<PAGE> 1
SUPPLEMENT TO THE COMMON CLASS PROSPECTUS
WARBURG PINCUS BALANCED FUND
WARBURG PINCUS VALUE FUND
WARBURG PINCUS CAPITAL APPRECIATION FUND
WARBURG PINCUS HEALTH SCIENCES FUND
The following information supersedes the section in the funds' Common Class
Prospectus entitled "Other Information -- About the Distributor".
Provident Distributors, Inc. (PDI), Four Falls Corporate Center, West
Conshohocken, PA 19428-2961, is the funds' distributor and is responsible for
making the funds available to you.
As part of their business strategies, the Balanced and Health Sciences funds
each have adopted a Rule 12b-1 shareholder-servicing and distribution plan to
compensate Credit Suisse Asset Management Securities, Inc. (CSAMSI) for
providing certain shareholder and other services related to the sale of the
Common Class. Under the plan, CSAMSI receives fees at an annual rate of 0.25% of
average daily net assets of the funds' Common Class. Because the fees are paid
out of a fund's assets on an ongoing basis, over time they will increase the
cost of your investment and may cost you more than paying other types of sales
charges.
Dated: January 3, 2000 WPUSL-16-0100
<PAGE> 2
STATEMENT OF ADDITIONAL INFORMATION
February 16, 1999
As Revised January 3, 2000
WARBURG PINCUS BALANCED FUND
WARBURG PINCUS VALUE FUND
WARBURG PINCUS CAPITAL APPRECIATION FUND
WARBURG PINCUS HEALTH SCIENCES FUND
This combined Statement of Additional Information provides information about
Warburg Pincus Balanced Fund (the "Balanced Fund"), Warburg Pincus Value Fund
(the "Value Fund"),Warburg Pincus Capital Appreciation Fund (the "Capital
Appreciation Fund") and Warburg Pincus Health Sciences Fund (the "Health
Sciences Fund," and collectively with the Balanced Fund, the Value Fund and the
Capital Appreciation Fund, the "Funds") that supplements information contained
in the combined Prospectus for the Common Shares of the Funds dated February 16,
1999, as revised May 26, 1999, and the Prospectuses for the Advisor Shares of
the Funds, each dated February 16, 1999.
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 4906
Boston, Massachusetts 02205-9030 Grand Central Station
800-WARBURG New York, NY 10163
Attn: Institutional Services
800-222-8977
<PAGE> 3
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES.....................................................................1
Options, Futures and Currency Exchange Transactions..................................1
Securities Options.............................................................1
Securities Index Options.......................................................4
OTC Options....................................................................5
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...............................................................13
Debt Securities.....................................................................16
Below Investment Grade Securities...................................................16
Zero Coupon Securities..............................................................18
Securities of Other Investment Companies............................................18
Lending of Portfolio Securities.....................................................18
Foreign Investments.................................................................19
Short Sales "Against the Box".......................................................22
Warrants............................................................................22
Non-Publicly Traded and Illiquid Securities.........................................23
Borrowing...........................................................................24
Reverse Repurchase Agreements.......................................................25
When-Issued Securities and Delayed-Delivery Transactions............................25
REITs...............................................................................26
Small Capitalization and Emerging Growth Companies; Unseasoned Issuers..............26
Special Situation Companies.........................................................26
Strategy Available to the Balanced Fund......................................................26
Municipal Obligations...............................................................26
Strategy Available to the Capital Appreciation Fund and the Health Sciences Fund.............28
Dollar Rolls........................................................................28
Strategies Available to the Health Sciences Fund.............................................29
Securities of Health Sciences Companies.............................................29
Short Sales (excluding Short Sales "Against the Box")...............................31
INVESTMENT RESTRICTIONS...............................................................................31
All Funds....................................................................................31
Balanced and Value Funds.....................................................................31
</TABLE>
<PAGE> 4
<TABLE>
Page
<S> <C>
Capital Appreciation Fund....................................................................33
Health Sciences Fund.........................................................................35
PORTFOLIO VALUATION...................................................................................37
PORTFOLIO TRANSACTIONS................................................................................38
PORTFOLIO TURNOVER....................................................................................40
MANAGEMENT OF THE FUNDS...............................................................................41
Officers and Board of Directors/Trustees.....................................................41
Directors/Trustees' Total Compensation.......................................................45
Portfolio Managers of the Funds..............................................................46
Balanced Fund.......................................................................46
Value Fund..........................................................................46
Capital Appreciation Fund...........................................................46
Health Sciences Fund................................................................47
Investment Adviser and Co-Administrators.....................................................47
Custodians and Transfer Agent................................................................49
Organization of the Funds....................................................................50
Capital Appreciation Fund...........................................................50
Balanced Fund, Value Fund and Health Sciences Fund..................................50
All Funds...........................................................................50
Distribution and Shareholder Servicing.......................................................51
Distributor..................................................................................51
Common Shares.......................................................................51
All Funds, Advisor Shares...........................................................53
General.............................................................................54
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION........................................................54
Automatic Cash Withdrawal Plan...............................................................55
EXCHANGE PRIVILEGE....................................................................................55
ADDITIONAL INFORMATION CONCERNING TAXES...............................................................56
The Funds and Their Investments..............................................................56
Passive Foreign Investment Companies.........................................................58
Dividends and Distributions..................................................................59
Sales of Shares..............................................................................60
Foreign Taxes................................................................................60
Backup Withholding...........................................................................60
Notices......................................................................................61
Special Tax Matters Relating to Zero Coupon Securities.......................................61
Other Taxation...............................................................................61
DETERMINATION OF PERFORMANCE..........................................................................61
INDEPENDENT ACCOUNTANTS AND COUNSEL...................................................................65
MISCELLANEOUS.........................................................................................65
FINANCIAL STATEMENTS..................................................................................68
APPENDIX - DESCRIPTION OF RATINGS....................................................................A-1
</TABLE>
(ii)
<PAGE> 5
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 Balanced Fund is maximum total
return through a combination of long-term growth of capital and current income
consistent with preservation of capital.
The investment objectives of the Value Fund are long-term
growth of capital and income and a reasonable current return.
The investment objective of the Capital Appreciation Fund is
long-term capital appreciation.
The investment objective of the Health Sciences Fund is
capital appreciation.
Unless otherwise indicated, all of the Funds are permitted to
engage in the following investment strategies. 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
(sell) 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
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
<PAGE> 6
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 an increase 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.
If security prices rise, a put writer would generally expect
to profit, although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that the
writer will also profit, because it should be able to close out the option at a
lower price. If security prices decline, the put writer would expect to suffer a
loss. This loss may be less than the loss from purchasing the underlying
instrument directly to the extent that the premium received offsets the effects
of the decline.
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, each Fund's investment adviser
("CSAM"), 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
2
<PAGE> 7
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 realized loss will be offset wholly or in part by the premium received.
Out-of-the-money, at-the-money and in-the-money put options (the reverse of call
options as to the relation of exercise price to market price) may be used in the
same market environments that such call options are used in equivalent
transactions. 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 a 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 a 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
3
<PAGE> 8
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 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 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.
4
<PAGE> 9
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 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 the Fund is authorized to invest in foreign securities, currencies for
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 CFTC regulations 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. Although the Funds are limited in the amount of
assets that may be invested in futures
5
<PAGE> 10
transactions, there is no overall limit on the percentage of Fund assets that
may be at risk with respect to futures activities.
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-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 may 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 posi-
6
<PAGE> 11
tions 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.
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. A 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. The Capital Appreciation and Health
Sciences Funds will only engage in currency exchange transactions for hedging
purposes.
7
<PAGE> 12
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 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.
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, a 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
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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
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
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<PAGE> 14
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 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
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 security
index futures contracts and options on these futures contracts. These guidelines
may, in certain instances, require segregation by the Fund of 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 put option written by a Fund
may require the Fund to segregate assets (as described above) equal to the
exercise price. A Fund could purchase a put option if the strike price of
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<PAGE> 15
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 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 year 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; commercial paper rated no lower than A-2 by
Standard & Poor's Ratings Services ("S&P") or Prime-2 by Moody's Investors
Service, Inc. ("Moody's") or the equivalent from another major
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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.
