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SUPPLEMENT TO THE PROSPECTUSES
WARBURG PINCUS TRUST II
The following information supersedes certain information in the trust's
Prospectuses.
New Distributor. Provident Distributors, Inc. (PDI), located at Four Falls
Corporate Center, West Conshohocken, PA 19428-2961, is the trust's distributor.
Dated: January 3, 2000 TRBDF-16-0100
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STATEMENT OF ADDITIONAL INFORMATION
April 30, 1999
As Revised January 3, 2000
WARBURG PINCUS TRUST II
FIXED INCOME PORTFOLIO
GLOBAL FIXED INCOME PORTFOLIO
This Statement of Additional Information provides information about Warburg
Pincus Trust II (the "Trust"), relating to the Fixed Income and Global Fixed
Income Portfolios (each a "Portfolio," and together, the "Portfolios") that
supplements information contained in the Prospectus or Prospectuses for the
relevant Portfolio (collectively, the "Prospectuses"), each dated April 30,
1999.
The Trust's audited Annual Reports dated December 31, 1998, which either
accompany this Statement of Additional Information or have 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 itself a Prospectus, no
investment in shares of the Portfolios should be made solely upon the
information contained herein. Copies of the Trust's Prospectuses, Annual Report
and information regarding each Portfolio's current performance may be obtained
by writing or telephoning:
Warburg Pincus
P.O. Box 9030
Boston, MA 02205-9030
800-222-8977
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TABLE OF CONTENTS
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INVESTMENT OBJECTIVES AND POLICIES............................................................................1
Options on Securities and Securities Indices and Currency Exchange Transactions...............................1
Securities Options.......................................................................................1
Securities Index Options.................................................................................4
OTC Options..............................................................................................5
Currency Exchange Transactions...........................................................................5
Forward Currency Contracts...............................................................................5
Currency Options.........................................................................................6
Currency Hedging.........................................................................................6
Futures Activities.......................................................................................7
Futures Contracts........................................................................................7
Options on Futures Contracts.............................................................................8
Hedging Generally........................................................................................9
Swaps....................................................................................................10
Asset Coverage for Forward Contracts, Options, Futures and Options on Futures
and Swaps............................................................................................11
Debt Securities...............................................................................................11
Below Investment Grade Securities........................................................................12
Loan Participations and Assignments......................................................................13
Convertible Securities...................................................................................14
Structured Securities....................................................................................14
Mortgage-Backed Securities...............................................................................14
Asset-Backed Securities..................................................................................15
Structured Notes, Bonds or Debentures....................................................................16
Stand-By Commitment Agreements................................................................................16
Variable Rate and Master Demand Notes....................................................................17
Municipal Obligations....................................................................................18
Interest Rate, Index, Mortgage and Currency Swaps; Interest Rate Caps, Floors and
Collars..............................................................................................19
U.S. Government Securities....................................................................................20
Money Market Obligations......................................................................................20
Repurchase Agreements....................................................................................21
Money Market Mutual Funds................................................................................21
Temporary Defensive Strategies...........................................................................21
Foreign Investments...........................................................................................21
Foreign Currency Exchange................................................................................21
Information..............................................................................................21
Political Instability....................................................................................22
Foreign Markets..........................................................................................22
Increased Expenses.......................................................................................22
Privatizations...........................................................................................23
Foreign Debt Securities..................................................................................23
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Brady Bonds..............................................................................................23
Depositary Receipts......................................................................................24
Emerging Markets.........................................................................................24
Euro Conversion..........................................................................................24
Securities of Other Investment Companies......................................................................24
Lending of Portfolio Securities...............................................................................25
Reverse Repurchase Agreements and Dollar Rolls................................................................25
When-Issued Securities and Delayed-Delivery Transactions......................................................26
Short Sales "Against the Box".................................................................................26
REITs.........................................................................................................27
Warrants......................................................................................................27
Non-Publicly Traded and Illiquid Securities...................................................................28
Rule 144A Securities.....................................................................................29
Small Capitalization and Emerging Growth Companies; Unseasoned Issuers........................................29
"Special Situation" Companies.................................................................................30
Borrowing.....................................................................................................30
Non-Diversified Status........................................................................................30
Other Investment Limitations..................................................................................30
PORTFOLIO VALUATION...........................................................................................32
PORTFOLIO TRANSACTIONS........................................................................................33
PORTFOLIO TURNOVER............................................................................................35
MANAGEMENT OF THE TRUST.......................................................................................36
Officers and Board of Trustees................................................................................36
Trustees' Compensation........................................................................................40
Portfolio Managers............................................................................................40
Investment Adviser and Co-Administrators......................................................................41
Custodians and Transfer Agent.................................................................................43
Distribution and Shareholder Servicing........................................................................44
Distributor...............................................................................................44
Shareholder Servicing.....................................................................................44
Organization of the Trust.....................................................................................44
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................................................46
ADDITIONAL INFORMATION CONCERNING TAXES.......................................................................46
DETERMINATION OF PERFORMANCE..................................................................................49
INDEPENDENT ACCOUNTANTS AND COUNSEL...........................................................................52
FINANCIAL STATEMENTS..........................................................................................52
MISCELLANEOUS.................................................................................................52
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INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the descriptions of each
Portfolio's investment objective and policies in the Prospectuses. There are no
assurances that the Portfolios will achieve their investment objectives.
The investment objective of the Fixed Income Portfolio is total return
consistent with prudent investment management.
The investment objective of the Global Fixed Income Portfolio is total
return consistent with prudent investment management, consisting of a
combination of interest income, currency gains and capital appreciation.
Unless otherwise indicated, all of the Portfolios are permitted, but not
obligated, to engage in the following investment strategies, subject to any
percentage limitations set forth below.
The Portfolios 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 on Securities and Securities Indices and Currency Exchange
Transactions
Each Portfolio may purchase and write (sell) options on securities,
securities indices and currencies for hedging purposes or to increase total
return. Up to 25% of a Portfolio'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.
Securities Options. Each Portfolio may write covered put and call
options on stock and debt securities and may purchase such options that are
traded on foreign and U.S. exchanges, as well as OTC options.
Each Portfolio 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.
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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
Portfolio, force the sale or purchase of portfolio securities at inopportune
times or at less advantageous prices, limit the amount of appreciation the
Portfolio could realize on its investments or require the Portfolio 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 Portfolio 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 Portfolio
that writes call options retains the risk of an increase in the price of the
underlying security. The size of the premiums that the Portfolio may receive may
be adversely affected as new or existing institutions, including other
investment companies, engage in or increase their option-writing activities.
If security prices rise, a put writer would generally expect to profit,
although its gain would be limited to the amount of the premium it received. If
security prices remain the same over time, it is likely that the writer will
also profit, because it should be able to close out the option at a lower price.
If security prices decline, the put writer would expect to suffer a loss. This
loss may be less than the loss from purchasing the underlying instrument
directly, to the extent that the premium received offsets the effects of the
decline.
In the case of options written by a Portfolio that are deemed covered by
virtue of the Portfolio'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 Portfolio has
written options may exceed the time within which the Portfolio must make
delivery in accordance with an exercise notice. In these instances, the
Portfolio may purchase or temporarily borrow the underlying securities for
purposes of physical delivery. By so doing, the Portfolio will not bear any
market risk, since the Portfolio 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 Portfolio 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 the Portfolios may write covered call options. For example, if a Portfolio
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
Portfolio 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 Portfolio 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,"
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"at-the-money" and "out-of-the-money," respectively. The Portfolios may
write (i) in-the-money call options when Credit Suisse Asset Management, LLC,
the Portfolios' 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 offset wholly or in part by the premium received. Out-of-the-money,
at-the-money and in-the-money put options (the reverse of call options as to the
relation of exercise price to market price) may be used in the same market
environments that such call options are used in equivalent transactions. To
secure its obligation to deliver the underlying security when it writes a call
option, a Portfolio 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 the Portfolio prior to the
exercise of options that it has purchased or written, respectively, of options
of the same series) in which the Portfolio 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 the Portfolio has purchased an option and engages in a
closing sale transaction, whether the Portfolio 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 Portfolio initially paid for the original option
plus the related transaction costs. Similarly, in cases where the Portfolio 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. The Portfolio 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 the Portfolio under an
option it has written would be terminated by a closing purchase transaction, but
the Portfolio would not be deemed to own an option as a result of the
transaction. So long as the obligation of the Portfolio as the writer of an
option continues, the Portfolio may be assigned an exercise notice by the
broker-dealer through which the option was sold, requiring the Portfolio to
deliver the underlying security against payment of the exercise price. This
obligation terminates when the option expires or the Portfolio effects a closing
purchase transaction. A Portfolio cannot effect a closing purchase transaction
with respect to an option once it has been assigned an exercise notice.
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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 Portfolio'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 Portfolio. The Portfolio, however, intends to purchase OTC
options only from dealers whose debt securities, as determined by CSAM, are
considered to be investment grade. If, as a covered call option writer, the
Portfolio 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 Trust or a
Portfolio 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 Portfolio
will be able to purchase on a particular security.
Securities Index Options. Each Portfolio may purchase and write
exchange-listed and OTC put and call options on securities indexes. A securities
index measures the movement of a certain group of securities by assigning
relative values to the securities included in the index, fluctuating with
changes in the market values of the securities included in the index. Some
securities index options are based on a broad market index, such as the NYSE
Composite Index, or a narrower market index such as the Standard & Poor's 100.
Indexes may also be based on a particular industry or market segment.
Options on securities indexes are similar to options on securities
except that (i) the expiration cycles of securities index options are monthly,
while those of securities options are currently quarterly, and (ii) the delivery
requirements are different. Instead of giving the right to take or make delivery
of securities at a specified price, an option on a securities index gives the
holder the right to receive a cash "exercise settlement amount" equal to (a) the
amount, if any, by which the fixed exercise price of the option exceeds (in the
case of a put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (b) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the securities index upon which the option is based being greater
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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. The Portfolios may purchase OTC or dealer options or sell
covered OTC options. Unlike exchange-listed options where an intermediary or
clearing corporation, such as the Clearing Corporation, assures that all
transactions in such options are properly executed, the responsibility for
performing all transactions with respect to OTC options rests solely with the
writer and the holder of those options. A listed call option writer, for
example, is obligated to deliver the underlying securities to the clearing
organization if the option is exercised, and the clearing organization is then
obligated to pay the writer the exercise price of the option. If a Portfolio
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 Portfolio, the Portfolio 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, the Portfolio 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 the Portfolio
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 Portfolio originally wrote the option. Although the
Portfolios 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 Portfolios, there can be no assurance that a Portfolio
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 Portfolio. Until a Portfolio, 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 the Portfolio's
ability to sell portfolio securities or, with respect to currency options,
currencies at a time when such sale might be advantageous.
Currency Exchange Transactions. The value in U.S. dollars of the assets
of a Portfolio 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 Portfolio 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
Portfolio 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 and writing 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
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the imposition of foreign exchange controls, suspension of settlement or other
governmental actions or unexpected events.
