<PAGE> 1
SUPPLEMENT TO THE COMMON CLASS PROSPECTUS
WARBURG PINCUS EMERGING GROWTH FUND
WARBURG PINCUS SMALL COMPANY VALUE FUND
WARBURG PINCUS SMALL COMPANY GROWTH FUND
WARBURG PINCUS POST-VENTURE CAPITAL 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, each of the funds except the Emerging
Growth Fund has 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.
Portfolio Manager Changes. The following information replaces certain
information in the funds' Common Class Prospectus:
WARBURG PINCUS SMALL COMPANY GROWTH FUND
Stephen J. Lurito and Sammy Oh serve as Co-Portfolio Managers of the fund.
Elizabeth B. Dater no longer serves as Co-Portfolio Manager of the fund.
Dated: January 3, 2000 WPUSS-16-0100
<PAGE> 2
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 16, 1999
AS REVISED JANUARY 3, 2000
WARBURG PINCUS EMERGING GROWTH FUND
WARBURG PINCUS POST-VENTURE CAPITAL FUND
WARBURG PINCUS SMALL COMPANY GROWTH FUND
WARBURG PINCUS SMALL COMPANY VALUE FUND
This combined Statement of Additional Information provides information about
Warburg Pincus Emerging Growth Fund (the "Emerging Growth Fund"), Warburg
Pincus Post-Venture Capital Fund (the "Post-Venture Capital Fund"), Warburg
Pincus Small Company Growth Fund (the "Small Company Growth Fund") and Warburg
Pincus Small Company Value Fund (the "Small Company Value Fund" and
collectively with the Emerging Growth Fund, the Small Company Growth Fund and
the Small Company Value Fund, the "Funds") that is contained in the combined
Prospectus for the Common Shares of the Funds and the Prospectuses for the
Advisor Shares of the Funds, each dated February 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 OF CONTENTS
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INVESTMENT OBJECTIVES AND POLICIES............................................................1
Options, Futures and Currency Exchange Transactions..................................1
Securities Options...................................................................1
Securities Index Options.............................................................4
OTC Options..........................................................................4
Futures Activities...................................................................5
Currency Exchange Transactions.......................................................7
Hedging Generally....................................................................9
Asset Coverage for Forward Contracts, Options, Futures and Options on Futures.......10
Additional Information on Other Investment Practices................................11
U.S. Government Securities..........................................................11
Money Market Obligations............................................................11
Convertible Securities..............................................................12
Structured Securities...............................................................12
Debt Securities.....................................................................16
Below Investment Grade Securities...................................................17
Securities of Other Investment Companies............................................18
Lending of Portfolio Securities.....................................................18
Foreign Investments.................................................................19
Short Sales.........................................................................22
Warrants............................................................................23
Non-Publicly Traded and Illiquid Securities.........................................24
Borrowing...........................................................................25
Reverse Repurchase Agreements and Dollar Rolls......................................25
When-Issued Securities and Delayed-Delivery Transactions............................26
REITs...............................................................................27
Small Capitalization and Emerging Growth Companies; Unseasoned Issuers..............27
Special Situation Companies.........................................................27
Strategy Available to the Emerging Growth Fund......................................28
Non-Diversified Status..............................................................28
Strategy Available to the Post-Venture Capital Fund.................................28
Post-Venture Capital Companies......................................................28
Private Funds.......................................................................28
INVESTMENT RESTRICTIONS......................................................................29
All Funds...........................................................................29
Emerging Growth Fund................................................................30
Post-Venture Capital and Small Company Growth Funds.................................31
Small Company Value Fund............................................................33
</TABLE>
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<TABLE>
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PORTFOLIO VALUATION..........................................................................35
PORTFOLIO TRANSACTIONS.......................................................................36
PORTFOLIO TURNOVER...........................................................................38
MANAGEMENT OF THE FUNDS......................................................................39
Officers and Board of Directors...........................................................39
Directors' Total Compensation.............................................................43
Portfolio Managers........................................................................44
Investment Advisers and Co-Administrators.................................................45
Custodians and Transfer Agent.............................................................47
Organization of the Funds.................................................................48
Distribution and Shareholder Servicing....................................................48
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...............................................51
Automatic Cash Withdrawal Plan............................................................52
EXCHANGE PRIVILEGE...........................................................................52
ADDITIONAL INFORMATION CONCERNING TAXES......................................................53
The Funds and Their Investments...........................................................53
Passive Foreign Investment Companies......................................................55
Dividends and Distributions...............................................................56
Sales of Shares...........................................................................57
Backup Withholding........................................................................57
Notices...................................................................................57
Other Taxation............................................................................58
DETERMINATION OF PERFORMANCE.................................................................58
INDEPENDENT ACCOUNTANTS AND COUNSEL..........................................................60
MISCELLANEOUS................................................................................60
FINANCIAL STATEMENTS.........................................................................64
APPENDIX - DESCRIPTION OF RATINGS...........................................................A-1
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each
Fund's investment objective and policies in the Prospectuses. There are no
assurances that the funds will achieve their investment objectives.
The investment objective of the Emerging Growth Fund is
maximum capital appreciation.
The investment objective of the Post-Venture Capital Fund is
long-term growth of capital.
The investment objective of the Small Company Growth Fund is
capital growth.
The investment objective of the Small Company Value Fund is
long-term capital appreciation.
Unless otherwise indicated, all of the Funds are permitted to
engage in the following investment strategies. The Funds are not obligated to
pursue any of the following strategies and do not represent that these
techniques are available now or will be available at any time in the future.
Options, Futures and Currency Exchange Transactions
Securities Options. Each Fund may purchase options and write
covered or collateralized options on securities, securities indices and, to the
extent the Fund is authorized to invest in foreign securities, currencies for
both hedging purposes and to increase total return. Up to 25% of a Fund's total
assets may be at risk in connection with investing in options on securities,
securities indices and, if applicable, currencies. The amount of assets
considered to be "at risk" in these transactions is, in the case of purchasing
options, the amount of the premium paid, and, in the case of writing options,
the value of the underlying obligation. These options may be traded on an
exchange or over-the-counter ("OTC").
Each Fund realizes fees (referred to as "premiums") for
granting the rights evidenced by the options it has written. A put option
embodies the right of its purchaser to compel the writer of the option to
purchase from the option holder an underlying security at a specified price for
a specified time period or at a specified time. In contrast, a call option
embodies the right of its purchaser to compel the writer of the option to sell
to the option holder an underlying security at a specified price for a
specified time period or at a specified time.
The potential loss associated with purchasing an option is
limited to the premium paid, and the premium would partially offset any gains
achieved from its use. However, for an option writer the exposure to adverse
price movements in the underlying security or index is potentially unlimited
during the exercise period. Writing securities options may result in
substantial losses to a Fund, force the sale or purchase of portfolio
securities at
<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 a decline in the
price of the underlying security. The size of the premiums that a Fund may
receive may be adversely affected as new or existing institutions, including
other investment companies, engage in or increase their option-writing
activities.
In the case of options written by a Fund that are deemed
covered by virtue of the Fund's holding convertible or exchangeable preferred
stock or debt securities, the time required to convert or exchange and obtain
physical delivery of the underlying common stock with respect to which the Fund
has written options may exceed the time within which the Fund must make
delivery in accordance with an exercise notice. In these instances, a Fund may
purchase or temporarily borrow the underlying securities for purposes of
physical delivery. By so doing, the Fund will not bear any market risk, since
the Fund will have the absolute right to receive from the issuer of the
underlying security an equal number of shares to replace the borrowed
securities, but the Fund may incur additional transaction costs or interest
expenses in connection with any such purchase or borrowing.
Additional risks exist with respect to certain of the
securities for which a Fund may write covered call options. For example, if the
Fund writes covered call options on mortgage-backed securities, the
mortgage-backed securities that it holds as cover may, because of scheduled
amortization or unscheduled prepayments, cease to be sufficient cover. If this
occurs, the Fund will compensate for the decline in the value of the cover by
purchasing an appropriate additional amount of mortgage-backed securities.
Options written by a Fund will normally have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. Each Fund may write (i) in-the-money call
options when Credit Suisse Asset Management, LLC, 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 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
2
<PAGE> 7
offset wholly or in part by the premium received. To secure its obligation to
deliver the underlying security when it writes a call option, each Fund will be
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the Options Clearing Corporation (the "Clearing
Corporation") and of the securities exchange on which the option is written.
Prior to their expirations, put and call options may be sold
in closing sale or purchase transactions (sales or purchases by a Fund prior to
the exercise of options that it has purchased or written, respectively, of
options of the same series) in which the Fund may realize a profit or loss from
the sale. An option position may be closed out only where there exists a
secondary market for an option of the same series on a recognized securities
exchange or in the OTC market. When a Fund has purchased an option and engages
in a closing sale transaction, whether the Fund realizes a profit or loss will
depend upon whether the amount received in the closing sale transaction is more
or less than the premium the Fund initially paid for the original option plus
the related transaction costs. Similarly, in cases where a Fund has written an
option, it will realize a profit if the cost of the closing purchase
transaction is less than the premium received upon writing the original option
and will incur a loss if the cost of the closing purchase transaction exceeds
the premium received upon writing the original option. A Fund may engage in a
closing purchase transaction to realize a profit, to prevent an underlying
security with respect to which it has written an option from being called or
put or, in the case of a call option, to unfreeze an underlying security
(thereby permitting its sale or the writing of a new option on the security
prior to the outstanding option's expiration). The obligation of a Fund under
an option it has written would be terminated by a closing purchase transaction
(a Fund would not be deemed to own an option as a result of the transaction).
So long as the obligation of a Fund as the writer of an option continues, the
Fund may be assigned an exercise notice by the broker-dealer through which the
option was sold, requiring the Fund to deliver the underlying security against
payment of the exercise price. This obligation terminates when the option
expires or the Fund effects a closing purchase transaction. A Fund cannot
effect a closing purchase transaction with respect to an option once it has
been assigned an exercise notice.
There is no assurance that sufficient trading interest will
exist to create a liquid secondary market on a securities exchange for any
particular option or at any particular time, and for some options no such
secondary market may exist. A liquid secondary market in an option may cease to
exist for a variety of reasons. In the past, for example, higher than
anticipated trading activity or order flow or other unforeseen events have at
times rendered certain of the facilities of the Clearing Corporation and
various securities exchanges inadequate and resulted in the institution of
special procedures, such as trading rotations, restrictions on certain types of
orders or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. Moreover,
a Fund's ability to terminate options positions established in the OTC market
may be more limited than for exchange-traded options and may also involve the
risk that securities dealers participating in OTC transactions would fail to
meet their obligations to the Fund. Each Fund, however, intends to purchase OTC
options only
3
<PAGE> 8
from dealers whose debt securities, as determined by CSAM, are considered to be
investment grade. If, as a covered call option writer, the Fund is unable to
effect a closing purchase transaction in a secondary market, it will not be
able to sell the underlying security and would continue to be at market risk on
the security.
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class which may be held
or written, or exercised within certain time periods by an investor or group of
investors acting in concert (regardless of whether the options are written on
the same or different securities exchanges or are held, written or exercised in
one or more accounts or through one or more brokers). It is possible that the
Funds and other clients of CSAM and certain of its affiliates may be considered
to be such a group. A securities exchange may order the liquidation of
positions found to be in violation of these limits and it may impose certain
other sanctions. These limits may restrict the number of options a Fund will be
able to purchase on a particular security.
Securities Index Options. Each Fund may utilize its total
assets to purchase and write exchange-listed and OTC put and call options on
securities indexes. A securities index measures the movement of a certain group
of securities by assigning relative values to the securities included in the
index, fluctuating with changes in the market values of the securities included
in the index. Some securities index options are based on a broad market index,
such as the NYSE Composite Index, or a narrower market index such as the
Standard & Poor's 100. Indexes may also be based on a particular industry or
market segment.
Options on securities indexes are similar to options on
securities except that (i) the expiration cycles of securities index options
are monthly, while those of securities options are currently quarterly, and
(ii) the delivery requirements are different. Instead of giving the right to
take or make delivery of securities at a specified price, an option on a
securities index gives the holder the right to receive a cash "exercise
settlement amount" equal to (a) the amount, if any, by which the fixed exercise
price of the option exceeds (in the case of a put) or is less than (in the case
of a call) the closing value of the underlying index on the date of exercise,
multiplied by (b) a fixed "index multiplier." Receipt of this cash amount will
depend upon the closing level of the securities index upon which the option is
based being greater than, in the case of a call, or less than, in the case of a
put, the exercise price of the index and the exercise price of the option times
a specified multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Securities index options may
be offset by entering into closing transactions as described above for
securities options.
OTC Options. Each Fund may purchase OTC or dealer options or
sell covered OTC options. Unlike exchange-listed options where an intermediary
or clearing corporation, such as the Clearing Corporation, assures that all
transactions in such options are properly executed, the responsibility for
performing all transactions with respect to OTC options rests solely with the
writer and the holder of those options. A listed call option writer, for
example, is obligated to deliver the underlying securities to the clearing
organization if the option is exercised, and the clearing organization is then
obligated to pay the writer the exercise price of
4
<PAGE> 9
the option. If a Fund were to purchase a dealer option, however, it would rely
on the dealer from whom it purchased the option to perform if the option were
exercised. If the dealer fails to honor the exercise of the option by the Fund,
the Fund would lose the premium it paid for the option and the expected benefit
of the transaction.
Exchange-traded options generally have a continuous liquid
market while OTC or dealer options do not. Consequently, a Fund will generally
be able to realize the value of a dealer option it has purchased only by
exercising it or reselling it to the dealer who issued it. Similarly, when a
Fund writes a dealer option, it generally will be able to close out the option
prior to its expiration only by entering into a closing purchase transaction
with the dealer to which the Fund originally wrote the option. Although each
Fund will seek to enter into dealer options only with dealers who will agree to
and that are expected to be capable of entering into closing transactions with
the Fund, there can be no assurance that the Fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. The
inability to enter into a closing transaction may result in material losses to
a Fund. Until the Fund, as a covered OTC call option writer, is able to effect
a closing purchase transaction, it will not be able to liquidate securities (or
other assets) used to cover the written option until the option expires or is
exercised. This requirement may impair a Fund's ability to sell portfolio
securities or, with respect to currency options, currencies at a time when such
sale might be advantageous.
Futures Activities. Each Fund may enter into futures
contracts and options on futures contracts on securities, securities indices
and, to the extent that a Fund may invest in foreign securities, currencies for
both bona fide hedging and speculative purposes. These futures contracts are
standardized contracts for the future delivery of a non-U.S. currency, an
interest rate sensitive security or, in the case of index futures contracts or
certain other futures contracts, a cash settlement with reference to a
specified multiplier times the change in the index. An option on a futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract.
These transactions may be entered into for "bona fide
hedging" purposes as defined in 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. 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
5
<PAGE> 10
provides for the future sale by one party and the purchase by the other party
of a certain amount of a specific interest rate sensitive financial instrument
(debt security) at a specified price, date, time and place. Securities indexes
are capitalization weighted indexes which reflect the market value of the
securities represented in the indexes. A securities index futures contract is
an agreement to be settled by delivery of an amount of cash equal to a
specified multiplier times the difference between the value of the index at the
close of the last trading day on the contract and the price at which the
agreement is made.