Money Market Mutual Funds. Where CSAM believes that it would
be beneficial to a 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.
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, acting under the supervision of the
Fund's Board of Directors/Trustees (the "Board"), 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").
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 the Fund should continue to hold the securities.
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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.
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 in a stable interest
rate environment, a common industry practice in the U.S. has been to assume that
prepayments will result in a 12-year average life, although it may vary
depending on numerous factors. 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
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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 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.
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Assignments and Participations. Each Fund may invest in
assignments of and participations in loans issued by banks and other financial
institutions.
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
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interpositioned between the Fund and the Borrower is determined by CSAM to be
creditworthy.
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 in debt securities (in
the case of the Value Fund, Capital Appreciation Fund and Health Sciences Fund,
with respect to up to 20% of the Fund's total assets). 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. The market value of debt obligations may be expected to vary
depending upon, among other factors, interest rates, the ability of the issuer
to repay principal and interest, any change in investment rating and general
economic conditions. 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.
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 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 of the Balanced Fund
and the Value Fund may invest up to 10% of its net assets, the Capital
Appreciation Fund may invest up to 5% of its total assets and the Health
Sciences Fund may invest up to 20% of its total assets in
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securities rated below investment grade, including convertible debt securities.
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 a
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.
While the market values of medium- and lower-rated securities
and unrated securities of comparable quality tend to react less to fluctuations
in interest rate levels than do those of higher-rated 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
higher-quality securities. In addition, medium- and lower-rated securities and
comparable unrated securities generally present a higher degree of credit risk.
Issuers of medium- and lower-rated securities and unrated 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 medium- and lower-rated securities and unrated 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. A 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 Funds anticipate 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 a Fund's ability to dispose of
particular issues 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 issuer. The lack of a liquid secondary market for
certain securities also may make it more difficult for a Fund to obtain accurate
market quotations for purposes of valuing the Fund and calculating its net asset
value.
The market value of securities in medium- and lower-rated
categories is also more volatile than that of higher quality securities. Factors
adversely impacting the market value of these securities will adversely impact a
Fund's net asset value. A Fund will rely on the judgment, analysis and
experience of CSAM in evaluating the creditworthiness of an issuer. In this
evaluation, in addition to relying on ratings assigned by Moody's or S&P,
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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. Interest
rate trends and specific developments which may affect individual issuers will
also be analyzed. Subsequent to its purchase by a Fund, an issue of securities
may cease to be rated or its rating may be reduced. 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.
Normally, medium- and lower-rated and comparable unrated securities are not
intended for short-term investment. A 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 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 the 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
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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 the 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.
Foreign Investments. The Balanced, Value, Capital Appreciation
and Health Sciences Funds may invest up to 15%, 20%, 20% and 35% of total
assets, respectively, 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 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.
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<PAGE> 24
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 the Funds
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 planned introduction of a single European
currency, the euro, on January 1, 1999 for participating European nations in the
Economic Monetary Union presents 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.
Information. Many of the foreign securities held by a Fund
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
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<PAGE> 25
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 which may result
in increased exposure to market and foreign exchange fluctuations and increased
illiquidity.
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 the 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. In
addition, foreign securities may be subject to foreign government taxes that
would reduce the net yield on such securities.
Foreign Debt Securities. 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.
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 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.
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.
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Brady Bonds. The 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 "Against the Box." In a short sale, a Fund (other
than the Capital Appreciation Fund) 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. A Fund may engage in a
short sale if at the time of the short sale the Fund owns or has the right to
obtain without additional cost an equal amount of the security being sold short.
This investment technique is known as a short sale "against the box." It may be
entered into by a Fund to, for example, lock in a sale price for a security the
Fund does not wish to sell immediately. If a Fund engages in a short sale, the
collateral for the short position will be segregated in an account with the
Fund's custodian or qualified sub-custodian. In the case of the Balanced, Value
and Health Sciences Funds, no 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.
A Fund may 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 a
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.
Warrants. Each Fund may invest up to 15% (10% in the case of
the Capital Appreciation Fund) of its net assets 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
22
<PAGE> 27
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. Each Fund may
invest up to 15% of its net assets (10% of total assets in the case of the
Capital Appreciation Fund) in non-publicly traded and illiquid securities,
including securities that are illiquid by virtue of the absence of a readily
available market, time deposits maturing in more than seven days, certain Rule
144A Securities (as defined below) and repurchase agreements which have a
maturity of longer 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. Companies whose securities are not publicly traded
may not be subject to the disclosure and other investor protection 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.
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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).
Investing in Rule 144A securities could have the effect of
increasing the level of illiquidity in the Funds to the extent that qualified
institutional buyers are unavailable or uninterested in purchasing such
securities from the Funds. The Boards may adopt guidelines and delegate to CSAM
the daily function of determining and monitoring the liquidity of Rule 144A
Securities, although each Board will retain ultimate responsibility for
liquidity determinations.
Borrowing. Each Fund may borrow up to 30% of its total assets
(10% of total assets in the case of the Capital Appreciation Fund) 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, so long as there is asset
coverage of at least 300% for all borrowings of the Fund. Additional 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, the
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.
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Reverse Repurchase Agreements . Each Fund 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 segregate with an approved
custodian cash or liquid high-grade debt securities having a value not less than
the repurchase price (including accrued interest). The segregated assets will be
marked-to-market daily and additional assets will be segregated 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. Reverse repurchase agreements that are
accounted for as financings are considered to be borrowings under the 1940 Act.
When-Issued Securities and Delayed-Delivery Transactions. Each
Fund 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). In these transactions, payment for and delivery of the securities
occur beyond the regular settlement dates, normally within 30-45 days after the
transaction. The Fund will enter into a when-issued transaction for the purpose
of acquiring portfolio securities and not for the purpose of leverage, but may
sell the securities before the settlement date 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 securities 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 yields
obtained on such securities may be higher or lower than the yields available in
the market on the dates when the investments are actually delivered to the
buyers. When-issued securities may include securities purchased on a "when, as
and if issued" basis, under which the issuance of the security depends on the
occurrence of a subsequent event, such as approval of a merger, corporate
reorganization or debt restructuring.
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
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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.
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 Balanced Fund
Municipal Obligations. The Balanced Fund may invest up to 15%
of its total assets in obligations that are issued by or on behalf of states,
territories and possessions of the
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United States, the District of Columbia and their political subdivisions,
agencies, instrumentalities, and authorities ("Municipal Obligations") to obtain
funds for various public purposes, including the construction of a wide range of
public facilities, the refunding of outstanding obligations, the payment of
general operating expenses and the extension of loans to public institutions and
facilities. The interest on Municipal Obligations, in the opinion of bond
counsel or counsel to the issuer, as the case may be, is exempt from regular
federal income tax. The two principal types of Municipal Obligations, in terms
of the source of payment of debt service on the bonds, are general obligation
bonds and revenue securities, and the Fund may hold both in any proportion.
General obligation bonds are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue
securities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
or other specific revenue source but not from the general taxing power.
Among other instruments, the Balanced Fund may purchase
short-term tax anticipation notes, bond anticipation notes, revenue anticipation
notes and other forms of short term loans. Such notes are issued with a short
term maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements or other revenues.
There are, of course, variations in the quality of Municipal
Obligations, both within a particular classification and between
classifications, and the yields on Municipal Obligations depend upon a variety
of factors, including general money market conditions, the financial condition
of the issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
The ratings of Moody's and S&P represent their opinions as to the quality of
Municipal Obligations. It should be emphasized, however, that the ratings are
general and are not absolute standards of quality, and Municipal Obligations
with the same maturity, interest rate and rating may have different yields,
while Municipal Obligations of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to its purchase by the
Balanced Fund, an issue of Municipal Obligations may cease to be rated or its
rating may be reduced below the minimum rating required for purchase by the
Fund. CSAM will consider such an event in determining whether the Balanced Fund
should continue to hold the obligation. See the Appendix attached hereto for
further information concerning the rating of Moody's and S&P and their
significance.