Forward Currency Contracts. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract as agreed upon by the
parties, at a price set at the time of the contract. These contracts are entered
into in the interbank market conducted directly between currency traders
(usually large commercial banks and brokers) and their customers. Forward
currency contracts are similar to currency futures contracts, except that
futures contracts are traded on commodities exchanges and are standardized as to
contract size and delivery date.
At or before the maturity of a forward contract, the Portfolio 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 the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio, 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. The Portfolios may purchase and write 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. The Portfolios' 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 Portfolio 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. A
Portfolio may not 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 the
Portfolio'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 Portfolio may
purchase foreign currency put options. If the value of the foreign currency does
decline, the Portfolio will have the right to sell the foreign currency for a
fixed amount in U.S. 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
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increasing the cost of the securities, the Portfolio 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 the Portfolio 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 devaluation is generally anticipated, the Portfolio 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
the Portfolio's investments and a currency hedge may not be entirely successful
in mitigating changes in the value of the Portfolio'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 Portfolio against a
price decline if the issuer's creditworthiness deteriorates.
Futures Activities. Each Portfolio may enter into foreign currency,
interest rate and securities index futures contracts and purchase and write
(sell) related options traded on exchanges designated by the Commodity Futures
Trading Commission (the "CFTC") or consistent with CFTC regulations on foreign
exchanges. These futures contracts are standardized contracts for the future
delivery of foreign currency or an interest rate sensitive security or, in the
case of stock index and certain other futures contracts, a cash settlement with
reference to a specified multiplier times the change in the specified index,
exchange rate or interest rate. 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 Portfolio's net asset value after
taking into account unrealized profits and unrealized losses on any such
contracts it has entered into. The Portfolios reserve 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 a Portfolio's policies. There is no overall limit on the percentage of
Portfolio assets that may be at risk with respect to futures activities.
Futures Contracts. A foreign currency futures contract provides for the
future sale by one party and the purchase by the other party of a certain amount
of a specified non-U.S. currency at a specified price, date, time and place. An
interest rate futures contract provides for the future sale by one party and the
purchase by the other party of a certain amount of a specific interest rate
sensitive financial instrument (debt security) at a specified
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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 Portfolio upon
entering into a futures contract. Instead, the Portfolio is required to
segregate with its custodian an amount of cash or 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 the Portfolio 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 Portfolio 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." The Portfolios will also incur brokerage costs in
connection with entering into futures transactions.
At any time prior to the expiration of a futures contract, a Portfolio
may elect to close the position by taking an opposite position, which will
operate to terminate the Portfolio'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 the Portfolios may enter into futures contracts only if there is an
active market for such contracts, there is no assurance that an active market
will exist at any particular time. Most futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit or trading may be suspended for
specified periods during the day. It is possible that futures contract prices
could move to the daily limit for several consecutive trading days with little
or no trading, thereby preventing prompt liquidation of futures positions at an
advantageous price and subjecting a Portfolio to substantial losses. In such
event, and in the event of adverse price movements, the Portfolio would be
required to make daily cash payments of variation margin. In such situations, if
the Portfolio 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 Portfolio 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 the Portfolio's performance.
Options on Futures Contracts. Each Portfolio may purchase and write put
and call options on foreign currency, interest rate and securities index a
futures contract and may enter into closing transactions with respect to such
options to terminate existing positions.
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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 the Portfolio.
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 Portfolio 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 the
Portfolio, an increase in the value of the futures contracts could only
mitigate, but not totally offset, the decline in the value of the Portfolio's
assets.
In hedging transactions based on an index, whether a Portfolio will
realize a gain or loss from the purchase or writing of options on an index
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 the Portfolio'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 Portfolio'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 Portfolio'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
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meeting additional margin deposit requirements, investors may close futures
contracts through offsetting transactions which would distort the normal
relationship between the stock 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 an index
and movements in the price of index futures, a correct forecast of general
market trends by CSAM still may not result in a successful hedging transaction.
A Portfolio will engage in hedging transactions only when deemed
advisable by CSAM, and successful use by the Portfolio 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 the Portfolio's
performance.
To the extent that a Portfolio engages in the strategies described
above, the Portfolio 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 the Portfolio may be
unable to close out a position without incurring substantial losses, if at all.
The Portfolio is also subject to the risk of a default by a counterparty to an
off-exchange transaction.
Swaps. Each Portfolio may enter into swaps relating to interest rates,
indexes, currencies and equity interests of foreign issuers. A swap transaction
is an agreement between a Portfolio and a counterparty to act in accordance with
the terms of the swap contract. Interest rate swaps involve the exchange by the
Portfolio with another party of their respective commitments to pay or receive
interest, such as an exchange of fixed rate payments for floating rate payments.
Index swaps involve the exchange by the Portfolio with another party of the
respective amounts payable with respect to a notional principal amount related
to one or more indexes. Currency swaps involve the exchange of cash flows on a
notional amount of two or more currencies based on their relative future values.
An equity swap is an agreement to exchange streams of payments computed by
reference to a notional amount based on the performance of a stock index, a
basket of stocks or a single stock. A Portfolio may enter into these
transactions for hedging purposes such as to preserve a return or spread on a
particular investment or portion of its assets, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Portfolio anticipates purchasing at a
later date. The Portfolios may also use these transactions for speculative
purposes to increase total return, such as to obtain the price performance of a
security without actually purchasing the security in circumstances where, for
example, the subject security is illiquid, is unavailable for direct investment
or available only on less
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<PAGE> 15
attractive terms. Swaps have risks associated with them, including possible
default by the counterparty to the transaction, illiquidity and, where swaps are
used as hedges, the risk that the use of a swap could result in losses greater
than if the swap had not been employed.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the agreement, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. Swaps do not involve the
delivery of securities, other underlying assets or principal. Accordingly, the
risk of loss with respect to swaps is limited to the net amount of payments that
the Portfolio is contractually obligated to make. If the counterparty to a swap
defaults, the Portfolio's risk of loss consists of the net amount of payments
that the Portfolio is contractually entitled to receive. Where swaps are entered
into for good faith hedging purposes, CSAM believes such obligations do not
constitute senior securities under the Investment Company Act of 1940, as
amended (the "1940 Act"), and, accordingly, will not treat them as being subject
to a Portfolio's borrowing restrictions. Where swaps are entered into for other
than hedging purposes, a Portfolio will segregate an amount of cash or liquid
securities having a value equal to the accrued excess of its obligations over
its entitlements with respect to each swap on a daily basis.
Asset Coverage for Forward Contracts, Options, Futures and Options on
Futures and Swaps. Each Portfolio 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 Portfolio on securities, securities indexes, currencies
and swaps; and currency, interest rate and index futures contracts and options
on these futures contracts. These guidelines may, in certain instances, require
segregation by the Portfolio of cash or liquid securities with its custodian or
a designated sub-custodian to the extent the Portfolio's obligations with
respect to these strategies are not otherwise "covered" through ownership of the
underlying security, financial instrument or currency 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
Portfolio's assets could impede portfolio management or the Portfolio's ability
to meet redemption requests or other current obligations.
For example, a call option written by the Portfolio on securities may
require the Portfolio 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 the Portfolio on
an index may require the Portfolio to own portfolio securities that correlate
with the index or to segregate assets (as described above) equal to the excess
of the index value over the exercise price on a current basis. A put option
written by the Portfolio may require the Portfolio to segregate assets (as
described above) equal to the exercise price. The Portfolio 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 Portfolio. If the Portfolio holds a futures or
forward contract, the Portfolio could purchase a put option on the same futures
or forward contract
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<PAGE> 16
with a strike price as high or higher than the price of the contract held. The
Portfolio may enter into fully or partially offsetting transactions so that its
net position, coupled with any segregated assets (equal to any remaining
obligation), equals its net obligation. Asset coverage may be achieved by other
means when consistent with applicable regulatory policies.
Debt Securities. Each Portfolio may invest without limit in debt
securities. 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 growth when interest rates are expected to decline. The success of such
a strategy is dependent upon CSAM's ability to forecast accurately 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.
Each Portfolio may invest to a limited extent in zero coupon securities.
See "Additional Information Concerning Taxes" for a discussion of the tax
consequences to shareholders as a result of a Portfolio's investment in zero
coupon securities.
A security will be deemed to be investment grade if it is rated within
the four highest grades by Moody's or S&P or, if unrated, is determined to be of
comparable quality by CSAM. Securities 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. Subsequent to
its purchase by a Portfolio, an issue of securities may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Portfolio.
Neither event will require sale of such securities, although CSAM will consider
such event in its determination of whether the Portfolio should continue to hold
the securities.
Below Investment Grade Securities. Each Portfolio may hold up to 35% of
its net assets in fixed income securities rated below investment grade and as
low as C by Moody's Investors Service, Inc. ("Moody's") or D by Standard &
Poor's Ratings Services ("S&P"), and in comparable unrated securities considered
to be of equivalent quality. 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
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<PAGE> 17
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 higher-quality 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 debt 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. Investors should be aware that ratings are
relative and subjective and are not absolute standards of quality.
An economic recession could disrupt severely the market for such
securities and may adversely affect the value of such securities and the ability
of the issuers of such securities to repay principal and pay interest thereon.
A Portfolio 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 Portfolios anticipate
that these securities could be sold only to a limited number of dealers or
institutional investors. To the extent a secondary trading market for these
securities does exist, it generally is not as liquid as the secondary market for
investment grade securities. The lack of a liquid secondary market, as well as
adverse publicity and investor perception with respect to these securities, may
have an adverse impact on market price and the ability to dispose of particular
issues when necessary to meet the 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 Portfolios to obtain accurate market quotations for
purposes of valuing the Portfolios and calculating their net asset values.
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 Portfolios' net asset value.
The Portfolios 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. Each
Portfolio 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.
Loan Participations and Assignments. The Portfolios may invest in fixed
and floating rate loans ("Loans") arranged through private negotiations between
a foreign
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<PAGE> 18
government (a "Borrower") and one or more financial institutions ("Lenders").
The majority of the Portfolios' 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 a Portfolio having a contractual relationship only with the Lender,
not with the Borrower. A Portfolio 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, a Portfolio
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 Portfolio may not directly benefit from any
collateral supporting the Loan in which it has purchased the Participation. As a
result, a Portfolio 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, a Portfolio 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 Portfolio will acquire Participations only if the Lender
interpositioned between the Portfolio and the Borrower is determined by CSAM to
be creditworthy.
When a Portfolio purchases Assignments from Lenders, the Portfolio 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 Portfolio 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 Portfolio 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 a Portfolio's ability to
dispose of particular Participations or Assignments when necessary to meet the
Portfolio'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
Portfolio to assign a value to these securities for purposes of valuing the
Portfolio's portfolio and calculating its net asset value.
Convertible Securities. Convertible securities in which each Portfolio
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.
Structured Securities. Each Portfolio may purchase any type of publicly
traded or privately negotiated fixed income security, including mortgage-backed
securities; structured notes, bonds or debentures; and assignments of and
participations in loans.
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<PAGE> 19
Mortgage-Backed Securities. Each Portfolio 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 Portfolio'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
Portfolio'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 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.
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Asset-Backed Securities. Each Portfolio 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 Portfolio 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 Portfolio'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.
