liquid market for such securities. The lack of a liquid secondary market will
have an adverse impact on the value of such securities and on the Fund's ability
to dispose of particular Participations or Assignments when necessary to meet
the Fund's liquidity needs or in response to a specific economic event, such as
a deterioration in the creditworthiness of the Borrower. The lack of a liquid
market for Participations and Assignments also may make it more difficult for a
Fund to assign a value to these securities for purposes of valuing the Fund's
portfolio and calculating its net asset value.
Debt Securities. Each Fund may invest up to 20% of its total assets in
debt securities (other than money market obligations). Debt obligations of
corporations in which the Funds may invest include corporate bonds, debentures
and notes. Debt securities convertible into common stock and certain preferred
stocks may have risks similar to those described below. The interest income to
be derived may be considered as one factor in selecting debt securities for
investment by CSAM. Because the market value of debt obligations can be expected
to vary inversely to changes in prevailing interest rates, investing in debt
obligations may provide an opportunity for capital appreciation when interest
rates are expected to decline. The success of such a strategy is dependent upon
CSAM's ability to accurately forecast changes in interest rates. The market
value of debt obligations may also be expected to vary depending upon, among
other factors, the ability of the issuer to repay principal and interest, any
change in investment rating and general economic conditions.
A security will be deemed to be investment grade if it is rated within
the four highest grades by Moody's or S&P or, if unrated, is determined to be of
comparable quality by CSAM. Bonds rated in the fourth highest grade may have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. A Fund's
holdings of debt securities rated below investment grade (commonly referred to
as "junk bonds") may be rated as low as C by Moody's or D by S&P at the time of
purchase, or may be unrated securities considered to be of equivalent quality.
Securities that are rated C by Moody's comprise the lowest rated class and can
be regarded as having extremely poor prospects of ever attaining any real
investment standing. Debt rated D by S&P is in default or is expected to default
upon maturity or payment date. Subsequent to its purchase by a Fund, an issue of
securities may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Fund. Neither event will require sale of such
securities, although CSAM will consider such event in its determination of
whether the Fund should continue to hold the securities. Any percentage
limitation on a Fund's ability to invest in debt securities
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<PAGE> 20
will not be applicable during periods when the Fund pursues a temporary
defensive strategy as discussed below.
When CSAM believes that a defensive posture is warranted, each Fund may
invest temporarily without limit in investment grade debt obligations and in
domestic and foreign money market obligations, including repurchase agreements.
Below Investment Grade Securities. Each Fund may invest up to 5% of its
total assets in securities rated below investment grade, including convertible
debt securities. Below investment grade debt securities may be rated as low as C
by Moody's or D by S&P, or be deemed by CSAM to be of equivalent quality.
Securities that are rated C by Moody's are the lowest rated class and can be
regarded as having extremely poor prospects of ever attaining any real
investment standing. A security rated D by S&P is in default or is expected to
default upon maturity or payment date. Below investment grade securities
(commonly referred to as "junk bonds"), (i) will likely have some quality and
protective characteristics that, in the judgment of the rating organizations,
are outweighed by large uncertainties or major risk exposures to adverse
conditions and (ii) are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligation. The market values of certain of these securities also tend to be
more sensitive to individual corporate developments and changes in economic
conditions than investment grade securities. In addition, these securities
generally present a higher degree of credit risk. The risk of loss due to
default is significantly greater because these securities generally are
unsecured and frequently are subordinated to the prior payment of senior
indebtedness. While the market values of below investment grade securities tend
to react less to fluctuations in interest rate levels than do those of
investment grade securities, the market values of certain of these securities
also tend to be more sensitive to individual corporate developments and changes
in economic conditions than investment grade securities. In addition, below
investment grade securities generally present a higher degree of credit risk.
Issuers of below investment grade securities are often highly leveraged and may
not have more traditional methods of financing available to them so that their
ability to service their obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. The risk of loss due
to default by such issuers is significantly greater because below investment
grade securities generally are unsecured and frequently are subordinated to the
prior payment of senior indebtedness.
An economic recession could disrupt severely the market for such
securities and may adversely affect the value of such securities and the ability
of the issuers of such securities to repay principal and pay interest thereon.
The Fund may have difficulty disposing of certain of these securities because
there may be a thin trading market. Because there is no established retail
secondary market for many of these securities, the Fund anticipates that these
securities could be sold only to a limited number of dealers or institutional
investors. To the extent a secondary trading market for these securities does
exist, it generally is not as liquid as the secondary market for higher-rated
securities. The lack of a liquid secondary market, as well as adverse publicity
and investor perception with respect to these securities, may have an adverse
impact on market price and the Fund's ability to dispose of particular issues
when
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<PAGE> 21
necessary to meet the Fund's liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
The lack of a liquid secondary market for certain securities also may make it
more difficult for the Fund to obtain accurate market quotations for purposes of
valuing the Fund and calculating its net asset value.
The market value of below investment grade securities is more volatile
than that of investment grade securities. Factors adversely impacting the market
value of these securities will adversely impact the Fund's net asset value. The
Fund will rely on the judgment, analysis and experience of CSAM in evaluating
the creditworthiness of an issuer. In this evaluation, CSAM will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. Normally, below
investment grade securities are not intended for short-term investment. The Fund
may incur additional expenses to the extent it is required to seek recovery upon
a default in the payment of principal or interest on its portfolio holdings of
such securities. At times, adverse publicity regarding lower-rated securities
has depressed the prices for such securities to some extent.
Zero Coupon Securities. Each Fund may invest in "zero coupon" U.S.
Treasury, foreign government and U.S. and foreign corporate convertible and
nonconvertible debt securities, which are bills, notes and bonds that have been
stripped of their unmatured interest coupons and custodial receipts or
certificates of participation representing interests in such stripped debt
obligations and coupons. A zero coupon security pays no interest to its holder
prior to maturity. Accordingly, such securities usually trade at a deep discount
from their face or par value and will be subject to greater fluctuations of
market value in response to changing interest rates than debt obligations of
comparable maturities that make current distributions of interest. The Funds
anticipate that they will not normally hold zero coupon securities to maturity.
Redemption of shares of the Fund that require it to sell zero coupon securities
prior to maturity may result in capital gains or losses that may be substantial.
Federal tax law requires that a holder of a zero coupon security accrue a
portion of the discount at which the security was purchased as income each year,
even though the holder receives no interest payment on the security during the
year. Such accrued discount will be includible in determining the amount of
dividends the Fund must pay each year and, in order to generate cash necessary
to pay such dividends, the Fund may liquidate portfolio securities at a time
when it would not otherwise have done so.
Securities of Other Investment Companies. Each Fund may invest in
securities of other investment companies to the extent permitted under the 1940
Act. Presently, under the 1940 Act, a Fund may hold securities of another
investment company in amounts which (i) do not exceed 3% of the total
outstanding voting stock of such company, (ii) do not exceed 5% of the value of
the Fund's total assets and (iii) when added to all other investment company
securities held by the Fund, do not exceed 10% of the value of the Fund's total
assets.
Lending of Portfolio Securities. Each Fund may lend portfolio
securities to brokers, dealers and other financial organizations that meet
capital and other credit
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<PAGE> 22
requirements or other criteria established by the Fund's Board of Directors (the
"Board"). These loans, if and when made, may not exceed 33 1/3% of a Fund's
total assets taken at value (including the loan collateral). No Fund will lend
portfolio securities to its investment adviser, any sub-investment adviser or
their affiliates unless it has applied for and received specific authority to do
so from the SEC. Loans of portfolio securities will be collateralized by cash,
letters of credit or U.S. Government Securities, which are maintained at all
times in an amount equal to at least 100% of the current market value of the
loaned securities. Any gain or loss in the market price of the securities loaned
that might occur during the term of the loan would be for the account of a Fund.
From time to time, a Fund may return a part of the interest earned from the
investment of collateral received for securities loaned to the borrower and/or a
third party that is unaffiliated with the Fund and that is acting as a "finder."
By lending its securities, a Fund can increase its income by continuing
to receive interest and any dividends on the loaned securities as well as by
either investing the collateral received for securities loaned in short-term
instruments or obtaining yield in the form of interest paid by the borrower when
U.S. Government Securities are used as collateral. Each Fund will adhere to the
following conditions whenever its portfolio securities are loaned: (i) the Fund
must receive at least 100% cash collateral or equivalent securities of the type
discussed in the preceding paragraph from the borrower; (ii) the borrower must
increase such collateral whenever the market value of the securities rises above
the level of such collateral; (iii) the Fund must be able to terminate the loan
at any time; (iv) the Fund must receive reasonable interest on the loan, as well
as any dividends, interest or other distributions on the loaned securities and
any increase in market value; (v) the Fund may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower, provided, however, that if a material event
adversely affecting the investment occurs, the Board must terminate the loan and
regain the right to vote the securities. Loan agreements involve certain risks
in the event of default or insolvency of the other party including possible
delays or restrictions upon a Fund's ability to recover the loaned securities or
dispose of the collateral for the loan. Default by or bankruptcy of a borrower
would expose the Funds to possible loss because of adverse market action,
expenses and/or delays in connection with the disposition of the underlying
securities. Any loans of a Fund's securities will be fully collateralized
and marked to market daily.
Foreign Investments. Each Fund may invest up to 10% of its total assets
in the securities of foreign issuers. Investors should recognize that investing
in foreign companies involves certain risks, including those discussed below,
which are in addition to those associated with investing in U.S. issuers.
Individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency, and balance of payments
positions. The Funds may invest in securities of foreign governments (or
agencies or instrumentalities thereof), and many, if not all, of the foregoing
considerations apply to such investments as well.
Depositary Receipts. The assets of each Fund may be invested in the
securities of foreign issuers in the form of American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and International Depositary
Receipts ("IDRs"). These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs are
receipts typically issued by a U.S. bank or trust company
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<PAGE> 23
which evidence ownership of underlying securities issued by a foreign
corporation. EDRs, which are sometimes referred to as Continental Depositary
Receipts ("CDRs"), are receipts issued in Europe, and IDRs, which are sometimes
referred to as Global Depositary Receipts ("GDRs"), are issued outside the
United States. EDRs (CDRs) and IDRs (GDRs) are typically issued by non-U.S.
banks and trust companies and evidence ownership of either foreign or domestic
securities. Generally, ADRs in registered form are designed for use in U.S.
securities markets and EDRs (CDRs) and IDRs (GDRs) in bearer form are designed
for use in European and non-U.S. securities markets, respectively.
Foreign Currency Exchange. Since the Funds may be investing in
securities denominated in currencies of non-U.S. countries, and since a Fund may
temporarily hold funds in bank deposits or other money market investments
denominated in foreign currencies, the Funds may be affected favorably or
unfavorably by exchange control regulations or changes in the exchange rate
between such currencies and the dollar. A change in the value of a foreign
currency relative to the U.S. dollar will result in a corresponding change in
the dollar value of the Fund assets denominated in that foreign currency.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by a Fund. Unless otherwise contracted, the rate of exchange
between the U.S. dollar and other currencies is determined by the forces of
supply and demand in the foreign exchange markets. Changes in the exchange rate
may result over time from the interaction of many factors directly or indirectly
affecting economic and political conditions in the United States and a
particular foreign country, including economic and political developments in
other countries. Governmental intervention may also play a significant role.
National governments rarely voluntarily allow their currencies to float freely
in response to economic forces. Sovereign governments use a variety of
techniques, such as intervention by a country's central bank or imposition of
regulatory controls or taxes, to affect the exchange rates of their currencies.
The Funds may use hedging techniques with the objective of protecting against
loss through the fluctuation of the value of foreign currencies against the U.S.
dollar, particularly the forward market in foreign exchange, currency options
and currency futures.
Euro Conversion. The introduction of a single European currency, the
euro, on January 1, 1999 for participating European nations in the Economic and
Monetary Union presented unique risks and uncertainties for investors in those
countries, including (i) the functioning of the payment and operational systems
of banks and other financial institutions; (ii) the creation of suitable
clearing and settlement payment schemes for the euro; (iii) the fluctuation of
the euro relative to non-euro currencies during the transition period from
January 1, 1999 to December 31, 2000 and beyond; and (iv) whether the interest
rate, tax and labor regimes of the European countries participating in the euro
will converge over time. Further, the conversion of the currencies of other
Economic Monetary Union countries, such as the United Kingdom, and the admission
of other countries, including Central and Eastern European countries, to the
Economic Monetary Union could adversely affect the euro. These or other factors
may cause market disruptions and could adversely affect the value of foreign
securities and currencies held by the Funds.
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<PAGE> 24
Information. Many of the foreign securities held by the Funds will not
be registered with, nor will the issuers thereof be subject to reporting
requirements of the SEC. Accordingly, there may be less publicly available
information about the securities and about the foreign company or government
issuing them than is available about a domestic company or government entity.
Foreign companies are generally subject to financial reporting standards,
practices and requirements that are either not uniform or less rigorous than
those applicable to U.S. companies.
Political Instability. With respect to some foreign countries, there is
the possibility of expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Funds, political or social instability,
or domestic developments which could affect U.S. investments in those and
neighboring countries.
Foreign Markets. Securities of some foreign companies are less liquid
and their prices are more volatile than securities of comparable U.S. companies.
Certain foreign countries are known to experience long delays between the trade
and settlement dates of securities purchased or sold.