Municipal Obligations are also subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, the laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon the ability of municipalities to levy taxes. There
is also the possibility that as the result of litigation or other conditions the
power or ability of any one or more issuers to pay, when due, principal of and
interest on its, or their, Municipal Obligations may be materially affected.
To the extent the Fund's assets are concentrated in Municipal
Obligations that are payable from the revenues of economically related projects
or facilities or whose issuers
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are located in the same state, the Fund will be subject to the peculiar risks
presented by the laws and economic conditions relating to such states or
projects or facilities to a greater extent than it would be if its assets were
not so concentrated.
Private Activity Bonds; Alternative Minimum Tax Bonds. The
Fund may invest in "Alternative Minimum Tax Bonds," which are certain private
activity bonds issued after August 7, 1986 to finance certain non-governmental
activities. While the income from Alternative Minimum Tax Bonds is exempt from
regular federal income tax, it is a tax preference item for purposes of the
federal individual and corporate "alternative minimum tax." The alternative
minimum tax is a special tax that applies to a limited number of taxpayers who
have certain adjustments or tax preference items. Available returns on
Alternative Minimum Tax Bonds acquired by the Fund may be lower than those from
other Municipal Obligations acquired by a Fund due to the possibility of
federal, state and local alternative minimum or minimum income tax liability on
Alternative Minimum Tax Bonds.
Variable Rate Notes. Municipal Obligations purchased by the
Fund may include variable rate demand notes ("VRDNs") issued by industrial
development authorities and other governmental entities. VRDNs are tax exempt
Municipal Obligations that provide for a periodic adjustment in the interest
rate paid on the notes. The interest rates are adjustable at intervals ranging
from daily to up to every six months at a prevailing market rate for similar
investments, such adjustment formula being calculated to maintain the market
value of the VRDN at approximately the par value of the VRDN upon the adjustment
date. The adjustments are typically based upon the prime rate of a bank or some
other appropriate interest rate adjustment index.
While there may be no active secondary market with respect to
a particular VRDN purchased by the Fund, the Fund may, upon notice as specified
in the note, demand payment of the principal of and accrued interest on the note
at any time or during specified periods not exceeding one year (depending on the
instrument involved) and may resell the note at any time to a third party. The
absence of such an active secondary market, however, could make it difficult for
the Fund to dispose of the VRDN involved, in the event the issuer of the note
defaulted on its payment obligations and during the periods that the Fund is not
entitled to exercise its demand rights. The Fund could, for this or other
reasons, suffer a loss to the extent of the default plus any expenses involved
in an attempt to recover the investment.
VRDNs are frequently not rated by credit rating agencies, but
unrated notes purchased by the Fund will have been determined by CSAM to be of
comparable quality at the time of the purchase to rated instruments purchasable
by the Fund. CSAM monitors the continuing creditworthiness of issuers of such
notes to determine whether the Fund should continue to hold such notes.
Strategy Available to the Capital Appreciation Fund and the Health Sciences Fund
Dollar Rolls. A Fund 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
28
<PAGE> 33
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 sale 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
segregate 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 segregated assets to ensure that its value is
maintained.
Strategies Available to the Health Sciences Fund
Securities of Health Sciences Companies. The Fund's investment
objective is capital appreciation. The Fund is a diversified management
investment company. The Fund intends to invest at least 80% of its total assets
in equity securities of health sciences companies, and under normal market
conditions will invest at least 65% of its assets in equity and debt securities
of health sciences companies. Equity securities are common stocks, preferred
stocks, warrants and securities convertible into or exchangeable for common
stocks. Health sciences companies are companies that are principally engaged in
the research, development, production or distribution of products or services
related to health care, medicine or the life sciences (collectively termed
"health sciences"). A company is considered to be "principally engaged" in
health sciences when at least 50% of its assets are committed to, or at least
50% of its revenues or operating profits are derived from, the activities
described in the previous sentence. A company will also be considered
"principally engaged" in health sciences if, in the judgment of CSAM, the
company has the potential for capital appreciation primarily as a result of
particular products, technology, patents or other market advantages in a health
sciences business and (a) the company holds itself out to the public as being
primarily engaged in a health sciences business, and (b) a substantial
percentage of the company's expenses are related to a health sciences business
and these expenses exceed revenues from non-health sciences businesses.
The Fund intends to concentrate its investments in health
sciences companies in three industries: services, pharmaceuticals and medical
devices. The Fund will, under normal market conditions, invest at least 25% of
its total assets in the aggregate in these three industries. This policy may
expose the Fund to greater risk than a health sciences fund that invests more
broadly among industries.
Because the Fund will focus its investments in securities of
companies that are principally engaged in the health sciences, the value of its
shares will be especially affected by factors relating to the health sciences,
resulting in greater volatility in share price than may be the case with funds
that invest in a wider range of industries.
Companies engaged in biotechnology, drugs and medical devices
are affected by, among other things, limited patent duration, intense
competition, obsolescence brought about by rapid technological change and
regulatory requirements. In addition, many health sciences companies are smaller
and less seasoned, suffer from inexperienced management, offer limited product
lines (or may not yet offer products), and may have persistent losses or erratic
revenue patterns. Securities of these smaller companies may have more limited
29
<PAGE> 34
marketability and, thus, may be more volatile. Because small companies normally
have fewer shares outstanding than larger companies, it may be more difficult
for the Fund to buy or sell significant amounts of such shares without an
unfavorable impact on prevailing prices. There is also typically less publicly
available information concerning smaller companies than for larger, more
established ones.
Other health sciences companies, including pharmaceutical
companies, companies undertaking research and development, and operators of
health care facilities and their suppliers are subject to government regulation,
product or service approval and, with respect to medical devices, the receipt of
necessary reimbursement codes, which could have a significant effect on the
price and availability of such products and services, and may adversely affect
the revenues of these companies. These companies are also susceptible to product
liability claims and competition from manufacturers and distributors of generic
products. Companies engaged in the ownership or management of health care
facilities receive a substantial portion of their revenues from federal and
state governments through Medicare and Medicaid payments. These sources of
revenue are subject to extensive regulation and government appropriations to
fund these expenditures are under intense scrutiny. Numerous federal and state
legislative initiatives are being considered that seek to control health care
costs and, consequently, could affect the profitability and stock prices of
companies engaged in the health sciences.
Health sciences companies are generally subject to greater
governmental regulation than other industries at both the state and federal
levels. Changes in governmental policies may have a material effect on the
demand for or costs of certain products and services. A health sciences company
must receive government approval before introducing new drugs and medical
devices or procedures. This process may delay the introduction of these products
and services to the marketplace, resulting in increased development costs,
delayed cost-recovery and loss of competitive advantage to the extent that rival
companies have developed competing products or procedures, adversely affecting
the company's revenues and profitability. Expansion of facilities by health care
providers is subject to "determinations of need" by the appropriate government
authorities. This process not only increases the time and cost involved in these
expansions, but also makes expansion plans uncertain, limiting the revenue and
profitability growth potential of health care facilities operators, and
negatively affecting the price of their securities.
Certain health sciences companies depend on the exclusive
rights or patents for the products they develop and distribute. Patents have a
limited duration and, upon expiration, other companies may market substantially
similar "generic" products which have cost less to develop and may cause the
original developer of the product to lose market share and/or reduce the price
charged for the product, resulting in lower profits for the original developer.
Because the products and services of health sciences companies
affect the health and well-being of many individuals, these companies are
especially susceptible to product liability lawsuits. The share price of a
health sciences company can drop dramatically not only as a reaction to an
adverse judicial ruling, but also from the adverse publicity accompanying
threatened litigation.
30
<PAGE> 35
Short Sales (excluding Short Sales "Against the Box"). The
Fund may from time to time sell securities short. A short sale is a transaction
in which the Fund sells securities it does not own in anticipation of a decline
in the market price of the securities. The current market value of the
securities sold short (excluding short sales "against the box") will not exceed
10% of the Fund's assets.