Stand-By Commitment Agreements. The Portfolios may acquire "stand-by
commitments" with respect to securities held in their portfolios. Under a
stand-by commitment, a dealer agrees to purchase at a Portfolio's option
specified securities at a specified price. The Portfolio's right to exercise
stand-by commitments is unconditional and unqualified. Stand-by commitments
acquired by a Portfolio may also be referred to as "put"
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options. A stand-by commitment is not transferable by a Portfolio, although the
Portfolio can sell the underlying securities to a third party at any time.
The principal risk of stand-by commitments is that the writer of a
commitment may default on its obligation to repurchase the securities acquired
with it. When investing in stand-by commitments, the Portfolios will seek to
enter into stand-by commitments only with brokers, dealers and banks that, in
the opinion of CSAM, present minimal credit risks. In evaluating the
creditworthiness of the issuer of a stand-by commitment, CSAM will periodically
review relevant financial information concerning the issuer's assets,
liabilities and contingent claims. The Portfolios will acquire stand-by
commitments only in order to facilitate portfolio liquidity and do not intend to
exercise their rights under stand-by commitments for trading purposes.
The amount payable to a Portfolio upon its exercise of a stand-by
commitment is normally (i) the Portfolio's acquisition cost of the securities
(excluding any accrued interest which the Portfolio paid on their acquisition),
less any amortized market premium or plus any amortized market or original issue
discount during the period the Portfolio owned the securities, plus (ii) all
interest accrued on the securities since the last interest payment date during
that period.
The Portfolios expect that stand-by commitments will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the Portfolios may pay for stand-by commitments
either separately in cash or by paying a higher price for portfolio securities
which are acquired subject to such commitments (thus reducing the yield to
maturity otherwise available for the same securities). The total amount paid in
either manner for outstanding stand-by commitments held in a Portfolio's
portfolio will not exceed 1/2 of 1% of the value of the Portfolio's total assets
calculated immediately after each stand-by commitment is acquired.
The Portfolios would acquire stand-by commitments solely to facilitate
portfolio liquidity and do not intend to exercise their rights thereunder for
trading purposes. The acquisition of a stand-by commitment would not affect the
valuation or assumed maturity of the underlying securities. Stand-by commitments
acquired by a Portfolio would be valued at zero in determining net asset value.
Where a Portfolio paid any consideration directly or indirectly for a stand-by
commitment, its cost would be reflected as unrealized depreciation for the
period during which the commitment was held by the Portfolio. Stand-by
commitments would not affect the average weighted maturity of the Portfolio's
portfolio.
The Internal Revenue Service has issued a revenue ruling to the effect
that a registered investment company will be treated for federal income tax
purposes as the owner of Municipal Obligations acquired subject to a stand-by
commitment and the interest on the Municipal Obligations will be tax exempt to a
Portfolio.
Variable Rate and Master Demand Notes. (Fixed Income Portfolio) The
Fixed Income Portfolio may invest in variable rate and master demand notes.
Variable rate demand notes ("VRDNs") are obligations issued by corporate or
governmental entities which contain a floating or variable interest rate
adjustment formula and an unconditional right of demand to
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receive payment of the unpaid principal balance plus accrued interest upon a
short notice period not to exceed seven days. The interest rates are adjustable
at intervals ranging from daily to up to every six months to some prevailing
market rate for similar investments, such adjustment formula being calculated to
maintain the market value of the VRDN at approximately the par value of the VRDN
upon the adjustment date. The adjustments are typically based upon the prime
rate of a bank or some other appropriate interest rate adjustment index.
Master demand notes are notes which provide for a periodic adjustment in
the interest rate paid (usually tied to the Treasury Bill auction rate) and
permit daily changes in the principal amount borrowed. While there may be no
active secondary market with respect to a particular VRDN purchased by a
Portfolio, the Portfolio may, upon the notice specified in the note, demand
payment of the principal of and accrued interest on the note at any time and may
resell the note at any time to a third party. The absence of such an active
secondary market, however, could make it difficult for the Portfolio to dispose
of the VRDN involved in the event the issuer of the note defaulted on its
payment obligations, and the Portfolio could, for this or other reasons, suffer
a loss to the extent of the default.
Municipal Obligations. Municipal Obligations are debt obligations issued
by or on behalf of states, territories and possessions of the United States and
the District of Columbia and their political subdivisions, agencies and
instrumentalities. Municipal Obligations are issued by governmental entities to
obtain funds for various public purposes, including the construction of a wide
range of public facilities, the refunding of outstanding obligations, the
payment of general operating expenses and the extension of loans to public
institutions and facilities. Private activity bonds that are issued by or on
behalf of public authorities to finance various privately-operated facilities
are included within the term Municipal Obligations if the interest paid thereon
is exempt from federal income tax.
The two principal types of Municipal Obligations, in terms of the source
of payment of debt service on the bonds, consist of "general obligation" and
"revenue" issues. General obligation bonds are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable from the revenues derived from a particular
facility or class of facilities or in some cases, from the proceeds of a special
excise tax or other specific revenue source such as the user of the facility
being financed. Consequently, the credit quality of revenue bonds is usually
directly related to the credit standing of the user of the facility involved.
There are, of course, variations in the quality of Municipal
Obligations, both within a particular classification and between
classifications, and the yields on Municipal Obligations depend upon a variety
of factors, including general money market conditions, the financial condition
of the issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
The ratings of Moody's and S&P represent their opinions as to the quality of
Municipal Obligations. It should be emphasized, however, that ratings are
general and are not absolute standards of quality, and Municipal Obligations
with the same maturity, interest rate and rating may have different yields while
Municipal Obligations of the same maturity and interest rate with
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<PAGE> 23
different ratings may have the same yield. Subsequent to its purchase by the
Fixed Income Portfolio, an issue of Municipal Obligations may cease to be rated
or its rating may be reduced below the minimum rating required for purchase by
the Portfolio. CSAM will consider such an event in determining whether the
Portfolio should continue to hold the obligation. See the Appendix attached
hereto for further information concerning the ratings of Moody's and S&P and
their significance.
Among other instruments, the Fixed Income Portfolio may purchase short
term Tax Anticipation Notes, Bond Anticipation Notes, Revenue Anticipation Notes
and other forms of short term loans. Such notes are issued with a short term
maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements or other revenues.
The yields on Municipal Obligations are dependent upon a variety of
factors, including general economic and monetary conditions, money market
factors, conditions of the municipal bond market, size of a particular offering,
maturity of the obligation offered and rating of the issue.
Municipal Obligations are also subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Code, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. There is also
the possibility that as a result of litigation or other conditions, the power or
ability of any one or more issuers to pay, when due, principal of and interest
on its, or their, Municipal Obligations may be materially affected.
Interest Rate, Index, Mortgage and Currency Swaps; Interest Rate Caps,
Floors and Collars. Each Portfolio may enter into interest rate, index and
mortgage swaps and interest rate caps, floors and collars for hedging purposes
or to seek to increase total return; and each Portfolio may enter into currency
swaps for hedging purposes. Interest rate swaps involve the exchange by the
Portfolio with another party of their respective commitments to pay or receive
interest, such as an exchange of fixed rate payments for floating rate payments.
Index swaps involve the exchange by the Portfolio with another party of the
respective amounts payable with respect to a notional principal amount related
to one or more indexes. Mortgage swaps are similar to interest rate swaps in
that they represent commitments to pay and receive interest. The notional
principal amount, however, is tied to a reference pool or pools of mortgages.
Currency swaps involve the exchange of cash flows on a notional amount of two or
more currencies based on their relative future values. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payment of interest on a
notional principal amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive payments
of interest on a notional principal amount from the party selling the interest
rate floor. An interest rate collar is the combination of a cap and a floor that
preserves a certain return within a predetermined range of interest rates.
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A Portfolio will enter into interest rate, index and mortgage swaps only
on a net basis, which means that the two payment streams are netted out, with
the Portfolio receiving or paying, as the case may be, only the net amount of
the two payments. Interest rate, index and mortgage swaps do not involve the
delivery of securities, other underlying assets or principal. Accordingly, the
risk of loss with respect to interest rate, index and mortgage swaps is limited
to the net amount of interest payments that the Portfolio is contractually
obligated to make. If the other party to an interest rate, index or mortgage
swap defaults, the Portfolio's risk of loss consists of the net amount of
interest payments that the Portfolio is contractually entitled to receive. In
contrast, currency swaps usually involve the delivery of a gross payment stream
in one designated currency in exchange for the gross payment stream in another
designated currency. Therefore, the entire payment stream under a currency swap
is subject to the risk that the other party to the swap will default on its
contractual delivery obligations. To the extent that the net amount payable by
the Portfolio under an interest rate, index or mortgage swap and the entire
amount of the payment stream payable by the Portfolio under a currency swap or
an interest rate cap, floor or collar are held in a segregated account
consisting of cash or liquid securities, the Portfolios and CSAM believe that
swaps do not constitute senior securities under the Investment Company Act of
1940, as amended (the "1940 Act") and, accordingly, will not treat them as being
subject to each Portfolio's borrowing restriction.
A Portfolio will not enter into interest rate, index, mortgage or
currency swaps, or interest rate cap, floor or collar transactions unless the
unsecured commercial paper, senior debt or claims paying ability of the other
party is rated either AA or A-1 or better by S&P or Aa or P-1 or better by
Moody's or, if unrated by such rating organizations, determined to be of
comparable quality by CSAM.
U.S. Government Securities. The obligations issued or guaranteed by the
U.S. government in which a Portfolio may invest include: direct obligations of
the U.S. Treasury and obligations issued by U.S. government agencies and
instrumentalities. 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 Portfolios 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, Government National Mortgage Association, General
Services Administration, Central Bank for Cooperatives, Federal Farm Credit
Banks, Federal Home Loan Banks, Federal Home Loan
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Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land Banks,
Federal National Mortgage Association, Federal Maritime Administration,
Tennessee Valley Authority, District of Columbia Armory Board and Student Loan
Marketing Association. Each Portfolio may also invest in instruments that are
supported by the right of the issuer to borrow from the U.S. Treasury and
instruments that are supported by the credit of the instrumentality. Because the
U.S. government is not obligated by law to provide support to an instrumentality
it sponsors, a Portfolio 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
Portfolio.
Money Market Obligations. Each Portfolio is authorized to invest under
normal market conditions up to 35% of its assets in short-term money market
obligations having remaining maturities of less than one year at the time of
purchase. Money market 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, domestic savings and
loans and similar institutions) that are high quality investments; commercial
paper rated no lower than A-2 by Standard & Poor's Ratings Services ("S&P") or
Prime-2 by Moody's Investors Service, Inc. ("Moody's") or the equivalent from
another major 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.
Repurchase Agreements. Each Portfolio may invest up to 20% of its total
assets 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 Portfolio 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 Portfolio to resell, the
obligation at an agreed-upon price and time, thereby determining the yield
during the Portfolio's holding period. This arrangement results in a fixed rate
of return that is not subject to market fluctuations during the Portfolio'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 Portfolio 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
Portfolio 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 while the Portfolio seeks to assert
this right. CSAM, acting under the supervision of each Portfolio's Board,
monitors the creditworthiness of those bank and non-bank dealers with which the
Portfolio enters into repurchase agreements to evaluate this risk. A repurchase
agreement is considered to be a loan under the 1940 Act.