No consideration is paid or received by a Fund upon entering
into a futures contract. Instead, the Fund is required to deposit in a
segregated account with its custodian an amount of cash or liquid securities
acceptable to the broker, equal to approximately 1% to 10% of the contract
amount (this amount is subject to change by the exchange on which the contract
is traded, and brokers may charge a higher amount). This amount is known as
"initial margin" and is in the nature of a performance bond or good faith
deposit on the contract which is returned to a Fund upon termination of the
futures contract, assuming all contractual obligations have been satisfied. The
broker will have access to amounts in the margin account if the Fund fails to
meet its contractual obligations. Subsequent payments, known as "variation
margin," to and from the broker, will be made daily as the currency, financial
instrument or securities index underlying the futures contract fluctuates,
making the long and short positions in the futures contract more or less
valuable, a process known as "marking-to-market." A Fund will also incur
brokerage costs in connection with entering into futures transactions.
At any time prior to the expiration of a futures contract, a
Fund may elect to close the position by taking an opposite position, which will
operate to terminate the Fund's existing position in the contract. Positions in
futures contracts and options on futures contracts (described below) may be
closed out only on the exchange on which they were entered into (or through a
linked exchange). No secondary market for such contracts exists. Although each
Fund intends to enter into futures contracts only if there is an active market
for such contracts, there is no assurance that an active market will exist at
any particular time. Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the
daily limit has been reached in a particular contract, no trades may be made
that day at a price beyond that limit or trading may be suspended for specified
periods during the day. It is possible that futures contract prices could move
to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions at an
advantageous price and subjecting the Fund to substantial losses. In such
event, and in the event of adverse price movements, the Fund would be required
to make daily cash payments of variation margin. In such situations, if a Fund
had insufficient cash, it might have to sell securities to meet daily variation
margin requirements at a time when it would be disadvantageous to do so. In
addition, if the transaction is entered into for hedging purposes, in such
circumstances the Fund may realize a loss on a futures contract or option that
is not offset by an increase in the value of the hedged position. Losses
incurred in futures transactions and the costs of these transactions will
affect a Fund's performance.
6
<PAGE> 11
Options on Futures Contracts. Each Fund may purchase and
write put and call options on foreign currency, interest rate and stock index
futures contracts and may enter into closing transactions with respect to such
options to terminate existing positions. There is no guarantee that such
closing transactions can be effected; the ability to establish and close out
positions on such options will be subject to the existence of a liquid market.
An option on a currency, interest rate or securities index
futures contract, as contrasted with the direct investment in such a contract,
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract at a specified exercise price at any time prior
to the expiration date of the option. The writer of the option is required upon
exercise to assume an offsetting futures position (a short position if the
option is a call and a long position if the option is a put). Upon exercise of
an option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
futures contract. The potential loss related to the purchase of an option on a
futures contract is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the point of
sale, there are no daily cash payments by the purchaser to reflect changes in
the value of the underlying contract; however, the value of the option does
change daily and that change would be reflected in the net asset value of a
Fund.
Currency Exchange Transactions. The value in U.S. dollars of
the assets of a Fund that are invested in foreign securities may be affected
favorably or unfavorably by a variety of factors not applicable to investment
in U.S. securities, and the Fund may incur costs in connection with conversion
between various currencies. Currency exchange transactions may be from any
non-U.S. currency into U.S. dollars or into other appropriate currencies. Each
Fund will conduct its currency exchange transactions (i) on a spot (i.e., cash)
basis at the rate prevailing in the currency exchange market, (ii) through
entering into futures contracts or options on such contracts (as described
above), (iii) through entering into forward contracts to purchase or sell
currency or (iv) by purchasing exchange-traded currency options. Risks
associated with currency forward contracts and purchasing currency options are
similar to those described herein for futures contracts and securities and
stock index options. In addition, the use of currency transactions could result
in losses from the imposition of foreign exchange controls, suspension of
settlement or other governmental actions or unexpected events. The Emerging
Growth Fund will only engage in currency exchange transactions for hedging
purposes.
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
7
<PAGE> 12
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, the Fund may purchase call options on
the particular currency. The purchase of these options could offset, at least
partially, the effects of the adverse movements in exchange rates. The benefit
to a Fund derived from purchases of currency options, like the benefit derived
from other types of options, will be reduced by premiums and other transaction
costs. Because transactions in currency exchange are generally conducted on a
principal basis, no fees or commissions are generally involved. Currency
hedging involves some of the same risks and considerations as other
transactions with similar instruments. Although currency hedges limit the risk
of loss due to a decline in the value of a hedged currency, at the same time,
they also limit any potential gain that might result should the value of the
currency increase. If a
8
<PAGE> 13
devaluation is generally anticipated, a Fund may not be able to contract to
sell a currency at a price above the devaluation level it anticipates.
While the values of currency futures and options on futures,
forward currency contracts and currency options may be expected to correlate
with exchange rates, they will not reflect other factors that may affect the
value of a Fund's investments and a currency hedge may not be entirely
successful in mitigating changes in the value of the Fund's investments
denominated in that currency. A currency hedge, for example, should protect a
Yen-denominated bond against a decline in the Yen, but will not protect the
Fund against a price decline if the issuer's creditworthiness deteriorates.
Hedging Generally. In addition to entering into options,
futures and currency exchange transactions for other purposes, including
generating current income to offset expenses or increase return, each Fund may
enter into these transactions as hedges to reduce investment risk, generally by
making an investment expected to move in the opposite direction of a portfolio
position. A hedge is designed to offset a loss in a portfolio position with a
gain in the hedged position; at the same time, however, a properly correlated
hedge will result in a gain in the portfolio position being offset by a loss in
the hedged position. As a result, the use of options, futures, contracts and
currency exchange transactions for hedging purposes could limit any potential
gain from an increase in the value of the position hedged. In addition, the
movement in the portfolio position hedged may not be of the same magnitude as
movement in the hedge. With respect to futures contracts, since the value of
portfolio securities will far exceed the value of the futures contracts sold by
a Fund, an increase in the value of the futures contracts could only mitigate,
but not totally offset, the decline in the value of the Fund's assets.
In hedging transactions based on an index, whether a Fund
will realize a gain or loss depends upon movements in the level of securities
prices in the stock market generally or, in the case of certain indexes, in an
industry or market segment, rather than movements in the price of a particular
security. The risk of imperfect correlation increases as the composition of a
Fund's portfolio varies from the composition of the index. In an effort to
compensate for imperfect correlation of relative movements in the hedged
position and the hedge, the Fund's hedge positions may be in a greater or
lesser dollar amount than the dollar amount of the hedged position. Such "over
hedging" or "under hedging" may adversely affect the Fund's net investment
results if market movements are not as anticipated when the hedge is
established. Securities index futures transactions may be subject to additional
correlation risks. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which would distort the normal relationship between the
securities index and futures markets. Secondly, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market also may cause temporary
price distortions. Because of the possibility of price distortions in the
futures market and the imperfect correlation between movements in the
securities index and
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movements in the price of securities index futures, a correct forecast of
general market trends by CSAM still may not result in a successful hedging
transaction.
Each Fund will engage in hedging transactions only when
deemed advisable by CSAM, and successful use by the Fund of hedging
transactions will be subject to CSAM's ability to predict trends in currency,
interest rate or securities markets, as the case may be, and to predict
correctly movements in the directions of the hedge and the hedged position and
the correlation between them, which predictions could prove to be inaccurate.
This requires different skills and techniques than predicting changes in the
price of individual securities, and there can be no assurance that the use of
these strategies will be successful. Even a well-conceived hedge may be
unsuccessful to some degree because of unexpected market behavior or trends.
Losses incurred in hedging transactions and the costs of these transactions
will affect a Fund's performance.
To the extent that a Fund engages in the strategies described
above, the Fund may experience losses greater than if these strategies had not
been utilized. In addition to the risks described above, these instruments may
be illiquid and/or subject to trading limits, and a Fund may be unable to close
out a position without incurring substantial losses, if at all. The Funds are
also subject to the risk of a default by a counterparty to an off-exchange
transaction.
Asset Coverage for Forward Contracts, Options, Futures and
Options on Futures. Each Fund will comply with guidelines established by the
U.S. Securities and Exchange Commission (the "SEC") and other applicable
regulatory bodies with respect to coverage of forward currency contracts;
options written by the Fund on securities and indexes; and currency, interest
rate and index futures contracts and options on these futures contracts. These
guidelines may, in certain instances, require that the Fund segregate cash or
liquid securities with its custodian or a designated sub-custodian to the
extent the Fund's obligations with respect to these strategies are not
otherwise "covered" through ownership of the underlying security or financial
instrument or by other portfolio positions or by other means consistent with
applicable regulatory policies. Segregated assets cannot be sold or transferred
unless equivalent assets are substituted in their place or it is no longer
necessary to segregate them. As a result, there is a possibility that
segregation of a large percentage of a Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
For example, a call option written by a Fund on securities
may require the Fund to hold the securities subject to the call (or securities
convertible into the securities without additional consideration) or to
segregate assets (as described above) sufficient to purchase and deliver the
securities if the call is exercised. A call option written by a Fund on an
index may require the Fund to own portfolio securities that correlate with the
index or to segregate assets (as described above) equal to the excess of the
index value over the exercise price on a current basis. A Fund could purchase a
put option if the strike price of that option is the same or higher than the
strike price of a put option sold by the Fund. If a Fund holds a futures or
forward contract, the Fund could purchase a put option on the same futures or
forward contract with a strike price as high or higher than the price of the
contract held. A Fund may
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enter into fully or partially offsetting transactions so that its net position,
coupled with any segregated assets (equal to any remaining obligation), equals
its net obligation. Asset coverage may be achieved by other means when
consistent with applicable regulatory policies.
Additional Information on Other Investment Practices
U.S. Government Securities. The obligations issued or
guaranteed by the U.S. government in which a Fund may invest include: direct
obligations of the U.S. Treasury and obligations issued by U.S. government
agencies and instrumentalities ("U.S. Government Securities"). Included among
direct obligations of the United States are Treasury Bills, Treasury Notes and
Treasury Bonds, which differ in terms of their interest rates, maturities and
dates of issuance. Treasury Bills have maturities of less than one year,
Treasury Notes have maturities of one to 10 years and Treasury Bonds generally
have maturities of greater than 10 years at the date of issuance. Included
among the obligations issued by agencies and instrumentalities of the United
States are: instruments that are supported by the full faith and credit of the
United States (such as certificates issued by the Government National Mortgage
Association ("GNMA")); instruments that are supported by the right of the
issuer to borrow from the U.S. Treasury (such as securities of Federal Home
Loan Banks); and instruments that are supported by the credit of the
instrumentality (such as Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC") bonds).
Other U.S. Government Securities the Funds may invest in
include securities issued or guaranteed by the Federal Housing Administration,
Farmers Home Loan Administration, Export-Import Bank of the United States,
Small Business Administration, General Services Administration, Central Bank
for Cooperatives, Federal Farm Credit Banks, Federal Intermediate Credit Banks,
Federal Land Banks, Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board and Student Loan Marketing Association.
Because the U.S. government is not obligated by law to provide support to an
instrumentality it sponsors, a Fund will invest in obligations issued by such
an instrumentality only if CSAM determines that the credit risk with respect to
the instrumentality does not make its securities unsuitable for investment by
the Fund.
Money Market Obligations. Each Fund is authorized to invest,
under normal market conditions, up to 20% of its total assets in domestic and
foreign short-term (one year or less remaining to maturity) and medium-term
(five years or less remaining to maturity) money market obligations and for
temporary defensive purposes may invest in these securities without limit.
These instruments consist of obligations issued or guaranteed by the U.S.
government or a foreign government, their agencies or instrumentalities; bank
obligations (including certificates of deposit, time deposits and bankers'
acceptances of domestic or foreign banks, domestic savings and loans and
similar institutions) that are high quality investments or, if unrated, deemed
by CSAM to be high quality investments; commercial paper rated no lower than
A-2 by S&P or Prime-2 by Moody's or the equivalent from another major rating
service or, if unrated, of an issuer having an outstanding, unsecured debt
issue then rated within the three highest rating categories; and repurchase
agreements with respect to the foregoing.
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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 (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").
Money Market Mutual Funds. Where CSAM believes that it would
be beneficial to the Fund and appropriate considering the factors of return and
liquidity, each Fund may invest up to 5% of its assets in securities of money
market mutual funds that are unaffiliated with the Fund or CSAM. As a
shareholder in any mutual fund, a Fund will bear its ratable share of the
mutual fund's expenses, including management fees, and will remain subject to
payment of the Fund's management fees and other expenses with respect to assets
so invested.
Convertible Securities. Convertible securities in which a
Fund may invest, including both convertible debt and convertible preferred
stock, may be converted at either a stated price or stated rate into underlying
shares of common stock. Because of this feature, convertible securities enable
an investor to benefit from increases in the market price of the underlying
common stock. Convertible securities provide higher yields than the underlying
equity securities, but generally offer lower yields than non-convertible
securities of similar quality. The value of convertible securities fluctuates
in relation to changes in interest rates like bonds and, in addition,
fluctuates in relation to the underlying common stock. Subsequent to purchase
by a Fund, convertible securities may cease to be rated or a rating may be
reduced below the minimum required for purchase by the Fund. Neither event will
require sale of such securities, although CSAM will consider such event in its
determination of whether a Fund should continue to hold the securities.
Structured Securities. The Funds may purchase any type of
publicly traded or privately negotiated fixed income security, including
mortgage-backed securities; structured notes, bonds or debentures; and
assignments of and participations in loans.
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Mortgage-Backed Securities. A Fund may invest in
mortgage-backed securities, such as those issued by the Government National
Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA"),
Federal Home Loan Mortgage Corporation ("FHLMC") or certain foreign issuers.
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property. The
mortgages backing these securities include, among other mortgage instruments,
conventional 30-year fixed-rate mortgages, 15-year fixed-rate mortgages,
graduated payment mortgages and adjustable rate mortgages. The government or
the issuing agency typically guarantees the payment of interest and principal
of these securities. However, the guarantees do not extend to the securities'
yield or value, which are likely to vary inversely with fluctuations in
interest rates, nor do the guarantees extend to the yield or value of the
Fund's shares. These securities generally are "pass-through" instruments,
through which the holders receive a share of all interest and principal
payments from the mortgages underlying the securities, net of certain fees.
Yields on pass-through securities are typically quoted by
investment dealers and vendors based on the maturity of the underlying
instruments and the associated average life assumption. The average life of
pass-through pools varies with the maturities of the underlying mortgage loans.