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
securities 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 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 from the short sale) will not be less than the
market value of the securities at the time they were sold short.
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 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. 2
of the Capital Appreciation Fund and No. 1 of each of the Balanced, Value and
Health Sciences Funds) 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.
Balanced and Value Funds. The investment limitations numbered
1 through 11 are Fundamental Restrictions. Investment limitations numbered 12
though 15 may be changed by a vote of the Board at any time.
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<PAGE> 36
The Balanced and Value Funds 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 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 and only if after such
borrowing there is assets coverage of at least 300% for all borrowings of the
Fund. For purposes of this restriction, the entry into options, futures
contracts and options on futures contracts shall not constitute borrowing.
2. 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 or more than 10% of the outstanding voting securities
of such issuer would be owned by the Fund, 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.
3. Make loans, except that the Fund may purchase or hold
fixed-income securities, lend portfolio securities and enter into repurchase
agreements in accordance with its investment objectives, policies and
limitations.
4. Underwrite any securities issued by others except to the
extent that the investment in restricted securities and the sale of securities
or the purchase of securities directly from the issuer in accordance with the
Fund's investment objectives, policies and limitations may be deemed to be
underwriting.
5. Purchase or sell real estate, except that the Fund may
invest in (a) securities secured by real estate, mortgages or interests therein
or (b) issued by companies which invest in real estate or interests therein.
6. Make short sales of securities or maintain a short
position, except that the Fund may maintain short positions in options on
currencies, securities and stock indexes, futures contracts and options on
futures contracts and enter into short sales "against the box."
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 options, futures
contracts and options on futures contracts 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 and options on futures contracts, currencies,
securities or indexes.
9. Pledge, mortgage or hypothecate its assets, except (a) to
the extent necessary to secure permitted borrowings and (b) to the extent
related to the deposit of assets in escrow in connection with collateral and
initial or variation margin arrangements with respect to options, futures
contracts, and options on futures contracts and in amounts not in excess of 125%
of the dollar amount borrowed.
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<PAGE> 37
10. 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.
11. Make additional investments (including roll-overs) if the
Fund's borrowings exceed 5% of its net assets.
12. Make investments for the purpose of exercising control or
management.
13. 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.
14. Invest in oil, gas or mineral exploration or development
programs, except that the Fund may invest in securities of companies that invest
in or sponsor oil, gas or mineral exploration or development programs.
15. 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
15% of the value of the Fund's total assets.
With regard to investment limitation No. 10, relating to a
Fund's holdings of illiquid securities, the Fund will monitor the liquidity of
its portfolio on an ongoing basis to determine whether, in light of current
circumstances, an adequate level of liquidity is being maintained. Particularly,
the Board will check routinely the value of illiquid securities in its portfolio
and should the value of such securities approach 15% of the net assets of the
Fund's portfolio, the Board will take action to reduce the Fund's holdings of
illiquid securities in an orderly fashion to maintain adequate liquidity. In no
event, however, will a Fund purchase an illiquid security if doing so would
result in more than 15% of the Fund's net assets being invested in illiquid
securities.
Capital Appreciation Fund. The investment limitations numbered
1 through 11 are Fundamental Restrictions. Investment limitations 12 through 14
may be changed by a vote of the Board at any time.
The Capital Appreciation Fund may not:
1. 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.
2. 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
33
<PAGE> 38
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.
3. 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.
4. Make loans, except that the Fund may purchase or hold
publicly distributed fixed-income securities, lend portfolio securities and
enter into repurchase agreements.
5. 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.
6. Purchase or sell real estate, real estate investment trust
securities, 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 companies that invest in or sponsor oil, gas or mineral
exploration or development programs and (c) futures contracts and related
options.
7. Make short sales of securities or maintain a short
position.
8. 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.
9. 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.
10. Purchase more than 10% of the voting securities of any one
issuer, more than 10% of the securities of any class of any one issuer or more
than 10% of the outstanding debt securities of any one issuer; provided that
this limitation shall not apply to investments in U.S. Government Securities.
34
<PAGE> 39
11. 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.
12. 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, (a) repurchase agreements
with maturities greater than seven days and (b) time deposits maturing in more
than seven calendar days shall be considered illiquid securities.
13. 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.
14. Invest in oil, gas or mineral leases.
Health Sciences 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 Health Sciences 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,
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 except that the Fund will invest at least 25% of its total assets
in the health services, pharmaceuticals and medical devices industries; 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.
35
<PAGE> 40
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.
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.
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<PAGE> 41
PORTFOLIO VALUATION
The following is a description of the procedures used by the
Funds in valuing their assets.
Securities listed on a U.S. securities exchange (including
securities traded through the Nasdaq National Market System) or foreign
securities exchange or traded in an over-the-counter market will be valued at
the most recent sale as of the time the valuation is made or, in the absence of
sales, at the mean between the highest bid and the lowest asked quotations. If
there are no such quotations, the value of the securities will be taken to be
the most recent bid quotation on the exchange or market. Options contracts will
be valued similarly. Futures contracts will be valued at the most recent
settlement price at the time of valuation. A security which is listed or traded
on more than one exchange is valued at the quotation on the exchange determined
to be the primary market for such security. 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.
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 for which
market quotations are not available and certain other assets of each Fund 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.
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.
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<PAGE> 42
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.
CSAM will select specific portfolio investments and effect
transactions for each Fund and in doing so seeks to obtain the overall best
execution of portfolio transactions. In evaluating prices and executions, CSAM
will consider the factors it deems relevant, which may include the breadth of
the market in the security, the price of the security, the financial condition
and execution capability of a broker or dealer and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis.
CSAM may, in its discretion, effect transactions in portfolio
securities with brokers and dealers who provide brokerage and research services
(as those terms are defined in Section 28(e) of the Securities Exchange Act of
1934, as amended) to a Fund and/or other accounts over which CSAM exercises
investment discretion. CSAM may place portfolio transactions with a broker or
dealer with whom it has negotiated a commission that is in excess of the
commission another broker or dealer would have charged for effecting the
transaction if CSAM determines in good faith that such amount of commission was
reasonable in relation to the value of such brokerage and research services
provided by such broker or dealer viewed in terms of either that particular
transaction or of the overall responsibilities of CSAM. Research and other
services received may be useful to CSAM in serving both the Fund and its other
clients and, conversely, research or other services obtained by the placement of
business of other clients may be useful to CSAM in carrying out its obligations
to a Fund. Research may include furnishing advice, either directly or through
publications or writings, as to the value of securities, the advisability of
purchasing or selling specific securities and the availability of securities or
purchasers or sellers of securities; furnishing seminars, information, analyses
and reports concerning issuers, industries, securities, trading markets and
methods, legislative
38
<PAGE> 43
developments, changes in accounting practices, economic factors and trends and
portfolio strategy; access to research analysts, corporate management personnel,
industry experts, economists and government officials; comparative performance
evaluation and technical measurement services and quotation services; and
products and other services (such as third party publications, reports and
analyses, and computer and electronic access, equipment, software, information
and accessories that deliver, process or otherwise utilize information,
including the research described above) that assist CSAM in carrying out its
responsibilities. Research received from brokers or dealers is supplemental to
CSAM's own research program. The fees to CSAM under its advisory agreement with
the Fund are not reduced by reason of its receiving any brokerage and research
services.