Money Market Mutual Funds. Where CSAM believes that it would be
beneficial to a Portfolio and appropriate considering the factors of return and
liquidity, a Portfolio may invest up to 5% of its assets in securities of money
market mutual funds that are unaffiliated with the Portfolio or CSAM. A money
market mutual fund is an investment company that invests in short-term high
quality money market instruments. A money market
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mutual fund generally does not purchase securities with a remaining maturity of
more than one year. As a shareholder in any mutual fund, a Portfolio will bear
its ratable share of the mutual fund's expenses, including management fees, and
will remain subject to payment of the Portfolio's management fees and other
expenses with respect to assets so invested.
Temporary Defensive Strategies. For temporary defensive purposes or, in
the case of the Global Fixed Income Portfolio, during times of international
political or economic uncertainty, each Portfolio may invest without limit in
short-term money market obligations.
Foreign Investments. The Fixed Income Portfolio may not invest more than
35% of its assets in securities denominated in a currency other than U.S.
dollars. 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. A Portfolio 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.
Foreign Currency Exchange. Since the Global Fixed Income Portfolio will
be investing substantially, and the Fixed Income Portfolio may be investing, in
securities denominated in currencies other than the U.S. dollar, and since the
Portfolios may temporarily hold funds in bank deposits or other money market
investments denominated in foreign currencies, each Portfolio's investments in
foreign companies may be affected favorably or unfavorably by exchange control
regulations or changes in the exchange rate between such currencies and the U.S.
dollar. A change in the value of a foreign currency relative to the U.S. dollar
will result in a corresponding change in the U.S. dollar value of a Portfolio's
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 by a Portfolio with respect to its foreign
investments. 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. A Portfolio 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.
Information. Many of the foreign securities held by a Portfolio will not
be registered with, nor the issuers thereof be subject to reporting requirements
of, the SEC.
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Accordingly, there may be less publicly available information about such
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 Portfolio, political or social
instability, or domestic developments which could affect U.S. investments in
those and neighboring countries.
Foreign Markets. Securities of some foreign companies are less liquid
and their prices are more volatile than securities of comparable U.S. companies.
Certain foreign countries are known to experience long delays between the trade
and settlement dates of securities purchased or sold, which may result in
increased exposure to market and foreign exchange fluctuation and increased
liquidity.
Increased Expenses. To the extent that each Portfolio invests in foreign
securities, the operating expenses of the Fixed Income Portfolio may, and the
Global Fixed Income Portfolio can, be expected to be higher than those of an
investment company investing exclusively in U.S. securities, since the expenses
of each Portfolio associated with foreign investing, such as custodial costs,
valuation costs and communication costs, as well as the rate of the investment
advisory fees, though similar to such expenses of some other international
funds, are higher than those costs incurred by other investment companies.
Privatizations. Each Portfolio 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 Portfolios,
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.
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 the Portfolios 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
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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.
Brady Bonds. Each Portfolio 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 OTC secondary market
for debt of Latin American issuers.
Depositary Receipts. Certain of the above risks may be involved with
ADRs, European Depositary Receipts ("EDRs") and International Depositary
Receipts ("IDRs"), instruments that evidence ownership of underlying securities
issued by a foreign corporation. ADRs, EDRs and IDRs may not necessarily be
denominated in the same currency as the securities whose ownership they
represent. ADRs are typically issued by a U.S. bank or trust company. EDRs
(sometimes referred to as Continental Depositary Receipts) are issued in Europe
and IDRs (sometimes referred to as Global Depositary Receipts) are issued
outside the United States, each typically by non-U.S. banks and trust companies.
The risks associated with investing in securities of non-U.S. issuers are
generally heightened for investments in securities of issuers in emerging
markets.
Emerging Markets. Each Portfolio may invest in securities of issuers
located in less developed countries considered to be "emerging markets."
Investing in securities of issuers located in emerging markets involves not only
the risks described above with respect to investing in foreign securities, but
also other risks, including exposure to economic structures that are generally
less diverse and mature than, and to political systems that can be expected to
have less stability than, those of developed countries. For example, many
investments in emerging markets experienced significant declines in value due to
political and currency volatility in emerging markets countries during the
latter part of 1997. Other characteristics of emerging markets that may affect
investment there include certain national policies that may restrict investment
by foreigners in issuers or industries deemed sensitive to relevant national
interests and the absence of developed legal structures governing private and
foreign investments and private property. The typically small size of the
markets for securities of
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issuers located in emerging markets and the possibility of a low or nonexistent
volume of trading in those securities may also result in a lack of liquidity and
in price volatility of those securities.
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 presents unique risks and uncertainties for investors in those
countries, including (i) the functioning of the payment and operational systems
of banks and other financial institutions; (ii) the creation of suitable
clearing and settlement payment schemes for the euro; (iii) the fluctuation of
the euro relative to non-euro currencies during the transition period from
January 1, 1999 to December 31, 2000 and beyond; and (iv) whether the interest
rate, tax and labor regimes of the European countries participating in the euro
will converge over time. Further, the conversion of the currencies of other
Economic Monetary Union countries, such as the United Kingdom, and the admission
of other countries, including Central and Eastern European countries, to the
Economic Monetary Union could adversely affect the euro. These or other factors
may cause market disruptions and could adversely affect the value of foreign
securities and currencies held by the Portfolios.
Securities of Other Investment Companies. Each Portfolio may invest in
securities of other investment companies to the extent permitted under the 1940
Act. Presently, under the 1940 Act, a Portfolio 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 Portfolio's total assets and (iii) when added to all other investment
company securities held by the Portfolio, do not exceed 10% of the value of the
Portfolio's total assets.
Lending of Portfolio Securities. Each Portfolio may lend portfolio
securities to brokers, dealers and other financial organizations that meet
capital and other credit requirements or other criteria established by the
Trust's Board of Trustees (the "Board"). These loans, if and when made, may not
exceed 33-1/3% of a Portfolio's total assets (including the Loan collateral)
taken at value. A Portfolio will not 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 or liquid 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 the Portfolio. From time to time, a Portfolio 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
Portfolio and that is acting as a "finder."
By lending its securities, a Portfolio 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 Portfolio
will adhere to the following conditions whenever its portfolio securities are
loaned: (i) the Portfolio must receive at least 100% cash collateral or
equivalent securities of
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the type discussed in the preceding paragraph from the borrower; (ii) the
borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (iii) the Portfolio must be
able to terminate the loan at any time; (iv) the Portfolio 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
Portfolio 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 the
Portfolio's ability to recover the loaned securities or dispose of the
collateral for the loan or possible decline in the value of the loaned
securities during the period in which the Portfolio seeks to assert its rights.
Reverse Repurchase Agreements and Dollar Rolls. Each Portfolio 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 a Portfolio pursuant to its agreement to repurchase
them at a mutually agreed upon date, price and rate of interest. At the time the
Portfolio enters into a reverse repurchase agreement, it will segregate cash or
liquid securities having a value not less than the repurchase price (including
accrued interest). The segregated assets will be marked-to-market daily and
additional assets will be segregated on any day in which the assets fall below
the repurchase price (plus accrued interest). The Portfolio'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 Portfolio 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 Portfolio's obligation to repurchase the securities, and the
Portfolio's use of the proceeds of the reverse repurchase agreement may
effectively be restricted pending such decision.
The Portfolios also may enter into "dollar rolls," in which the
Portfolio 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 Portfolio would forego principal and interest paid on such
securities. The Portfolio 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
Portfolio enters into a dollar roll transaction, it will segregate with an
approved custodian cash or liquid securities having a value not less than the
repurchase price (including accrued interest) and will subsequently monitor the
segregated assets to ensure that their value is maintained. Reverse repurchase
agreements and dollar rolls that are accounted for as financings are considered
to be borrowings under the 1940 Act.
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When-Issued Securities and Delayed-Delivery Transactions. Each Portfolio
may use 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
Portfolio will enter into a when-issued transaction for the purpose of acquiring
portfolio securities and not for the purpose of leverage, but may sell the
securities before the settlement date if CSAM deems it advantageous to do so.
The payment obligation and the interest rate that will be received on
when-issued securities are fixed at the time the buyer enters into the
commitment. Due to fluctuations in the value of securities purchased or sold on
a when-issued or delayed-delivery basis, the prices obtained on 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. When a Portfolio 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. Normally,
the custodian will set aside portfolio securities to satisfy a purchase
commitment, and in such a case the Portfolio may be required subsequently to
segregate additional assets in order to ensure that the value of the segregated
assets remains equal to the amount of the Portfolio's commitment. It may be
expected that the Portfolio'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 Portfolio 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 Portfolio's incurring a
loss or missing an opportunity to obtain a price considered to be advantageous.
Short Sales "Against the Box". Each Portfolio may enter into short sales
"against the box." Not more than 10% of a Portfolio's net assets (taken at
current value) may be held as collateral for such sales at any one time. In a
short sale, a Portfolio 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. While a short sale is made by selling a
security a Portfolio does not own, a short sale is "against the box" to the
extent that a Portfolio contemporaneously owns or has the right to obtain, at no
added cost, securities identical to those sold short. If the Portfolio engages
in a short sale, the collateral for the short position will be segregated by the
Portfolio's custodian or qualified sub-custodian. While the short sale is open,
the Portfolio will continue to segregate an amount of securities equal in kind
and amount to the securities sold short or securities convertible into or
exchangeable for such equivalent securities. These securities constitute the
Portfolio's long position.
The Portfolios do not intend to engage in short sales against the box
for investment purposes. A Portfolio may make a short sale as a hedge, when it
believes that the price of a security may decline, causing a decline in the
value of a security owned by the Portfolio (or a security convertible or
exchangeable for such security). In such case, any future losses in the
Portfolio'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 Portfolio
owns. There will be certain additional transaction costs associated with short
sales against the box, but the Portfolio will endeavor to offset these costs
with the income from the investment of the cash proceeds of
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short sales.
If a Portfolio 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 Portfolio 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 Portfolio may effect short
sales.
REITs. Each Portfolio 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 Trust, 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"). The Portfolio
investing in a REIT will indirectly bear its proportionate share of any expenses
paid by the REIT in addition to the expenses of the Portfolio.
Warrants. Each Portfolio may invest up to 10% of its total assets in
warrants. 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. A Portfolio may purchase warrants issued by domestic and foreign
companies to purchase newly created equity securities consisting of common and
preferred stock. The equity security underlying a warrant is outstanding at the
time the warrant is issued or is issued together with the warrant.
Investing in warrants can provide a greater potential for profit or loss
than an equivalent investment in the underlying security, and, thus, can be a
speculative investment. At the time of issue, the cost of a warrant is
substantially less than the cost of the underlying security itself, and price
movements in the underlying security are generally magnified in the price
movements of the warrant. This leveraging effect enables the investor to gain
exposure to the underlying security with a relatively low capital investment.