A pool's term may be shortened by unscheduled or early payments of principal on
the underlying mortgages. The occurrence of mortgage prepayments is affected by
various factors, including the level of interest rates, general economic
conditions, the location, scheduled maturity and age of the mortgage and other
social and demographic conditions. Because prepayment rates of individual pools
vary widely, it is not possible to predict accurately the average life of a
particular pool. For pools of fixed-rate 30-year mortgages, a common industry
practice in the U.S. has been to assume that prepayments will result in a
12-year average life. At present, pools, particularly those with loans with
other maturities or different characteristics, are priced on an assumption of
average life determined for each pool. In periods of falling interest rates,
the rate of prepayment tends to increase, thereby shortening the actual average
life of a pool of mortgage-related securities. Conversely, in periods of rising
rates the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the pool. However, these effects may not be present, or may
differ in degree, if the mortgage loans in the pools have adjustable interest
rates or other special payment terms, such as a prepayment charge. Actual
prepayment experience may cause the yield of mortgage-backed securities to
differ from the assumed average life yield. Reinvestment of prepayments may
occur at higher or lower interest rates than the original investment, thus
affecting the Fund's yield.
The rate of interest on mortgage-backed securities is lower
than the interest rates paid on the mortgages included in the underlying pool
due to the annual fees paid to the servicer of the mortgage pool for passing
through monthly payments to certificate holders and to any guarantor, such as
GNMA, and due to any yield retained by the issuer. Actual yield to the holder
may vary from the coupon rate, even if adjustable, if the mortgage-backed
securities are purchased or traded in the secondary market at a premium or
discount. In addition, there is normally some delay between the time the issuer
receives mortgage payments from the
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<PAGE> 18
servicer and the time the issuer makes the payments on the mortgage-backed
securities, and this delay reduces the effective yield to the holder of such
securities.
Asset-Backed Securities. A Fund may invest in asset-backed
securities, which represent participations in, or are secured by and payable
from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property and
receivables from revolving credit (credit card) agreements. Such assets are
securitized through the use of trusts and special purpose corporations.
Payments or distributions of principal and interest may be guaranteed up to
certain amounts and for a certain time period by a letter of credit or a pool
insurance policy issued by a financial institution unaffiliated with the trust
or corporation.
Asset-backed securities present certain risks that are not
presented by other securities in which the Fund may invest. Automobile
receivables generally are secured by automobiles. Most issuers of automobile
receivables permit the loan servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that
of the holders of the asset-backed securities. In addition, because of the
large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have a proper security interest in the underlying
automobiles. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities. Credit card receivables are generally unsecured, and the debtors
are entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts owed
on the credit cards, thereby reducing the balance due. In addition, there is no
assurance that the security interest in the collateral can be realized.
Structured Notes, Bonds or Debentures. Typically, the value
of the principal and/or interest on these instruments is determined by
reference to changes in the value of specific currencies, interest rates,
commodities, indexes or other financial indicators (the "Reference") or the
relevant change in two or more References. The interest rate or the principal
amount payable upon maturity or redemption may be increased or decreased
depending upon changes in the applicable Reference. The terms of the structured
securities may provide that in certain circumstances no principal is due at
maturity and, therefore, may result in the loss of a Fund's entire investment.
The value of structured securities may move in the same or the opposite
direction as the value of the Reference, so that appreciation of the Reference
may produce an increase or decrease in the interest rate or value of the
security at maturity. In addition, the change in interest rate or the value of
the security at maturity may be a multiple of the change in the value of the
Reference so that the security may be more or less volatile than the Reference,
depending on the multiple. Consequently, structured securities may entail a
greater degree of market risk and volatility than other types of debt
obligations.
Assignments and Participations. Each Fund may invest in
assignments of and participations in loans issued by banks and other financial
institutions.
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When a Fund purchases assignments from lending financial
institutions, the Fund will acquire direct rights against the borrower on the
loan. However, since assignments are generally arranged through private
negotiations between potential assignees and potential assignors, the rights
and obligations acquired by a Fund as the purchaser of an assignment may differ
from, and be more limited than, those held by the assigning lender.
Participations in loans will typically result in a Fund
having a contractual relationship with the lending financial institution, not
the borrower. A Fund would have the right to receive payments of principal,
interest and any fees to which it is entitled only from the lender of the
payments from the borrower. In connection with purchasing a participation, a
Fund generally will have no right to enforce compliance by the borrower with
the terms of the loan agreement relating to the loan, nor any rights of set-off
against the borrower, and the Fund may not benefit directly from any collateral
supporting the loan in which it has purchased a participation. As a result, a
Fund purchasing a participation will assume the credit risk of both the
borrower and the lender selling the participation. In the event of the
insolvency of the lender selling the participation, the Fund may be treated as
a general creditor of the lender and may not benefit from any set-off between
the lender and the borrower.
A Fund may have difficulty disposing of assignments and
participations because there is no liquid market for such securities. The lack
of a liquid secondary market will have an adverse impact on the value of such
securities and on a Fund's ability to dispose of particular assignments or
participations when necessary to meet the Fund's liquidity needs or in response
to a specific economic event, such as a deterioration in the creditworthiness
of the borrower. The lack of a liquid market for assignments and participations
also may make it more difficult for a Fund to assign a value to these
securities for purposes of valuing the Fund's portfolio and calculating its net
asset value.
A Fund may invest in fixed and floating rate loans ("Loans")
arranged through private negotiations between a foreign government (a
"Borrower") and one or more financial institutions ("Lenders"). The majority of
the Fund's investments in Loans are expected to be in the form of
participations in Loans ("Participations") and assignments of portions of Loans
from third parties ("Assignments"). Participations typically will result in the
Fund having a contractual relationship only with the Lender, not with the
Borrower. A Fund will have the right to receive payments of principal, interest
and any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by the Lender of the payments from the
Borrower. In connection with purchasing Participations, the Fund generally will
have no right to enforce compliance by the Borrower with the terms of the loan
agreement relating to the Loan, nor any rights of set-off against the Borrower,
and the Fund may not directly benefit from any collateral supporting the Loan
in which it has purchased the Participation. As a result, the Fund will assume
the credit risk of both the Borrower and the Lender that is selling the
Participation. In the event of the insolvency of the Lender selling a
Participation, the Fund may be treated as a general creditor of the Lender and
may not benefit from any set-off between the Lender and the Borrower. The Fund
will acquire Participations only if the Lender interpositioned between the Fund
and the Borrower is determined by CSAM to be creditworthy.
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When a Fund purchases Assignments from Lenders, the Fund will
acquire direct rights against the Borrower on the Loan. However, since
Assignments are generally arranged through private negotiations between
potential assignees and potential assignors, the rights and obligations
acquired by the Fund as the purchaser of an Assignment may differ from, and be
more limited than, those held by the assigning Lender.
There are risks involved in investing in Participations and
Assignments. A Fund may have difficulty disposing of them because there is no
liquid market for such securities. The lack of a liquid secondary market will
have an adverse impact on the value of such securities and on the Fund's
ability to dispose of particular Participations or Assignments when necessary
to meet the Fund's liquidity needs or in response to a specific economic event,
such as a deterioration in the creditworthiness of the Borrower. The lack of a
liquid market for Participations and Assignments also may make it more
difficult for a Fund to assign a value to these securities for purposes of
valuing the Fund's portfolio and calculating its net asset value.
Debt Securities. Each Fund may invest up to 20% of its total
assets in debt securities (other than money market obligations). Each Fund may
also invest to a limited extent in zero coupon bonds, which may result in
taxable income to shareholders in the Fund. Debt obligations of corporations in
which the Funds may invest include corporate bonds, debentures and notes. Debt
securities convertible into common stock and certain preferred stocks may have
risks similar to those described below. The interest income to be derived may
be considered as one factor in selecting debt securities for investment by
CSAM. Because the market value of debt obligations can be expected to vary
inversely to changes in prevailing interest rates, investing in debt
obligations may provide an opportunity for capital appreciation when interest
rates are expected to decline. The success of such a strategy is dependent upon
CSAM's ability to accurately forecast changes in interest rates. The market
value of debt obligations may also be expected to vary depending upon, among
other factors, the ability of the issuer to repay principal and interest, any
change in investment rating and general economic conditions.
A security will be deemed to be investment grade if it is
rated within the four highest grades by Moody's or S&P or, if unrated, is
determined to be of comparable quality by CSAM. Bonds rated in the fourth
highest grade may have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade bonds. A Fund's holdings of debt securities rated below investment grade
(commonly referred to as "junk bonds") may be rated as low as C by Moody's or D
by S&P at the time of purchase, or may be unrated securities considered to be
of equivalent quality. Securities that are rated C by Moody's comprise the
lowest rated class and can be regarded as having extremely poor prospects of
ever attaining any real investment standing. Debt rated D by S&P is in default
or is expected to default upon maturity or payment date. Subsequent to its
purchase by a Fund, an issue of securities may cease to be rated or its rating
may be reduced below the minimum required for purchase by the Fund. Neither
event will require sale of such securities, although CSAM will consider such
event in its determination of whether the Fund should continue to
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<PAGE> 21
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 Fund may invest up to
5% of its total assets in securities rated below investment grade, including
convertible debt securities. Below investment grade debt securities may be
rated as low as C by Moody's or D by S&P, or be deemed by CSAM to be of
equivalent quality. Securities that are rated C by Moody's are the lowest rated
class and can be regarded as having extremely poor prospects of ever attaining
any real investment standing. A security rated D by S&P is in default or is
expected to default upon maturity or payment date. Below investment grade
securities (commonly referred to as "junk bonds"), (i) will likely have some
quality and protective characteristics that, in the judgment of the rating
organizations, are outweighed by large uncertainties or major risk exposures to
adverse conditions and (ii) are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation. The market values of certain of these securities also
tend to be more sensitive to individual corporate developments and changes in
economic conditions than investment grade securities. In addition, these
securities generally present a higher degree of credit risk. The risk of loss
due to default is significantly greater because these securities generally are
unsecured and frequently are subordinated to the prior payment of senior
indebtedness. While the market values of below investment grade securities tend
to react less to fluctuations in interest rate levels than do those of
investment grade securities, the market values of certain of these securities
also tend to be more sensitive to individual corporate developments and changes
in economic conditions than investment grade securities. In addition, below
investment grade securities generally present a higher degree of credit risk.
Issuers of below investment grade securities are often highly leveraged and may
not have more traditional methods of financing available to them so that their
ability to service their obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. The risk of loss
due to default by such issuers is significantly greater because below
investment grade securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness.
An economic recession could disrupt severely the market for
such securities and may adversely affect the value of such securities and the
ability of the issuers of such securities to repay principal and pay interest
thereon. The Fund may have difficulty disposing of certain of these securities
because there may be a thin trading market. Because there is no established
retail secondary market for many of these securities, the Fund anticipates that
these securities could be sold only to a limited number of dealers or
institutional investors. To the extent a secondary trading market for these
securities does exist, it generally is not as liquid as the secondary market
for higher-rated securities. The lack of a liquid secondary market, as well as
adverse publicity and investor perception with respect to these securities, may
have an
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adverse impact on market price and the 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 the Fund to obtain accurate market quotations for
purposes of valuing the Fund and calculating its net asset value.
The market value of below investment grade securities is more
volatile than that of investment grade securities. Factors adversely impacting
the market value of these securities will adversely impact the Fund's net asset
value. The Fund will rely on the judgment, analysis and experience of CSAM in
evaluating the creditworthiness of an issuer. In this evaluation, CSAM will
take into consideration, among other things, the issuer's financial resources,
its sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. Normally, below
investment grade securities are not intended for short-term investment. The
Fund may incur additional expenses to the extent it is required to seek
recovery upon a default in the payment of principal or interest on its
portfolio holdings of such securities. At times, adverse publicity regarding
lower-rated securities has depressed the prices for such securities to some
extent.
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 a Fund's total assets taken at value (including the loan
collateral). No Fund will lend portfolio securities to its investment adviser,
any sub-investment adviser or their affiliates unless it has applied for and
received specific authority to do so from the SEC. Loans of portfolio
securities will be collateralized by cash, letters of credit or U.S. Government
Securities, which are maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. Any gain or loss in
the market price of the securities loaned that might occur during the term of
the loan would be for the account of a Fund. From time to time, a Fund may
return a part of the interest earned from the investment of collateral received
for securities loaned to the borrower and/or a third party that is unaffiliated
with the Fund and that is acting as a "finder."
By lending its securities, a Fund can increase its income by
continuing to receive interest and any dividends on the loaned securities as
well as by either investing the collateral received for securities loaned in
short-term instruments or obtaining yield in the form of interest paid by the
borrower when U.S. Government Securities are used as collateral. Each Fund will
adhere to the following conditions whenever its portfolio securities are
loaned: (i) the Fund must receive at least 100% cash collateral or equivalent
securities of the type
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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. Each Fund may invest up to 10% of its
total assets (20% in the case of the Post-Venture Capital Fund) 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.
securities markets and EDRs (CDRs) and IDRs (GDRs) in bearer form are designed
for use in European and non-U.S. securities markets, respectively.
Foreign Currency Exchange. Since the Funds may be investing
in securities denominated in currencies of non-U.S. countries, and since a Fund
may temporarily hold funds in bank deposits or other money market investments
denominated in foreign currencies, the Funds may be affected favorably or
unfavorably by exchange control regulations or changes in the exchange rate
between such currencies and the dollar. A change in the value of a foreign
currency relative to the U.S. dollar will result in a corresponding change in
the dollar value of the Fund assets denominated in that foreign currency.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed
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to shareholders by a Fund. Unless otherwise contracted, the rate of exchange
between the U.S. dollar and other currencies is determined by the forces of
supply and demand in the foreign exchange markets. Changes in the exchange rate
may result over time from the interaction of many factors directly or
indirectly affecting economic and political conditions in the United States and
a particular foreign country, including economic and political developments in
other countries. Governmental intervention may also play a significant role.
National governments rarely voluntarily allow their currencies to float freely
in response to economic forces. Sovereign governments use a variety of
techniques, such as intervention by a country's central bank or imposition of
regulatory controls or taxes, to affect the exchange rates of their currencies.
The Funds may use hedging techniques with the objective of protecting against
loss through the fluctuation of the value of foreign currencies against the
U.S. dollar, particularly the forward market in foreign exchange, currency
options and currency futures.
Euro Conversion. The introduction of a single European
currency, the euro, on January 1, 1999 for participating European nations in
the Economic and Monetary Union presented unique risks and uncertainties for
investors in those countries, including (i) the functioning of the payment and
operational systems of banks and other financial institutions; (ii) the
creation of suitable clearing and settlement payment schemes for the euro;
(iii) the fluctuation of the euro relative to non-euro currencies during the
transition period from January 1, 1999 to December 31, 2000 and beyond; and
(iv) whether the interest rate, tax and labor regimes of the European countries
participating in the euro will converge over time. Further, the conversion of
the currencies of other Economic Monetary Union countries, such as the United
Kingdom, and the admission of other countries, including Central and Eastern
European countries, to the Economic Monetary Union could adversely affect the
euro. These or other factors may cause market disruptions and could adversely
affect the value of foreign securities and currencies held by the Funds.