For the fiscal year ended October 31, 1998, $91,213,
$1,565,859, $2,521,643, and $94,901 of total brokerage commissions for the
Balanced Fund, Value Fund, Capital Appreciation Fund and Health Sciences Fund,
respectively, was paid to brokers and dealers who provided such research and
other 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 or periods.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
FUND YEAR/PERIOD ENDED COMMISSIONS
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Balanced Fund August 31, 1996 $ 61,926
------------------------------------------------------
August 31, 1997 $ 87,403
------------------------------------------------------
October 31, 1997 $ 14,333
------------------------------------------------------
October 31, 1998 $ 91,213
- ----------------------------------------------------------------------------------------------
Value Fund August 31, 1996 $ 2,898,813
------------------------------------------------------
August 31, 1997 $ 3,350,811
------------------------------------------------------
October 31, 1997 $ 279,210
------------------------------------------------------
October 31, 1998 $ 1,565,859
- ----------------------------------------------------------------------------------------------
Capital Appreciation Fund October 31, 1996 $ 1,510,431
------------------------------------------------------
October 31, 1997 $ 3,338,918
------------------------------------------------------
October 31, 1998 $ 2,521,643
- ----------------------------------------------------------------------------------------------
Health Sciences Fund October 31, 1997 $ 66,762
- ----------------------------------------------------------------------------------------------
October 31, 1998 $ 94,901
- ----------------------------------------------------------------------------------------------
</TABLE>
The increase in commission payments by the Capital
Appreciation Fund in the 1996 and 1997 fiscal years was attributable to the
increased size of the Fund and increased equity investments.
39
<PAGE> 44
Investment decisions for a 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, Credit Suisse Asset Management Securities, Inc. ("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
40
<PAGE> 45
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
brokerage commissions, dealer mark-ups or underwriting commissions as well as
other transaction costs. In addition, gains realized from portfolio turnover may
be taxable to shareholders. The Balanced Fund's portfolio turnover policy is the
same for both the common stock and non-common stock portions of its portfolio.
MANAGEMENT OF THE FUNDS
Officers and Board of Directors/Trustees
Except in the case of the Capital Appreciation Fund, 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 business and affairs of
the Capital Appreciation Fund are managed by a Board of Trustees in accordance
with the laws of the Commonwealth of Massachusetts. Each 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/Trustees and
officers, their addresses, present positions and principal occupations during
the past five years and other affiliations are set forth below.
<TABLE>
<CAPTION>
<S> <C>
Richard H. Francis (67) Director/Trustee
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>
41
<PAGE> 46
<TABLE>
<CAPTION>
<S> <C>
Jack W. Fritz (72) Director/Trustee
2425 North Fish Creek Road Private investor; Consultant and Director of Fritz
P.O. Box 483 Broadcasting, Inc. and Fritz Communications (developers and
Wilson, Wyoming 83014 operators of radio stations); Director of Advo, Inc.
(direct mail advertising); Director/Trustee of other
Warburg Pincus Funds.
Jeffrey E. Garten (53) Director/Trustee
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/Trustee of other Warburg Pincus Funds.
James S. Pasman, Jr. (69) Director/Trustee
29 The Trillium Currently retired; President and Chief Operating Officer of
Pittsburgh, Pennsylvania 15238 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 and
New York, New York 10022 Managing Director of CSAM (U.S.) since 1990; Director of
TIG Holdings, Inc.; Director/Trustee of other Warburg
Pincus Funds and other CSAM-advised investment companies.
</TABLE>
* Indicates a Director/Trustee who is an "interested person" of the Fund as
defined in the 1940 Act.
42
<PAGE> 47
<TABLE>
<CAPTION>
<S> <C>
Steven N. Rappaport (51) Director/Trustee
40 East 52nd Street President of Loanet, Inc. since 1997; Executive Vice
New York, New York 10022 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/Trustee
1317 F Street, N.W., 5th Floor Currently retired; President of Trowbridge Partners, Inc.
Washington, DC 20004 (business consulting) from January 1990 to November 1996;
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
New York, New York 10017-3147 CSAM since CSAM 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.
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.
</TABLE>
43
<PAGE> 48
<TABLE>
<CAPTION>
<S> <C>
Michael A. Pignataro (40) Treasurer and Chief Financial Officer
153 East 53rd Street Vice President and Director of Fund Administration of CSAM;
New York, New York 10022 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;
New York, New York 10017-3147 Associated with CSAM since CSAM 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 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>
Balanced Fund $ 500 $250 $250 *
- --------------------------------------------------------------------------------------------
Value Fund $ 500 $250 $250 *
- --------------------------------------------------------------------------------------------
Capital Appreciation Fund $ 1,000 $250 $250 *
- --------------------------------------------------------------------------------------------
Health Sciences Fund $ 500 $250 $250 *
- --------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE> 49
* Alexander B. Trowbridge received $325 per fund serving as chairman of the
Audit Committee.
Each Director is reimbursed for expenses incurred in
connection with attendance at Board meetings.
Directors/Trustees' Total Compensation
(for the fiscal year ended October 31, 1998)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
All
Investment
Companies
Growth & Capital Health in Warburg
Name of Balanced Income Appreciation Sciences Pincus Fund
Director/Trustee Fund Fund Fund Fund Complex*
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
William W. Priest** None None None None None
- -----------------------------------------------------------------------------------------
Arnold M. Reichman*** None None None None None
- -----------------------------------------------------------------------------------------
Richard N. Cooper**** $1,900 $1,900 $2,400 $1,900 $56,600
- -----------------------------------------------------------------------------------------
Donald J. Donahue**** $ 475 $ 475 $ 600 $ 475 $13,525
- -----------------------------------------------------------------------------------------
Richard H. Francis***** None None None None None
- -----------------------------------------------------------------------------------------
Jack W. Fritz $2,150 $2,150 $2,650 $2,150 $63,100
- -----------------------------------------------------------------------------------------
Jeffrey E. Garten***** $1,675 $1,675 $2,050 $1,675 $49,325
- -----------------------------------------------------------------------------------------
Thomas A. Melfe**** $2,150 $2,150 $2,650 $2,150 $60,700
- -----------------------------------------------------------------------------------------
James S. Pasman, Jr.***** None None None None None
- -----------------------------------------------------------------------------------------
Steven N.Rappaport***** None None None None None
- -----------------------------------------------------------------------------------------
Alexander B. Trowbridge $2,250 $2,250 $2,750 $2,250 $64,000
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Each Director/Trustee serves as a Director or Trustee of 51 investment
companies and portfolios in the Warburg Pincus family of funds.
** 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.
*** Mr. Reichman resigned as a Director/Trustee of each Fund effective
August 18, 1999.
**** Mr. Donahue resigned as a Director/Trustee of each Fund effective
February 6, 1998. Messrs. Cooper and Melfe resigned as a
Director/Trustee of each Fund effective July 6, 1999.
***** Mr. Garten became a Director/Trustee of each Fund effective February 6,
1998. Messrs. Francis, Pasman and Rappaport became Directors/Trustees
of the Funds effective July 6, 1999.
</TABLE>
45
<PAGE> 50
As of January 31, 1999 Directors or officers of the Funds as a group owned less
than 1% of the outstanding shares of each Fund.
Portfolio Managers of the Funds
Balanced Fund. Scott T. Lewis is the Portfolio Manager of the
equity portion of the Balanced Fund and also manages other Warburg Pincus Funds.
M. Anthony E. van Daalen and Charles C. Van Vleet serve as Co-Portfolio Managers
of the fixed income portion of the Balanced Fund and also manage other Warburg
Pincus Funds. Mr. Lewis has been associated with CSAM since CSAM acquired the
Funds' predecessor adviser in July 1999 and joined the predecessor adviser in
1986. Prior to that Mr. Lewis was an assistant portfolio manager at Bench
Corporation from 1984 to 1985 and a trader at Atlanta/Sosnoff Management Corp.
from 1984 to 1985 and a trader at E.F. Hutton & Co. from 1982 to 1984. Mr. Lewis
received a M.B.A. and a B.S. degree from New York University.
Mr. van Daalen has been associated with CSAM since CSAM
acquired the Funds' predecessor adviser in July 1999 and joined the predecessor
adviser in 1992. Prior to that Mr. van Daalen was an assistant vice president,
portfolio manager at Citibank in the Private Banking Group from 1985 to 1991.
Mr. van Daalen was a retail banking manager at The Connecticut Bank and Trust
Co. from 1983 to 1985 and an analyst at Goldstein/Krall Market Research from
1982 to 1983. Mr. van Daalen received a B.A. degree from Wesleyan University and
a M.B.A. degree from New York University.