This leveraging increases an investor's risk, however, in the event of a decline
in the value of the underlying security and can result in a complete loss of the
amount invested in the warrant. In addition, the price of a warrant tends to be
more volatile than, and may not correlate exactly to, the price of the
underlying security. If the market price of the underlying security is below the
exercise price of the warrant on its expiration date, the warrant will generally
expire without value. The value of a warrant may decline because of a decline in
the value of the underlying security, the passage of time, changes in interest
rates or in the dividend or other policies of the company whose equity underlies
the warrant or a change in the perception as to the future price of the
underlying security, or any combination thereof. Warrants generally pay no
dividends and confer no voting or other rights other than to purchase the
underlying security.
Non-Publicly Traded and Illiquid Securities. A Portfolio may not invest
more than 15% of its net assets in non-publicly traded and illiquid securities,
including securities that are illiquid by virtue of the absence of a readily
available market, repurchase agreements
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which have a maturity of longer than seven days, time deposits maturing in more
than seven calendar days and, with respect to the Fixed Income Portfolio, VRDNs
and master demand notes providing for settlement upon more than seven days
notice by the Portfolio. 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. 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. 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.
Non-publicly traded securities (including Rule 144A Securities) may
involve a high degree of business and financial risk and may result in
substantial losses. These securities may be less liquid than publicly traded
securities, and a Portfolio may take longer to liquidate these positions than
would be the case for publicly traded securities. Although these securities may
be resold in privately negotiated transactions, the prices realized from these
sales could be less than those originally paid by the Portfolio. Further,
companies whose securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements that would be applicable
if their securities were publicly traded. A Portfolio's investment in illiquid
securities is subject to the risk that should the Portfolio desire to sell any
of these securities when a ready buyer is not available at a price that is
deemed to be representative of their value, the value of the Portfolio's net
assets could be adversely affected.
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
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<PAGE> 34
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 the Portfolio's limits 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 may consider,
inter alia, the following factors: (i) the unregistered nature of the security;
(ii) the frequency of trades and quotes for the security; (iii) the number of
dealers wishing to purchase or sell the security and the number of other
potential purchasers; (iv) dealer undertakings to make a market in the security
and (v) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer).
Investing in Rule 144A Securities could have the effect of increasing
the level of illiquidity in the Portfolios to the extent that qualified
institutional buyers are unavailable or uninterested in purchasing such
securities from the Portfolios. The Board may adopt guidelines and delegate to
CSAM the daily function of determining and monitoring the illiquidity of Rule
144A Securities, although the Board will retain ultimate responsibility for
liquidity determinations.
Small Capitalization and Emerging Growth Companies; Unseasoned Issuers.
Investments in small-and medium- sized and emerging growth companies and
companies with continuous operations of less than three years ("unseasoned
issuers"), which may include foreign securities, 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 these companies 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, may provide an
attractive investment opportunity. 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. Although investing in securities
of small- and medium-sized and emerging growth companies, unseasoned issuers or
issuers in "special situations" offers potential for above-average returns if
the companies are successful, the risk exists that the companies will not
succeed and the prices of the companies' shares could significantly decline in
value. Therefore, an investment in a Portfolio may involve a greater degree of
risk than an investment in other mutual funds that seek growth of capital or
capital appreciation by investing in better-known, larger companies.
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Borrowing. Each Portfolio may borrow up to 30% 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 the Portfolio's net
assets. Although the principal of such borrowings will be fixed, the Portfolio's
assets may change in value during the time the borrowing is outstanding. Each
Portfolio 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
sub-custodian, which may include the lender.
Non-Diversified Status. Each Portfolio 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 portfolio, each Portfolio 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. Each Portfolio's investments will be limited, however, in order to
qualify as a "regulated investment company" for purposes of the Code. To
qualify, each Portfolio will comply with certain requirements, including
limiting its investments so that at the close of each quarter of the taxable
year (i) not more than 25% of the market value of its total assets will be
invested in the securities of a single issuer or of two or more issuers in which
the Portfolio has 20% or more voting control and which are in similar or related
trades or businesses, and (ii) 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 Portfolio will not own
more than 10% of the outstanding voting securities of a single issuer.
Other Investment Limitations
The investment limitations numbered 1 through 9 may not be changed
without the affirmative vote of the holders of a majority of a Portfolio's
outstanding shares. Such majority is defined as the lesser of (i) 67% or more of
the shares present at the meeting, if the holders of more than 50% of the
outstanding shares of the Portfolio are present or represented by proxy, or (ii)
more than 50% of the outstanding shares. Investment limitations 10 through 13
may be changed by a vote of the Board at any time. If a percentage restriction
(other than the percentage limitation set forth in No. 1, below) 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 the Portfolio's assets will not constitute a violation of such
restriction.
A Portfolio may not:
1. Borrow money except that the Portfolio may (i) borrow from banks
for temporary or emergency purposes and (ii) 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 Portfolio may not exceed 30% of the value of the
Portfolio's total assets. For purposes of this restriction, short sales, the
entry into currency transactions, options, futures contracts, options on futures
contracts, forward
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<PAGE> 36
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 Portfolio'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 Portfolio may purchase or hold
fixed-income securities, including loan participations, assignments and
structured securities, lend portfolio securities and enter into repurchase
agreements.
4. 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 Portfolio's investment objective, policies and limitations
may be deemed to be underwriting.
5. Purchase or sell real estate or invest in oil, gas or mineral
exploration or development programs or oil, gas and mineral leases, except that
the Portfolio may invest in (i) securities secured by real estate, mortgages or
interests therein and (ii) securities of companies that invest in or sponsor
oil, gas or mineral exploration or development programs.
6. Make short sales of securities or maintain a short position,
except that the Portfolio may maintain short positions in forward currency
contracts, options, futures contracts and options on futures contracts and make
short sales "against the box."
7. Issue any senior security except as permitted under the 1940
Act.
8. Purchase securities on margin, except that the Portfolio 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 Portfolio may purchase
and sell futures contracts, including those relating to securities, currencies
and indexes, and options on futures contracts, securities, currencies or
indexes, and purchase and sell currencies or securities on a forward commitment
or delayed-delivery basis.
10. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition, reorganization or offer of
exchange or as otherwise permitted under the 1940 Act.
11. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
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<PAGE> 37
arrangements with respect to currency transactions, options, futures contracts,
and options on futures contracts.
12. Invest more than 15% of the value of the Portfolio'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, (a) repurchase agreements with
maturities greater than seven days, (b) VRDNs and master demand notes providing
for settlement upon more than seven days notice by the Portfolio and (c) time
deposits maturing in more than seven calendar days shall be considered illiquid
securities.
13. Make additional investments (including roll-overs) if the
Portfolio's borrowings exceed 5% of its net assets.
PORTFOLIO VALUATION
The following is a description of the procedures used by each Portfolio
in valuing its 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 OTC 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. If there are no such quotations, the
value of the securities will be taken to be the lowest bid quotation on the
exchange or market. 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, a Portfolio may employ
outside organizations (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 the Trust 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 and futures contracts for which market quotations
are not available and certain other assets of a Portfolio 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
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<PAGE> 38
York. Furthermore, trading takes place in various foreign markets on days which
are not business days in New York and days on which a Portfolio's net asset
value is not calculated. As a result, calculation of a Portfolio's net asset
value may not take place contemporaneously with the determination of the prices
of certain 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.
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.
No brokerage commissions are typically paid on purchases and sales of U.S.
Government Securities.
PORTFOLIO TRANSACTIONS
CSAM is responsible for establishing, reviewing and, where necessary,
modifying each Portfolio's investment program to achieve its investment
objectives. 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 OTC, depending on where it appears that
the best price or execution will be obtained. The purchase price paid by a
Portfolio to underwriters of newly issued securities usually includes a
concession paid by the issuer to the underwriter, and purchases of securities
from dealers, acting as either principals or agents in the after market, are
normally executed at a price between the bid and asked price, which includes a
dealer's mark-up or mark-down. Transactions on U.S. stock exchanges and some
foreign stock exchanges involve the payment of negotiated brokerage commissions.
On exchanges on which commissions are negotiated, the cost of transactions may
vary among different brokers. On most foreign exchanges, commissions are
generally fixed. There is generally no stated commission in the case of
securities traded in domestic or foreign OTC markets, but the price of
securities traded in OTC 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.
CSAM will select specific portfolio investments and effect transactions
for each Portfolio 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 dealers who provide
brokerage and research services (as those terms are defined in Section 28(e) of
the Securities Exchange Act of 1934) to a Portfolio 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
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overall responsibilities of CSAM. Research and other services received due to
brokerage business on behalf of the Portfolios may be useful to CSAM in serving
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 the Portfolios. Research may include furnishing advice, either
directly or through publications or writings, as to the value of securities, the
advisability of purchasing or selling specific securities and the availability
of securities or purchasers or sellers of securities; furnishing seminars,
information, analyses and reports concerning issuers, industries, securities,
trading markets and methods, legislative 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 December 31, 1998, no brokerage commissions were paid by the
Fixed Income and Global Fixed Income Portfolios 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 fees to CSAM under
its advisory agreements with each Portfolio are not reduced by reason of its
receiving any brokerage and research services.
The following table details amounts paid by each Portfolio in
commissions to broker-dealers for execution of portfolio transactions during the
period from March 31, 1997 (commencement of operations) through December 31,
1997 and the fiscal year ended December 31, 1998.
1997 1998
----------------- -----------------
Fixed Income Portfolio $18 $ 0
Global Fixed Income Portfolio $ 0 $ 0
The table below shows the amounts of outstanding repurchase agreements
that a Portfolio had, as of December 31, 1998, with Merrill Lynch & Co., one of
the regular broker-dealers of each Portfolio.
-------------------------------------------------------
Fixed Income Portfolio $ 38,000
-------------------------------------------------------
Global Fixed Income Portfolio $129,000
-------------------------------------------------------
Investment decisions for each Portfolio concerning specific portfolio
securities are made independently from those for other clients advised by CSAM.
Such other investment clients may invest in the same securities as a Portfolio.
When purchases or sales of the same security are made at substantially the same
time on behalf of such other clients, transactions are averaged as to price and
available investments allocated as to amount, in a manner which CSAM believes to
be equitable to each client, including the Portfolios. In some instances, this
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investment procedure may adversely affect the price paid or received by a
Portfolio or the size of the position obtained or sold for a Portfolio. To the
extent permitted by law, securities to be sold or purchased for a Portfolio may
be aggregated 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 or Credit Suisse Asset Management Securities, Inc. ("CSAMSI") or Credit
Suisse First Boston ("CS First Boston") or any affiliated person of such
companies.
Transactions for the Portfolios may be effected on foreign securities
exchanges. In transactions for securities not actively traded on a foreign
securities exchange, the Portfolios 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 Portfolio may participate, if and when practicable, in bidding for
the purchase of securities for the Portfolio's portfolio directly from an issuer
in order to take advantage of the lower purchase price available to members of
such a group. A Portfolio will engage in this practice, however, only when CSAM,
in its sole discretion, believes such practice to be otherwise in the
Portfolio's interest.
PORTFOLIO TURNOVER
A Portfolio'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.