Increased Expenses. The operating expenses of a Fund, to the extent it
invests in foreign securities, may be higher than that of an investment company
investing exclusively in U.S. securities, since the expenses of the Funds, such
as cost of converting foreign currency into U.S. dollars, the payment of fixed
brokerage commissions on foreign exchanges, custodial costs, valuation costs and
communication costs, may be higher than those costs incurred by other investment
companies not investing in foreign securities.
Dollar-Denominated Debt Securities of Foreign Issuers. The returns on
foreign debt securities reflect interest rates and other market conditions
prevailing in those countries. The relative performance of various countries'
fixed income markets historically has reflected wide variations relating to the
unique characteristics of each country's economy. Year-to-year fluctuations in
certain markets have been significant, and negative returns have been
experienced in various markets from time to time.
Foreign Debt Securities. The returns on foreign debt securities reflect
interest rates and other market conditions prevailing in those countries and the
effect of gains and losses in the denominated currencies against the U.S.
dollar, which have had a substantial impact on investment in foreign
fixed-income securities. The relative performance of various countries'
fixed-income markets historically has reflected wide variations relating to the
unique characteristics of each country's economy. Year-to-year fluctuations in
certain markets have been significant, and negative returns have been
experienced in various markets from time to time.
The foreign government securities in which each of the Funds may invest
generally consist of obligations issued or backed by national, state or
provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt obligations
of supranational entities, which include international
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<PAGE> 25
organizations designated or backed by governmental entities to promote economic
reconstruction or development, international banking institutions and related
government agencies. Examples include the International Bank for Reconstruction
and Development (the "World Bank"), the European Coal and Steel Community, the
Asian Development Bank and the InterAmerican Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt securities
of quasi-governmental agencies are issued by entities owned by either a
national, state or equivalent government or are obligations of a political unit
that is not backed by the national government's full faith and credit and
general taxing powers. An example of a multinational currency unit is the
European Currency Unit ("ECU"). An ECU represents specified amounts of the
currencies of certain member states of the European Economic Community. The
specific amounts of currencies comprising the ECU may be adjusted by the Council
of Ministers of the European Community to reflect changes in relative values of
the underlying currencies.
Privatizations. Each Fund may invest in privatizations (i.e., foreign
government programs of selling interests in government-owned or controlled
enterprises). The ability of U.S. entities, such as the Funds, to participate in
privatizations may be limited by local law, or the terms for participation may
be less advantageous than for local investors. There can be no assurance that
privatization programs will be available or successful.
Brady Bonds. Each Fund may invest in so-called "Brady Bonds," which
have been issued by Costa Rica, Mexico, Uruguay and Venezuela and which may be
issued by other Latin American countries. Brady Bonds are issued as part of a
debt restructuring in which the bonds are issued in exchange for cash and
certain of the country's outstanding commercial bank loans. Investors should
recognize that Brady Bonds do not have a long payment history. Brady Bonds may
be collateralized or uncollateralized, are issued in various currencies
(primarily the U.S. dollar) and are actively traded in the over-the-counter
("OTC") secondary market for debt of Latin American issuers. In light of the
history of commercial bank loan defaults by Latin American public and private
entities, investments in Brady Bonds may be viewed as speculative.
Short Sales. (Small Company Growth Fund only). The current market value
of securities sold short (excluding short sales "against the box") will not
exceed 10% of the Fund's assets. This Fund may engage in "short sales." In a
short sale, the investor sells a borrowed security and has a corresponding
obligation to the lender to return the identical security. The seller does not
immediately deliver the securities sold and is said to have a short position in
those securities until delivery occurs. To deliver the securities to the buyer,
the Fund must arrange through a broker to borrow the securities and, in so
doing, the Fund becomes obligated to replace the securities borrowed at their
market price at the time of replacement, whatever that price may be. The Fund
will make a profit or incur a loss as a result of a short sale depending on
whether the price of the security decreases or increases between the date of the
short sale and the date on which the Fund purchases the security to replace the
borrowed securities that have been sold. The amount of any loss would be
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increased (and any gain decreased) by any premium or interest the Fund is
required to pay in connection with a short sale.
The Fund's obligation to replace the securities borrowed in connection
with a short sale will be secured by cash or liquid securities deposited as
collateral with the broker. In addition, the Fund will place in a segregated
account with its custodian or a qualified subcustodian an amount of cash or
liquid securities equal to the difference, if any, between (i) the market value
of the securities sold at the time they were sold short and (ii) any cash or
liquid securities deposited as collateral with the broker in connection with the
short sale (not including the proceeds of the short sale). Until it replaces the
borrowed securities, the Fund will maintain the segregated account daily at a
level so that (a) the amount deposited in the account plus the amount deposited
with the broker (not including the proceeds from the short sale) will equal the
current market value of the securities sold short and (b) the amount deposited
in the account plus the amount deposited with the broker (not including the
proceeds of the short sale) will not be less than the market value of the
securities at the time they were sold short.
Short Sales "Against the Box" (Small Company Growth and Small Company
Value Funds). Not more than 10% of a Fund's net assets (taken at current value)
may be held as collateral for short sales against the box at any one time. While
a short sale is made by selling a security a Fund does not own, a short sale is
"against the box" to the extent that a Fund contemporaneously owns or has the
right to obtain, at no added cost, securities identical to those sold short. A
Fund will deposit, in a segregated account with its custodian or a qualified
subcustodian, the securities sold short or convertible or exchangeable preferred
stocks or debt securities in connection with short sales against the box. No
Fund intends to engage in short sales against the box for investment purposes. A
Fund may, however, make a short sale as a hedge, when it believes that the price
of a security may decline, causing a decline in the value of a security owned by
the Fund (or a security convertible or exchangeable for such security). In such
case, any future losses in the Fund's long position should be offset by a gain
in the short position and, conversely, any gain in the long position should be
reduced by a loss in the short position. The extent to which such gains or
losses are reduced will depend upon the amount of the security sold short
relative to the amount the Fund owns. There will be certain additional
transaction costs associated with short sales against the box, but the Fund will
endeavor to offset these costs with the income from the investment of the cash
proceeds of short sales.
If a Fund effects a short sale of securities at a time when it has an
unrealized gain on the securities, it may be required to recognize that gain as
if it had actually sold the securities (as a "constructive sale") on the date it
effects the short sale. However, such constructive sale treatment may not apply
if the Fund closes out the short sale with securities other than the appreciated
securities held at the time of the short sale and if certain other conditions
are satisfied. Uncertainty regarding the tax consequences of effecting short
sales may limit the extent to which a Fund may effect short sales.
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Warrants. Each Fund may invest up to 10% of its net assets (15% in the
case of the Small Company Growth Fund) in warrants. Each Fund may purchase
warrants issued by domestic and foreign companies to purchase newly created
equity securities consisting of common and preferred stock. Warrants are
securities that give the holder the right, but not the obligation, to purchase
equity issues of the company issuing the warrants, or a related company, at a
fixed price either on a date certain or during a set period. The equity security
underlying a warrant is authorized at the time the warrant is issued or is
issued together with the warrant.
Investing in warrants can provide a greater potential for profit or
loss than an equivalent investment in the underlying security, and, thus, can be
a speculative investment. At the time of issue, the cost of a warrant is
substantially less than the cost of the underlying security itself, and price
movements in the underlying security are generally magnified in the price
movements of the warrant. This leveraging effect enables the investor to gain
exposure to the underlying security with a relatively low capital investment.
This leveraging increases an investor's risk, however, in the event of a decline
in the value of the underlying security and can result in a complete loss of the
amount invested in the warrant. In addition, the price of a warrant tends to be
more volatile than, and may not correlate exactly to, the price of the
underlying security. If the market price of the underlying security is below the
exercise price of the warrant on its expiration date, the warrant will generally
expire without value. The value of a warrant may decline because of a decline in
the value of the underlying security, the passage of time, changes in interest
rates or in the dividend or other policies of the company whose equity underlies
the warrant or a change in the perception as to the future price of the
underlying security, or any combination thereof. Warrants generally pay no
dividends and confer no voting or other rights other than to purchase the
underlying security.
Non-Publicly Traded and Illiquid Securities. The Small Company Growth
Fund may invest up to 15% of its net assets and the Emerging Growth and Small
Company Value Funds may invest up to 10% of their total assets in non-publicly
traded and illiquid securities, including securities that are illiquid by virtue
of the absence of a readily available market, repurchase agreements which have a
maturity of longer than seven days, certain Rule 144A Securities (as defined
below) and time deposits maturing in more than seven days. Securities that have
legal or contractual restrictions on resale but have a readily available market
are not considered illiquid for purposes of this limitation. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Companies whose securities are
not publicly traded may not be subject to the disclosure and other investor
protection
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requirements applicable to companies whose securities are publicly traded.
Limitations on resale may have an adverse effect on the marketability of
portfolio securities and a mutual fund might be unable to dispose of restricted
or other illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemptions within seven days without
borrowing. A mutual fund might also have to register such restricted securities
in order to dispose of them resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
Rule 144A Securities. Rule 144A under the Securities Act adopted by the
SEC allows for a broader institutional trading market for securities otherwise
subject to restriction on resale to the general public. Rule 144A establishes a
"safe harbor" from the registration requirements of the Securities Act for
resales of certain securities to qualified institutional buyers. CSAM
anticipates that the market for certain restricted securities such as
institutional commercial paper will expand further as a result of this
regulation and use of automated systems for the trading, clearance and
settlement of unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of Securities Dealers,
Inc.
An investment in Rule 144A Securities will be considered illiquid and
therefore subject to a Fund's limit on the purchase of illiquid securities
unless the Board or its delegates determines that the Rule 144A Securities are
liquid. In reaching liquidity decisions, the Board and its delegates may
consider, inter alia, the following factors: (i) the unregistered nature of the
security; (ii) the frequency of trades and quotes for the security; (iii) the
number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (iv) dealer undertakings to make a market in the
security and (v) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer).
This investment practice could have the effect of increasing the level
of illiquidity in the Funds to the extent that qualified institutional buyers
become uninterested for a time in purchasing Rule 144A Securities. The Board of
each Fund will carefully monitor any investments by the Fund in Rule 144A
Securities. The Boards have adopted guidelines and delegated to CSAM the daily
function of determining and monitoring the liquidity of Rule 144A Securities,
although each Board will retain ultimate responsibility for any determination
regarding liquidity.
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Borrowing. Each of the Small Company Growth and Small Company Value
Funds may borrow up to 30%, and the Emerging Growth Fund may borrow up to 10%,
of its total assets for temporary or emergency purposes, including to meet
portfolio redemption requests so as to permit the orderly disposition of
portfolio securities or to facilitate settlement transactions on portfolio
securities. Investments (including roll-overs) will not be made when borrowings
exceed 5% of a Fund's total assets. Although the principal of such borrowings
will be fixed, a Fund's assets may change in value during the time the borrowing
is outstanding. Each Fund expects that some of its borrowings may be made on a
secured basis. In such situations, either the custodian will segregate the
pledged assets for the benefit of the lender or arrangements will be made with a
suitable subcustodian, which may include the lender.
Reverse Repurchase Agreements and Dollar Rolls. Each of the Funds may
enter into reverse repurchase agreements with member banks of the Federal
Reserve System and certain non-bank dealers. Reverse repurchase agreements
involve the sale of securities held by the Fund pursuant to its agreement to
repurchase them at a mutually agreed upon date, price and rate of interest. At
the time the Fund enters into a reverse repurchase agreement, it will establish
and maintain a segregated account with an approved custodian containing cash or
liquid securities having a value not less than the repurchase price (including
accrued interest). The assets contained in the segregated account will be
marked-to-market daily and additional assets will be placed in such account on
any day in which the assets fall below the repurchase price (plus accrued
interest). The Fund's liquidity and ability to manage its assets might be
affected when it sets aside cash or portfolio securities to cover such
commitments. Reverse repurchase agreements involve the risk that the market
value of the securities retained in lieu of sale may decline below the price of
the securities the Fund has sold but is obligated to repurchase. In the event
the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision.
The Funds also may enter into "dollar rolls," in which the Fund sells
fixed-income securities for delivery in the current month and simultaneously
contracts to repurchase similar but not identical (same type, coupon and
maturity) securities on a specified future date. During the roll period, the
Fund would forego principal and interest paid on such securities. The Fund would
be compensated by the difference between the current sales price and the forward
price for the future purchase, as well as by the interest earned on the cash
proceeds of the initial sale. At the time the Fund enters into a dollar roll
transaction, it will place in a segregated account maintained with an approved
custodian cash or liquid securities having a value not less than the repurchase
price (including accrued interest) and will subsequently monitor the account to
ensure that its value is maintained. Reverse repurchase agreements and dollar
rolls that are accounted for as financings are considered to be borrowings under
the 1940 Act.
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When-Issued Securities and Delayed-Delivery Transactions. Each of the
Funds may utilize up to 20% of its total assets to purchase securities on a
"when-issued" basis or purchase or sell securities for delayed delivery (i.e.,
payment or delivery occur beyond the normal settlement date at a stated price
and yield). A Fund will not enter into a when-issued or delayed-delivery
transaction for the purpose of leverage, but may sell the right to acquire a
when-issued security prior to its acquisition or dispose of its right to deliver
or receive securities in a delayed-delivery transaction if CSAM deems it
advantageous to do so. The payment obligation and the interest rate that will be
received on when-issued and delayed-delivery transactions are fixed at the time
the buyer enters into the commitment. Due to fluctuations in the value of
securities purchased or sold on a when-issued or delayed-delivery basis, the
prices of such securities may be higher or lower than the prices available in
the market on the dates when the investments are actually delivered to the
buyers. Each Fund will segregate with its custodian cash or liquid securities in
an amount equal to its when-issued and delayed-delivery purchase commitments and
will segregate the securities underlying commitments to sell securities for
delayed delivery.