Information. Many of the foreign securities held by the Funds
will not be registered with, nor will the issuers thereof be subject to
reporting requirements of the SEC. Accordingly, there may be less publicly
available information about the securities and about the foreign company or
government issuing them than is available about a domestic company or
government entity. Foreign companies are generally subject to financial
reporting standards, practices and requirements that are either not uniform or
less rigorous than those applicable to U.S. companies.
Political Instability. With respect to some foreign
countries, there is the possibility of expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the Funds, political or
social instability, or domestic developments which could affect U.S.
investments in those and neighboring countries.
Foreign Markets. Securities of some foreign companies are
less liquid and their prices are more volatile than securities of comparable
U.S. companies. Certain foreign countries are known to experience long delays
between the trade and settlement dates of securities purchased or sold.
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Increased Expenses. The operating expenses of a Fund, to the
extent it invests in foreign securities, may be higher than that of an
investment company investing exclusively in U.S. securities, since the expenses
of the Funds, such as cost of converting foreign currency into U.S. dollars,
the payment of fixed brokerage commissions on foreign exchanges, custodial
costs, valuation costs and communication costs, may be higher than those costs
incurred by other investment companies not investing in foreign securities.
Dollar-Denominated Debt Securities of Foreign Issuers. The
returns on foreign debt securities reflect interest rates and other market
conditions prevailing in those countries. The relative performance of various
countries' fixed income markets historically has reflected wide variations
relating to the unique characteristics of each country's economy. Year-to-year
fluctuations in certain markets have been significant, and negative returns
have been experienced in various markets from time to time.
Foreign Debt Securities. The returns on foreign debt
securities reflect interest rates and other market conditions prevailing in
those countries and the effect of gains and losses in the denominated
currencies against the U.S. dollar, which have had a substantial impact on
investment in foreign fixed-income securities. The relative performance of
various countries' fixed-income markets historically has reflected wide
variations relating to the unique characteristics of each country's economy.
Year-to-year fluctuations in certain markets have been significant, and
negative returns have been experienced in various markets from time to time.
The foreign government securities in which each of the Funds
may invest generally consist of obligations issued or backed by national, state
or provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt obligations
of supranational entities, which include international organizations designated
or backed by governmental entities to promote economic reconstruction or
development, international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank"), the European Coal and Steel Community, the
Asian Development Bank and the InterAmerican Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt securities
of quasi-governmental agencies are issued by entities owned by either a
national, state or equivalent government or are obligations of a political unit
that is not backed by the national government's full faith and credit and
general taxing powers. An example of a multinational currency unit is the
European Currency Unit ("ECU"). An ECU represents specified amounts of the
currencies of certain member states of the European Economic Community. The
specific amounts of currencies comprising the ECU may be adjusted by the
Council of Ministers of the European Community to reflect changes in relative
values of the underlying currencies.
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Privatizations. Each Fund may invest in privatizations (i.e.,
foreign government programs of selling interests in government-owned or
controlled enterprises). The ability of U.S. entities, such as the Funds, to
participate in privatizations may be limited by local law, or the terms for
participation may be less advantageous than for local investors. There can be
no assurance that privatization programs will be available or successful.
Brady Bonds. 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. (Post-Venture Capital and Small Company Growth
Funds only). The current market value of securities sold short (excluding short
sales "against the box") will not exceed 10% of a Fund's assets. These Funds
may engage in "short sales." In a short sale, the investor sells a borrowed
security and has a corresponding obligation to the lender to return the
identical security. The seller does not immediately deliver the securities sold
and is said to have a short position in those securities until delivery occurs.
To deliver the securities to the buyer, the Fund must arrange through a broker
to borrow the securities and, in so doing, the Fund becomes obligated to
replace the securities borrowed at their market price at the time of
replacement, whatever that price may be. The Fund will make a profit or incur a
loss as a result of a short sale depending on whether the price of the security
decreases or increases between the date of the short sale and the date on which
the Fund purchases the security to replace the borrowed securities that have
been sold. The amount of any loss would be 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 Portfolio will maintain the
segregated account daily at a level so that (a) the amount deposited in the
account plus the amount deposited with the broker (not including the proceeds
from the short sale) will equal the current market value of the securities sold
short and (b) the amount deposited in the account plus the amount deposited
with the broker (not including the proceeds of the short sale) will not be less
than the market value of the securities at the time they were sold short.
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Short Sales "Against the Box" (Each Fund except the Emerging
Growth Fund). Not more than 10% of a Fund's net assets (taken at current value)
may be held as collateral for short sales against the box at any one time.
While a short sale is made by selling a security a Fund does not own, a short
sale is "against the box" to the extent that a Fund contemporaneously owns or
has the right to obtain, at no added cost, securities identical to those sold
short. A Fund will deposit, in a segregated account with its custodian or a
qualified subcustodian, the securities sold short or convertible or
exchangeable preferred stocks or debt securities in connection with short sales
against the box. No Fund intends to engage in short sales against the box for
investment purposes. A Fund may, however, make a short sale as a hedge, when it
believes that the price of a security may decline, causing a decline in the
value of a security owned by the Fund (or a security convertible or
exchangeable for such security). In such case, any future losses in the Fund's
long position should be offset by a gain in the short position and, conversely,
any gain in the long position should be reduced by a loss in the short
position. The extent to which such gains or losses are reduced will depend upon
the amount of the security sold short relative to the amount the Fund owns.
There will be certain additional transaction costs associated with short sales
against the box, but the Fund will endeavor to offset these costs with the
income from the investment of the cash proceeds of short sales.
If a Fund effects a short sale of securities at a time when
it has an unrealized gain on the securities, it may be required to recognize
that gain as if it had actually sold the securities (as a "constructive sale")
on the date it effects the short sale. However, such constructive sale
treatment may not apply if the Fund closes out the short sale with securities
other than the appreciated securities held at the time of the short sale and if
certain other conditions are satisfied. Uncertainty regarding the tax
consequences of effecting short sales may limit the extent to which a Fund may
effect short sales.
Warrants. Each Fund may invest up to 10% of its net assets
(15% in the case of the Small Company Growth Fund) in warrants. Each Fund may
purchase warrants issued by domestic and foreign companies to purchase newly
created equity securities consisting of common and preferred stock. Warrants
are securities that give the holder the right, but not the obligation, to
purchase equity issues of the company issuing the warrants, or a related
company, at a fixed price either on a date certain or during a set period. The
equity security underlying a warrant is authorized at the time the warrant is
issued or is issued together with the warrant.
Investing in warrants can provide a greater potential for
profit or loss than an equivalent investment in the underlying security, and,
thus, can be a speculative investment. At the time of issue, the cost of a
warrant is substantially less than the cost of the underlying security itself,
and price movements in the underlying security are generally magnified in the
price movements of the warrant. This leveraging effect enables the investor to
gain exposure to the underlying security with a relatively low capital
investment. This leveraging increases an investor's risk, however, in the event
of a decline in the value of the underlying security and can result in a
complete loss of the amount invested in the warrant. In addition, the price of
a warrant tends to be more volatile than, and may not correlate exactly to, the
price of the
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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 of the
Post-Venture Capital and Small Company Growth Funds may invest up to 15% of its
net assets (10% of total assets in the case of the Emerging Growth and Small
Company Value Funds) in non-publicly traded and illiquid securities, including
securities that are illiquid by virtue of the absence of a readily available
market, repurchase agreements which have a maturity of longer than seven days,
certain Rule 144A Securities (as defined below), time deposits maturing in more
than seven days and, with respect to the Post-Venture Capital Fund, private
equity portfolios that invest in venture capital companies ("Private Funds").
Securities that have legal or contractual restrictions on resale but have a
readily available market are not considered illiquid for purposes of this
limitation. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which have
not been registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market. Mutual funds do not typically hold a significant
amount of these restricted or other illiquid securities because of the
potential for delays on resale and uncertainty in valuation. Companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements applicable to companies whose securities
are publicly traded. Limitations on resale may have an adverse effect on the
marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days without borrowing. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public
offering of securities.
In recent years, however, a large institutional market has
developed for certain securities that are not registered under the Securities
Act including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
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Rule 144A Securities. Rule 144A under the Securities Act
adopted by the SEC allows for a broader institutional trading market for
securities otherwise subject to restriction on resale to the general public.
Rule 144A establishes a "safe harbor" from the registration requirements of the
Securities Act for resales of certain securities to qualified institutional
buyers. CSAM anticipates that the market for certain restricted securities such
as institutional commercial paper will expand further as a result of this
regulation and use of automated systems for the trading, clearance and
settlement of unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of Securities Dealers,
Inc.
An investment in Rule 144A Securities will be considered
illiquid and therefore subject to a Fund's limit on the purchase of illiquid
securities unless the Board or its delegates determines that the Rule 144A
Securities are liquid. In reaching liquidity decisions, the Board and its
delegates may consider, inter alia, the following factors: (i) the unregistered
nature of the security; (ii) the frequency of trades and quotes for the
security; (iii) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (iv) dealer undertakings to make
a market in the security and (v) the nature of the security and the nature of
the marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer).
This investment practice could have the effect of increasing
the level of illiquidity in the Funds to the extent that qualified
institutional buyers become uninterested for a time in purchasing Rule 144A
Securities. The Board of each Fund will carefully monitor any investments by
the Fund in Rule 144A Securities. The Boards 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
any determination regarding liquidity.
Borrowing. Each of the Post-Venture Capital, Small Company
Growth and Small Company Value Funds may borrow up to 30%, and the Emerging
Growth Fund may borrow up to 10%, of its total assets for temporary or
emergency purposes, including to meet portfolio redemption requests so as to
permit the orderly disposition of portfolio securities or to facilitate
settlement transactions on portfolio securities. Investments (including
roll-overs) will not be made when borrowings exceed 5% of a Fund's total
assets. Although the principal of such borrowings will be fixed, a Fund's
assets may change in value during the time the borrowing is outstanding. Each
Fund expects that some of its borrowings may be made on a secured basis. In
such situations, either the custodian will segregate the pledged assets for the
benefit of the lender or arrangements will be made with a suitable
subcustodian, which may include the lender.
Reverse Repurchase Agreements and Dollar Rolls. Each of the
Funds may enter into reverse repurchase agreements with member banks of the
Federal Reserve System and certain non-bank dealers. Reverse repurchase
agreements involve the sale of securities held by the Fund pursuant to its
agreement to repurchase them at a mutually agreed upon date, price and rate of
interest. At the time the Fund enters into a reverse repurchase agreement, it
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will establish and maintain a segregated account with an approved custodian
containing cash or liquid securities having a value not less than the
repurchase price (including accrued interest). The assets contained in the
segregated account will be marked-to-market daily and additional assets will be
placed in such account on any day in which the assets fall below the repurchase
price (plus accrued interest). The Fund's liquidity and ability to manage its
assets might be affected when it sets aside cash or portfolio securities to
cover such commitments. Reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale may decline below the
price of the securities the Fund has sold but is obligated to repurchase. In
the event the buyer of securities under a reverse repurchase agreement files
for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision.
The Funds also may enter into "dollar rolls," in which the
Fund sells fixed-income securities for delivery in the current month and
simultaneously contracts to repurchase similar but not identical (same type,
coupon and maturity) securities on a specified future date. During the roll
period, the Fund would forego principal and interest paid on such securities.
The Fund would be compensated by the difference between the current sales price
and the forward price for the future purchase, as well as by the interest
earned on the cash proceeds of the initial sale. At the time the Fund enters
into a dollar roll transaction, it will place in a segregated account
maintained with an approved custodian cash or liquid securities having a value
not less than the repurchase price (including accrued interest) and will
subsequently monitor the account to ensure that its value is maintained.
Reverse repurchase agreements and dollar rolls that are accounted for as
financings are considered to be borrowings under the 1940 Act.
When-Issued Securities and Delayed-Delivery Transactions.
Each of the Funds may utilize up to 20% of its total assets to purchase
securities on a "when-issued" basis or purchase or sell securities for delayed
delivery (i.e., payment or delivery occur beyond the normal settlement date at
a stated price and yield). A Fund will not enter into a when-issued or
delayed-delivery transaction for the purpose of leverage, but may sell the
right to acquire a when-issued security prior to its acquisition or dispose of
its right to deliver or receive securities in a delayed-delivery transaction if
CSAM deems it advantageous to do so. The payment obligation and the interest
rate that will be received on when-issued and delayed-delivery transactions are
fixed at the time the buyer enters into the commitment. Due to fluctuations in
the value of securities purchased or sold on a when-issued or delayed-delivery
basis, the prices of such securities may be higher or lower than the prices
available in the market on the dates when the investments are actually
delivered to the buyers. Each Fund will segregate with its custodian cash or
liquid securities in an amount equal to its when-issued and delayed-delivery
purchase commitments and will segregate the securities underlying commitments
to sell securities for delayed delivery.
When a Fund agrees to purchase when-issued or
delayed-delivery securities, its custodian will set aside cash or liquid
securities equal to the amount of the commitment in a
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segregated account. Normally, the custodian will set aside portfolio securities
to satisfy a purchase commitment, and in such a case the Fund may be required
subsequently to place additional assets in the segregated account in order to
ensure that the value of the account remains equal to the amount of the Fund's
commitment. It may be expected that the Fund's net assets will fluctuate to a
greater degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. When the Fund engages in when-issued
or delayed-delivery transactions, it relies on the other party to consummate
the trade. Failure of the seller to do so may result in the Fund incurring a
loss or missing an opportunity to obtain a price considered to be advantageous.
REITs. Each Fund may invest in real estate investment trusts
("REITs"), which are pooled investment vehicles that invest primarily in
income-producing real estate or real estate related loans or interests. Like
regulated investment companies such as the Fund, REITs are not taxed on income
distributed to shareholders provided they comply with several requirements of
the Internal Revenue Code of 1986, as amended (the "Code"). By investing in a
REIT, the Fund will indirectly bear its proportionate share of any expenses
paid by the REIT in addition to the expenses of the Fund.
Investing in REITs involves certain risks. A REIT may be
affected by changes in the value of the underlying property owned by such REIT
or by the quality of any credit extended by the REIT. REITs are dependent on
management skills, are not diversified (except to the extent the Code
requires), and are subject to the risks of financing projects. REITs are
subject to heavy cash flow dependency, default by borrowers, self-liquidation,
the possibilities of failing to qualify for the exemptions from the 1940 Act.
REITs are also subject to interest rate risks.
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,
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the Fund may achieve maximum capital appreciation. There can be no assurance,
however, that a special situation that exists at the time of an investment will
be consummated under the terms and within the time period contemplated.
Strategy Available to the Emerging Growth Fund
Non-Diversified Status. The Emerging Growth Fund is
classified as non-diversified within the meaning of the 1940 Act, which means
that it is not limited by such Act in the proportion of its assets that it may
invest in securities of a single issuer. As a non-diversified fund, the Fund
may invest a greater proportion of its assets in the obligations of a smaller
number of issuers and, as a result, may be subject to greater risk with respect
to portfolio securities. The Fund's investments will be limited, however, in
order to qualify as a "regulated investment company" for purposes of the Code.