The Portfolios do not intend to seek profits through short-term trading,
but the rate of turnover will not be a limiting factor when the Portfolios deem
it desirable to sell or purchase securities. Certain practices that may be
employed by each Portfolio could result in high portfolio turnover. For example,
portfolio securities may be sold in anticipation of a rise in interest rates
(market decline) or purchased in anticipation of a decline in interest rates
(market rise) and later sold. In addition, a security may be sold and another of
comparable quality purchased at approximately the same time to take advantage of
what CSAM believes to be a temporary disparity in the normal yield relationship
between the two securities. These yield disparities may occur for reasons not
directly related to the investment quality of particular issues or the general
movement of interest rates, such as changes in the overall demand for, or supply
of, various types of securities. In addition, options on securities may be sold
in anticipation of a decline in the price of the underlying security (market
decline) or purchased in anticipation of a rise in the price of the underlying
security (market rise) and later sold.
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It is not possible to predict the Portfolios' portfolio turnover rates.
High portfolio turnover rates (100% or more) may result in dealer markups 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 TRUST
Officers and Board of Trustees
The business and affairs of the Trust are managed by the Board of
Trustees in accordance with the laws of the Commonwealth of Massachusetts. The
Board elects officers who are responsible for the day-to-day operations of the
Trust and who execute policies authorized by the Board. Under the Trust's
Declaration of Trust, the Board may classify or reclassify any unissued shares
of the Trust 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 the Trust.
The names (and ages) of the Trust's Trustees and officers, their
addresses, present positions and principal occupations during the past five
years and other affiliations are set forth below.
Richard H. Francis (67) Trustee
40 Grosvenor Road Currently retired; Executive Vice President and
Short Hills, New Jersey 07078 Chief 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.
Jack W. Fritz (72) Trustee
2425 North Fish Creek Road Private investor; Consultant and Director of
P.O. Box 483 Fritz Broadcasting, Inc. and Fritz
Wilson, Wyoming 83014 Communications (developers and operators of
radio stations); Director of Advo, Inc. (direct
mail advertising); Director/Trustee of other
Warburg Pincus Funds.
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Jeffrey E. Garten (53) Trustee
Box 208200 Dean of Yale School of Management and William S.
New Haven, Connecticut Beinecke Professor in the Practice of
06520-8200 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) Trustee
29 The Trillium Currently retired; President and Chief Operating
Pittsburgh, Pennsylvania 15238 Officer of National InterGroup, Inc. from April
1989 to March 1991; Chairman of Permian Oil Co.
from April 1989 to March 1991; Director of
Education Management Corp., Tyco International
Ltd.; Trustee, BT Insurance Funds Trust;
Director/Trustee of other Warburg Pincus Funds
and other CSAM-advised investment companies.
William W. Priest* (58) Chairman of the Board
153 East 53rd Street Chairman- Management Committee, Chief Executive
New York, New York 10022 Officer and 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.
Steven N. Rappaport (51) Trustee
40 East 52nd Street, President of Loanet, Inc. since 1997; Executive
New York, New York 10022 Vice President of Loanet, Inc. from 1994 to
1997; Director, President, North American
Operations, and former Executive Vice President
from 1992 to 1993 of Worldwide Operations of
Metallurg Inc.; Executive Vice President,
Telerate, Inc. from 1987 to 1992; Partner in the
law firm of Hartman & Craven until 1987;
Director/Trustee of other Warburg Pincus Funds
and other CSAM-advised investment companies.
- -------------------------
* Indicates a Director/Trustee who is an "interested person" of the Fund as
defined in the 1940 Act.
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<PAGE> 43
Alexander B. Trowbridge (70) Trustee
1317 F Street, N.W., 5th Floor Currently retired; President of Trowbridge
Washington, DC 20004 Partners, Inc. (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
New York, New York 10017-3147 since CSAM acquired the Portfolios' predecessor
adviser in July 1999; with the predecessor
adviser since 1991; Vice President of Citibank,
N.A. from 1987 to 1991; Officer of CSAMSI and of
other Warburg Pincus Funds.
Hal Liebes, Esq. (35) Vice President and Secretary
153 East 53rd Street Managing Director and General Counsel of CSAM;
New York, New York 10022 Associated 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
New York, New York 10022 Administration of CSAM; Associated with CSAM
since 1984; Officer of other Warburg Pincus
Funds and other CSAM-advised investment
companies.
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Stuart J. Cohen, Esq. (31) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel of CSAM;
New York, New York 10017-3147 Associated with CSAM since CSAM acquired the
Portfolios' 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
New York, New York 10022 Officer of 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.
No employee of CSAM or PFPC Inc., the Trust's co-administrator ("PFPC"), or any
of their affiliates receives any compensation from the Trust for acting as an
officer or Trustee of the Trust. For each fund in the Warburg Pincus family of
funds, each Director/Trustee who is not a director, trustee, officer or employee
of CSAM, PFPC or any of their affiliates receives an annual fee of $500, $1,000
or $2,000 per fund for Director/Trustee services provided, $250 for each Board
meeting attended and $250 for each Audit Committee meeting attended ($325 for
the Chairman of the Audit Committee), in addition to reimbursement for expenses
incurred in connection with attendance at Board meetings.
Trustees' Compensation
(for the fiscal year ended December 31, 1998)
<TABLE>
<CAPTION>
Total Total Compensation from
Compensation from all Investment Companies in
Name of Trustee Trust Warburg Pincus Fund Complex*
- --------------------------- ------------------------------- --------------------------------
<S> <C> <C>
William W. Priest** None None
Arnold M. Reichman*** None None
Richard N. Cooper**** $2,150 $56,600
Donald J. Donahue**** $475 $13,525
Richard H. Francis***** None None
Jack W. Fritz $2,400 $63,100
</TABLE>
-40-
<PAGE> 45
<TABLE>
<S> <C> <C>
Jeffrey E. Garten***** $1,925 $49,325
Thomas A. Melfe**** $2,400 $60,700
James S. Pasman, Jr. ***** None None
Steven N. Rappaport***** None None
Alexander B. Trowbridge $2,250 $64,000
</TABLE>
- ---------------------------
* Each Trustee also serves as a Director or Trustee of 51 investment
companies or portfolios in the Warburg Pincus family of funds.
** Mr. Priest receives compensation as an affiliate of CSAM, and,
accordingly, receives no compensation from the Trust or any other
investment company in the Warburg Pincus family of funds.
*** Mr. Reichman resigned as a Trustee of the Trust effective August 18,
1999.
**** Mr. Donahue resigned as Trustee of the Trust effective February 6, 1998.
Messrs. Cooper and Melfe resigned as Trustees of the Trust effective
July 6, 1999.
***** Mr. Garten became a Trustee of the Trust effective February 6, 1998.
Messrs. Francis, Pasman and Rappaport became Trustees of the Trust
effective July 6, 1999.
As of March 30, 1999, no Trustees or officers of the Trust owned any of
the outstanding shares of the Portfolios.
Portfolio Managers
M. Anthony E. van Daalen, Portfolio Manager of the Fixed Income
Portfolio, also manages other Warburg Pincus Funds. Mr. van Daalen has been
associated with CSAM since CSAM acquired the Portfolios' predecessor adviser in
July 1999 and joined the predecessor adviser in 1992. Prior to that Mr. van
Daalen was an assistant vice president, portfolio manager at Citibank in the
Private Banking Group from 1985 to 1991. Mr. van Daalen was a retail banking
manager at The Connecticut Bank and Trust Co. from 1983 to 1985 and an analyst
at Goldstein/Krall Market Research from 1982 to 1983. Mr. van Daalen earned a
B.A. degree from Wesleyan University and a M.B.A. degree from New York
University.
Charles C. Van Vleet, Portfolio Manager of the Global Fixed Income
Portfolio, also manages other Warburg Pincus Funds. Mr. Van Vleet has been
associated with CSAM since CSAM acquired the Portfolios' predecessor adviser in
July 1999 and joined the predecessor adviser in 1998. Prior to that Mr. Van
Vleet was a senior vice president and senior global strategist at Putnam
Investment Management from 1994 to 1998. Mr. Van Vleet served as vice president
and senior portfolio manager at Alliance Capital Management. Mr. Van Vleet
earned a B.A. degree from the University of California, Berkeley.
Investment Adviser and Co-Administrators
CSAM, located at 153 East 53rd Street, New York, New York 10022, serves
as investment adviser to the Portfolios. CSAM is an indirect wholly-owned U.S.
subsidiary of Credit Suisse Group ("Credit Suisse"). Credit Suisse is a global
financial services company,
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<PAGE> 46
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 the Portfolios. 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 Portfolios' 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.
CSAM serves as investment adviser to each Portfolio, CSAMSI serves as a
co-administrator to the Trust and PFPC serves as a co-administrator to the Trust
pursuant to separate written agreements (the "Advisory Agreements," the "CSAMSI
Co-Administration Agreement" and the "PFPC Co-Administration Agreement,"
respectively). CSAMSI became co-administrator to the Trust on November 1, 1999.
Prior to that, Counsellors Funds Service, Inc. ("Counsellors Service") served as
co-administrator to the Trust. CSAM, subject to the control of the Trust's
officers and the Board, manages the investment and reinvestment of the assets of
the Portfolios in accordance with each Portfolio's investment objective and
stated investment policies. CSAM makes investment decisions for each Portfolio
and places orders to purchase or sell securities on behalf of the Portfolio.
CSAM also employs a support staff of management personnel to provide services to
the Trust and furnishes the Trust with office space, furnishings and equipment.
For the services provided by CSAM, the Trust pays CSAM a fee calculated
at an annual rate equal to percentages of the relevant Portfolio's average daily
net assets, as follows: Fixed Income Portfolio --.50% and Global Fixed Income
Portfolio -- 1.00%. CSAM and the Portfolios' co-administrators may voluntarily
waive a portion of their fees from time to time and temporarily limit the
expenses to be borne by the Portfolios.
As co-administrator, CSAMSI provides shareholder liaison services to the
Portfolios, including responding to shareholder inquiries and providing
information on shareholder investments. CSAMSI also performs a variety of other
services, including furnishing certain executive and administrative services,
acting as liaison between each Portfolio and its various service providers,
furnishing corporate secretarial services, which include preparing materials for
meetings of the Board, preparing proxy statements and annual and semiannual
reports, assisting in the preparation of tax returns and developing and
monitoring compliance procedures for the Portfolios. As compensation, each
Portfolio pays CSAMSI a fee calculated at an annual rate of .10% of the
Portfolio's average daily net assets.
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<PAGE> 47
As a co-administrator, PFPC calculates each Portfolio's net asset value,
provides all accounting services for the Portfolios and assists in related
aspects of the Portfolios' operations. As compensation, each Portfolio pays PFPC
a fee calculated at an annual rate of .05% of average daily net assets. PFPC has
its principal offices at 400 Bellevue Parkway, Wilmington, Delaware 19809.
The advisory fees earned by CSAM's predecessor, Warburg, and the
co-administration fees earned by PFPC and Counsellors Service (the Portfolios'
predecessor co-administrator), respectively, for the period from March 31, 1997
(commencement of operations) to December 31, 1997 and for the fiscal year ended
December 31, 1998 are described below.