When a Fund agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash or liquid securities equal to the
amount of the commitment in a segregated account. Normally, the custodian will
set aside portfolio securities to satisfy a purchase commitment, and in such a
case the Fund may be required subsequently to place additional assets in the
segregated account in order to ensure that the value of the account remains
equal to the amount of the Fund's commitment. It may be expected that the Fund's
net assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash. When
the Fund engages in when-issued or delayed-delivery transactions, it relies on
the other party to consummate the trade. Failure of the seller to do so may
result in the Fund incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
REITs. Each Fund may invest in real estate investment trusts ("REITs"),
which are pooled investment vehicles that invest primarily in income-producing
real estate or real estate related loans or interests. Like regulated investment
companies such as the Fund, REITs are not taxed on income distributed to
shareholders provided they comply with several requirements of the Internal
Revenue Code of 1986, as amended (the "Code"). By investing in a REIT, the Fund
will indirectly bear its proportionate share of any expenses paid by the REIT in
addition to the expenses of the Fund.
Investing in REITs involves certain risks. A REIT may be affected by
changes in the value of the underlying property owned by such REIT or by the
quality of any credit extended by the REIT. REITs are dependent on management
skills, are not diversified (except to the extent the Code requires), and are
subject to the risks of financing projects. REITs are subject to heavy cash flow
dependency, default by borrowers, self-liquidation, the possibilities of failing
to qualify for the exemptions from the 1940 Act. REITs are also subject to
interest rate risks.
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Small Capitalization and Emerging Growth Companies; Unseasoned Issuers.
Investments in small- and medium- sized and emerging growth companies, as well
as companies with continuous operations of less than three years ("unseasoned
issuers") involve considerations that are not applicable to investing in
securities of established, larger-capitalization issuers, including reduced and
less reliable information about issuers and markets, less stringent financial
disclosure requirements, illiquidity of securities and markets, higher brokerage
commissions and fees and greater market risk in general. In addition, securities
of small- and medium-sized and emerging growth companies and unseasoned issuers
may involve greater risks since these securities may have limited marketability
and, thus, may be more volatile.
"Special Situation" Companies. "Special situation companies" are
involved in an actual or prospective acquisition or consolidation;
reorganization; recapitalization; merger, liquidation or distribution of cash,
securities or other assets; a tender or exchange offer; a breakup or workout of
a holding company; or litigation which, if resolved favorably, would improve the
value of the company's stock. If the actual or prospective situation does not
materialize as anticipated, the market price of the securities of a "special
situation company" may decline significantly. CSAM believes, however, that if it
analyzes "special situation companies" carefully and invests in the securities
of these companies at the appropriate time, the Fund may achieve maximum capital
appreciation. There can be no assurance, however, that a special situation that
exists at the time of an investment will be consummated under the terms and
within the time period contemplated.
Strategy Available to the Emerging Growth Fund
Non-Diversified Status. The Emerging Growth Fund is classified as
non-diversified within the meaning of the 1940 Act, which means that it is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. As a non-diversified fund, the Fund may invest a
greater proportion of its assets in the obligations of a smaller number of
issuers and, as a result, may be subject to greater risk with respect to
portfolio securities. The Fund's investments will be limited, however, in order
to qualify as a "regulated investment company" for purposes of the Code. To
qualify, the Fund will comply with certain requirements, including limiting its
investments so that at the close of each quarter of its taxable year (a) not
more than 25% of the market value of its total assets will be invested in the
securities of a single issuer, and (b) with respect to 50% of the market value
of its total assets, not more than 5% of the market value of its total assets
will be invested in the securities of a single issuer and the will not own more
than 10% of the outstanding voting securities of a single issuer.
INVESTMENT RESTRICTIONS
All Funds
Certain investment limitations of each Fund may not be changed without
the affirmative vote of the holders of a majority of the Fund's outstanding
shares ("Fundamental Restrictions"). Such majority is defined as the lesser of
(i) 67% or more of the shares present
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at the meeting, if the holders of more than 50% of the outstanding shares of the
Fund are present or represented by proxy, or (ii) more than 50% of the
outstanding shares. If a percentage restriction (other than the percentage
limitation set forth in No. 1 with respect to each Fund) is adhered to at the
time of an investment, a later increase or decrease in the percentage of assets
resulting from a change in the values of portfolio securities or in the amount
of a Fund's assets will not constitute a violation of such restriction.
Emerging Growth Fund
The investment limitations numbered 1 through 9 are Fundamental
Restrictions. Investment limitations 10 through 13 may be changed by a vote of
the Board at any time.
The Emerging Growth Fund may not:
1. Borrow money or issue senior securities except that the Fund may (a)
borrow from banks for temporary or emergency purposes, and not for leveraging,
and then in amounts not in excess of 10% of the value of the Fund's total assets
at the time of such borrowing and (b) enter into futures contracts; or mortgage,
pledge or hypothecate any assets except in connection with any bank borrowing
and in amounts not in excess of the lesser of the dollar amounts borrowed or 10%
of the value of the Fund's total assets at the time of such borrowing. Whenever
borrowings described in (a) exceed 5% of the value of the Fund's total assets,
the Fund will not make any additional investments (including roll-overs). For
purposes of this restriction, (a) the deposit of assets in escrow in connection
with the purchase of securities on a when-issued or delayed-delivery basis and
(b) collateral arrangements with respect to initial or variation margin for
futures contracts will not be deemed to be pledges of the Fund's assets.
2. Purchase any securities which would cause 25% or more of the value
of the Fund's total assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the same
industry; provided that there shall be no limit on the purchase of U.S.
Government Securities.
3. Make loans, except that the Fund may purchase or hold publicly
distributed fixed-income securities, lend portfolio securities and enter into
repurchase agreements.
4. Underwrite any issue of securities except to the extent that the
investment in restricted securities and the purchase of fixed-income securities
directly from the issuer thereof in accordance with the Fund's investment
objective, policies and limitations may be deemed to be underwriting.
5. Purchase or sell real estate, real estate investment trust
securities, real estate limited partnerships, commodities or commodity
contracts, or invest in oil, gas or mineral exploration or development programs,
except that the Fund may invest in (a) fixed-income securities secured by real
estate, mortgages or interests therein, (b) securities of
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<PAGE> 33
companies that invest in or sponsor oil, gas or mineral exploration or
development programs and (c) futures contracts and related options.
6. Make short sales of securities or maintain a short position.
7. Purchase, write or sell puts, calls, straddles, spreads or
combinations thereof, except that the Fund may (a) purchase put and call options
on securities, (b) write covered call options on securities, (c) purchase and
write put and call options on stock indices and (d) enter into options on
futures contracts.
8. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition, reorganization or offer of
exchange or as otherwise permitted under the 1940 Act.
9. Purchase securities on margin, except that the Fund may obtain any
short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of initial
or variation margin in connection with futures contracts or related options will
not be deemed to be a purchase of securities on margin.
10. Invest more than 10% of the value of the Fund's total assets in
securities which may be illiquid because of legal or contractual restrictions on
resale or securities for which there are no readily available market quotations.
For purposes of this limitation, repurchase agreements with maturities greater
than seven days shall be considered illiquid securities.
11. Invest more than 10% of the value of the Fund's total assets in
time deposits maturing in more than seven calendar days.
12. Invest in warrants (other than warrants acquired by the Fund as
part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would exceed 10%
of the value of the Fund's net assets.
13. Invest in oil, gas or mineral leases.
Small Company Growth Fund
The investment limitations numbered 1 through 9 are Fundamental
Restrictions. Investment limitations 10 through 13 may be changed by a vote of
the Board at any time.
The Small Company Growth Fund may not:
1. Borrow money except that the Fund may (a) borrow from banks
for temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the Fund's
total assets at the time of such borrowing. For purposes of this restriction,
30
<PAGE> 34
short sales, the entry into currency transactions, options, futures contracts,
options on futures contracts, forward commitment transactions and dollar roll
transactions that are not accounted for as financings (and the segregation of
assets in connection with any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of the value
of the Fund's total assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the same
industry; provided that there shall be no limit on the purchase of U.S.
Government Securities.
3. Purchase the securities of any issuer if as a result more than 5% of
the value of the Fund's total assets would be invested in the securities of such
issuer, except that this 5% limitation does not apply to U.S. Government
Securities and except that up to 25% of the value of the Fund's total assets may
be invested without regard to this 5% limitation.
4. Make loans, except that the Fund may purchase or hold fixed-income
securities, including loan participations, assignments and structured
securities, lend portfolio securities and enter into repurchase agreements.
5. Underwrite any securities issued by others except to the extent that
the investment in restricted securities and the sale of securities in accordance
with the Fund's investment objective, policies and limitations may be deemed to
be underwriting.
6. Purchase or sell real estate or invest in oil, gas or mineral
exploration or development programs, except that the Fund may invest in (a)
securities secured by real estate, mortgages or interests therein and (b)
securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
7. Purchase securities on margin, except that the Fund may obtain any
short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of initial
or variation margin in connection with transactions in currencies, options,
futures contracts or related options will not be deemed to be a purchase of
securities on margin.
8. Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies and
indexes, and options on futures contracts, securities, currencies or indexes,
purchase and sell currencies on a forward commitment or delayed-delivery basis
and enter into stand-by commitments.
9. Issue any senior security except as permitted in the Fund's
investment limitations.
10. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition, reorganization or offer of
exchange, or as otherwise permitted under the 1940 Act.
31
<PAGE> 35
11. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the purchase of securities on a
forward commitment or delayed-delivery basis and collateral and initial or
variation margin arrangements with respect to currency transactions, options,
futures contracts, and options on futures contracts.
12.Invest more than 15% of the Fund's net assets in securities
which may be illiquid because of legal or contractual restrictions on resale or
securities for which there are no readily available market quotations. For
purposes of this limitation, repurchase agreements with maturities greater than
seven days shall be considered illiquid securities.
13. Make additional investments (including roll-overs) if the
Fund's borrowings exceed 5% of its net assets.
Small Company Value Fund
The investment limitations numbered 1 through 10 are
Fundamental Restrictions. Investment limitations 11 through 15 may be changed by
a vote of the Board at any time.
The Small Company Value Fund may not:
1. Borrow money except that the Fund may (a) borrow from banks
for temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the Fund's
total assets at the time of such borrowing. For purposes of this restriction,
the entry into currency transactions, options, futures contracts, options on
futures contracts, forward commitment transactions and dollar roll transactions
that are not accounted for as financings (and the segregation of assets in
connection with any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of
the value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of U.S.
Government Securities.
3. Purchase the securities of any issuer if as a result more
than 5% of the value of the Fund's total assets would be invested in the
securities of such issuer, except that this 5% limitation does not apply to U.S.
Government Securities and except that up to 25% of the value of the Fund's total
assets may be invested without regard to this 5% limitation.
4. Make loans, except that the Fund may purchase or hold
fixed-income securities, including loan participations, assignments and
structured securities, lend portfolio securities and enter into repurchase
agreements.
32
<PAGE> 36
5. Underwrite any securities issued by others except to the
extent that the investment in restricted securities and the sale of securities
in accordance with the Fund's investment objective, policies and limitations may
be deemed to be underwriting.
6. Purchase or sell real estate or invest in oil, gas or
mineral exploration or development programs, except that the Fund may invest in
(a) securities secured by real estate, mortgages or interests therein and (b)
securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
7. Make short sales of securities or maintain a short
position, except that the Fund may maintain short positions in forward currency
contracts, options, futures contracts and options on futures contracts and enter
into short sales "against the box."
8. Purchase securities on margin, except that the Fund may
obtain any short-term credits necessary for the clearance of purchases and sales
of securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with transactions in currencies,
options, futures contracts or related options will not be deemed to be a
purchase of securities on margin.
9. Invest in commodities, except that the Fund may purchase
and sell futures contracts, including those relating to securities, currencies
and indexes, and options on futures contracts, securities, currencies or
indexes, purchase and sell currencies on a forward commitment or
delayed-delivery basis and enter into stand-by commitments.
10. Issue any senior security except as permitted in the
Fund's investment limitations.
11. Purchase securities of other investment companies except
in connection with a merger, consolidation, acquisition, reorganization or offer
of exchange, or as otherwise permitted under the 1940 Act.
12. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the purchase of securities on a
forward commitment or delayed-delivery basis and collateral and initial or
variation margin arrangements with respect to currency transactions, options,
futures contracts, and options on futures contracts.
13. Invest more than 10% of the Fund's net assets in
securities which may be illiquid because of legal or contractual restrictions on
resale or securities for which there are no readily available market quotations.
For purposes of this limitation, repurchase agreements with maturities greater
than seven days shall be considered illiquid securities.
14. Invest in warrants (other than warrants acquired by the
Fund as part of a unit or attached to securities at the time of purchase) if, as
a result, the investments (valued at the lower of cost or market) would exceed
10% of the value of the Fund's net assets.
33
<PAGE> 37
15. Make additional investments (including roll-overs) if the
Fund's borrowings exceed 5% of its net assets.