To qualify, the Fund will comply with certain requirements, including limiting
its investments so that at the close of each quarter of the taxable year (a)
not more than 25% of the market value of its total assets will be invested in
the securities of a single issuer, and (b) with respect to 50% of the market
value of its total assets, not more than 5% of the market value of its total
assets will be invested in the securities of a single issuer and the will not
own more than 10% of the outstanding voting securities of a single issuer.
Strategy Available to the Post-Venture Capital Fund
Post-Venture Capital Companies. Although the Fund may invest
up to 10% of its assets in venture capital and other investment funds, the Fund
is not designed primarily to provide venture capital financing. Rather, under
normal market conditions, the Fund will invest at least 65% of its total assets
in equity securities of "post-venture capital companies." A post-venture
capital company is a company that has received venture capital financing either
(a) during the early stages of the company's existence or the early stages of
the development of a new product or service, or (b) as part of a restructuring
or recapitalization of the company. The investment of venture capital
financing, distribution of such company's securities to venture capital
investors, or initial public offering, whichever is later, will have been made
within ten years prior to the Fund's purchase of the company's securities.
Private Funds. Up to 10% of the Fund's assets may be invested
in United States or foreign private limited partnerships or other investment
funds ("Private Funds") that themselves invest in equity or debt securities of
(a) companies in the venture capital or post-venture capital stages of
development or (b) companies engaged in special situations or changes in
corporate control, including buyouts. In selecting Private Funds for
investment, Abbott Capital Management, LLC, the Fund's sub-investment adviser
with respect to Private Funds ("Abbott"), attempts to invest in a mix of
Private Funds that will provide an above average internal rate of return (i.e.,
the discount rate at which the present value of an investment's future cash
inflows (dividend income and capital gains) are equal to the cost of the
investment). CSAM believes that the Portfolio's investments in Private Funds
offer individual investors a unique opportunity to participate in venture
capital and other private investment funds, providing access to investment
opportunities typically available only to large
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institutions and accredited investors. Although investments in Private Funds
offer the opportunity for significant capital gains, these investments involve
a high degree of business and financial risk that can result in substantial
losses in the portion of the Post-Venture Capital Fund's assets invested in
these investments. Among these are the risks associated with investment in
companies in an early stage of development or with little or no operating
history, companies operating at a loss or with substantial variation in
operation results from period to period, companies with the need for
substantial additional capital to support expansion or to maintain a
competitive position, or companies with significant financial leverage. Such
companies may also face intense competition from others including those with
greater financial resources or more extensive development, manufacturing,
distribution or other attributes, over which the Portfolio will have no
control.
Interests in the Private Funds in which the Post-Venture
Capital Fund may invest will be subject to substantial restrictions on transfer
and, in some instances, may be non-transferable for a period of years. Private
Funds may participate in only a limited number of investments and, as a
consequence, the return of a particular Private Fund may be substantially
adversely affected by the unfavorable performance of even a single investment.
Certain of the Private Funds in which the Fund may invest may pay their
investment managers a fee based on the performance of the Fund, which may
create an incentive for the manager to make investments that are riskier or
more speculative than would be the case if the manager was paid a fixed fee.
Private Funds are not registered under the 1940 Act and, consequently, are not
subject to the restrictions on affiliated transactions and other protections
applicable to regulated investment companies. The valuation of companies held
by Private Funds, the securities of which are generally unlisted and illiquid,
may be very difficult and will often depend on the subjective valuation of the
managers of the Private Funds, which may prove to be inaccurate. Inaccurate
valuations of a Private Fund's portfolio holdings may affect the Fund's net
asset value calculations. Private Funds in which the Fund invests will not
borrow to increase the amount of assets available for investment or otherwise
engage in leverage. Debt securities held by a Private Fund will tend to be
rated below investment grade and may be rated as low as C by Moody's or D by
S&P. Securities in these rating categories are in payment default or have
extremely poor prospects of attaining any investment standing. The Fund may
also hold non-publicly traded equity securities of companies in the venture and
post-venture stages of development, such as those of closely held companies or
private placements of public companies. The portion of the Fund's assets
invested in these non-publicly traded securities will vary over time depending
on investment opportunities and other factors. The Portfolio's illiquid assets,
including interests in Private Funds and other illiquid non-publicly traded
securities, may not exceed 15% of the Fund's net assets.
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
29
<PAGE> 34
at the meeting, if the holders of more than 50% of the outstanding shares of
the Fund are present or represented by proxy, or (ii) more than 50% of the
outstanding shares. If a percentage restriction (other than the percentage
limitation set forth in No. 1 with respect to each Fund) is adhered to at the
time of an investment, a later increase or decrease in the percentage of assets
resulting from a change in the values of portfolio securities or in the amount
of a Fund's assets will not constitute a violation of such restriction.
Emerging Growth Fund
The investment limitations numbered 1 through 9 are
Fundamental Restrictions. Investment limitations 10 through 13 may be changed
by a vote of the Board at any time.
The Emerging Growth Fund may not:
1. Borrow money or issue senior securities except that
the Fund may (a) borrow from banks for temporary or emergency purposes, and not
for leveraging, and then in amounts not in excess of 10% of the value of the
Fund's total assets at the time of such borrowing and (b) enter into futures
contracts; or mortgage, pledge or hypothecate any assets except in connection
with any bank borrowing and in amounts not in excess of the lesser of the
dollar amounts borrowed or 10% of the value of the Fund's total assets at the
time of such borrowing. Whenever borrowings described in (a) exceed 5% of the
value of the Fund's total assets, the Fund will not make any additional
investments (including roll-overs). For purposes of this restriction, (a) the
deposit of assets in escrow in connection with the purchase of securities on a
when-issued or delayed-delivery basis and (b) collateral arrangements with
respect to initial or variation margin for futures contracts will not be deemed
to be pledges of the Fund's assets.
2. Purchase any securities which would cause 25% or
more of the value of the Fund's total assets at the time of purchase to be
invested in the securities of issuers conducting their principal business
activities in the same industry; provided that there shall be no limit on the
purchase of U.S. Government Securities.
3. Make loans, except that the Fund may purchase or
hold publicly distributed fixed-income securities, lend portfolio securities
and enter into repurchase agreements.
4. Underwrite any issue of securities except to the
extent that the investment in restricted securities and the purchase of
fixed-income securities directly from the issuer thereof in accordance with the
Fund's investment objective, policies and limitations may be deemed to be
underwriting.
5. Purchase or sell real estate, real estate investment
trust securities, real estate limited partnerships, commodities or commodity
contracts, or invest in oil, gas or mineral exploration or development
programs, except that the Fund may invest in (a) fixed-income securities
secured by real estate, mortgages or interests therein, (b) securities of
30
<PAGE> 35
companies that invest in or sponsor oil, gas or mineral exploration or
development programs and (c) futures contracts and related options.
6. Make short sales of securities or maintain a short
position.
7. Purchase, write or sell puts, calls, straddles,
spreads or combinations thereof, except that the Fund may (a) purchase put and
call options on securities, (b) write covered call options on securities, (c)
purchase and write put and call options on stock indices and (d) enter into
options on futures contracts.
8. Purchase securities of other investment companies
except in connection with a merger, consolidation, acquisition, reorganization
or offer of exchange or as otherwise permitted under the 1940 Act.
9. Purchase securities on margin, except that the Fund
may obtain any short-term credits necessary for the clearance of purchases and
sales of securities. For purposes of this restriction, the deposit or payment
of initial or variation margin in connection with futures contracts or related
options will not be deemed to be a purchase of securities on margin.
10. Invest more than 10% of the value of the Fund's
total assets in securities which may be illiquid because of legal or
contractual restrictions on resale or securities for which there are no readily
available market quotations. For purposes of this limitation, repurchase
agreements with maturities greater than seven days shall be considered illiquid
securities.
11. Invest more than 10% of the value of the Fund's
total assets in time deposits maturing in more than seven calendar days.
12. Invest in warrants (other than warrants acquired by
the Fund as part of a unit or attached to securities at the time of purchase)
if, as a result, the investments (valued at the lower of cost or market) would
exceed 10% of the value of the Fund's net assets.
13. Invest in oil, gas or mineral leases.
Post-Venture Capital and Small Company Growth Funds
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.
Each of the Post-Venture Capital and Small Company Growth
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, 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,
31
<PAGE> 36
short sales, the entry into currency transactions, options, futures contracts,
options on futures contracts, forward commitment transactions and dollar roll
transactions that are not accounted for as financings (and the segregation of
assets in connection with any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or
more of the value of the Fund's total assets at the time of purchase to be
invested in the securities of issuers conducting their principal business
activities in the same industry; provided that there shall be no limit on the
purchase of U.S. Government Securities.
3. Purchase the securities of any issuer if as a result
more than 5% of the value of the Fund's total assets would be invested in the
securities of such issuer, except that this 5% limitation does not apply to
U.S. Government Securities and except that up to 25% of the value of the Fund's
total assets may be invested without regard to this 5% limitation.
4. Make loans, except that the Fund may purchase or
hold fixed-income securities, including loan participations, assignments and
structured securities, lend portfolio securities and enter into repurchase
agreements.
5. Underwrite any securities issued by others except to
the extent that the investment in restricted securities and the sale of
securities in accordance with the Fund's investment objective, policies and
limitations may be deemed to be underwriting.
6. Purchase or sell real estate or invest in oil, gas
or mineral exploration or development programs, except that the Fund may invest
in (a) securities secured by real estate, mortgages or interests therein and
(b) securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
7. Purchase securities on margin, except that the Fund
may obtain any short-term credits necessary for the clearance of purchases and
sales of securities. For purposes of this restriction, the deposit or payment
of initial or variation margin in connection with transactions in currencies,
options, futures contracts or related options will not be deemed to be a
purchase of securities on margin.
8. Invest in commodities, except that the Fund may
purchase and sell futures contracts, including those relating to securities,
currencies and indexes, and options on futures contracts, securities,
currencies or indexes, purchase and sell currencies on a forward commitment or
delayed-delivery basis and enter into stand-by commitments.
9. Issue any senior security except as permitted in the
Fund's investment limitations.
10. Purchase securities of other investment companies
except in connection with a merger, consolidation, acquisition, reorganization
or offer of exchange, or as otherwise permitted under the 1940 Act.
32
<PAGE> 37
11. Pledge, mortgage or hypothecate its assets, except
to the extent necessary to secure permitted borrowings and to the extent
related to the deposit of assets in escrow in connection with the purchase of
securities on a forward commitment or delayed-delivery basis and collateral and
initial or variation margin arrangements with respect to currency transactions,
options, futures contracts, and options on futures contracts.
12. Invest more than 15% of the Fund's net assets in
securities which may be illiquid because of legal or contractual restrictions
on resale or securities for which there are no readily available market
quotations. For purposes of this limitation, repurchase agreements with
maturities greater than seven days shall be considered illiquid securities.
13. Make additional investments (including roll-overs)
if the Fund's borrowings exceed 5% of its net assets.
Small Company Value Fund
The investment limitations numbered 1 through 10 are
Fundamental Restrictions. Investment limitations 11 through 15 may be changed
by a vote of the Board at any time.
The Small Company Value Fund may not:
1. Borrow money except that the Fund may (a) borrow
from banks for temporary or emergency purposes and (b) enter into reverse
repurchase agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the
Fund's total assets at the time of such borrowing. For purposes of this
restriction, the entry into currency transactions, options, futures contracts,
options on futures contracts, forward commitment transactions and dollar roll
transactions that are not accounted for as financings (and the segregation of
assets in connection with any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or
more of the value of the Fund's total assets at the time of purchase to be
invested in the securities of issuers conducting their principal business
activities in the same industry; provided that there shall be no limit on the
purchase of U.S. Government Securities.
3. Purchase the securities of any issuer if as a result
more than 5% of the value of the Fund's total assets would be invested in the
securities of such issuer, except that this 5% limitation does not apply to
U.S. Government Securities and except that up to 25% of the value of the Fund's
total assets may be invested without regard to this 5% limitation.
4. Make loans, except that the Fund may purchase or
hold fixed-income securities, including loan participations, assignments and
structured securities, lend portfolio securities and enter into repurchase
agreements.
33
<PAGE> 38
5. Underwrite any securities issued by others except to
the extent that the investment in restricted securities and the sale of
securities in accordance with the Fund's investment objective, policies and
limitations may be deemed to be underwriting.
6. Purchase or sell real estate or invest in oil, gas
or mineral exploration or development programs, except that the Fund may invest
in (a) securities secured by real estate, mortgages or interests therein and
(b) securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
7. Make short sales of securities or maintain a short
position, except that the Fund may maintain short positions in forward currency
contracts, options, futures contracts and options on futures contracts and
enter into short sales "against the box."
8. Purchase securities on margin, except that the Fund
may obtain any short-term credits necessary for the clearance of purchases and
sales of securities. For purposes of this restriction, the deposit or payment
of initial or variation margin in connection with transactions in currencies,
options, futures contracts or related options will not be deemed to be a
purchase of securities on margin.
9. Invest in commodities, except that the Fund may
purchase and sell futures contracts, including those relating to securities,
currencies and indexes, and options on futures contracts, securities,
currencies or indexes, purchase and sell currencies on a forward commitment or
delayed-delivery basis and enter into stand-by commitments.
10. Issue any senior security except as permitted in the
Fund's investment limitations.
11. Purchase securities of other investment companies
except in connection with a merger, consolidation, acquisition, reorganization
or offer of exchange, or as otherwise permitted under the 1940 Act.
12. Pledge, mortgage or hypothecate its assets, except
to the extent necessary to secure permitted borrowings and to the extent
related to the deposit of assets in escrow in connection with the purchase of
securities on a forward commitment or delayed-delivery basis and collateral and
initial or variation margin arrangements with respect to currency transactions,
options, futures contracts, and options on futures contracts.
13. Invest more than 10% of the Fund's net assets in
securities which may be illiquid because of legal or contractual restrictions
on resale or securities for which there are no readily available market
quotations. For purposes of this limitation, repurchase agreements with
maturities greater than seven days shall be considered illiquid securities.
14. Invest in warrants (other than warrants acquired by
the Fund as part of a unit or attached to securities at the time of purchase)
if, as a result, the investments (valued at the lower of cost or market) would
exceed 10% of the value of the Fund's net assets.
34
<PAGE> 39
15. Make additional investments (including roll-overs)
if the Fund's borrowings exceed 5% of its net assets.
PORTFOLIO VALUATION
The following is a description of the procedures used by the
Funds in valuing their assets.
Securities listed on 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 lowest asked quotations. Options
or futures contracts will be valued similarly. 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.
35
<PAGE> 40
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. Purchases of Private Funds
by the Post-Venture Capital Fund through a broker or placement agent may also
involve a commission or other fee. 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.