Mr. Van Vleet has been associated with CSAM since CSAM
acquired the Funds' predecessor adviser in July 1999 and joined the predecessor
adviser in May 1998. Prior to that Mr. Van Vleet was a senior vice president and
senior global strategist at Putnam Investment Management from 1994 to 1998.
Prior to that Mr. Van Vleet served as vice president and senior portfolio
manager at Alliance Capital Management. Mr. Van Vleet received a B.A. degree
from the University of California, Berkeley.
Value Fund. Scott T. Lewis (described above) and Stacy Dutton
are Co-Portfolio Managers of the Value Fund. Ms. Dutton has been associated with
CSAM since CSAM acquired the Funds' predecessor adviser in July 1999 and joined
the predecessor adviser in 1997. Previously, Ms. Dutton was a senior vice
president and analyst for Jennison Associates Capital Corp. from 1993 to 1997.
Capital Appreciation Fund. Ms. Susan L. Black, Portfolio
Manager of the Capital Appreciation Fund, is also Portfolio Manager of the
Health Sciences Fund. Ms. Black has been associated with CSAM since CSAM
acquired the Funds' predecessor adviser in July 1999 and joined the predecessor
adviser in 1985. From 1979 until 1985 Ms. Black was a partner at Century Capital
Associates. From 1977 until 1978 Ms. Black was a vice president of research at
Donaldson, Lufkin & Jenrette. From 1973 until 1977 and from 1978 until 1979 Ms.
Black was a vice president of research at Drexel Burnham Lambert. From 1961
until 1973, Ms. Black was employed by Argus Research, first as a securities
analyst, then as director of research. Ms. Black received a B.A. degree from
Mount Holyoke College.
46
<PAGE> 51
Health Sciences Fund. Ms. Susan L. Black (described above) is
also the Portfolio Manager of the Health Sciences Fund.
Investment Adviser 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"). 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 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 both serve as co-administrators to each 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 Balanced Fund, Value Fund, Capital Appreciation Fund
and Health Sciences Fund each pay CSAM a fee calculated at an annual rate of
.90%, .75%, .70% 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, the Balanced Fund and Value Fund each pay PFPC
a fee calculated at an annual rate of .15% of the Fund's first $500 million in
average daily net assets, .10% of the next $1 billion in average daily net
assets and .05% of average daily net assets exceeding $1.5 billion, and the
Capital Appreciation Fund and Health Sciences Fund each pay 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 average daily net assets and
.05% of average daily net assets exceeding $1.5 billion, exclusive of
out-of-pocket expenses. Each class of shares of a 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.
47
<PAGE> 52
For the following fiscal years or period ended October 31
during which a Fund had investment operations, investment advisory fees earned
by CSAM's predecessor, Warburg, waivers and net advisory fees for each Fund were
as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
GROSS NET
FUND YEAR/ PERIOD ENDED ADVISORY FEE WAIVER ADVISORY FEE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Fund August 31, 1996 $ 170,672 $ 145,632 $ 25,040
-------------------------------------------------------------------------
August 31, 1997 $ 319,264 $ 140,469 $ 178,795
-------------------------------------------------------------------------
October 31, 1997 $ 60,121 $ 35,238 $ 24,883
-------------------------------------------------------------------------
October 31, 1998 $ 350,839 $ 180,006 $ 170,833
- --------------------------------------------------------------------------------------------------------------
Value Fund August 31, 1996 $ 7,914,238 0 $ 7,914,238
-------------------------------------------------------------------------
August 31, 1997 $ 4,637,851 0 $ 4,637,851
-------------------------------------------------------------------------
October 31, 1997 $ 901,812 0 $ 901,812
-------------------------------------------------------------------------
October 31, 1998 $ 6,112,330 0 $ 6,112,330
- --------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund October 31, 1996 $ 2,323,788 0 $ 2,323,788
-------------------------------------------------------------------------
October 31, 1997 $ 3,847,872 0 $ 3,847,872
-------------------------------------------------------------------------
October 31, 1998 $ 4,861,495 0 $ 4,861,495
- --------------------------------------------------------------------------------------------------------------
Health Sciences Fund October 31, 1997 $ 124,333 $ 124,333 0
-------------------------------------------------------------------------
October 31, 1998 $ 432,399 $ 120,371 $ 312,028
- --------------------------------------------------------------------------------------------------------------
</TABLE>
For the fiscal year ended October 31, 1998, Warburg also
reimbursed expenses for the Balanced Fund and the Health Sciences Fund in the
amounts of $2,644 and $5,157, respectively.
48
<PAGE> 53
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>
Balanced Fund August 31, 1996 $ 28,445 $ 18,949
($23,732 waived)
-----------------------------------------------------------------------------
August 31, 1997 $ 53,211 $ 35,474
-----------------------------------------------------------------------------
October 31, 1997 $ 10,020 $ 6,680
-----------------------------------------------------------------------------
October 31, 1998 $ 73,474 $ 38,982
($58,473 waived)
------------------------------------------------------------------------------------------------------------------
Value Fund August 31, 1996 $ 1,645,362 $ 992,718
-----------------------------------------------------------------------------
August 31, 1997 $ 927,570 $ 555,880
-----------------------------------------------------------------------------
October 31, 1997 $ 180,362 $ 109,797
----------------------------------------------------------------------------
October 31, 1998 $ 1,069,787 $ 849,366
------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund October 31, 1996 $ 332,684 $ 332,684
-----------------------------------------------------------------------------
October 31, 1997 $ 535,580 $ 549,696
-----------------------------------------------------------------------------
October 31, 1998 $ 649,064 $ 694,499
------------------------------------------------------------------------------------------------------------------
Health Sciences Fund October 31, 1997 $ 12,433* $ 12,433
-----------------------------------------------------------------------------
October 31, 1998 $ 45,297 $ 43,240
($37,985 waived)
-----------------------------------------------------------------------------
</TABLE>
*Fully Waived
Custodians and Transfer Agent
PFPC Trust Company ("PFPC Trust") and State Street Bank and Trust Company serve
as custodians of each Funds' U.S. and non-U.S. assets, respectively, pursuant to
separate custodian agreements (the "Custodian Agreements"). 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 for the account of the Fund's portfolio securities held by it 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. With the approval of the Board, 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 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 200 Stevens Drive, Lester, Pennsylvania
19113. 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
49
<PAGE> 54
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
Capital Appreciation Fund. The Fund's Agreement and
Declaration of Trust (the "Trust Agreement") authorizes the Board to issue an
unlimited number of full and fractional shares of common stock, $.001 par value
per share, of which an unlimited number are designated "Common Shares" and an
unlimited number are designated "Advisor Shares."
Massachusetts law provides that shareholders could, under
certain circumstances, be held personally liable for the obligations of the
Capital Appreciation Fund. However, the Trust Agreement disclaims shareholder
liability for acts or obligations of the Fund and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Fund or a Trustee. The Trust Agreement provides for
indemnification from the Fund's property for all losses and expenses of any
shareholder held personally liable for the obligations of the Fund. Thus, the
risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund would be unable to meet
its obligations, a possibility that CSAM believes is remote and immaterial. Upon
payment of any liability incurred by the Fund, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the Fund.
The Trustees intend to conduct the operations of the Fund in such a way so as to
avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Fund.
Balanced Fund, Value Fund and Health Sciences Fund. Each
Fund's charter authorizes the Board to issue three billion full and fractional
shares of common stock, $.001 par value per share, of which one billion shares
are designated "Common Shares" and two billion shares are designated "Advisor
Shares" in the case of the Balanced and Value Funds and one billion shares are
designated "Common Shares" and one billion shares are designated "Advisor
Shares" in the case of the Health Sciences Fund.
All Funds. 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/Trustees can elect all
Directors/Trustees. Shares are transferable but have no preemptive, conversion
or subscription rights.