PORTFOLIO VALUATION
The following is a description of the procedures used by the
Funds in valuing their assets.
Securities listed on an exchange or traded in an
over-the-counter market will be valued at the closing price on the exchange or
market on which the security is primarily traded (the "Primary Market") at the
time of valuation (the "Valuation Time"). If the security did not trade on the
Primary Market, the security will be valued at the closing price on another
exchange or market where it trades at the Valuation Time. If there are no such
sales prices, the security will be valued at the most recent bid quotation as of
the Valuation Time or at the lowest asked quotation in the case of a short sale
of securities. If there are no such quotations, the value of the security will
be taken to be the most recent bid quotation on the exchange or market. In
determining the market value of portfolio investments, each Fund may employ
outside organizations (each, a "Pricing Service") which may use a matrix,
formula or other objective method that takes into consideration market indexes,
matrices, yield curves and other specific adjustments. The procedures of Pricing
Services are reviewed periodically by the officers of each Fund under the
general supervision and responsibility of the Board, which may replace a Pricing
Service at any time. If a Pricing Service is not able to supply closing prices
and bid/asked quotations, and there are two or more dealers, brokers or market
makers in the security, the security will be valued at the mean between the
highest bid and the lowest asked quotations from at least two dealers, brokers
or market makers or, if such dealers, brokers or market makers only provide bid
quotations, at the mean between the highest and the lowest bid quotations
provided. If a Pricing Service is not able to supply closing prices and
bid/asked quotations, and there is only one dealer, broker or market maker in
the security, the security will be valued at the mean between the bid and the
asked quotations provided, unless the dealer, broker or market maker can only
provide a bid quotation in which case the security will be valued at such bid
quotation. Options contracts will be valued similarly. Futures contracts will be
valued at the most recent settlement price at the time of valuation. Short-term
obligations with maturities of 60 days or less are valued at amortized cost,
which constitutes fair value as determined by the Board. Amortized cost involves
valuing a portfolio instrument at its initial cost and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument. The
amortized cost method of valuation may also be used with respect to other debt
obligations with 60 days or less remaining to maturity. Securities, options,
futures contracts and other assets which cannot be valued pursuant to the
foregoing will be valued at their fair value as determined in good faith
pursuant to consistently applied procedures established by the Board. In
addition, the Board or its delegates may value a security at fair value if it
determines that such security's value determined by the methodology set forth
above does not reflect its fair value.
34
<PAGE> 38
Trading in securities in certain foreign countries is
completed at various times prior to the close of business on each business day
in New York (i.e., a day on which The New York Stock Exchange, Inc. (the "NYSE")
is open for trading). In addition, securities trading in a particular country or
countries may not take place on all business days in New York. Furthermore,
trading takes place in various foreign markets on days which are not business
days in New York and days on which a Fund's net asset value is not calculated.
As a result, calculation of a Fund's net asset value may not take place
contemporaneously with the determination of the prices of certain foreign
portfolio securities used in such calculation. All assets and liabilities
initially expressed in foreign currency values will be converted into U.S.
dollar values at the prevailing rate as quoted by a Pricing Service as of 12:00
noon (Eastern time). If such quotations are not available, the rate of exchange
will be determined in good faith pursuant to consistently applied procedures
established by the Board.
PORTFOLIO TRANSACTIONS
CSAM is responsible for establishing, reviewing and, where
necessary, modifying each Fund's investment program to achieve its investment
objective. Purchases and sales of newly issued portfolio securities are usually
principal transactions without brokerage commissions effected directly with the
issuer or with an underwriter acting as principal. Other purchases and sales may
be effected on a securities exchange or over-the-counter, depending on where it
appears that the best price or execution will be obtained. The purchase price
paid by a Fund to underwriters of newly issued securities usually includes a
concession paid by the issuer to the underwriter, and purchases of securities
from dealers, acting as either principals or agents in the after market, are
normally executed at a price between the bid and asked price, which includes a
dealer's mark-up or mark-down. Transactions on U.S. stock exchanges and some
foreign stock exchanges involve the payment of negotiated brokerage commissions.
On exchanges on which commissions are negotiated, the cost of transactions may
vary among different brokers. On most foreign exchanges, commissions are
generally fixed. There is generally no stated commission in the case of
securities traded in domestic or foreign over-the-counter markets, but the price
of securities traded in over-the-counter markets includes an undisclosed
commission or mark-up. U.S. Government Securities are generally purchased from
underwriters or dealers, although certain newly issued U.S. Government
Securities may be purchased directly from the U.S. Treasury or from the issuing
agency or instrumentality. No brokerage commissions are typically paid on
purchases and sales of U.S. Government Securities.
In selecting broker-dealers, CSAM does business exclusively
with those broker-dealers that, in CSAM's judgment, can be expected to provide
the best service. The service has two main aspects: the execution of buy and
sell orders and the provision of research. In negotiating commissions with
broker-dealers, CSAM will pay no more for execution and research services than
it considers either, or both together, to be worth. The worth of execution
service depends on the ability of the broker-dealer to minimize costs of
securities purchased and to maximize prices obtained for securities sold. The
worth of research depends on its usefulness in optimizing portfolio composition
and its changes over time. Commissions for the combination of execution and
research services
35
<PAGE> 39
that meet CSAM's standards may be higher than for execution services alone or
for services that fall below CSAM's standards. CSAM believes that these
arrangements may benefit all clients and not necessarily only the accounts in
which the particular investment transactions occur that are so executed.
Further, CSAM will only receive brokerage or research service in connection with
securities transactions that are consistent with the "safe harbor" provisions of
Section 28(e) of the Securities Exchange Act of 1934 when paying such higher
commissions. Research services may include research on specific industries or
companies, macroeconomic analyses, analyses of national and international events
and trends, evaluations of thinly traded securities, computerized trading
screening techniques and securities ranking services, and general research
services. For the fiscal year ended October 31, 1999, $467,968, $6,608 and
$47,582 of total brokerage commissions was paid by the Emerging Growth, Small
Company Growth and Small Company Value Funds, respectively, to brokers and
dealers who provided research services. Research received from brokers or
dealers is supplemental to CSAM's own research program.
The following table details amounts paid by each Fund in
commissions to broker-dealers for execution of portfolio transactions during the
indicated fiscal years ended October 31.
<TABLE>
<CAPTION>
FUND YEAR COMMISSIONS
<S> <C> <C>
Emerging Growth Fund 1997 $ 2,702,386
1998 $ 3,656,224
1999 $ 4,812,415
Small Company Growth Fund 1997 $ 24,051
1998 $ 23,665
1999 $ 15,566
Small Company Value Fund 1997 $ 547,325
1998 $ 586,864
1999 $ 424,225
</TABLE>
For the fiscal year ended October 31, 1999, the increase in the amounts paid
by the Emerging Growth Fund in commissions to broker-dealers was due in part to
an increase in capital outflows due to redemptions of the Fund's shares.
All orders for transactions in securities or options on behalf
of a Fund are placed by CSAM with broker-dealers that it selects, including
Credit Suisse Asset Management Securities, Inc. ("CSAMSI") and affiliates of
Credit Suisse Group ("Credit Suisse"). A Fund may utilize CSAMSI or affiliates
of Credit Suisse in connection with a purchase or sale of securities when CSAM
believes that the charge for the transaction does not exceed usual and customary
levels and when doing so is consistent with guidelines adopted by the Board.
36
<PAGE> 40
Investment decisions for each Fund concerning specific
portfolio securities are made independently from those for other clients advised
by CSAM. Such other investment clients may invest in the same securities as a
Fund. When purchases or sales of the same security are made at substantially the
same time on behalf of such other clients, transactions are averaged as to price
and available investments allocated as to amount, in a manner which CSAM
believes to be equitable to each client, including the Funds. In some instances,
this investment procedure may adversely affect the price paid or received by the
Fund or the size of the position obtained or sold for the Fund. To the extent
permitted by law, securities may be aggregated with those to be sold or
purchased for a Fund with those to be sold or purchased for such other
investment clients in order to obtain best execution.
In no instance will portfolio securities be purchased from or
sold to CSAM, CSAMSI or Credit Suisse First Boston ("CS First Boston") or any
affiliated person of such companies. In addition, a Fund will not give
preference to any institutions with whom the Fund enters into distribution or
shareholder servicing agreements concerning the provision of distribution
services or support services.
Transactions for a Fund may be effected on foreign securities
exchanges. In transactions for securities not actively traded on a foreign
securities exchange, a Fund will deal directly with the dealers who make a
market in the securities involved, except in those circumstances where better
prices and execution are available elsewhere. Such dealers usually are acting as
principal for their own account. On occasion, securities may be purchased
directly from the issuer. Such portfolio securities are generally traded on a
net basis and do not normally involve brokerage commissions. Securities firms
may receive brokerage commissions on certain portfolio transactions, including
options, futures and options on futures transactions and the purchase and sale
of underlying securities upon exercise of options.
Each Fund may participate, if and when practicable, in bidding
for the purchase of securities for the Fund's portfolio directly from an issuer
in order to take advantage of the lower purchase price available to members of
such a group. A Fund will engage in this practice, however, only when CSAM, in
its sole discretion, believes such practice to be otherwise in the Fund's
interest.
PORTFOLIO TURNOVER
Each Fund does not intend to seek profits through short-term
trading, but the rate of turnover will not be a limiting factor when the Fund
deems it desirable to sell or purchase securities. Each Fund's portfolio
turnover rate is calculated by dividing the lesser of purchases or sales of its
portfolio securities for the year by the monthly average value of the portfolio
securities. Securities with remaining maturities of one year or less at the date
of acquisition are excluded from the calculation.
Certain practices that may be employed by a Fund could result
in high portfolio turnover. For example, options on securities may be sold in
anticipation of a decline in the price of the underlying security (market
decline) or purchased in anticipation of a rise in the price of the underlying
security (market rise) and later sold. To the extent that its portfolio is
37
<PAGE> 41
traded for the short-term, a Fund will be engaged essentially in trading
activities based on short-term considerations affecting the value of an issuer's
stock instead of long-term investments based on fundamental valuation of
securities. Because of this policy, portfolio securities may be sold without
regard to the length of time for which they have been held. Consequently, the
annual portfolio turnover rate of a Fund may be higher than mutual funds having
similar objectives that do not utilize these strategies.
It is not possible to predict the Funds' portfolio turnover
rates. High portfolio turnover rates (100% or more) may result in higher dealer
mark-ups or underwriting commissions as well as other transaction costs,
including correspondingly higher brokerage commissions. In addition, short-term
gains realized from portfolio turnover may be taxable to shareholders as
ordinary income.
For the fiscal year ended October 31, 1999, the increase in
the Emerging Growth Fund's portfolio turnover rate was due to an increase in
capital outflows due to redemptions of the Fund's shares. The increase in the
Small Company Growth Fund's portfolio turnover rate for the same period was due
to large capital inflows and outflows due to purchases and redemptions of the
Fund's shares. The increase in the Small Company Value Fund's portfolio turnover
rate for the same period was due to an increase in purchases and sales of
portfolio securities in response to volatility in market prices.
MANAGEMENT OF THE FUNDS
Officers and Board of Directors
The business and affairs of the Funds are managed by the Board
of Directors in accordance with the laws of the State of Maryland. The Board
elects officers who are responsible for the day-to-day operations of the Fund
and who execute policies authorized by the Board. Under each Fund's Charter, the
Board may classify or reclassify any unissued shares of each Fund into one or
more additional classes by setting or changing in any one or more respects their
relative rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption. The Board may similarly
classify or reclassify any class of its shares into one or more series and,
without shareholder approval, may increase the number of authorized shares of
each Fund.
The names (and ages) of each Fund's Directors and officers,
their addresses, present positions and principal occupations during the past
five years and other affiliations are set forth below.
<TABLE>
<S> <C>
Richard H. Francis (67) Director
40 Grosvenor Road Currently retired; Executive Vice President and Chief
Short Hills, New Jersey 07078 Financial Officer of Pan Am Corporation and Pan American
World Airways, Inc. from 1988 to 1991; Director of The
Infinity Mutual Funds, BISYS Group Incorporated;
Director/Trustee of other Warburg Pincus Funds and other
CSAM-advised investment companies.
</TABLE>
38
<PAGE> 42
<TABLE>
<S> <C>
Jack W. Fritz (72) Director
2425 North Fish Creek Road Private investor; Consultant and Director of Fritz
P.O. Box 483 Broadcasting, Inc. and Fritz Communications (developers
Wilson, Wyoming 83014 and operators of radio stations); Director/Trustee of
other Warburg Pincus Funds.
Jeffrey E. Garten+ (53) Director
Box 208200 Dean of Yale School of Management and William S. Beinecke
New Haven, Connecticut 06520-8200 Professor in the Practice of International Trade and
Finance; Undersecretary of Commerce for International Trade
from November 1993 to October 1995; Professor at Columbia
University from September 1992 to November 1993; Director
of Aetna, Inc.; Director of Calpine Energy Corporation;
Director/Trustee of other Warburg Pincus Funds.
James S. Pasman, Jr. (69) Director
29 The Trillium Currently retired; President and Chief Operating Officer
Pittsburgh, Pennsylvania 15238 of National InterGroup, Inc. from April 1989 to March
1991; Chairman of Permian Oil Co. from April 1989 to
March 1991; Director of Education Management Corp., Tyco
International Ltd.; Trustee, BT Insurance Funds Trust;
Director/Trustee of other Warburg Pincus Funds and other
CSAM-advised investment companies.