Except for Private Funds investments managed by Abbott
Capital Management, LLC, the Post-Venture Capital Fund's sub-investment adviser
with respect to Private Funds ("Abbott"), 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
36
<PAGE> 41
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 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. For the fiscal year ended
October 31, 1998, $3,656,224, $191,270, $23,665 and $586,864 of total brokerage
commissions was paid by the Emerging Growth, Post-Venture Capital, Small
Company Growth and Small Company Value Funds, respectively, 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 period ended October 31.
<TABLE>
<CAPTION>
- --------------------------------------- ------------------------------ ---------------------------
FUND YEAR COMMISSIONS
<S> <C> <C>
- --------------------------------------- ------------------------------ ---------------------------
Emerging Growth Fund 1996 $ 1,592,936
- --------------------------------------- ------------------------------ ---------------------------
1997 $ 2,702,386*
- --------------------------------------- ------------------------------ ---------------------------
1998 $ 3,656,224*
- --------------------------------------- ------------------------------ ---------------------------
- --------------------------------------- ------------------------------ ---------------------------
Post-Venture Capital Fund 1996 $ 200,468
- --------------------------------------- ------------------------------ ---------------------------
1997 $ 335,766
- --------------------------------------- ------------------------------ ---------------------------
1998 $ 191,270*
- --------------------------------------- ------------------------------ ---------------------------
- --------------------------------------- ------------------------------ ---------------------------
Small Company Growth Fund 1997 $ 24,051
- --------------------------------------- ------------------------------ ---------------------------
1998 $ 23,665
- --------------------------------------- ------------------------------ ---------------------------
- --------------------------------------- ------------------------------ ---------------------------
Small Company Value Fund 1996 $ 144,319
- --------------------------------------- ------------------------------ ---------------------------
1997 $ 547,325*
- --------------------------------------- ------------------------------ ---------------------------
1998 $ 586,864
- --------------------------------------- ------------------------------ ---------------------------
</TABLE>
* The increase or decrease in brokerage commissions paid in the most
recent fiscal year was due to an increase or decrease, respectively,
in overall assets of the Fund and increased equity investments.
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<PAGE> 42
Investment decisions for each Fund concerning specific
portfolio securities are made independently from those for other clients
advised by CSAM or Abbott, as relevant. 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 or Abbott, as the case may be,
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
38
<PAGE> 43
price of the underlying security (market rise) and later sold. To the extent
that its portfolio is traded for the short-term, a Fund will be engaged
essentially in trading activities based on short-term considerations affecting
the value of an issuer's stock instead of long-term investments based on
fundamental valuation of securities. Because of this policy, portfolio
securities may be sold without regard to the length of time for which they have
been held. Consequently, the annual portfolio turnover rate of a Fund may be
higher than mutual funds having similar objectives that do not utilize these
strategies.
It is not possible to predict the Funds' portfolio turnover
rates. High portfolio turnover rates (100% or more) may result in higher dealer
mark-ups or underwriting commissions as well as other transaction costs,
including correspondingly higher brokerage commissions. In addition, short-term
gains realized from portfolio turnover may be taxable to shareholders as
ordinary income.
MANAGEMENT OF THE FUNDS
Officers and Board of Directors
The business and affairs of the Funds are managed by the
Board of Directors in accordance with the laws of the State of Maryland. The
Board elects officers who are responsible for the day-to-day operations of the
Fund and who execute policies authorized by the Board. Under each Fund's
Charter, the Board may classify or reclassify any unissued shares of each Fund
into one or more additional classes by setting or changing in any one or more
respects their relative rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption. The Board may
similarly classify or reclassify any class of its shares into one or more
series and, without shareholder approval, may increase the number of authorized
shares of each Fund.
The names (and ages) of each Fund's Directors and officers,
their addresses, present positions and principal occupations during the past
five years and other affiliations are set forth below.
<TABLE>
<S> <C>
Richard H. Francis (67) Director
40 Grosvenor Road Currently retired; Executive Vice President and Chief
Short Hills, New Jersey 07078 Financial Officer of Pan Am Corporation and Pan American
World Airways, Inc. from 1988 to 1991; Director of The
Infinity Mutual Funds, BISYS Group Incorporated;
Director/Trustee of other Warburg Pincus Funds and other
CSAM-advised investment companies.
</TABLE>
39
<PAGE> 44
<TABLE>
<S> <C>
Jack W. Fritz (72) Director
2425 North Fish Creek Road Private investor; Consultant and Director of Fritz
P.O. Box 483 Broadcasting, Inc. and Fritz Communications (developers 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
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
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.
40
<PAGE> 45
<TABLE>
<S> <C>
Steven N. Rappaport (51) Director
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
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 CSAM since CSAM
New York, New York 10017-3147 acquired the Funds' predecessor adviser in July 1999; with
the predecessor adviser since 1991; Vice President of
Citibank, N.A. from 1987 to 1991; Officer of CSAMSI and of
other Warburg Pincus Funds.
</TABLE>
41
<PAGE> 46
<TABLE>
<S> <C>
Hal Liebes, Esq. (35) Vice President and Secretary
153 East 53rd Street Managing Director and General Counsel of CSAM; Associated
New York, New York 10022 with Lehman Brothers, Inc. from 1996 to 1997; Associated
with CSAM from 1995 to 1996; Associated with CS First
Boston Investment Management from 1994 to 1995; Associated
with Division of Enforcement, U.S. Securities and Exchange
Commission from 1991 to 1994; Officer of CSAMSI, other
Warburg Pincus Funds and other CSAM-advised investment
companies.
Michael A. Pignataro (40) Treasurer and Chief Financial Officer
153 East 53rd Street Vice President and Director of Fund Administration of 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; Associated with
New York, New York 10017-3147 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>
42
<PAGE> 47
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>
Emerging Growth Fund $ 1,000 $250 $250*
- --------------------------------------- ----------------------- ------------------------ ------------------------
Post-Venture Capital Fund $ 500 $250 $250*
- --------------------------------------- ----------------------- ------------------------ ------------------------
Small Company Growth Fund $ 500 $250 $250*
- --------------------------------------- ----------------------- ------------------------ ------------------------
Small Company Value Fund $ 500 $250 $250*
- --------------------------------------- ----------------------- ------------------------ ------------------------
</TABLE>
* Alexander B. Trowbridge received $325 per fund serving as chairman of the
Audit Committee.
Each Director is reimbursed for expenses incurred in
connection with his attendance at Board meetings.
Directors' Total Compensation
(for the fiscal year ended October 31, 1998)
<TABLE>
<CAPTION>
- ------------------------- ---------------- ---------------- --------------- ------------------ ------------------
ALL INVESTMENT
COMPANIES
MANAGED IN
EMERGING GROWTH POST-VENTURE SMALL COMPANY SMALL COMPANY WARBURG PINCUS
NAME OF DIRECTOR FUND CAPITAL FUND GROWTH FUND VALUE 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**** $2,400 $1,900 $2,150 $2,150 $56,600
- ------------------------- ---------------- ---------------- --------------- ------------------ ------------------
Donald J. Donahue**** $ 600 $ 475 $ 475 $ 475 $13,525
- ------------------------- ---------------- ---------------- --------------- ------------------ ------------------
Richard H. Francis***** None None None None None
- ------------------------- ---------------- ---------------- --------------- ------------------ ------------------
Jack W. Fritz $2,650 $2,150 $2,400 $2,400 $63,100
- ------------------------- ---------------- ---------------- --------------- ------------------ ------------------
Jeffrey E. Garten***** $2,300 $1,800 $2,050 $2,050 $49,325
- ------------------------- ---------------- ---------------- --------------- ------------------ ------------------
Thomas A. Melfe**** $2,650 $2,150 $2,400 $2,400 $60,700
- ------------------------- ---------------- ---------------- --------------- ------------------ ------------------
James S. Pasman,
Jr.***** None None None None None
- ------------------------- ---------------- ---------------- --------------- ------------------ ------------------
Steven N. Rappaport***** None None None None None
- ------------------------- ---------------- ---------------- --------------- ------------------ ------------------
Alexander B. Trowbridge $2,750 $2,250 $2,250 $2,250 $64,000
- ------------------------- ---------------- ---------------- --------------- ------------------ ------------------
</TABLE>
43
<PAGE> 48
* Each Director 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. Reichmann resigned as a Director of each Fund effective August 18,
1999.
**** Mr. Donahue resigned as a Director of each Fund effective February 6,
1998. Messrs. Cooper and Melfe resigned as a Director of each Fund
effective July 6, 1999.
***** Mr. Garten became a Director of each Fund effective February 6, 1998.
Messrs. Francis, Pasman and Rappaport became Directors of the Funds
effective July 6, 1999.
As of January 31, 1999, the Directors and officers of each
Fund as a group owned less than 1% of the outstanding shares of each Fund.
Portfolio Managers
Emerging Growth Fund. Elizabeth B. Dater Stephen J. Lurito
and Sammy Oh are Co-Portfolio Managers of the Emerging Growth Fund and manage
other Warburg Pincus Funds. Ms. Dater has been associated with CSAM since CSAM
acquired the Funds' predecessor adviser in July 1999 and joined the predecessor
adviser in 1979. Prior to that she was a vice president of research at
Fiduciary Trust Company of New York and an institutional sales assistant at
Lehman Brothers. Ms. Dater has been a regular panelist on Maryland Public
Television's Wall Street Week with Louis Rukeyser since 1976. Ms. Dater earned
a B.A. degree from Boston University in Massachusetts.
Mr. Lurito has been associated with CSAM since CSAM acquired
the Funds' predecessor adviser in July 1999 and joined the predecessor adviser
in 1987. Prior to that he was a research analyst at Sanford C. Bernstein &
Company, Inc. Mr. Lurito earned a B.A. degree from the University of Virginia
and an M.B.A. from The Wharton School, University of Pennsylvania. Mr. Oh has
been associated with CSAM since CSAM acquired the Funds' predecessor adviser in
July 1999 and joined the predecessor adviser in 1997. Prior to that he was a
vice president with Bessemer Trust from 1995 to 1996, and he was a vice
president of Forstmann-Leff from 1993 to 1995.
Post-Venture Capital Fund. Ms. Dater (described above) and
Mr. Robert S. Janis are Co-Portfolio Managers of the Post-Venture Capital Fund.
Mr. Janis has been associated with CSAM since CSAM acquired the Funds'
predecessor adviser in July 1999 and joined the predecessor adviser in 1994.
Prior to that Mr. Janis was a vice president and senior research analyst at
U.S. Trust Company of New York. He earned B.A. and M.B.A. degrees from the
University of Pennsylvania.
Raymond L. Held and Thaddeus I. Gray, Investment Managers and
Managing Directors of Abbott, manage the Post-Venture Capital Fund's
investments in Private Funds. Abbott also acts as sub-investment adviser for
other Warburg Pincus Funds. Prior to co-founding a predecessor of Abbott in
1986, Mr. Held had been an investment analyst and portfolio manager at
Manufacturers Hanover Investment Corporation since 1970, before which time he
had been a security analyst with Weis, Voisin, Cannon, Inc., L.M. Rosenthal &
Co.,
44
<PAGE> 49
Shearson, Hammill & Co. and Standard & Poor's Corporation. Mr. Held earned an
M.B.A. from New York University, an M.A. from Columbia University and a B.A.
from Queens College.
Prior to joining a predecessor of Abbott in 1989, Mr. Gray
was an assistant vice president at Commerzbank Capital Markets Corporation,
where he managed the area responsible for underwriting and distributing all new
issues of securities. Prior to this, he was an associate with Credit
Commercial de France in Paris in the Corporate Finance Department. Mr. Gray
received his B.A. in History from the University of Pennsylvania and his M.B.A.
in Finance from New York University. He is also a Chartered Financial Analyst.
Small Company Growth Fund. Ms. Dater, Mr. Lurito and Mr. Oh
(each described above) are Co-Portfolio Managers of the Small Company Growth
Fund.
Small Company Value Fund. Mr. Kyle F. Frey, Portfolio
Manager of the Small Company Value Fund, has been associated with CSAM since
CSAM acquired the Funds' predecessor adviser in July 1999 and joined the
predecessor adviser in 1989. Prior to that Mr. Frey was with Goldman, Sachs &
Co. in the institutional sales division. Mr. Frey earned a B.S. degree from
the University of New Hampshire and an M.B.A. from New York University.
Investment Advisers and Co-Administrators
CSAM, located at 153 East 53rd Street, New York, New York
10022, serves as investment adviser to each Fund pursuant to a written
agreement (the "Advisory Agreement"). CSAM is an indirect wholly-owned U.S.
subsidiary of Credit Suisse ("Credit Suisse"). 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.
Abbott serves as sub-investment adviser to the Post-Venture
Capital Fund and CSAMSI and PFPC serve as co-administrators to the Fund
pursuant to separate written agreements (the "Sub-Investment Advisory
Agreement," the "CSAMSI Co-Administration
45
<PAGE> 50
Agreement" and the "PFPC Co-Administration Agreement," respectively). CSAMSI
became co-administrator to each Fund on November 1, 1999. Prior to that,
Counsellors Funds Service, Inc. ("Counsellors Service") served as
co-administrator to the Funds. For the services provided by CSAM under the
Advisory Agreements, the Emerging Growth Fund, Post-Venture Capital Fund, Small
Company Growth Fund and Small Company Value Fund each pay CSAM a fee calculated
at an annual rate of .90%, 1.25%, 1.00% and 1.00%, respectively, of the Fund's
average daily net assets.+ For the services provided by CSAMSI under the CSAMSI
Co-Administration Agreement, each Fund pays CSAMSI a fee calculated at an
annual rate of .10% of the Fund's average daily net assets. For the services
provided by PFPC under the PFPC Co-Administration Agreement, each Fund pays
PFPC a fee calculated at an annual rate of .10% of the Fund's first $500
million in average daily net assets, .075% of the next $1 billion in assets and
.055 of assets exceeding $1.5 billion, exclusive of out-of-pocket expenses.
Each class of shares of the Fund bears its proportionate share of fees payable
to CSAM, CSAMSI and PFPC in the proportion that its assets bear to the
aggregate assets of the Fund at the time of calculation. These fees are
calculated at an annual rate based on a percentage of a Portfolio's average
daily net assets.