Advisory Fees earned by Warburg for the fiscal years ended December 31
(portions of fees waived, if any, are noted in parentheses next to the amount
earned)*
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
1997 1998
---- ----
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Income $ 2,166 ($2,166) $ 6,619 ($ 6,619)
- ------------------------------------------------------------------------------------
Global Fixed
Income $12,047 ($12,047) $16,787 ($16,787)
- ------------------------------------------------------------------------------------
</TABLE>
- ------------------
* During the periods ended December 31, 1997 and 1998, Warburg also
reimbursed expenses of $53,791 and $50,074, respectively, to the Fixed
Income Portfolio and $50,728 and $32,729, respectively, to the Global
Fixed Income Portfolio.
Co-Administration Fees earned by PFPC for the fiscal years ended December 31
(portions of fees waived, if any, are noted in parentheses next to the amount
earned)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
1997 1998
---- ----
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Income $216 ($216) $4,662 ($662)
- ------------------------------------------------------------------------------------
Global Fixed Income $602 ($602) $2,911 ($839)
- ------------------------------------------------------------------------------------
</TABLE>
Co-Administration Fees earned by Counsellors Service (the Portfolios'
predecessor co-administrator for the fiscal years ended December 31
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
1997 1998
---- ----
- ----------------------------------------------------------------------
<S> <C> <C>
Fixed Income $433 $1,324
- ----------------------------------------------------------------------
Global Fixed Income $1,205 $1,679
- ----------------------------------------------------------------------
</TABLE>
Custodians and Transfer Agent
PFPC Trust Company ("PFPC Trust") serves as custodian of each
Portfolio's U.S. assets and State Street Bank and Trust Company ("State Street")
serves as custodian of each Portfolio's non-U.S. assets. Each custodian serves
pursuant to separate custodian agreements (the "Custodian Agreements"). Under
the Custodian Agreements PFPC Trust and
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<PAGE> 48
State Street each (i) maintains a separate account or accounts in the name of
the relevant Portfolio, (ii) holds and transfers portfolio securities on account
of the relevant Portfolio, (iii) makes receipts and disbursements of money on
behalf of the relevant Portfolio, (iv) collects and receives all income and
other payments and distributions on account of the relevant Portfolio's
portfolio securities held by it and (v) makes periodic reports to the Board
concerning the Trust's custodial arrangements. PFPC Trust may delegate its
duties under its Custodian Agreement with the Trust to a wholly owned direct or
indirect subsidiary of PFPC Trust or PNC Bank Corp. upon notice to the Trust and
upon the satisfaction of certain other conditions. State Street is authorized to
select one or more foreign banking institutions and foreign securities
depositaries as sub-custodian on behalf of the relevant Portfolio and PFPC Trust
is authorized to select one or more domestic banks or trust companies to serve
as sub-custodian on behalf of the Portfolios. 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, Suite 440, 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 the Trust pursuant to a Transfer Agency and Service
Agreement, under which State Street (i) issues and redeems shares of each
Portfolio, (ii) addresses and mails all communications by the Trust to record
owners of Portfolio 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 Trust. 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, Boston, Massachusetts 02171.
Distribution and Shareholder Servicing
Distributor . Provident Distributors, Inc. ("PDI") serves as the
distributor of the Portfolios shares. PDI offers each Portfolio's shares on a
continuous basis. No compensation is payable by the Portfolios to PDI for
distribution services, however, pursuant to a separate agreement with CSAM, PDI
is compensated for the services provided to the Portfolios. PDI's principal
business address is Four Falls Corporate Center, West Conshohocken, Pennsylvania
19428-2961.
Shareholder Servicing. The Trust has authorized certain insurance
companies ("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 relevant Portfolio'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
Trust 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 Trust in proper form will be priced at the
relevant Portfolio's net asset value
-44-
<PAGE> 49
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 a Portfolio's shares are purchased directly from the Trust.
For administration, subaccounting, transfer agency and/or other
services, CSAM or its affiliates may pay Service Organizations a fee of up to
.35% of the average annual value of accounts with the Trust 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.
Organization of the Trust
The Trust was organized on December 16, 1996 under the laws of the
Commonwealth of Massachusetts as a "Massachusetts business trust." The Trust's
Declaration of Trust authorizes the Board to issue an unlimited number of full
and fractional shares of beneficial interest, $.001 par value per share. Shares
of two series have been authorized, which constitute the interests in the
Portfolios. The Board may classify or reclassify any of its shares into one or
more additional series without shareholder approval.
When matters are submitted for shareholder vote, shareholders of each
Portfolio will have one vote for each full share held and fractional votes for
fractional shares held. Generally, shares of the Trust will vote by individual
Portfolio on all matters except where otherwise required by law. There will
normally be no meetings of shareholders for the purpose of electing Trustees
unless and until such time as less than a majority of the members holding office
have been elected by shareholders. Shareholders of record of no less than
two-thirds of the outstanding shares of the Trust may remove a Trustee through a
declaration in writing or by vote cast in person or by proxy at a meeting called
for that purpose. A meeting will be called for the purpose of voting on the
removal of a Trustee at the written request of holders of 10% of the Trust's
outstanding shares. Under current law, a Participating Insurance Company is
required to request voting instructions from Variable Contract owners and must
vote all Trust shares held in the separate account in proportion to the voting
instructions received. Plans may or may not pass through voting rights to Plan
participants, depending on the terms of the Plan's governing documents. For a
more complete discussion of voting rights, refer to the sponsoring Participating
Insurance Company separate account prospectus or the Plan documents or other
informational materials supplied by Plan sponsors.
Each Portfolio may compare its performance with (i) that of other mutual
funds with similar investment objectives and policies, which may be based on the
rankings prepared by Lipper Analytical Services, Inc. or similar investment
services that monitor the performance of mutual funds; (ii) in the case of the
Fixed Income Portfolio, with the Lehman Intermediate Government/Corporate Bond
Index (an unmanaged index of government and corporate bonds calculated by Lehman
Brothers); in the case of the Global Fixed Income Portfolio, with the Salomon
Brothers World Government Bond Index (a hedged, market-
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<PAGE> 50
capitalization weighted index designed to track major government debt markets),
Lehman Brothers Aggregate Index and the Lipper World Income Average (an average
of funds that invest primarily in non-U.S. dollar and U.S. dollar debt
instruments); in the case of the Intermediate Government Fund, with the Lehman
Intermediate Government Bond Index (an unmanaged index of government bonds
calculated by Lehman Brothers); and in the case of the New York Municipal
Portfolio, with the Lehman 5-Year Municipal Bond Index and the Lipper New York
Intermediate Municipal Debt Funds Average (an unmanaged index of 61 Intermediate
Municipal Debt Funds calculated by Lipper Analytical Services); or (iii) other
appropriate indexes of investment securities or with data developed by CSAM
derived from such indexes. A Portfolio may also include evaluations of the
Portfolio published by nationally recognized ranking services and by financial
publications such as Barron's, Business Week, Financial Times, Forbes, Fortune,
Inc., Institutional Investor, Investor's Business Daily, Money, Morningstar,
Mutual Fund Magazine, SmartMoney, The Wall Street Journal and Worth.
Morningstar, Inc. rates funds in broad categories based on risk/reward analyses
over various time periods. In addition, each Portfolio may from time to time
compare its expense ratio to that of investment companies with similar
objectives and policies, based on data generated by Lipper Analytical Services,
Inc. or similar investment services that monitor mutual funds.
Massachusetts law provides that shareholders could, under certain
circumstances, be held personally liable for the obligations of a Portfolio.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration of Trust provides for indemnification from a
Portfolio's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the relevant Portfolio would be unable to meet
its obligations, a possibility that CSAM believes is remote and immaterial. Upon
payment of any liability incurred by the Trust, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the
relevant Portfolio. The Trustees intend to conduct the operations of the Trust
in such a way so as to avoid, as far as possible, ultimate liability of the
shareholders for liabilities of the Trust.
All shareholders of a Portfolio, upon liquidation, will participate
ratably in the Portfolio'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 Trustees can elect all Trustees. Shares are transferable but have no
preemptive, conversion or subscription rights.
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<PAGE> 51
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Portfolios may not be purchased or redeemed by individual
investors directly but may be purchased or redeemed only through Variable
Contracts offered by separate accounts of Participating Insurance Companies and
through Plans, including participant-directed Plans which elect to make a
Portfolio an investment option for Plan participants. The offering price of each
Portfolio's shares is equal to its per share net asset value.
Under the 1940 Act, a Portfolio may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
NYSE is closed, other than customary weekend and holiday closings, or during
which trading on the NYSE is restricted, or during which (as determined by the
SEC) an emergency exists as a result of which disposal or fair valuation of
portfolio securities is not reasonably practicable, or for such other periods as
the SEC may permit. (A Portfolio may also suspend or postpone the recordation of
an exchange of its shares upon the occurrence of any of the foregoing
conditions.)
If conditions exist which make payment of redemption proceeds wholly in
cash unwise or undesirable, a Portfolio 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. The Trust intends to
comply with Rule 18f-1 promulgated under the 1940 Act with respect to
redemptions in kind.
ADDITIONAL INFORMATION CONCERNING TAXES
The discussion set out below of tax considerations generally affecting
the Trust and its shareholders is intended to be only a summary and is not
intended as a substitute for careful tax planning by prospective shareholders.
Shareholders are advised to consult the sponsoring Participating Insurance
Company separate account prospectus or the Plan documents or other informational
materials supplied by Plan sponsors and their own tax advisers with respect to
the particular tax consequences to them of an investment in a Portfolio.
Each Portfolio intends to qualify as a "regulated investment company"
under Subchapter M of the Code. If it qualifies as a regulated investment
company, a Portfolio will effectively pay no federal income taxes on its taxable
net investment income (that is, taxable income other than net realized capital
gains) and its net realized capital gains that are distributed to shareholders.
To qualify under Subchapter M, a Portfolio must, among other things: (i)
distribute to its shareholders the sum of at least 90% of its taxable net
investment income (for this purpose consisting of taxable net investment income
and net realized short-term capital gains) plus at least 90% of its net
tax-exempt interest income; (ii) derive at least 90% of its gross income from
dividends, interest, payments with respect to loans of securities, gains from
the sale or other disposition of stock, securities or foreign currencies, or
other income (including, but not limited to, gains from options, futures, and
forward
-47-
<PAGE> 52
contracts) derived with respect to its business of investing in such stock,
securities or foreign currencies; and (iii) diversify its holdings so that, at
the end of each fiscal quarter of the Portfolio (a) at least 50% of the market
value of the Portfolio's assets is represented by cash, U.S. Government
Securities, securities of other regulated investment companies and other
securities, with those other securities limited, with respect to any one issuer,
to an amount no greater in value than 5% of the Portfolio's total assets and to
not more than 10% of the outstanding voting securities of the issuer, and (b)
not more than 25% of the market value of the Portfolio's assets is invested in
the securities of any one issuer (other than U.S. Government Securities or
securities of other regulated investment companies) or of two or more issuers
that the Portfolio controls and that are determined to be in the same or similar
trades or businesses or related trades or businesses.