William W. Priest* (58) Chairman of the Board
153 East 53rd Street Chairman -- Management Committee, Chief Executive Officer
New York, New York 10022 and Managing Director of CSAM since 1990; Director/Trustee of
other Warburg Pincus Funds and other CSAM-advised investment
companies.
</TABLE>
+ Mr. Garten is a Director of the Small Company Growth Fund
only.
* Indicates a Director/Trustee who is an "interested person" of
the Fund as defined in the 1940 Act.
39
<PAGE> 43
<TABLE>
<S> <C>
Steven N. Rappaport (51) Director
40 East 52nd Street President of Loanet, Inc. (on-line accounting service)
New York, New York 10022 since 1997; Executive Vice President of Loanet, Inc. from
1994 to 1997; Director, President, North American
Operations, and former Executive Vice President from 1992
to 1993 of Worldwide Operations of Metallurg Inc.;
Executive Vice President, Telerate, Inc. from 1987 to
1992; Partner in the law firm of Hartman & Craven until
1987; Director/Trustee of other Warburg Pincus Funds and
other CSAM-advised investment companies.
Alexander B. Trowbridge (70) Director
1317 F Street, N.W., 5th Floor President of Trowbridge Partners, Inc. (business
Washington, DC 20004 consulting) since January 1990; Director or Trustee of New
England Mutual Life Insurance Co., ICOS Corporation
(biopharmaceuticals), IRI International (energy
services), The Rouse Company (real estate development),
Harris Corp. (electronics and communications equipment),
The Gillette Co. (personal care products) and Sunoco,
Inc. (petroleum refining and marketing); Director/Trustee
of other Warburg Pincus Funds.
Eugene L. Podsiadlo (42) President
466 Lexington Avenue Managing Director of CSAM; Associated with CSAM since New
York, New York 10017-3147 Credit Suisse acquired the Funds' predecessor adviser
in July 1999; with the predecessor adviser since 1991;
Vice President of Citibank, N.A. from 1987 to 1991;
Officer of CSAMSI and of other Warburg Pincus Funds.
</TABLE>
40
<PAGE> 44
<TABLE>
<S> <C>
Hal Liebes, Esq. (35) Vice President and Secretary
153 East 53rd Street Managing Director and General Counsel of CSAM; Associated
New York, New York 10022 with Lehman Brothers, Inc. from 1996 to 1997; Associated
with CSAM from 1995 to 1996; Associated with CS First
Boston Investment Management from 1994 to 1995;
Associated with Division of Enforcement, U.S. Securities
and Exchange Commission from 1991 to 1994; Officer of
CSAMSI, other Warburg Pincus Funds and other CSAM-advised
investment companies.
Michael A. Pignataro (40) Treasurer and Chief Financial Officer
153 East 53rd Street Vice President and Director of Fund Administration of
New York, New York 10022 CSAM; Associated with CSAM since 1984; Officer of other
Warburg Pincus Funds and other CSAM-advised investment
companies.
Stuart J. Cohen, Esq. (31) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel of CSAM; Associated with
New York, New York 10017-3147 CSAM since Credit Suisse acquired the Funds' predecessor
adviser in July 1999; with the predecessor adviser since
1997; Associated with the law firm of Gordon Altman
Butowsky Weitzen Shalov & Wein from 1995 to 1997; Officer
of other Warburg Pincus Funds.
Rocco A. DelGuercio (36) Assistant Treasurer
153 East 53rd Street Assistant Vice President and Administrative Officer of
New York, New York 10022 CSAM; Associated with CSAM since June 1996; Assistant
Treasurer, Bankers Trust Corp. -- Fund Administration
from March 1994 to June 1996; Mutual Fund Accounting
Supervisor, Dreyfus Corporation from April 1987 to March
1994; Officer of other Warburg Pincus Funds and other
CSAM-advised investment companies.
</TABLE>
No employee of CSAM, PFPC Inc., the Funds' co-administrator
("PFPC"), or any of their affiliates receives any compensation from the Funds
for acting as an officer or director/trustee of a Fund. Each Director who is not
a director, trustee, officer
41
<PAGE> 45
or employee of CSAM, PFPC or any of their affiliates receives the following
annual and per-meeting fees:
<TABLE>
<CAPTION>
FEE FOR EACH AUDIT
FEE FOR EACH MEETING COMMITTEE MEETING
FUND ANNUAL FEE ATTENDED ATTENDED
<S> <C> <C> <C>
Emerging Growth Fund $ 750 $250 $250*
Small Company Growth Fund $ 750 $250 $250*
Small Company Value Fund $ 750 $250 $250*
</TABLE>
* Alexander B. Trowbridge receives $325 per fund for serving as
chairman of the Audit Committee.
Each Director is reimbursed for expenses incurred in
connection with his attendance at Board meetings.
Directors' Total Compensation
(for the fiscal year ended October 31, 1999)
<TABLE>
<CAPTION>
ALL INVESTMENT
COMPANIES
EMERGING GROWTH SMALL COMPANY SMALL COMPANY IN WARBURG
FUND GROWTH FUND VALUE FUND PINCUS FUND
NAME OF DIRECTOR COMPLEX1
<S> <C> <C> <C> <C>
William W. Priest2 None None None None
Arnold M. Reichman3 None None None None
Richard N. Cooper4 $1,375 $1,125 $1,125 $47,500
Richard H. Francis5 $1,000 $1,000 $1,000 $38,250
Jack W. Fritz $2,750 $2,250 $2,250 $94,250
Jeffrey E. Garten $2,750 $2,250 $2,250 $94,250
Thomas A. Melfe4 $1,625 $1,375 $1,375 $40,750
James S. Pasman, Jr.5 $1,000 $1,000 $1,000 $38,250
Steven N. Rappaport5 $1,000 $1,000 $1,000 $38,250
Alexander B. Trowbridge $2,825 $2,325 $2,325 $97,100
</TABLE>
1 Each Director serves as a Director or Trustee of 51 investment
companies and portfolios in the Warburg Pincus family of funds, except
for Mr. Garten, who also serves as a Director or Trustee of 33
investment companies in the Warburg Pincus family of funds. Mr. Garten
resigned as a Director of the Emerging Growth and Small Company Value
Funds effective February 3, 2000.
2 Mr. Priest receives compensation as an affiliate of CSAM, and,
accordingly, receives no compensation from any Fund or any other
investment company advised by CSAM.
3 Mr. Reichmann resigned as a Director of each Fund effective August 18,
1999.
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<PAGE> 46
4 Messrs. Cooper and Melfe resigned as a Director of each Fund effective
July 6, 1999.
5 Messrs. Francis, Pasman and Rappaport became Directors of each Fund
effective July 6, 1999.
As of January 31, 2000, the Directors and officers of each
Fund as a group owned less than 1% of the outstanding shares of each Fund.
Portfolio Managers
Emerging Growth Fund. Elizabeth B. Dater and Stephen J. Lurito
are Co-Portfolio Managers of the Emerging Growth Fund and manage other Warburg
Pincus Funds. Ms. Dater has been associated with CSAM since Credit Suisse
acquired the Funds' predecessor adviser in July 1999 and joined the predecessor
adviser in 1979. Prior to that she was a vice president of research at Fiduciary
Trust Company of New York and an institutional sales assistant at Lehman
Brothers. Ms. Dater has been a regular panelist on Maryland Public Television's
Wall Street Week with Louis Rukeyser since 1976. Ms. Dater earned a B.A. degree
from Boston University in Massachusetts.
Mr. Lurito has been associated with CSAM since Credit Suisse
acquired the Funds' predecessor adviser in July 1999 and joined the predecessor
adviser in 1987. Prior to that he was a research analyst at Sanford C. Bernstein
& Company, Inc. Mr. Lurito earned a B.A. degree from the University of Virginia
and an M.B.A. from The Wharton School, University of Pennsylvania.
Small Company Growth Fund. Mr. Lurito (described above) and
Mr. Sammy Oh are Co-Portfolio Managers of the Small Company Growth Fund. Mr. Oh
has been associated with CSAM since Credit Suisse acquired the Funds'
predecessor adviser in July 1999 and joined the predecessor adviser in 1997.
Prior to that he was a vice president with Bessemer Trust from 1995 to 1996, and
he was a vice president of Forstmann-Leff from 1993 to 1995. Mr. Oh earned an
A.B. degree from Stanford University and an M.B.A. from The Amos Tuck School at
Dartmouth.
Small Company Value Fund. Mr. Kyle F. Frey, Portfolio Manager
of the Small Company Value Fund, has been associated with CSAM since Credit
Suisse acquired the Funds' predecessor adviser in July 1999 and joined the
predecessor adviser in 1989. Prior to that Mr. Frey was with Goldman, Sachs &
Co. in the institutional sales division. Mr. Frey earned a B.S. degree from the
University of New Hampshire and an M.B.A. from New York University.
Investment Advisers and Co-Administrators
CSAM, located at 153 East 53rd Street, New York, New York
10022, serves as investment adviser to each Fund pursuant to a written agreement
(the "Advisory Agreement"). CSAM is an indirect wholly-owned U.S. subsidiary of
Credit Suisse. Credit Suisse is a global financial services company, providing a
comprehensive range of banking and insurance products. Active on every continent
and in all major financial
43
<PAGE> 47
centers, Credit Suisse comprises five business units -- Credit Suisse Asset
Management (asset management); Credit Suisse First Boston (investment banking);
Credit Suisse Private Banking (private banking); Credit Suisse (retail banking);
and Winterthur (insurance). Credit Suisse has approximately $680 billion of
global assets under management and employs approximately 62,000 people
worldwide. The principal business address of Credit Suisse is Paradeplatz 8, CH
8070, Zurich, Switzerland.
Prior to July 6, 1999, Warburg Pincus Asset Management, Inc.
("Warburg") served as investment adviser to each Fund. On that date, Credit
Suisse acquired Warburg and combined Warburg with Credit Suisse's existing
U.S.-based asset management business ("Credit Suisse Asset Management").
Consequently, the combined entity, CSAM, became the Funds' investment adviser.
Credit Suisse Asset Management, formerly known as BEA Associates, together with
its predecessor firms, has been engaged in the investment advisory business for
over 60 years.
CSAMSI and PFPC serve as co-administrators to the Fund
pursuant to separate written agreements (the "CSAMSI Co-Administration
Agreement" and the "PFPC Co-Administration Agreement," respectively). CSAMSI
became co-administrator to each Fund on November 1, 1999. Prior to that,
Counsellors Funds Service, Inc. ("Counsellors Service") served as
co-administrator to the Funds. For the services provided by CSAM under the
Advisory Agreements, the Emerging Growth Fund, Small Company Growth Fund and
Small Company Value Fund each pay CSAM a fee calculated at an annual rate of
.90%, 1.00% and 1.00%, respectively, of the Fund's average daily net assets. For
the services provided by CSAMSI under the CSAMSI Co-Administration Agreement,
each Fund pays CSAMSI a fee calculated at an annual rate of .10% of the Fund's
average daily net assets. For the services provided by PFPC under the PFPC
Co-Administration Agreement, each Fund pays PFPC a fee calculated at an annual
rate of .10% of the Fund's first $500 million in average daily net assets, .075%
of the next $1 billion in assets and .055 of assets exceeding $1.5 billion,
exclusive of out-of-pocket expenses. Each class of shares of the Fund bears its
proportionate share of fees payable to CSAM, CSAMSI and PFPC in the proportion
that its assets bear to the aggregate assets of the Fund at the time of
calculation. These fees are calculated at an annual rate based on a percentage
of a Fund's average daily net assets.
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<PAGE> 48
For the following fiscal years ended October 31, investment
advisory fees earned by CSAM or its predecessor, Warburg, waivers and net
advisory fees for each Fund were as follows:
<TABLE>
<CAPTION>
GROSS NET
FUND YEAR ADVISORY FEE WAIVER ADVISORY FEE
<S> <C> <C> <C> <C>
Emerging Growth Fund 1997 $ 14,879,436 0 $ 14,879,436
1998 $ 18,191,066 0 $ 18,191,066
1999 $ 16,912,762 0 $ 16,912,762
Small Company Growth Fund 1997 $ 69,204 $ 69,204 0
1998 $ 105,741 $ 43,714 $ 62,027
1999 $ 65,661 $ 65,661 0
Small Company Value Fund 1997 $ 1,735,893 $ 55,966 $ 1,679,927
1998 $ 1,530,064 $ 11,933 $ 1,518,131
1999 $ 464,414 $ 146,999 $ 317,415
</TABLE>
For the fiscal year ended October 31, 1999, CSAM or its
predecessor, Warburg also reimbursed expenses for the Small Company Growth Fund
in the amount of $67,337.
During the following fiscal years ended October 31, PFPC and
Counsellors Service (the Funds' predecessor co-administrator) earned the
following amounts in co-administration fees.