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, waivers and net advisory fees for each Fund were as
follows:
<TABLE>
<CAPTION>
- -------------------------------- --------- ---------------------- ---------------------- ----------------------
GROSS NET
FUND YEAR ADVISORY FEE WAIVER ADVISORY FEE
- -------------------------------- --------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Emerging Growth Fund 1996 $ 9,738,214 0 $ 9,738,214
--------- ---------------------- ---------------------- ----------------------
1997 $ 14,879,436 0 $ 14,879,436
--------- ---------------------- ---------------------- ----------------------
1998 $ 18,191,066 0 $ 18,191,066
- -------------------------------- --------- ---------------------- ---------------------- ----------------------
Post-Venture Capital Fund 1996 $ 1,253,423 $ 634,122 $ 629,301
--------- ---------------------- ---------------------- ----------------------
1997 $ 1,704,057 $ 553,243 $ 1,150,814
--------- ---------------------- ---------------------- ----------------------
1998 $ 1,172,367 $ 340,613 $ 831,753
- -------------------------------- --------- ---------------------- ---------------------- ----------------------
Small Company Growth Fund
(commenced operations 12/31/96) 1997 $ 69,204 $ 69,204 $ 0
- -------------------------------- --------- ---------------------- ---------------------- ----------------------
1998 $ 105,741 $ 43,714 $ 62,027
- -------------------------------- --------- ---------------------- ---------------------- ----------------------
Small Company Value Fund
(commenced operations 12/29/95) 1996 $ 280,663 $ 115,171 $ 165,492
--------- ---------------------- ---------------------- ----------------------
1997 $ 1,735,893 $ 55,966 $ 1,679,927
--------- ---------------------- ---------------------- ----------------------
1998 $ 1,530,064 $ 11,933 $ 1,518,131
- -------------------------------- --------- ---------------------- ---------------------- ----------------------
</TABLE>
- ------------------------
(+) With respect to the Post-Venture Capital Fund, the services provided by
Abbott under the Sub-Investment Advisory Agreement are also described in
the Prospectus: CSAM pays Abbott for sub-investment advisory services out
of the fees CSAM receives from the Fund.
46
<PAGE> 51
For the fiscal year ended October 31, 1998, Warburg also
reimbursed expenses for the Post-Venture Capital Fund, Small Company Growth
Fund and Small Company Value Fund in the amounts of $39,268, $62,236 and
$3,991, respectively.
During the following fiscal years or period ended October 31
during which a Fund had investment operations, PFPC and Counsellors Service
(the Funds' predecessor co-administrator) earned the following amounts in
co-administration fees.
<TABLE>
<CAPTION>
- -------------------------------- ------------------- ----------------------------- ----------------------------
FUND YEAR PFPC COUNSELLORS SERVICE
- -------------------------------- ------------------- ----------------------------- ----------------------------
<S> <C> <C> <C>
Emerging Growth Fund 1996 $ 1,043,313 $ 1,082,024
------------------- ----------------------------- ----------------------------
1997 $ 1,324,178 $ 1,653,283
------------------- ----------------------------- ----------------------------
1998 $ 1,514,914 $ 2,021,230
- -------------------------------- ------------------- ----------------------------- ----------------------------
Post-Venture Capital Fund 1996 $ 100,274 $ 100,274
------------------- ----------------------------- ----------------------------
1997 $ 136,324 $ 136,324
------------------- ----------------------------- ----------------------------
1998 $ 98,258 $ 93,788
- -------------------------------- ------------------- ----------------------------- ----------------------------
Small Company Growth Fund $ 6,920
(commenced operations 12/31/96) 1997 (fully waived) $ 6,920
- -------------------------------- ------------------- ----------------------------- ----------------------------
1998 $ 13,940* $ 10,574
- -------------------------------- ------------------- ----------------------------- ----------------------------
Small Company Value Fund $ 237
(commenced operations 12/29/95) 1996 (fully waived) $ 28,066
------------------- ----------------------------- ----------------------------
1997 $ 173,589 $ 173,589
------------------- ----------------------------- ----------------------------
1998 $ 155,383 $ 153,007
- -------------------------------- ------------------- ----------------------------- ----------------------------
</TABLE>
* $10,574 waived.
Custodians and Transfer Agent
Pursuant to separate custodian agreements with each Fund (the
"Custodian Agreements"), PFPC Trust Company ("PFPC Trust") is custodian of
Fund's U.S. assets and State Street serves as custodian of the Funds' non-U.S.
assets. Under the Custodian Agreements, PFPC Trust and State Street each (i)
maintains a separate account or accounts in the name of the Fund, (ii) holds
and transfers portfolio securities on account of the Fund, (iii) makes receipts
and disbursements of money on behalf of the Fund, (iv) collects and receives
all income and other payments and distributions on account of the Fund's
portfolio securities and (v) makes periodic reports to the Board concerning the
Fund's custodial arrangements. PFPC Trust may delegate its duties under its
Custodian Agreement with the Fund to a wholly owned direct or indirect
subsidiary of PFPC Trust or PNC Bank Corp. upon notice to the Fund and upon the
satisfaction of certain other conditions. State Street is authorized to select
one or more foreign banking institutions and foreign securities depositories to
serve as sub-custodian on behalf of the Small Company Growth Fund and PFPC Trust
is authorized to select one or more domestic banks or trust companies to serve
as sub-custodian
47
<PAGE> 52
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 which State Street (i) issues and redeems
shares of the Fund, (ii) addresses and mails all communications by the Fund to
record owners of Fund shares, including reports to shareholders, dividend and
distribution notices and proxy material for its meetings of shareholders, (iii)
maintains shareholder accounts and, if requested, sub-accounts and (iv) makes
periodic reports to the Board concerning the transfer agent's operations with
respect to the Fund. State Street has delegated to Boston Financial Data
Services, Inc., an affiliate of State Street ("BFDS"), responsibility for most
shareholder servicing functions. BFDS's principal business address is 2
Heritage Drive, North Quincy, Massachusetts 02171.
Organization of the Funds
The Funds are open-end management investment companies within
the meaning of the 1940 Act. The Emerging Growth Fund was incorporated on
November 12, 1987 under the laws of the State of Maryland under the name
"Counsellors Emerging Growth Fund, Inc." On October 27, 1995, the Fund amended
its charter to change its name to "Warburg, Pincus Emerging Growth Fund, Inc."
The Post-Venture Capital Fund was incorporated on July 12, 1995 under the laws
of the State of Maryland under the name "Warburg, Pincus Post-Venture Capital
Fund, Inc." The Small Company Growth Fund was incorporated on October 31, 1996
under the laws of the State of Maryland under the name "Warburg, Pincus Small
Company Growth Fund, Inc." The Small Company Value Fund was incorporated on
October 23, 1995 under the laws of the State of Maryland under the name
"Warburg, Pincus Small Company Value Fund, Inc." Each of the Funds is
diversified, with the exception of the Emerging Growth Fund which is not
diversified. Each Fund offers two classes of shares, Common Shares and Advisor
Shares. Unless otherwise indicated, references to a "Fund" apply to each class
of shares of that Fund.
All shareholders of a Fund in each class, upon liquidation,
will participate ratably in the Fund's net assets. Shares do not have
cumulative voting rights, which means that holders of more than 50% of the
shares voting for the election of Directors can elect all Directors. Shares are
transferable but have no preemptive, conversion or subscription rights.
Distribution and Shareholder Servicing
Distributor. Provident Distributors, Inc. ("PDI") serves as
distributor of the Funds' shares. PDI offers each Fund's shares on a
continuous basis. No compensation is payable by the Funds to PDI for
distribution services, however, pursuant to a separate agreement with CSAM, PDI
is compensated for the services provided to the Funds. PDI's
48
<PAGE> 53
principal business address is Four Falls Corporate Center, West Conshohocken,
Pennsylvania 19428-2961.
Post-Venture Capital, Small Company Growth and Small Company
Value Funds, Common Shares. Each of these Funds have adopted a Shareholder
Servicing and Distribution Plan (the "Common Shares 12b-1 Plan"), pursuant to
Rule 12b-1 under the 1940 Act, pursuant to which the Fund pays CSAMSI a fee
calculated at an annual rate of .25% of the average daily net assets of the
Common Shares of the Fund. The fee is intended to compensate CSAMSI, or to
enable CSAMSI to compensate other persons ("Service Providers"), for providing
Services (as defined below) to the Funds. Services performed by CSAMSI or
Service Providers include (i) services that are primarily intended to result
in, or that are primarily attributable to, the sale of the Common Shares, as
set forth in the Common Shares 12b-1 Plan ("Selling Services") and (ii) ongoing
servicing and/or maintenance of the accounts of Common Shareholders of the
Fund, as set forth in the Common Shares 12b-1 Plan ("Shareholder Services",
together with Selling Services, "Services"). Shareholder Services may include,
without limitation, responding to Fund shareholder inquiries and providing
services to shareholders not otherwise provided by the Funds' distributor or
transfer agent. Selling Services may include, without limitation, (a) the
printing and distribution to prospective investors in Common Shares of
prospectuses and statements of additional information describing the Funds; (b)
the preparation, including printing, and distribution of sales literature,
advertisements and other informational materials relating to the Common Shares;
(c) providing telephone services relating to the Funds, including responding to
inquiries of prospective Fund investors; (d) formulating and implementing
marketing and promotional activities, including, but not limited to, direct
mail promotions and television, radio, newspaper, magazine and other mass media
advertising and obtaining whatever information, analyses and reports with
respect to marketing and promotional activities that the Funds may, from time
to time, deem advisable. In providing compensation for Services in accordance
with this Plan, CSAMSI is expressly authorized (i) to make, or cause to be
made, payments to Service Providers reflecting an allocation of overhead and
other office expenses related to providing Services and (ii) to make, or cause
to be made, payments to compensate selected dealers or other authorized persons
for providing any Services.
Payments under the 12b-1 Plan are not tied exclusively to the
distribution expenses actually incurred by CSAMSI and the payments may exceed
distribution expenses actually incurred.
Pursuant to the Common Shares 12b-1 Plan, CSAMSI provides the
Board with periodic reports of amounts expended under the Common Shares 12b-1
Plan and the purpose for which the expenditures were made. The Common Shares
12b-1 Plan was adopted on November 1, 1999. Prior to that date, a substantially
similar plan was in place with respect to the Common Shares (the "Prior Common
Shares 12b-1 Plan"). For the fiscal year ended October 31, 1998, the
Post-Venture Capital, Small Company Growth and Small Company Value Funds paid
$234,184, $0 and $382,127, respectively, pursuant to the Prior Common Shares
12b-1 Plan, which was spent on advertising, marketing communications and public
relations.
49
<PAGE> 54
Each Fund has authorized certain broker-dealers, financial
institutions, recordkeeping organizations and other financial intermediaries
(collectively, "Service Organizations") or, if applicable, their designees to
enter confirmed purchase and redemption orders on behalf of their clients and
customers, with payment to follow no later than the Fund's pricing on the
following business day. If payment is not received by such time, the Service
Organization could be held liable for resulting fees or losses. The Fund may be
deemed to have received a purchase or redemption order when a Service
Organization, or, if applicable, its authorized designee, accepts the order.
Such orders received by the Fund in proper form will be priced at the Fund's
net asset value next computed after they are accepted by the Service
Organization or its authorized designee. Service Organizations may impose
transaction or administrative charges or other direct fees, which charges or
fees would not be imposed if Fund shares are purchased directly from the Funds.
For administration, subaccounting, transfer agency and/or
other services, CSAM or its affiliates may pay Service Organizations a fee of
up to .40% of the average annual value of accounts with the Funds maintained by
such Service Organizations. Service Organizations may also be reimbursed for
marketing costs. The Service Fee payable to any one Service Organization is
determined based upon a number of factors, including the nature and quality of
services provided, the operations processing requirements of the relationship
and the standardized fee schedule of the Service Organization or recordkeeper.
The Funds may reimburse part of the Service Fee at rates they would normally
pay to the transfer agent for providing the services.
All Funds, Advisor Shares. The Funds have entered into
agreements ("Agreements") with institutional shareholders of record,
broker-dealers, financial institutions, depository institutions, retirement
plans and financial intermediaries ("Institutions") to provide certain
distribution, shareholder servicing, administrative and/or accounting services
for their customers (or participants in the case of retirement plans)
("Customers") who are beneficial owners of Advisor Shares. Agreements will be
governed by a distribution plan (the "Advisor Shares 12b-1 Plan" and
collectively with the Common Shares 12b-1 Plan, the "12b-1 Plans") pursuant to
Rule 12b-1 under the 1940 Act, pursuant to which the Fund pays in consideration
for services, a fee calculated at an annual rate of .50% of the average daily
net assets of the Advisor Shares of the Fund. Such payments may be paid to
Institutions directly by a Fund or by CSAMSI on behalf of the Fund. The Advisor
Shares 12b-1 Plan requires the Board, at least quarterly, to receive and review
written reports of amounts expended under the Advisor Shares 12b-1 Plan and the
purposes for which such expenditures were made. The Advisor Shares 12b-1 Plan
was adopted on November 1, 1999. Prior to that date, a substantially similar
plan was in place with respect to the Advisor Shares (the "Prior Advisor Shares
12b-1 Plan"). For the fiscal year ended October 31, 1998, the Advisor Shares of
the Emerging Growth, Post-Venture Capital and Small Company Value Funds paid
$1,957,786, $579, and $776, respectively, pursuant to the Prior Advisor Shares
12b-1 Plan, all of which were paid to Institutions.
Certain Institutions may receive additional fees from the
Distributor, the Adviser or their affiliates for providing supplemental
services in connection with investments
50
<PAGE> 55
in the Funds. Institutions may also be reimbursed for marketing and other
costs. Additional fees may be up to 0.10% per year of the value of Fund
accounts maintained by the firm. Fees payable to any particular Institution are
determined based upon a number of factors, including the nature and quality of
the services provided, the operations processing requirements of the
relationship and the standardized fee schedule of the Institution. To the
extent that the Distributor, the Adviser or their affiliates provide additional
compensation or reimbursements for marketing expenses, such payments would not
represent an additional expense to the Funds or their shareholders.
An Institution with which a Fund has entered into an
Agreement with respect to its Advisor Shares may charge a Customer one or more
of the following types of fees, as agreed upon by the Institution and the
Customer, with respect to the cash management or other services provided by the
Institution: (i) account fees (a fixed amount per month or per year); (ii)
transaction fees (a fixed amount per transaction processed); (iii) compensation
balance requirements (a minimum dollar amount a Customer must maintain in order
to obtain the services offered); or (iv) account maintenance fees (a periodic
charge based upon the percentage of assets in the account or of the dividend
paid on those assets). Services provided by an Institution to Customers are in
addition to, and not duplicative of, the services to be provided under each
Fund's co-administration and distribution and shareholder servicing
arrangements. A Customer of an Institution should read the relevant Prospectus
and this Statement of Additional Information in conjunction with the Agreement
and other literature describing the services and related fees that would be
provided by the Institution to its Customers prior to any purchase of Fund
shares. Prospectuses are available from each Fund's distributor upon request.
No preference will be shown in the selection of Fund portfolio investments for
the instruments of Institutions.
General. The 12b-1 Plans will continue in effect for so long
as its continuance is specifically approved at least annually by each Fund's
Board, including a majority of the Directors who are not interested persons of
the Fund and who have no direct or indirect financial interest in the operation
of the 12b-1 Plans, as the case may be ("Independent Directors"). Any material
amendment of the 12b-1 Plans would require the approval of the Board in the
same manner. Neither of the 12b-1 Plans may be amended to increase materially
the amount to be spent thereunder without shareholder approval of the relevant
class of shares. Each 12b-1 Plan may be terminated at any time, without
penalty, by vote of a majority of the Independent Directors or by a vote of a
majority of the outstanding voting securities of the relevant class of shares.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of each Fund's shares is equal to the per
share net asset value of the relevant class of shares of the Fund.