Investors in a Fund are entitled to one vote for each full
share held and fractional votes for fractional shares held. Shareholders of a
Fund will vote in the aggregate except where otherwise required by law and
except that each class will vote separately on
50
<PAGE> 55
certain matters pertaining to its distribution and shareholder servicing
arrangements. There will normally be no meetings of investors for the purpose of
electing members of the governing Board unless and until such time as less than
a majority of the members holding office have been elected by investors. Any
Director of a Fund may be removed from office upon the vote of shareholders
holding at least a majority of the relevant Fund's outstanding shares, at a
meeting called for that purpose. A meeting will be called for the purpose of
voting on the removal of a Board member at the written request of holders of 10%
of the outstanding shares of a Fund.
The Funds are open-end management investment companies within
the meaning of the 1940 Act. The Balanced and Value Funds were incorporated on
January 29, 1996, under the laws of the State of Maryland. The Capital
Appreciation Fund was organized on January 20, 1987 under the laws of The
Commonwealth of Massachusetts and is a business entity commonly known as a
"Massachusetts business trust." The Health Sciences Fund was incorporated on
October 31, 1996 under the laws of the State of Maryland. Each of the Funds is
diversified. Each Fund (except the Health Sciences 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.
The Balanced and Value Funds were incorporated under the names
Warburg, Pincus Balanced Fund, Inc. and Warburg, Pincus Growth & Income Fund,
Inc., respectively. On May 3, 1996, each of the Balanced Fund and Warburg Pincus
Growth & Income Fund, Inc. acquired all of the assets and liabilities of the
investment portfolio of the RBB Fund with a similar name. On February 26, 1992,
the Capital Appreciation Fund amended its Agreement and Declaration of Trust to
change its name from "Counsellors Capital Appreciation Fund" to "Warburg, Pincus
Capital Appreciation Fund." On January 1, 2000, the Value Fund changed its name
from "Warburg, Pincus Growth & Income Fund, Inc." to "Warburg, Pincus Value
Fund, Inc." The Health Sciences Fund was incorporated under the name "Warburg,
Pincus Health Sciences Fund, Inc."
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.
Common Shares. The Balanced Fund and the Health Sciences Fund
have each 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
51
<PAGE> 56
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 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 year ended
October 31, 1998, the Balanced Fund and the Health Sciences Fund Common Shares
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>
Balanced Fund $ 97,024
- -------------------------------------------------
Health Sciences Fund $ 108,100
- -------------------------------------------------
</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
52
<PAGE> 57
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.
All Funds, Advisor Shares. The Balanced, Value, Capital
Appreciation and the Health Sciences Fund (which currently does not offer
Advisor Shares) 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 clients or 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 Share 12b-1
Plan") 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 Share 12b-1 Plan requires the Board, at least quarterly, to
receive and review written reports of amounts expended under the Advisor Share
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 year ended October 31, 1998, the
Funds paid the following fees pursuant to the Prior Advisor Shares 12b-1 Plan,
all of which were paid to Institutions:
<TABLE>
<CAPTION>
- -----------------------------------------------------
FUND PAYMENT
- -----------------------------------------------------
<S> <C>
Balanced Fund $ 863
- -----------------------------------------------------
Value Fund $ 502,703
- -----------------------------------------------------
Capital Appreciation Fund $ 166,239
- -----------------------------------------------------
</TABLE>
53
<PAGE> 58
Certain Institutions may receive additional fees from CSAMSI,
CSAM 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 CSAMSI, CSAM 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 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 Advisor Share 12b-1 Plans and the Common Shares
12b-1 Plans will continue in effect for so long as their 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 Advisor
Shares 12b-1 Plans or the Common Shares 12b-1 Plans, as the case may be
("Independent Directors"). Any material amendment of the Advisor Shares 12b-1
Plans or the Common Shares 12b-1 Plans would require the approval of the Board
in the same manner. Neither the Advisor Shares 12b-1 Plans nor the Common Shares
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
Advisor Share 12b-1 Plan and the Common Shares 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.
54
<PAGE> 59
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 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 will comply with Rule 18f-1 promulgated under the 1940 Act
with respect to redemptions in kind.
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.
55
<PAGE> 60
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. 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, which
are subject to change.
The Funds and Their Investments
Each Fund intends to continue to qualify to be treated as a
regulated investment company each taxable year under the Code. 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 or 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, United States 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 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- and short-term capital gains) and its
net realized long- 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, but will be subject to
tax at regular corporate rates on any taxable income or gains that it does not
56
<PAGE> 61
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.
If for any taxable year the Fund does not qualify for the
special federal income tax treatment afforded regulated investment companies,
all of its taxable income will be subject to federal income tax at regular
corporate rates (without any deduction for distributions to its shareholders).
In such event, dividend distributions, including amounts derived from interest
on tax-exempt obligations, would be taxable to shareholders to the extent of
current and accumulated earnings and profits, and would be eligible for the
dividends received deduction for corporations in the case of corporate
shareholders.
Each Fund intends to distribute annually to its shareholders
substantially all of its investment company taxable income. The Board 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 to distribute any 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 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 the
shareholder's 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"). Even if a Fund makes such an
election, it is possible that it may incur an excise tax as a result of not
having distributed net capital gains.
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 net investment income for that year and 98% of the net amount of its
capital gains (both long-and short-term) for the one-year period ending, as a
general rule, on October 31 of that year. For this purpose, however, any income
or gain 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 tax.
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<PAGE> 62
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, in the event of a failure to qualify,
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. In addition, 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 any net built-in gains (the
excess of the aggregate gains, including items of income, over aggregate losses
that would have been realized if it 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" (a "PFIC"), 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
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<PAGE> 63
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 passive foreign investment companies in which it invests,
which may be difficult or not possible to obtain.
Alternatively, a Fund may make a mark-to-market election that
will result in a Fund being treated as if it had sold and repurchased all of the
PFIC stock at the end of each year. In this case, the Fund would report gains as
ordinary income and would deduct 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
company stock. The Fund may have to distribute this "phantom" income and gain to
satisfy its 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-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 the 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.
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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 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.
Foreign Taxes
Income received by a Fund from non-U.S. sources may be subject
to withholding and other taxes imposed by other countries. Because it is not
expected that more than 50 percent of the value of a Fund's total assets at the
close of its taxable year will consist of stock and securities of non-U.S.
corporations, it is not expected that a Fund will be eligible to elect to "pass
through" to the Fund's shareholders the amount of foreign income and similar
taxes paid by the Fund. In the absence of such an election, the foreign taxes
paid by a Fund will reduce its investment company taxable income, and
distributions of investment company taxable income received by the Fund from
non-US sources will be treated as United States source income.
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
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<PAGE> 65
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.
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. The net asset value of Common Shares is listed
in The Wall Street Journal each business day under the heading "Warburg Pincus
Funds." Current total return figures may be obtained by calling Warburg Pincus
Funds at (800) 927-2874.
With respect to a Funds' Common and Advisor Shares, the Funds'
average annual total returns for the indicated periods ended October 31, 1998
were as follows
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(performance figures calculated without waiver by a Fund's
service provider(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>
Balanced Fund
(10/6/88) 5.33% 4.63% 13.02% 12.83% 12.79% 11.29%
Value Fund
(10/6/88) 9.11% 12.19% 13.80%
Capital Appreciation Fund
(8/17/87) 12.75% 22.56% 18.35% 13.87%
Health Sciences Fund
(12/31/96) 25.25% 24.82% N/A N/A 26.10% 25.55%
</TABLE>
ADVISOR SHARES
<TABLE>
<CAPTION>
Period from the
commencement
One-Year Five-Year Ten-Year of operations
----------------------- ---------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Balanced Fund
(7/31/95) 4.93% 3.63% N/A N/A 12.86% 10.45%
Value Fund
(5/15/95) 8.70% N/A 11.23%
Capital Appreciation Fund
(8/17/87) 12.23% 17.81% N/A 15.98%
</TABLE>
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).
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
n
following formula: P (1 + T) = 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
62
<PAGE> 67
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. Investors should note that this performance may not be
representative of a Fund's total return over longer market cycles.