<TABLE>
<CAPTION>
FUND YEAR PFPC COUNSELLORS SERVICE
<S> <C> <C> <C>
Emerging Growth Fund 1997 $ 1,324,178 $ 1,653,283
1998 $ 1,514,914 $ 2,021,230
1999 $ 1,443,896 $ 1,879,196
Small Company Growth Fund 1997 $ 6,920 $ 6,920
(fully waived)
1998 $ 13,940 $ 10,574
($10,574 waived)
1999 $ 10,267 $ 6,566
($6,566 waived)
Small Company Value Fund 1997 $ 173,589 $ 173,589
1998 $ 155,383 $ 153,007
1999 $ 48,684 $ 46,441
($28,790 waived)
</TABLE>
45
<PAGE> 49
Custodians and Transfer Agent
Pursuant to separate custodian agreements with each Fund (the
"Custodian Agreements"), PFPC Trust Company ("PFPC Trust") is custodian of
Fund's U.S. assets and State Street serves as custodian of the Funds' non-U.S.
assets. Under the Custodian Agreements, PFPC Trust and State Street each (i)
maintains a separate account or accounts in the name of the Fund, (ii) holds and
transfers portfolio securities on account of the Fund, (iii) makes receipts and
disbursements of money on behalf of the Fund, (iv) collects and receives all
income and other payments and distributions on account of the Fund's portfolio
securities and (v) makes periodic reports to the Board concerning the Fund's
custodial arrangements. PFPC Trust may delegate its duties under its Custodian
Agreement with the Fund to a wholly owned direct or indirect subsidiary of PFPC
Trust or PNC Bank Corp. upon notice to the Fund and upon the satisfaction of
certain other conditions. State Street is authorized to select one or more
foreign banking institutions and foreign securities depositories to serve as
sub-custodian on behalf of the Small Company Growth Fund and PFPC Trust is
authorized to select one or more domestic banks or trust companies to serve as
sub-custodian on behalf of the Funds. PFPC Trust has entered into a
sub-custodian agreement with PNC Bank, National Association ("PNC"), pursuant to
which PNC provides asset safekeeping and securities clearing services. PFPC
Trust and PNC are indirect, wholly owned subsidiaries of PNC Bank Corp. and
their principal business address is 8800 Tinicum Boulevard, Philadelphia,
Pennsylvania 19153. The principal business address of State Street is 225
Franklin Street, Boston, Massachusetts 02110.
State Street also serves as the shareholder servicing,
transfer and dividend disbursing agent of each Fund pursuant to a Transfer
Agency and Service Agreement, under which State Street (i) issues and redeems
shares of the Fund, (ii) addresses and mails all communications by the Fund to
record owners of Fund shares, including reports to shareholders, dividend and
distribution notices and proxy material for its meetings of shareholders, (iii)
maintains shareholder accounts and, if requested, sub-accounts and (iv) makes
periodic reports to the Board concerning the transfer agent's operations with
respect to the Fund. State Street has delegated to Boston Financial Data
Services, Inc., an affiliate of State Street ("BFDS"), responsibility for most
shareholder servicing functions. BFDS's principal business address is 2 Heritage
Drive, North Quincy, Massachusetts 02171.
Organization of the Funds
The Funds are open-end management investment companies within
the meaning of the 1940 Act. The Emerging Growth Fund was incorporated on
November 12, 1987 under the laws of the State of Maryland under the name
"Counsellors Emerging Growth Fund, Inc." On October 27, 1995, the Fund amended
its charter to change its name to "Warburg, Pincus Emerging Growth Fund, Inc."
The Small Company Growth Fund was incorporated on October 31, 1996 under the
laws of the State of Maryland under the name "Warburg, Pincus Small Company
Growth Fund, Inc." The Small Company Value Fund was incorporated on October 23,
1995 under the laws of the State of Maryland under the name "Warburg, Pincus
Small Company Value Fund, Inc." Each of the Funds is diversified, with the
exception of the
46
<PAGE> 50
Emerging Growth Fund which is not diversified. Each Fund (except for the Small
Company Growth Fund) offers two classes of shares, Common Shares and Advisor
Shares. Unless otherwise indicated, references to a "Fund" apply to each class
of shares of that Fund.
All shareholders of a Fund in each class, upon liquidation,
will participate ratably in the Fund's net assets. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Directors can elect all Directors. Shares are transferable
but have no preemptive, conversion or subscription rights.
Distribution and Shareholder Servicing
Distributor. Provident Distributors, Inc. ("PDI") serves as
distributor of the Funds' shares. PDI offers each Fund's shares on a continuous
basis. No compensation is payable by the Funds to PDI for distribution services,
however, pursuant to a separate agreement with CSAM, PDI is compensated for the
services provided to the Funds. PDI's principal business address is Four Falls
Corporate Center, West Conshohocken, Pennsylvania 19428-2961.
Small Company Growth and Small Company Value Funds, Common
Shares. Each of these Funds have adopted a Shareholder Servicing and
Distribution Plan (the "Common Shares 12b-1 Plan"), pursuant to Rule 12b-1 under
the 1940 Act, pursuant to which the Fund pays CSAMSI a fee calculated at an
annual rate of .25% of the average daily net assets of the Common Shares of the
Fund. The fee is intended to compensate CSAMSI, or to enable CSAMSI to
compensate other persons ("Service Providers"), for providing Services (as
defined below) to the Funds. Services performed by CSAMSI or Service Providers
include (i) services that are primarily intended to result in, or that are
primarily attributable to, the sale of the Common Shares, as set forth in the
Common Shares 12b-1 Plan ("Selling Services") and (ii) ongoing servicing and/or
maintenance of the accounts of Common Shareholders of the Fund, as set forth in
the Common Shares 12b-1 Plan ("Shareholder Services", together with Selling
Services, "Services"). Shareholder Services may include, without limitation,
responding to Fund shareholder inquiries and providing services to shareholders
not otherwise provided by the Funds' distributor or transfer agent. Selling
Services may include, without limitation, (a) the printing and distribution to
prospective investors in Common Shares of prospectuses and statements of
additional information describing the Funds; (b) the preparation, including
printing, and distribution of sales literature, advertisements and other
informational materials relating to the Common Shares; (c) providing telephone
services relating to the Funds, including responding to inquiries of prospective
Fund investors; (d) formulating and implementing marketing and promotional
activities, including, but not limited to, direct mail promotions and
television, radio, newspaper, magazine and other mass media advertising and
obtaining whatever information, analyses and reports with respect to marketing
and promotional activities that the Funds may, from time to time, deem
advisable. In providing compensation for Services in accordance with this Plan,
CSAMSI is expressly authorized (i) to make, or cause to be made, payments to
Service Providers reflecting an allocation of overhead and other office expenses
related to providing Services and (ii) to make, or
47
<PAGE> 51
cause to be made, payments to compensate selected dealers or other authorized
persons for providing any Services.
Payments under the 12b-1 Plan are not tied exclusively to the
distribution expenses actually incurred by CSAMSI and the payments may exceed
distribution expenses actually incurred.
Pursuant to the Common Shares 12b-1 Plan, CSAMSI provides the
Board with periodic reports of amounts expended under the Common Shares 12b-1
Plan and the purpose for which the expenditures were made. The Common Shares
12b-1 Plan was adopted on November 1, 1999. Prior to that date, a substantially
similar plan was in place with respect to the Common Shares (the "Prior Common
Shares 12b-1 Plan"). For the fiscal year ended October 31, 1999, the Small
Company Growth and Small Company Value Funds paid the following amounts pursuant
to the Prior Common Shares 12b-1 Plan, all of which was spent on advertising,
marketing communications and public relations:
<TABLE>
<CAPTION>
FUND PAYMENT
<S> <C>
Small Company Growth Fund $ 16,126
Small Company Value Fund $ 115,996
</TABLE>
Each Fund has authorized certain broker-dealers, financial
institutions, recordkeeping organizations and other financial intermediaries
(collectively, "Service Organizations") or, if applicable, their designees to
enter confirmed purchase and redemption orders on behalf of their clients and
customers, with payment to follow no later than the Fund's pricing on the
following business day. If payment is not received by such time, the Service
Organization could be held liable for resulting fees or losses. The Fund may be
deemed to have received a purchase or redemption order when a Service
Organization, or, if applicable, its authorized designee, accepts the order.
Such orders received by the Fund in proper form will be priced at the Fund's net
asset value next computed after they are accepted by the Service Organization or
its authorized designee. Service Organizations may impose transaction or
administrative charges or other direct fees, which charges or fees would not be
imposed if Fund shares are purchased directly from the Funds.
For administration, subaccounting, transfer agency and/or
other services, CSAM or its affiliates may pay Service Organizations a fee of up
to .40% of the average annual value of accounts with the Funds maintained by
such Service Organizations. Service Organizations may also be reimbursed for
marketing costs. The Service Fee payable to any one Service Organization is
determined based upon a number of factors, including the nature and quality of
services provided, the operations processing requirements of the relationship
and the standardized fee schedule of the Service Organization or recordkeeper.
The Funds may reimburse part of the Service Fee at rates they would normally pay
to the transfer agent for providing the services.
48
<PAGE> 52
Emerging Growth and Small Company Value Funds, Advisor Shares.
The Funds have entered into agreements ("Agreements") with institutional
shareholders of record, broker-dealers, financial institutions, depository
institutions, retirement plans and financial intermediaries ("Institutions") to
provide certain distribution, shareholder servicing, administrative and/or
accounting services for their customers (or participants in the case of
retirement plans) ("Customers") who are beneficial owners of Advisor Shares.
Agreements will be governed by a distribution plan (the "Advisor Shares 12b-1
Plan" and collectively with the Common Shares 12b-1 Plan, the "12b-1 Plans")
pursuant to Rule 12b-1 under the 1940 Act, pursuant to which the Fund pays in
consideration for services, a fee calculated at an annual rate of .50% of the
average daily net assets of the Advisor Shares of the Fund. Such payments may be
paid to Institutions directly by a Fund or by CSAMSI on behalf of the Fund. The
Advisor Shares 12b-1 Plan requires the Board, at least quarterly, to receive and
review written reports of amounts expended under the Advisor Shares 12b-1 Plan
and the purposes for which such expenditures were made. The Advisor Shares 12b-1
Plan was adopted on November 1, 1999. Prior to that date, a substantially
similar plan was in place with respect to the Advisor Shares (the "Prior Advisor
Shares 12b-1 Plan"). For the fiscal year ended October 31, 1999, the Advisor
Shares of the Emerging Growth and Small Company Value Funds paid the following
amounts pursuant to the Prior Advisor Shares 12b-1 Plan, all of which were paid
to Institutions:
<TABLE>
<CAPTION>
FUND PAYMENT
<S> <C>
Emerging Growth Fund $1,413,608
Small Company Value Fund $ 214
</TABLE>
Certain Institutions may receive additional fees from the
Distributor, the Adviser or their affiliates for providing supplemental services
in connection with investments in the Funds. Institutions may also be reimbursed
for marketing and other costs. Additional fees may be up to 0.10% per year of
the value of Fund accounts maintained by the firm. Fees payable to any
particular Institution are determined based upon a number of factors, including
the nature and quality of the services provided, the operations processing
requirements of the relationship and the standardized fee schedule of the
Institution. To the extent that the Distributor, the Adviser or their affiliates
provide additional compensation or reimbursements for marketing expenses, such
payments would not represent an additional expense to the Funds or their
shareholders.
An Institution with which a Fund has entered into an Agreement
with respect to its Advisor Shares may charge a Customer one or more of the
following types of fees, as agreed upon by the Institution and the Customer,
with respect to the cash management or other services provided by the
Institution: (i) account fees (a fixed amount per month or per year); (ii)
transaction fees (a fixed amount per transaction processed); (iii) compensation
balance requirements (a minimum dollar amount a Customer must maintain in order
to obtain the
49
<PAGE> 53
services offered); or (iv) account maintenance fees (a periodic charge based
upon the percentage of assets in the account or of the dividend paid on those
assets). Services provided by an Institution to Customers are in addition to,
and not duplicative of, the services to be provided under each Fund's
co-administration and distribution and shareholder servicing arrangements. A
Customer of an Institution should read the relevant Prospectus and this
Statement of Additional Information in conjunction with the Agreement and other
literature describing the services and related fees that would be provided by
the Institution to its Customers prior to any purchase of Fund shares.
Prospectuses are available from each Fund's distributor upon request. No
preference will be shown in the selection of Fund portfolio investments for the
instruments of Institutions.
General. The 12b-1 Plans will continue in effect for so long
as its continuance is specifically approved at least annually by each Fund's
Board, including a majority of the Directors who are not interested persons of
the Fund and who have no direct or indirect financial interest in the operation
of the 12b-1 Plans, as the case may be ("Independent Directors"). Any material
amendment of the 12b-1 Plans would require the approval of the Board in the same
manner. Neither of the 12b-1 Plans may be amended to increase materially the
amount to be spent thereunder without shareholder approval of the relevant class
of shares. Each 12b-1 Plan may be terminated at any time, without penalty, by
vote of a majority of the Independent Directors or by a vote of a majority of
the outstanding voting securities of the relevant class of shares.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of each Fund's shares is equal to the per
share net asset value of the relevant class of shares of the Fund.
Under the 1940 Act, a Fund may suspend the right of redemption
or postpone the date of payment upon redemption for any period during which the
NYSE is closed, other than customary weekend and holiday closings, or during
which trading on the NYSE is restricted, or during which (as determined by the
SEC) an emergency exists as a result of which disposal or fair valuation of
portfolio securities is not reasonably practicable, or for such other periods as
the SEC may permit. (A Fund may also suspend or postpone the recordation of an
exchange of its shares upon the occurrence of any of the foregoing conditions.)