Under the 1940 Act, a Fund may suspend the right of
redemption or postpone the date of payment upon redemption for any period
during which the NYSE is closed, other than customary weekend and holiday
closings, or during which trading on the NYSE is
51
<PAGE> 56
restricted, or during which (as determined by the SEC) an emergency exists as a
result of which disposal or fair valuation of portfolio securities is not
reasonably practicable, or for such other periods as the SEC may permit. (A
Fund may also suspend or postpone the recordation of an exchange of its shares
upon the occurrence of any of the foregoing conditions.)
If the Board determines that conditions exist which make
payment of redemption proceeds wholly in cash unwise or undesirable, a Fund may
make payment wholly or partly in securities or other investment instruments
which may not constitute securities as such term is defined in the applicable
securities laws. If a redemption is paid wholly or partly in securities or
other property, a shareholder would incur transaction costs in disposing of the
redemption proceeds. Each Fund 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.
52
<PAGE> 57
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, U.S. Government Securities
and other securities, with such other securities limited, in respect of any one
issuer, to an amount not greater than 5% of the Fund's assets and not greater
than 10% of the outstanding voting securities of such issuer and (ii) not more
than 25% of the value of its assets is invested in the securities (other than
U.S. Government Securities or securities of other regulated investment
companies) of any one issuer or any two or more issuers that the Fund controls
and 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
53
<PAGE> 58
will be subject to tax at regular corporate rates on any taxable income or
gains that it does not distribute. Any dividend declared by a Fund in October,
November or December of any calendar year and payable to shareholders of record
on a specified date in such a month shall be deemed to have been received by
each shareholder on December 31 of such calendar year and to have been paid by
the Fund not later than such December 31, provided that such dividend is
actually paid by the Fund during January of the following calendar year.
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
Directors of each Fund will determine annually whether to distribute any net
realized long-term capital gains in excess of net realized short-term capital
losses (including any capital loss carryovers). Each Fund currently expects 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
54
<PAGE> 59
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.
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
55
<PAGE> 60
tax on a portion of any "excess distribution" or gain from the disposition of
such shares even if such income is distributed as a taxable dividend by the
Fund to its shareholders. Additional charges in the nature of interest may be
imposed on the Fund in respect of deferred taxes arising from such
distributions or gains. If a Fund were to invest in a PFIC and elected to treat
the PFIC as a "qualified electing fund" under the Code, in lieu of the
foregoing requirements, the Fund might be required to include in income each
year a portion of the ordinary earnings and net capital gains of the qualified
electing fund, even if not distributed to the Fund, and such amounts would be
subject to the 90% and excise tax distribution requirements described above. In
order to make this election, the Fund would be required to obtain certain
annual information from the 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.
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<PAGE> 61
Investors considering buying shares just prior to a dividend
or capital gain distribution should be aware that, although the price of shares
just purchased at that time may reflect the amount of the forthcoming
distribution, such dividend or distribution may nevertheless be taxable to
them.
If a Fund is the holder of record of any stock on the record
date for any dividends payable with respect to such stock, such dividends are
included in the Fund's gross income not as of the date received but as of the
later of (a) the date such stock became ex-dividend with respect to such
dividends (i.e., the date on which a buyer of the stock would not be entitled
to receive the declared, but unpaid, dividends) or (b) the date the Fund
acquired such stock. Accordingly, in order to satisfy its income distribution
requirements, the Fund may be required to pay dividends based on anticipated
earnings, and shareholders may receive dividends in an earlier year than would
otherwise be the case.
Sales of Shares
Upon the sale or exchange of his shares, a shareholder will
realize a taxable gain or loss equal to the difference between the amount
realized and his basis in his shares. Such gain or loss will be treated as
capital gain or loss, if the shares are capital assets in the shareholder's
hands, and will be long-term capital gain or loss if the shares are held for
more than one year and short-term capital gain or loss if the shares are held
for one year or less. Any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of 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.
Backup Withholding
Each Fund may be required to withhold, for United States
federal income tax purposes, 31% of the dividends and distributions payable to
shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the IRS that they are subject to backup withholding. Certain
shareholders are exempt from backup withholding. Backup withholding is not an
additional tax and any amount withheld may be credited against a shareholder's
United States federal income tax liabilities.
Notices
Shareholders will be notified annually by each Fund as to the
United States federal income tax status of the dividends, distributions and
deemed distributions attributable to undistributed capital gains (discussed
above in "The Funds and Their Investments") made by
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<PAGE> 62
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.
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. With respect to the Funds' Common and Advisor
Shares, the Funds' average annual total returns for the indicated periods ended
October 31, 1998 were as follows (performance figures calculated without waiver
by a Fund's service providers(s), if any, are noted in italics):
<TABLE>
<CAPTION>
TOTAL RETURN
COMMON SHARES
Period from the
commencement
One-Year Five-Year Ten-Year of operations
---------------- ------------------ ---------- -------------------
<S> <C> <C> <C> <C>
Emerging Growth Fund
(1/21/88) (9.40%) 11.33% N/A 14.99%
Post-Venture Capital Fund
(9/29/95) (8.63%) (9.09%) N/A N/A 16.62% 15.72%
Small Company Growth Fund
(12/31/96) (0.00%) (19.08%) N/A N/A 22.50% (3.48%)
</TABLE>
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<PAGE> 63
<TABLE>
<CAPTION>
Period from the
commencement
One-Year Five-Year Ten-Year of operations
---------------- ------------------ ---------- -------------------
<S> <C> <C> <C> <C>
Small Company Value Fund
(12/29/95) (19.97%) (20.03%) N/A N/A 15.85% 15.76%
</TABLE>
<TABLE>
<CAPTION>
ADVISOR SHARES*
Period from the
commencement
One-Year Five-Year Ten-Year of operations
---------------- ------------------ ---------- -------------------
<S> <C> <C> <C> <C>
Emerging Growth Fund
(4/4/91) (9.75%) 10.84% N/A 13.95%
Post-Venture Capital Fund
(9/29/95) (8.83%) (9.00%) N/A N/A 16.17% 15.87%
Small Company Value Fund+
(12/29/95) (19.93%) (20.53%) N/A N/A 15.61% 14.99%
</TABLE>
* No Small Company Growth Fund Advisor shares were outstanding as of October
31, 1998.
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
n
the 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 payment made at the beginning of the one-, five- or ten-year periods (or
fractional portion thereof). Total return or "T" is computed by finding the
average annual change in the value of an initial $1,000 investment over the
period and assumes that all dividends and distributions are reinvested during
the period.
When considering average total return figures for periods
longer than one year, it is important to note that the annual total return for
one year in the period might have been greater or less than the average for the
entire period. When considering total return figures for periods shorter than
one year, investors should bear in mind that such return may not be
representative of any Fund's return over a longer market cycle. A Fund may also
advertise aggregate total return figures for various periods, representing the
cumulative change in value
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<PAGE> 64
of an investment in the relevant Fund for the specific period. Aggregate and
average total returns may be shown by means of schedules, charts or graphs, and
may indicate various components of total return (i.e., change in value of
initial investment, income dividends and capital gain distributions).
A Fund may advertise, from time to time, comparisons of the
performance of its Common Shares and/or Advisor Shares with that of one or more
other mutual funds with similar investment objectives. A Fund may advertise
average annual calendar year-to-date and calendar quarter returns, which are
calculated according to the formula set forth in the preceding paragraph,
except that the relevant measuring period would be the number of months that
have elapsed in the current calendar year or most recent three months, as the
case may be. Investors should note that this performance may not be
representative of the Fund's total return in longer market cycles.
The performance of a class of Fund shares will vary from time
to time depending upon market conditions, the composition of a Fund's portfolio
and operating expenses allocable to it. As described above, total return is
based on historical earnings and is not intended to indicate future
performance. Consequently, any given performance quotation should not be
considered as representative of performance for any specified period in the
future. Performance information may be useful as a basis for comparison with
other investment alternatives. However, a Fund's performance will fluctuate,
unlike certain bank deposits or other investments which pay a fixed yield for a
stated period of time. Any fees charged by Institutions or other institutional
investors directly to their customers in connection with investments in Fund
shares are not reflected in a Fund's total return, and such fees, if charged,
will reduce the actual return received by customers on their investments.
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
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<PAGE> 65
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:
EMERGING GROWTH FUND
<TABLE>
<CAPTION>
Common Shares Advisor Shares
------------- --------------
<S> <C> <C>
Charles Schwab & Co., Inc.* 16.11%
Special Custody Account for
the Exclusive Benefit of Customers
Attn: Mutual Funds Dept.
101 Montgomery Street
San Francisco, California 94104-4122
Nationwide Life Insurance Company* 11.70%
Nationwide QPVA
c/o IPO Portfolio Accounting
PO Box 182029
Columbus, Ohio 43218-2029
Fidelity Investment Institutional* 8.73%
Operations Cnt as Agent for CERTA
Employee Benefit Plans
100 Magellan Way
Covington, Kentucky 41015-1999
National Financial Services Corp.* 6.81%
FBO Customers
PO Box 3908
Church Street Station
New York, New York 10008-3908
First Trust National Association* 6.41%
TTEE United Healthcare Corp.
401K Savings Plan
Attn: Mutual Funds A/C #21740224
PO Box 64010
St. Paul, Minnesota 55164-0010
Connecticut General Life Ins. Co.* 98.53%
On behalf of its separate accounts
55G c/o Melissa Spencer M110
CIGNA Corp. PO Box 2975
Hartford, Connecticut 06104-2975
</TABLE>
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<PAGE> 66
POST-VENTURE CAPITAL FUND
<TABLE>
<CAPTION>
Common Shares Advisor Shares
------------- --------------
<S> <C> <C>
Charles Schwab & Co. Inc.* 32.17%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds Dept.
101 Montgomery St.
San Francisco, CA 94104-4122
National Financial Services Corp.* 12.82%
FBO Customers
PO Box 3908
Church Street Station
New York, New York 10008-3908
EMJAYCO* 97.25%
Omnibus Account
PO Box 17909
Milwaukee, WI 53217-0909
</TABLE>
SMALL COMPANY VALUE FUND
<TABLE>
<CAPTION>
Common Shares Advisor Shares
------------- --------------
<S> <C> <C>
Charles Schwab & Co. Inc.* 25.76%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds Dept.
101 Montgomery St.
San Francisco, CA 94104-4122
National Financial Services Corp.* 14.70% 11.34%
FBO Customers
A/C #SV8849-8436
PO Box 3908
Church Street Station
New York, New York 10008-3908
Donaldson Lufkin & Jenrette* 5.36%
Securities Corporation Pershing Division
Mutual Fund Balancing
1 Pershing Plaza, 14th Floor
Jersey City, New Jersey 07399-0001
Donald J. Smith, Robert J. Smith TTEES* 20.52%
E.M. Smith Jewelers Inc.
P/S Pension Fund Trust
1334 Bridge St.
Chillicothe, Ohio 45601
</TABLE>
62
<PAGE> 67
<TABLE>
<CAPTION>
Common Shares Advisor Shares
------------- --------------
<S> <C> <C>
Donaldson Lufkin & Jenrette Secs.* 19.73%
PO Box 2052
Jersey City, New Jersey 07303-2052
Donald J. Smith, Robert J. Smith, 25.17%
David E. Smith, TTEES
Eugene M. Smith Revocable Trust*
UAD 4/8/80
17 Briarcliff Dr.
Chillicothe, Ohio 45601
State Street Bank & Trust Co.* 8.35%
Cust for the IRA of
Peggy D. Polonkey
150 Stable Rd.
Norristown, PA 19403-2664
Discover Brokerage Direct* 5.96%
500-12640-18
333 Market Street
San Francisco, CA 94105-2102
</TABLE>
WARBURG PINCUS SMALL COMPANY GROWTH FUND
<TABLE>
<CAPTION>
Common Shares Advisor Shares
------------- --------------
<S> <C> <C>
Charles Schwab & Co. Inc.* 19.38%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds Dept.
101 Montgomery St.
San Francisco, CA 94104-4122
The Wooden Nickel Foundation 11.61%
c/o Lionel I. Pincus
EM Warburg Pincus & Co. Inc.
466 Lexington Avenue
New York, NY 10017-3140
National Financial Services Corp.* 8.71%
FBO Customers
PO Box 3908
Church St. Station
New York, NY 10008-3908
1991 Trust #2 6.13%
Edwin Gustafson, Jr. TTEE
c/o Warburg Pincus*
466 Lexington Avenue
New York, NY 10017-3140
</TABLE>
63
<PAGE> 68
<TABLE>
<CAPTION>
Common Shares Advisor Shares
------------- --------------
<S> <C> <C>
1991 Trust #1 6.13%
Edwin Gustafson, Jr. TTEE
c/o Warburg Pincus*
466 Lexington Avenue
New York, NY 10017-3140
</TABLE>
* Each Fund believes these entities are not the beneficial
owners of shares held of record by them.
FINANCIAL STATEMENTS
Each Fund's audited annual report dated October 31, 1999,
which either accompanies this Statement of Additional Information or has
previously been provided to the investor to whom this Statement of Additional
Information is being sent, is incorporated herein by reference. Each Fund will
furnish without charge a copy of its annual report upon request by calling
Warburg Pincus Funds at 800-927-2874.
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<PAGE> 69
APPENDIX
DESCRIPTION OF RATINGS
Commercial Paper Ratings
Commercial paper rated A-1 by Standard and Poor's Ratings
Services ("S&P") indicates that the degree of safety regarding timely payment
is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign designation. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating
assigned by Moody's Investors Service, Inc. ("Moody's"). Issuers rated Prime-1
(or related supporting institutions) are considered to have a superior capacity
for repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics of issuers rated Prime-1 but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
Corporate Bond Ratings
The following summarizes the ratings used by S&P for
corporate bonds:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA - Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB - This is the lowest investment grade. Debt rated BBB is
regarded as having an adequate capacity to pay interest and repay principal.
Although it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for bonds in this category than
for bonds in higher rated categories.
BB, B and CCC - Debt rated BB and B is regarded, on balance,
as predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB represents a lower
degree of speculation than B, and CCC the highest degree of speculation. While
such bonds will likely have some quality
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and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to
default than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions, which could lead to inadequate capacity to meet timely interest and
principal payments. The BB rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied BBB rating.
B - Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable
vulnerability to default and is dependent upon favorable business, financial
and economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic conditions,
it is not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt rating. The C
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on
which no interest is being paid. Such debt is rated between debt rated C and
debt rated D.
To provide more detailed indications of credit quality, the
ratings may be modified by the addition of a plus or minus sign to show
relative standing within this major rating category.
The following summarizes the ratings used by Moody's for
corporate bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds.
A-2
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They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as
medium-grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers (1, 2 and 3) with respect
to the bonds rated "Aa" through "B." The modifier 1 indicates that the bond
being rated ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
bond ranks in the lower end of its generic rating category.
Caa - Bonds that are rated Caa are of poor standing. These
issues may be in default or present elements of danger may exist with respect
to principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C comprise the lowest rated class
of bonds, and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
A-3