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 each Fund seeks long-term
appreciation and 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 (again reflecting
changes in share prices and assuming reinvestment of dividends and
distributions). 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.
A Fund may also advertise its yield. Yield is calculated by
annualizing the net investment income generated by the Fund over a specified
thirty-day period according to the following formula:
6
YIELD = 2[( a-b + 1) -1]
---
cd
For purposes of this formula: "a" is dividends and interest earned during the
period; "b" is expenses accrued for the period (net of reimbursements); "c" is
the average daily number of shares outstanding during the period that were
entitled to receive dividends; and "d" is the maximum offering price per share
on the last day of the period.
The yield for the Common Shares of the Balanced Fund for the
thirty-day period ended October 31, 1998 was 2.08% (1.70% without waiver) and
for the Advisor Shares was 1.84% (1.00% without waiver).
The yield for the Common Shares of the Value Fund for the
thirty-day period ended October 31, 1998 was 0.88% and for the Advisor Shares
was 0.62%.
63
<PAGE> 68
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.
In addition, reference may be made in advertising a class of
Fund shares to opinions of Wall Street economists and analysts regarding
economic cycles and their effects historically on the performance of small
companies, both as a class and relative to other investments. A Fund may also
discuss its beta, or volatility relative to the market, and make reference to
its relative performance in various market cycles in the United States.
Each Fund may compare its performance with (i) that of other
mutual funds as listed in the rankings prepared by Lipper Analytical Services,
Inc. or similar investment services that monitor the performance of mutual funds
or as set forth in the publications listed below; (ii) in the case of the
Balanced and Value Funds, with the S&P 500 Index; in the case of the Capital
Appreciation Fund, with appropriate indexes prepared by Frank Russell Company
relating to securities represented in the Fund, the S&P Midcap 400 Index and the
S&P Index; and in the case of the Health Sciences Fund, various unmanaged
indexes, developed and maintained by S&P, relating to the securities of health
sciences companies; or (iii) other appropriate indexes of investment securities
or with data developed by CSAM derived from such indexes. A Fund may include
evaluations of the Fund published by nationally recognized ranking services and
by financial publications that are nationally recognized, such as Barron's,
Business Week, Financial Times, Forbes, Fortune, Inc., Institutional Investor,
Investor's Business Daily, Money, Morningstar, Mutual Fund Magazine, SmartMoney,
The Wall Street Journal and Worth. Morningstar, Inc. rates funds in broad
categories based on risk/reward analyses over various time periods. In addition,
each Fund may from time to time compare the expense ratio of its Common Shares
to that of any investment companies with similar objectives and policies, based
on data generated by Lipper Analytical Services, Inc. or similar investment
services that monitor mutual funds.
In reports or other communications to investors or in
advertising, each Fund may also describe the general biography or work
experience of the portfolio managers of the Fund and may include quotations
attributable to the portfolio managers describing approaches taken in managing
the Fund's investments, research methodology underlying stock selection or the
Fund's investment objective. In addition, a Fund and its portfolio managers may
render periodic updates of Fund activity, which may include a discussion of
significant portfolio holdings; analysis of holdings by industry, country,
credit quality and other characteristics; and comparison and analysis of the
Fund with respect to relevant market industry benchmarks. Each Fund may also
discuss measures of risk, the continuum of risk and return relating to
64
<PAGE> 69
different investments and the potential impact of foreign stocks on a portfolio
otherwise composed of domestic securities.
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, 1999, 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:
BALANCED FUND
<TABLE>
<CAPTION>
Common Shares Advisor Shares
------------- --------------
<S> <C> <C>
Charles Schwab & Co. Inc. 47.48%
Special Custody Account for the
Exclusive Benefit of Customers
Attn Mutual Funds
101 Montgomery St.
San Francisco, CA 94104-4122
National Financial Services Corp. 14.56%
FBO Customers
PO Box 3908
Church Street Station
New York, NY 10008-3908
</TABLE>
65
<PAGE> 70
<TABLE>
<S> <C> <C>
Carn & Co. 6.32%
FBO Whiting Swenson Employees Savings Plan
A/C # 022194-01
Attn: Mutual Funds - Star
PO Box 96211
Washington, DC 20090-6211
OLCOBA Co 60.31%
PO Box 1000
Minneapolis, MN 55480-1000
Albert J. Lagerman 20.78%
Gene W. Reisinger TTEES
Family Practice Center PC
401k Trust
307 E. Chestnut St.
Mifflinburg, PA 17844-9678
Bradley M. Lines 18.18%
Tina K. Pankiewicz TTEES
Axxess Tech Inc. 401k Retire Plan
U/A DTD 10/01/96
9185 South Farmer Ave
Tempe, AZ 85284-2943
</TABLE>
VALUE FUND
<TABLE>
<CAPTION>
Common Shares Advisor Shares
------------- --------------
<S> <C> <C>
Charles Schwab & Co. Inc. 26.92%
Special Custody Account for the
Exclusive Benefit of Customers
Attn Mutual Funds
101 Montgomery St.
San Francisco, CA 94104-4122
National Financial Services Corp. 26.66%
FBO Customers
Church Street Station
PO Box 3908
New York, NY 10008-3908
</TABLE>
66
<PAGE> 71
<TABLE>
<S> <C>
Connecticut General Life Ins. Co. 98.95%
On Behalf of its Separate Account
55S c/o Melissa Spencer M110
Cigna Corp.
PO Box 2975
Hartford, CT 06104-2975
</TABLE>
CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
Common Shares Advisor Shares
------------- --------------
<S> <C> <C>
Charles Schwab & Co. Inc. 9.17%
Special Custody Account for the
Exclusive Benefit of Customers
Attn Mutual Funds
101 Montgomery St.
San Francisco, CA 94104-4122
Bank One Securities 6.78%
FBO The One Investment Solution
733 Greenrest Dr.
Westerville, OH 43081-4903
Connecticut General Life Ins. Co. 94.48%
On Behalf of its Separate Account
55S c/o Melissa Spencer M110
Cigna Corp.
PO Box 2975
Hartford, CT 06104-2975
</TABLE>
HEALTH SCIENCES FUND
<TABLE>
<CAPTION>
Common Shares Advisor Shares
------------- --------------
<S> <C> <C>
Charles Schwab & Co. Inc. 24.42%
Special Custody Account for the
Exclusive Benefit of Customers
Attn Mutual Funds
101 Montgomery St.
San Francisco, CA 94104-4122
</TABLE>
67
<PAGE> 72
<TABLE>
<CAPTION>
Common Shares Advisor Shares
------------- --------------
<S> <C> <C>
National Financial Services Corp. 14.68%
FBO Customers
PO Box 3908
Church Street 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 with respect to
all information regarding the relevant Fund included therein. Each Fund will
furnish without charge a copy of its annual report upon request by calling the
Warburg Pincus Funds at 800-927-2874.
68
<PAGE> 73
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.
Short-Term Note Ratings
The following summarizes the two highest ratings used by S&P
for short-term notes:
SP-1 - Loans bearing this designation evidence a very strong
or strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics will be given a plus sign
designation.
SP-2 - Loans bearing this designation evidence a satisfactory
capacity to pay principal and interest..
The following summarizes the two highest ratings used by
Moody's for short-term notes and variable rate demand obligations:
MIG-1/VMIG-1 - Obligations bearing these designations are of
the best quality, enjoying strong protection from established cash flows of
funds for their servicing or from established and broad-based access to the
market for refinancing, or both.
MIG-2/VMIG-2 - Obligations bearing these designations are of
high quality with margins of protection ample although not so large as in the
preceding group.
A-1
<PAGE> 74
Corporate Bond and Municipal Obligations Ratings
The following summarizes the ratings used by S&P for corporate
bonds and Municipal Obligations:
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 are 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 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.
A-2
<PAGE> 75
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.
D - Debt rated D is in payment default. The D rating category
is used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The D rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The following summarizes the ratings used by Moody's for
corporate bonds and Municipal Obligations:
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. 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.
A-3
<PAGE> 76
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-4