If the Board determines that conditions exist which make
payment of redemption proceeds wholly in cash unwise or undesirable, a Fund may
make payment wholly or partly in securities or other investment instruments
which may not constitute securities as such term is defined in the applicable
securities laws. If a redemption is paid wholly or partly in securities or other
property, a shareholder would incur transaction costs in disposing of the
redemption proceeds. Each Fund has elected, however, to be governed by Rule
18f-1 under the 1940 Act as a result of which a Fund is obligated to redeem
shares, with respect to any one shareholder during any 90 day period, solely in
cash up to the lesser of $250,000 or 1% of the net asset value of that Fund at
the beginning of the period.
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<PAGE> 54
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the "Plan") is available to
shareholders who wish to receive specific amounts of cash periodically.
Withdrawals may be made under the Plan by redeeming as many shares of the
relevant Fund as may be necessary to cover the stipulated withdrawal payment. To
the extent that withdrawals exceed dividends, distributions and appreciation of
a shareholder's investment in a Fund, there will be a reduction in the value of
the shareholder's investment and continued withdrawal payments may reduce the
shareholder's investment and ultimately exhaust it. Withdrawal payments should
not be considered as income from investment in a Fund.
EXCHANGE PRIVILEGE
An exchange privilege with certain other funds advised by CSAM
is available to investors in each Fund. A Common Shareholder may exchange Common
Shares of a Fund for Common Shares of another Fund or for Common Shares of
another Warburg Pincus fund at their respective net asset values. An Advisor
Shareholder may exchange Advisor Shares of a Fund for Advisor Shares of another
Warburg Pincus fund at their respective net asset values. If an exchange request
is received by Warburg Pincus Funds or their agent prior to the close of regular
trading on the NYSE, the exchange will be made at each Fund's net asset value
determined at the end of that business day. Exchanges will be effected without a
sales charge but must satisfy the minimum dollar amount necessary for new
purchases. The Fund may refuse exchange purchases at any time without prior
notice.
The exchange privilege is available to shareholders residing
in any state in which the shares being acquired may legally be sold. When an
investor effects an exchange of shares, the exchange is treated for federal
income tax purposes as a redemption. Therefore, the investor may realize a
taxable gain or loss in connection with the exchange. Investors wishing to
exchange shares of a Fund for shares in another Warburg Pincus Fund should
review the prospectus of the other fund prior to making an exchange. For further
information regarding the exchange privilege or to obtain a current prospectus
for another Warburg Pincus Fund, an investor should contact Warburg Pincus Funds
at (800) 927-2874.
Each Fund reserves the right to refuse exchange purchases by
any person or group if, in CSAM's judgment, the Fund would be unable to invest
the money effectively in accordance with its investment objective and policies,
or would otherwise potentially be adversely affected. Examples of when an
exchange purchase could be refused are when a Fund receives or anticipates
receiving large exchange orders at or about the same time and/or when a pattern
of exchanges within a short period of time (often associated with a "market
timing" strategy) is discerned. Each Fund reserves the right to terminate or
modify the exchange privilege at any time upon 30 days' notice to shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is a summary of the material United States
federal income tax considerations regarding the purchase, ownership and
disposition of shares in each Fund.
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<PAGE> 55
Each prospective shareholder is urged to consult his own tax adviser with
respect to the specific federal, state, local and foreign tax consequences of
investing in a Fund. The summary is based on the laws in effect on the date of
this Statement of Additional Information and existing judicial and
administrative interpretations thereof, both of which are subject to change.
The Funds and Their Investments
Each Fund intends to continue to qualify as a regulated
investment company under the Code during each of its taxable years. To so
qualify, a Fund must, among other things: (a) derive at least 90% of its gross
income in each taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income (including, but not limited
to, gains from options, futures or forward contracts) derived with respect to
its business of investing in such stock, securities or currencies; and (b)
diversify its holdings so that, at the end of each quarter of the Fund's taxable
year, (i) at least 50% of the market value of the Fund's assets is represented
by cash, securities of other regulated investment companies, U.S. Government
Securities and other securities, with such other securities limited, in respect
of any one issuer, to an amount not greater than 5% of the Fund's assets and not
greater than 10% of the outstanding voting securities of such issuer and (ii)
not more than 25% of the value of its assets is invested in the securities
(other than U.S. Government Securities or securities of other regulated
investment companies) of any one issuer or any two or more issuers that the Fund
controls and which are determined to be engaged in the same or similar trades or
businesses or related trades or businesses.
As a regulated investment company, each Fund will not be
subject to United States federal income tax on its net investment income (i.e.,
income other than its net realized long-term and short-term capital gains) and
on its net realized long-term and short-term capital gains, if any, that it
distributes to its shareholders, provided that an amount equal to at least 90%
of the sum of its investment company taxable income (i.e., 90% of its taxable
income minus the excess, if any, of its net realized long-term capital gains
over its net realized short-term capital losses (including any capital loss
carryovers), plus or minus certain other adjustments as specified in the Code)
and its net tax-exempt income for the taxable year is distributed to its
shareholders, but will be subject to tax at regular corporate rates on any
taxable income or gains that it does not distribute. Any dividend declared by a
Fund in October, November or December of any calendar year and payable to
shareholders of record on a specified date in such a month shall be deemed to
have been received by each shareholder on December 31 of such calendar year and
to have been paid by the Fund not later than such December 31, provided that
such dividend is actually paid by the Fund during January of the following
calendar year.
Each Fund intends to distribute annually to its shareholders
substantially all of its investment company taxable income. The Board of
Directors of each Fund will determine annually whether to distribute any net
realized long-term capital gains in excess of net realized short-term capital
losses (including any capital loss carryovers). Each Fund currently expects
52
<PAGE> 56
to distribute any such excess annually to its shareholders. However, if a Fund
retains for investment an amount equal to all or a portion of its net long-term
capital gains in excess of its net short-term capital losses and capital loss
carryovers, it will be subject to a corporate tax (currently at a rate of 35%)
on the amount retained. In that event, the Fund will designate such retained
amounts as undistributed capital gains in a notice to its shareholders who (a)
will be required to include in income for United Stares federal income tax
purposes, as long-term capital gains, their proportionate shares of the
undistributed amount, (b) will be entitled to credit their proportionate shares
of the 35% tax paid by the Fund on the undistributed amount against their United
States federal income tax liabilities, if any, and to claim refunds to the
extent their credits exceed their tax liabilities, if any, and (c) will be
entitled to increase their tax basis, for United States federal income tax
purposes, in their shares by an amount equal to 65% of the amount of
undistributed capital gains included in their income. Organizations or persons
not subject to federal income tax on such capital gains will be entitled to a
refund of their pro rata share of such taxes paid by a Fund upon filing
appropriate returns or claims for refund with the Internal Revenue Service (the
"IRS").
The Code imposes a 4% nondeductible excise tax on each Fund to
the extent the Fund does not distribute by the end of any calendar year at least
98% of its ordinary income for that year and at least 98% of its net capital
gains (both long-term and short-term) for the one-year period ending, as a
general rule, on October 31 of that year. For this purpose, however, any
ordinary income or net capital gains retained by a Fund that is subject to
corporate income tax will be considered to have been distributed by year-end. In
addition, the minimum amounts that must be distributed in any year to avoid the
excise tax will be increased or decreased to reflect any underdistribution or
overdistribution, as the case may be, from the previous year. Each Fund
anticipates that it will pay such dividends and will make such distributions as
are necessary in order to avoid the application of this excise tax.
With regard to each Fund's investments in foreign securities,
exchange control regulations may restrict repatriations of investment income and
capital or the proceeds of securities sales by foreign investors such as the
Fund and may limit the Fund's ability to pay sufficient dividends and to make
sufficient distributions to satisfy the 90% and excise tax distribution
requirements.
If, in any taxable year, a Fund fails to qualify as a
regulated investment company under the Code or fails to meet the distribution
requirement, it would be taxed in the same manner as an ordinary corporation and
distributions to its shareholders would not be deductible by the Fund in
computing its taxable income. In addition, the Fund's distributions, to the
extent derived from the Fund's current or accumulated earnings and profits,
would constitute dividends (eligible for the corporate dividends-received
deduction) which are taxable to shareholders as ordinary income, even though
those distributions might otherwise (at least in part) have been treated in the
shareholders' hands as long-term capital gains. If a Fund fails to qualify as a
regulated investment company in any year, it must pay out its earnings and
profits accumulated in that year in order to qualify again as a regulated
investment company. Moreover, if the Fund failed to qualify as a regulated
investment company for a period greater than one taxable year, the Fund may be
required to recognize
53
<PAGE> 57
any net built-in gains (the excess of the aggregate gains, including items of
income, over aggregate losses that would have been realized if the Fund had been
liquidated) in order to qualify as a regulated investment company in a
subsequent year.
Each Fund's short sales against the box, if any, and
transactions in foreign currencies, forward contracts, options and futures
contracts (including options and futures contracts on foreign currencies) will
be subject to special provisions of the Code that, among other things, may
affect the character of gains and losses realized by the Fund (i.e., may affect
whether gains or losses are ordinary or capital), accelerate recognition of
income to the Fund and defer Fund losses. These rules could therefore affect the
character, amount and timing of distributions to shareholders. These provisions
also (a) will require each Fund to mark-to-market certain types of the positions
in its portfolio (i.e., treat them as if they were closed out) and (b) may cause
the Fund to recognize income without receiving cash with which to pay dividends
or make distributions in amounts necessary to satisfy the distribution
requirements for avoiding income and excise taxes. Each Fund will monitor its
transactions, will make the appropriate tax elections and will make the
appropriate entries in its books and records when it engages in short sales
against the box or acquires any foreign currency, forward contract, option,
futures contract or hedged investment in order to mitigate the effect of these
rules and prevent disqualification of the Fund as a regulated investment
company.
Passive Foreign Investment Companies
If a Fund purchases shares in certain foreign investment
entities, called "passive foreign investment companies" ("PFICs"), it may be
subject to United States federal income tax on a portion of any "excess
distribution" or gain from the disposition of such shares even if such income is
distributed as a taxable dividend by the Fund to its shareholders. Additional
charges in the nature of interest may be imposed on the Fund in respect of
deferred taxes arising from such distributions or gains. If a Fund were to
invest in a PFIC and elected to treat the PFIC as a "qualified electing fund"
under the Code, in lieu of the foregoing requirements, the Fund might be
required to include in income each year a portion of the ordinary earnings and
net capital gains of the qualified electing fund, even if not distributed to the
Fund, and such amounts would be subject to the 90% and excise tax distribution
requirements described above. In order to make this election, the Fund would be
required to obtain certain annual information from the PFICs in which it
invests, which may be difficult or impossible to obtain.
Alternatively, a Fund may make a mark-to-market election that
will result in the Fund being treated as if it had sold and repurchased all of
the PFIC stock at the end of each year. In such case, the Fund would report any
such gains as ordinary income and would deduct any such losses as ordinary
losses to the extent of previously recognized gains. The election, once made,
would be effective for all subsequent taxable years of the Fund, unless revoked
with the consent of the IRS. By making the election, a Fund could potentially
ameliorate the adverse tax consequences with respect to its ownership of shares
in a PFIC, but in any particular year may be required to recognize income in
excess of the distributions it receives from PFICs and its proceeds from
dispositions of PFIC stock. The Fund may have
54
<PAGE> 58
to distribute this "phantom" income and gain to satisfy the 90% distribution
requirement and to avoid imposition of the 4% excise tax. The Fund will make the
appropriate tax elections, if possible, and take any additional steps that are
necessary to mitigate the effect of these rules.
Dividends and Distributions
Dividends of net investment income and distributions of net
realized short-term capital gains are taxable to a United States shareholder as
ordinary income, whether paid in cash or in shares. Distributions of net
realized long-term capital gains, if any, that a Fund designates as capital
gains dividends are taxable as long-term capital gains, whether paid in cash or
in shares and regardless of how long a shareholder has held shares of the Fund.
Dividends and distributions paid by a Fund (except for the portion thereof, if
any, attributable to dividends on stock of U.S. corporations received by the
Fund) will not qualify for the deduction for dividends received by corporations.
Distributions in excess of a Fund's current and accumulated earnings and profits
will, as to each shareholder, be treated as a tax-free return of capital, to the
extent of a shareholder's basis in his shares of the Fund, and as a capital gain
thereafter (if the shareholder holds his shares of the Fund as capital assets).
Shareholders receiving dividends or distributions in the form
of additional shares should be treated for United States federal income tax
purposes as receiving a distribution in an amount equal to the amount of money
that the shareholders receiving cash dividends or distributions will receive,
and should have a cost basis in the shares received equal to such amount.
Investors considering buying shares just prior to a dividend
or capital gain distribution should be aware that, although the price of shares
just purchased at that time may reflect the amount of the forthcoming
distribution, such dividend or distribution may nevertheless be taxable to them.
If a Fund is the holder of record of any stock on the record
date for any dividends payable with respect to such stock, such dividends are
included in the Fund's gross income not as of the date received but as of the
later of (a) the date such stock became ex-dividend with respect to such
dividends (i.e., the date on which a buyer of the stock would not be entitled to
receive the declared, but unpaid, dividends) or (b) the date the Fund acquired
such stock. Accordingly, in order to satisfy its income distribution
requirements, the Fund may be required to pay dividends based on anticipated
earnings, and shareholders may receive dividends in an earlier year than would
otherwise be the case.
Sales of Shares
Upon the sale or exchange of his shares, a shareholder will
realize a taxable gain or loss equal to the difference between the amount
realized and his basis in his shares. Such gain or loss will be treated as
capital gain or loss if the shares are capital assets in the shareholder's
hands, and will be long-term capital gain or loss if the shares are held for
more than one year and short-term capital gain or loss if the shares are held
for one year or less. Any loss realized on a sale or exchange will be disallowed
to the extent the shares disposed of
55
<PAGE> 59
are replaced, including replacement through the reinvesting of dividends and
capital gains distributions in a Fund, within a 61-day period beginning 30 days
before and ending 30 days after the disposition of the shares. In such a case,
the basis of the shares acquired will be increased to reflect the disallowed
loss. Any loss realized by a shareholder on the sale of a Fund share held by the
shareholder for six months or less will be treated for United States federal
income tax purposes as a long-term capital loss to the extent of any
distributions or deemed distributions of long-term capital gains received by the
shareholder with respect to such share during such six-month period.
Backup Withholding
Each Fund may be required to withhold, for United States
federal income tax purposes, 31% of the dividends and distributions payable to
shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the IRS that they are subject to backup withholding. Certain
shareholders are exempt from backup withholding. Backup withholding is not an
additional tax and any amount withheld may be credited against a shareholder's
United States federal income tax liabilities.
Notices
Shareholders will be notified annually by each Fund as to the
United States federal income tax status of the dividends, distributions and
deemed distributions attributable to undistributed capital gains (discussed
above in "The Funds and Their Investments") made by the Fund to its
shareholders. Furthermore, shareholders will also receive, if appropriate,
various written notices after the close of a Fund's taxable year regarding the
United States federal income tax status of certain dividends, distributions and
deemed distributions that were paid (or that are treated as having been paid) by
the Fund to its shareholders during the preceding taxable year.
Special Tax Matters Relating to Zero Coupon Securities
Investment by a Fund in zero coupon securities may create
special tax consequences. Zero coupon securities do not make interest payments;
however, a portion of the difference between a zero coupon security's maturity
value and its purchase price is imputed as income to the Fund each year even
though the Fund receives no cash distribution until maturity. Under the U.S.
federal tax laws applicable to mutual funds, the Fund will not be subject to tax
on this income if it pays dividends to its shareholders substantially equal to
all the income received from, or imputed with respect to, its investments during
the year, including its zero coupon securities. These dividends will ordinarily
constitute taxable income to shareholders of the Fund.
Other Taxation
Distributions also may be subject to additional state, local
and foreign taxes depending on each shareholder's particular situation.
56
<PAGE> 60
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN MATERIAL TAX CONSEQUENCES AFFECTING
EACH FUND AND ITS SHAREHOLDERS. SHAREHOLDERS ARE ADVISED TO CONSULT THEIR
OWN TAX ADVISERS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO
THEM OF AN INVESTMENT IN A FUND.
DETERMINATION OF PERFORMANCE
From time to time, a Fund may quote the total return of its Common
Shares and/or Advisor Shares in advertisements or in reports and other
communications to shareholders. With respect to the Funds' Common and Advisor
Shares, the Funds' average annual total returns for the indicated periods ended
October 31, 1999 were as follows (performance figures calculated without waiver
by a Fund's service providers(s), if any, are noted in italics):
TOTAL RETURN
COMMON SHARES
<TABLE>
<CAPTION>
PERIOD FROM THE
COMMENCEMENT
ONE-YEAR FIVE-YEAR TEN-YEAR OF OPERATIONS
-------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
EMERGING GROWTH FUND
(1/21/88) 29.80% 17.25% 15.54% 16.25%
SMALL COMPANY
GROWTH FUND 64.19% 61.62% N/A N/A 19.81% (17.32%)
(12/31/96)
SMALL COMPANY VALUE FUND
(12/29/95) (3.91%) (4.45%) N/A N/A 10.35% 10.00%
</TABLE>
ADVISOR SHARES*
<TABLE>
<CAPTION>
PERIOD FROM THE
COMMENCEMENT
ONE-YEAR FIVE-YEAR TEN-YEAR OF OPERATIONS
<S> <C> <C> <C> <C> <C>
EMERGING GROWTH FUND
(4/4/91) 29.16% 16.73% N/A 15.63%
SMALL COMPANY VALUE FUND
(12/29/95) (4.17%) (4.64%) N/A N/A 10.10% 9.21%
</TABLE>
* No Small Company Growth Fund Advisor shares were outstanding as of October
31, 1999.
These total return figures show the average percentage change in
value of an investment in a Fund from the beginning of the measurement period to
the end of the measurement period. The figures reflect changes in the price of
the Fund's shares assuming that any income dividends and/or capital gain
distributions made by the Fund during the period were reinvested in shares of
the Fund. Total return will be shown for recent one-, five- and ten-year
periods, and may be shown for other periods as well (such as from commencement
of the Fund's operations or on a year-by-year, quarterly or current year-to-date
basis).
57
<PAGE> 61
These figures are calculated by finding the average annual
compounded rates of return for the one-, five- and ten- (or such shorter period
as the relevant class of shares has been offered) year periods that would equate
the initial amount invested to the ending redeemable value according to the
following formula: P (1 + T)n = ERV. For purposes of this formula, "P" is a
hypothetical investment of $1,000; "T" is average annual total return; "n" is
number of years; and "ERV" is the ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the one-, five- or ten-year periods (or
fractional portion thereof). Total return or "T" is computed by finding the
average annual change in the value of an initial $1,000 investment over the
period and assumes that all dividends and distributions are reinvested during
the period.
When considering average total return figures for periods longer
than one year, it is important to note that the annual total return for one year
in the period might have been greater or less than the average for the entire
period. When considering total return figures for periods shorter than one year,
investors should bear in mind that such return may not be representative of any
Fund's return over a longer market cycle. A Fund may also advertise aggregate
total return figures for various periods, representing the cumulative change in
value of an investment in the relevant Fund for the specific period. Aggregate
and average total returns may be shown by means of schedules, charts or graphs,
and may indicate various components of total return (i.e., change in value of
initial investment, income dividends and capital gain distributions).
A Fund may advertise, from time to time, comparisons of the
performance of its Common Shares and/or Advisor Shares with that of one or more
other mutual funds with similar investment objectives. A Fund may advertise
average annual calendar year-to-date and calendar quarter returns, which are
calculated according to the formula set forth in the preceding paragraph, except
that the relevant measuring period would be the number of months that have
elapsed in the current calendar year or most recent three months, as the case
may be. Investors should note that this performance may not be representative of
the Fund's total return in longer market cycles.
The performance of a class of Fund shares will vary from time to
time depending upon market conditions, the composition of a Fund's portfolio and
operating expenses allocable to it. As described above, total return is based on
historical earnings and is not intended to indicate future performance.
Consequently, any given performance quotation should not be considered as
representative of performance for any specified period in the future.
Performance information may be useful as a basis for comparison with other
investment alternatives. However, a Fund's performance will fluctuate, unlike
certain bank deposits or other investments which pay a fixed yield for a stated
period of time. Any fees charged by Institutions or other institutional
investors directly to their customers in connection with investments in Fund
shares are not reflected in a Fund's total return, and such fees, if charged,
will reduce the actual return received by customers on their investments.
58
<PAGE> 62
INDEPENDENT ACCOUNTANTS AND COUNSEL
PricewaterhouseCoopers LLP ("PwC"), with principal offices at
2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as independent
accountants for each Fund. The financial statements that are incorporated by
reference into this Statement of Additional Information have been audited by
PwC, and have been incorporated by reference herein in reliance upon the report
of such firm of independent accountants given upon their authority as experts in
accounting and auditing.
Willkie Farr & Gallagher serves as counsel for each Fund and
provides legal services from time to time for CSAM and CSAMSI.
MISCELLANEOUS
The Funds are not sponsored, endorsed, sold or promoted by Warburg,
Pincus & Co. Warburg, Pincus & Co. makes no representation or warranty, express
or implied, to the owners of the Funds or any member of the public regarding the
advisability of investing in securities generally or in the Funds particularly.
Warburg, Pincus & Co. licenses certain trademarks and trade names of Warburg,
Pincus & Co., and is not responsible for and has not participated in the
calculation of the Funds' net asset value, nor is Warburg, Pincus & Co. a
distributor of the Funds. Warburg, Pincus & Co. has no obligation or liability
in connection with the administration, marketing or trading of the Funds.
As of January 31, 2000, the name, address and percentage of
ownership of each person that owns of record 5% or more of each Fund's
outstanding shares were as follows:
EMERGING GROWTH FUND
<TABLE>
<CAPTION>
Common Shares Advisor Shares
------------- --------------
<S> <C> <C>
Charles Schwab & Co., Inc.* 14.64%
Special Custody Account for
the Exclusive Benefit of Customers
Attn: Mutual Funds Dept.
101 Montgomery Street
San Francisco, California 94104-4122
Nationwide Life Insurance Company* 13.08%
Nationwide QPVA
c/o IPO Portfolio Accounting
PO Box 182029
Columbus, Ohio 43218-2029
</TABLE>
59
<PAGE> 63
<TABLE>
<CAPTION>
Common Shares Advisor Shares
------------- --------------
<S> <C> <C>
Fidelity Investment Institutional* 10.35%
Operations Cnt as Agent for certain
Employee Benefit Plans
100 Magellan Way
Covington, Kentucky 41015-1999
First Trust National Association* 7.32%
TTEE United Healthcare Corp.
401K Savings Plan
Attn: Mutual Funds A/C #21740224
PO Box 64010
St. Paul, Minnesota 55164-0010
Connecticut General Life Ins. Co.* 95.04%
On behalf of its separate accounts
55G c/o Melissa Spencer M110
CIGNA Corp. PO Box 2975
Hartford, Connecticut 06104-2975
</TABLE>
SMALL COMPANY VALUE FUND
<TABLE>
<CAPTION>
Common Shares Advisor Shares
------------- --------------
<S> <C> <C>
Charles Schwab & Co. Inc.* 22.83%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds Dept.
101 Montgomery St.
San Francisco, CA 94104-4122
National Financial Services Corp.* 11.26% 38.68%
FBO Customers
A/C #SV8849-8436
PO Box 3908
Church Street Station
New York, New York 10008-3908
Merrill Lynch Pierce Fenner & Smith Inc.* 5.62%
Building 1, Team A
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
Donaldson Lufkin & Jenrette Secs.* 31.24%
PO Box 2052
Jersey City, New Jersey 07303-2052
State Street Bank & Trust Co.* 14.52%
Cust for the IRA of
Peggy D. Polonkey
150 Stable Rd.
Norristown, PA 19403-2664
</TABLE>
60
<PAGE> 64
<TABLE>
<CAPTION>
Common Shares Advisor Shares
------------- --------------
<S> <C> <C>
MSDW Online Inc.* 10.35%
500-12640-18
333 Market Street
San Francisco, CA 94105-2102
</TABLE>
WARBURG PINCUS SMALL COMPANY GROWTH FUND
<TABLE>
<CAPTION>
Common Shares Advisor Shares
------------- --------------
<S> <C> <C>
Charles Schwab & Co. Inc.* 21.36%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds Dept.
101 Montgomery St.
San Francisco, CA 94104-4122
Merrill Lynch Pierce Fenner & Smith Inc.* 18.62%
Building 1, Team A
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
National Financial Services Corp.* 12.14%
FBO Customers
PO Box 3908
Church St. Station
New York, NY 10008-3908
</TABLE>
* Each Fund believes these entities are not the beneficial owners of
shares held of record by them.
FINANCIAL STATEMENTS
Each Fund's audited annual report dated October 31, 1999, which
either accompanies this Statement of Additional Information or has previously
been provided to the investor to whom this Statement of Additional Information
is being sent, is incorporated herein by reference. Each Fund will furnish
without charge a copy of its annual report upon request by calling Warburg
Pincus Funds at 800-927-2874.
61
<PAGE> 65
APPENDIX
DESCRIPTION OF RATINGS
Commercial Paper Ratings
Commercial paper rated A-1 by Standard and Poor's Ratings Services
("S&P") indicates that the degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted with a plus sign designation. Capacity for timely payment on commercial
paper rated A-2 is satisfactory, but the relative degree of safety is not as
high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating assigned
by Moody's Investors Service, Inc. ("Moody's"). Issuers rated Prime-1 (or
related supporting institutions) are considered to have a superior capacity for
repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics of issuers rated Prime-1 but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
Corporate Bond Ratings
The following summarizes the ratings used by S&P for corporate
bonds:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB - This is the lowest investment grade. Debt rated BBB is
regarded as having an adequate capacity to pay interest and repay principal.
Although 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 bonds in this category than for
bonds in higher rated categories.
BB, B and CCC - Debt rated BB and B is regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB represents a lower
degree of speculation than B, and CCC the highest degree of speculation. While
such bonds will likely have some quality
<PAGE> 66
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which could
lead to inadequate capacity to meet timely interest and principal payments. The
BB rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B - Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on which no
interest is being paid. Such debt is rated between debt rated C and debt rated
D.
To provide more detailed indications of credit quality, the ratings
may be modified by the addition of a plus or minus sign to show relative
standing within this major rating category.
The following summarizes the ratings used by Moody's for corporate
bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds.
A-2
<PAGE> 67
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers (1, 2 and 3) with respect to the
bonds rated "Aa" through "B." The modifier 1 indicates that the bond being rated
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 bond ranks in the
lower end of its generic rating category.
Caa - Bonds that are rated Caa are of poor standing. These issues
may be in default or present elements of danger may exist with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C comprise the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
A-3