If, in any taxable year, a Portfolio 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 Portfolio in
computing its taxable income. In addition, in the event of a failure to qualify,
the Portfolio's distributions, to the extent derived from the Portfolio'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 Portfolio 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 a
Portfolio failed to qualify as a regulated investment company for a period
greater than one taxable year, the Portfolio 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.
In addition, each Portfolio intends to comply with the diversification
requirements of Section 817(h) of the Code related to the tax-deferred status of
insurance company separate accounts. To comply with regulations under Section
817(h) of the Code, each Portfolio will be required to diversify its investments
so that on the last day of each calendar quarter no more than 55% of the value
of its assets is represented by any one investment, no more than 70% is
represented by any two investments, no more than 80% is represented by any three
investments and no more than 90% is represented by any four investments.
Generally, all securities of the same issuer are treated as a single investment.
For the purposes of Section 817(h), obligations of the United States Treasury
and each U.S. government agency or instrumentality are treated as securities of
separate issuers. The Treasury Department has indicated that it may issue future
pronouncements addressing the circumstances in which a Variable Contract owner's
control of the investments of a separate account may cause the Variable Contract
owner, rather than the Participating Insurance Company, to be treated as the
owner of the assets held by the separate account. If the Variable Contract owner
is considered the owner of the securities underlying the separate account,
income and gains produced by those securities would be included currently in the
Variable Contract owner's gross income. It is not known what standards will be
set forth in such pronouncements or when, if at all, these pronouncements may be
issued. In the event
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<PAGE> 53
that rules or regulations are adopted, there can be no assurance that the
Portfolios will be able to operate as currently described, or that the Trust
will not have to change the investment goal or investment policies of a
Portfolio. While a Portfolio's investment goal is fundamental and may be changed
only by a vote of a majority of the Portfolio's outstanding shares, the Board
reserves the right to modify the investment policies of a Portfolio as necessary
to prevent any such prospective rules and regulations from causing a Variable
Contract owner to be considered the owner of the shares of the Portfolio
underlying the separate account.
A Portfolio's short sales against the box, if any, and transactions, if
any, in foreign currencies, forward contracts, options and futures contracts
(including options, futures contracts and forward 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 recognized by the Portfolio
(i.e., may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Portfolio, defer Portfolio losses and cause the
Portfolio to be subject to hyperinflationary currency rules. These rules could
therefore affect the character, amount and timing of distributions to
shareholders. These provisions also (i) will require a Portfolio to
mark-to-market certain types of its positions (i.e., treat them as if they were
closed out) and (ii) may cause the Portfolio 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 Portfolio 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 a short sale against-the-box or acquires any foreign
currency, forward contract, option, futures contract or hedged investment so
that (a) neither the Portfolio nor its shareholders will be treated as receiving
a materially greater amount of capital gains or distributions than actually
realized or received, (b) the Portfolio will be able to use substantially all of
its losses for the fiscal years in which the losses actually occur and (c) the
Portfolio will continue to qualify as a regulated investment company.
Investments by a Portfolio in zero coupon securities may create special
tax consequences. Zero coupon securities do not make interest payments, although
a portion of the difference between a zero coupon security's face value and its
purchase price is imputed as income to the Portfolio each year even though the
Portfolio receives no cash distribution until maturity. Under the U.S. federal
tax laws, the Portfolio will not be subject to tax on this income if it pays
dividends to its shareholders substantially equal to all the income received
from, or imputed with respect to, its investments during the year, including its
zero coupon securities. These dividends ordinarily will constitute taxable
income to the shareholders of the Portfolio.
Because shares of a Portfolio may only be purchased through Variable
Contracts and Plans, it is anticipated that dividends and distributions will be
exempt from current taxation if left to accumulate within the Variable Contracts
or Plans.
Income received by a Portfolio from investments in foreign securities
may be subject to withholding and other taxes imposed by foreign countries. The
foreign taxes paid by a Portfolio will reduce its return from investments in
such Portfolio.
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<PAGE> 54
DETERMINATION OF PERFORMANCE
From time to time, a Portfolio may quote its total return or yield in
advertisements or in reports and other communications to shareholders. The
average annual total returns for the Portfolios for the fiscal periods ended
December 31, 1998, were as follows (performance figures calculated without the
waiver of fees by a Portfolio's service providers, if any, are noted in
italics):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
One-Year Since Inception (Date)
-------- ----------------------
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Income 8.08% 5.87% 17.76% 7.38%
(3/31/97)
- -----------------------------------------------------------------------------------
Global Fixed Income 12.09% 8.81% 15.47% 8.22%
(3/31/97)
- -----------------------------------------------------------------------------------
</TABLE>
These total return figures show the average percentage change in value
of an investment in a Portfolio from the beginning of the measurement period to
the end of the measurement period. The figures reflect changes in the price of
the Portfolio's shares assuming that any income dividends and/or capital gain
distributions made by the Portfolio during the period were reinvested in shares
of the Portfolio. 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 Portfolio's operations or on a year-by-year, quarterly or current
year-to-date basis).
Total return is calculated by finding the average annual compounded
rates of return for the one-, five-, and ten- (or such shorter period as the
Portfolio has been offered) year periods that would equate the initial amount
invested to the ending redeemable value according to the following formula: P (1
n
+ 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
Portfolio's return over a longer market cycle. A Portfolio may also advertise
aggregate total return figures for various periods, representing the cumulative
change in value of an investment in the relevant Portfolio 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).
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<PAGE> 55
A Portfolio may advertise, from time to time, comparisons of its
performance with that of one or more other mutual funds with similar investment
objectives. A Portfolio 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 Portfolio's total return in longer
market cycles.
Yield is calculated by annualizing the net investment income
generated by a Portfolio over a specified thirty-day period according to the
following formula:
6
YIELD = 2[( a-b +1) -1]
---
cd
For purposes of this formula: "a" is dividends and interest earned
during the period; "b" is expenses accrued for the period (net of
reimbursements); "c" is the average daily number of shares outstanding during
the period that were entitled to receive dividends; and "d" is the maximum
offering price per share on the last day of the period.
Each Portfolio's 30-day annualized current yield as of December 31, 1998
was as follows (figures calculated without the waiver of fees by a Portfolio's
service provider(s), if any, are noted in italics):
<TABLE>
<CAPTION>
With waivers Without waivers
------------ ---------------
<S> <C> <C>
Fixed Income: 4.63% (1.05%)
Global Fixed Income: 4.71% (0.43%)
</TABLE>
A Portfolio's performance will vary from time to time depending upon
market conditions, the composition of its 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 Portfolio's performance will fluctuate, unlike certain bank deposits or other
investments which pay a fixed yield for a stated period of time. Performance
quotations for the Portfolios include the effect of deducting each Portfolio's
expenses, but may not include charges and expenses attributable to any
particular Variable Contract or Plan, which would reduce the returns described
in this section.
Each Portfolio may compare its performance with (i) that of other mutual
funds with similar investment objectives and policies, which may be based on the
rankings prepared by Lipper Analytical Services, Inc. or similar investment
services that monitor the performance of mutual funds; (ii) in the case of the
Fixed Income Portfolio, with the Lehman Intermediate Government/Corporate Bond
Index (an unmanaged index of government and corporate bonds calculated by Lehman
Brothers); and in the case of the Global Fixed Income Portfolio, with the
Salomon Brothers World Government Bond Index (a hedged, market-capitalization
weighted index designed to track major government debt markets), Lehman
-51-
<PAGE> 56
Brothers Aggregate Index and the Lipper World Income Average (an average of
funds that invest primarily in non-U.S. dollar and U.S. dollar debt
instruments); or (iii) other appropriate indexes of investment securities or
with data developed by CSAM derived from such indexes. A Portfolio may also
include evaluations of the Portfolio published by nationally recognized ranking
services and by financial publications such as Barron's, Business Week,
Financial Times, Forbes, Fortune, Inc., Institutional Investor, Investor's
Business Daily, Money, Morningstar, Mutual Portfolio Magazine, SmartMoney, The
Wall Street Journal and Worth. Morningstar, Inc. rates funds in broad categories
based on risk/reward analyses over various time periods. In addition, each
Portfolio may from time to time compare its expense ratio to that of investment
companies with similar objectives and policies, based on data generated by
Lipper Analytical Services, Inc. or similar investment services that monitor
mutual funds.
In reports or other communications to investors or in advertising, each
Portfolio may also describe the general biography or work experience of the
portfolio managers of the Portfolio and may include quotations attributable to
the portfolio managers describing approaches taken in managing the Portfolio's
investments, research methodology underlying stock selection or the Portfolio's
investment objective. In addition, a Portfolio and its portfolio managers may
render periodic updates of Portfolio activity, which may include a discussion of
significant portfolio holdings; analysis of holdings by industry, country,
credit quality and other characteristics; and comparison and analysis of the
Portfolio with respect to relevant market industry benchmarks. Each Portfolio
may also discuss measures of risk, the continuum of risk and return relating to
different investments and the potential impact of foreign stocks on a portfolio
otherwise composed of domestic securities.
INDEPENDENT ACCOUNTANTS AND COUNSEL
PricewaterhouseCoopers LLP ("PwC"), with principal offices at 2400
Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as independent
accountants for the Trust. The financial statements that are incorporated by
reference in this Statement of Additional Information have been audited by PwC,
whose report thereon appears elsewhere herein and have been included 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 the Trust and provides
legal services from time to time for CSAM and CSAMSI.
FINANCIAL STATEMENTS
The Trust's audited Annual Report dated December 31, 1998, which either
accompanies this Statement of Additional Information or has previously been
provided to the investor to whom this Statement of Additional Information is
being sent, is incorporated herein by reference with respect to all information
regarding the Portfolios included therein. The Trust will furnish without charge
a copy of its Annual Report upon request by calling the Trust at 1-800-222-8977.
-52-
<PAGE> 57
MISCELLANEOUS
The Portfolios and the Trust 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 Portfolios or any member
of the public regarding the advisability of investing in securities generally or
in the Portfolios 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 Portfolios' net asset value,
nor is Warburg, Pincus & Co. a distributor of the Portfolios. Warburg, Pincus &
Co. has no obligation or liability in connection with the administration,
marketing or trading of the Portfolios.
As of March 30, 1999, the following persons owned of record 5% or more
of each Portfolio's outstanding shares:
FIXED INCOME PORTFOLIO
United Life & Annuity 77.80%
Separate Account One
c/o Marketing One Inc.
Attn: Ron Hyde
851 SW Sixth Avenue
Portland, OR 97204
Warburg Pincus Asset Mgmt 22.20%
Attn: Stephen Distler
466 Lexington Ave., 10th Floor
New York, NY 10017-3140
GLOBAL FIXED INCOME PORTFOLIO
Warburg Pincus Asset Mgmt 100.00%
Attn: Stephen Distler
466 Lexington Ave., 10th Floor
New York, NY 10017-3140
-53-
<PAGE> 58
APPENDIX
DESCRIPTION OF RATINGS
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 they are 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 has 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, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly 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 C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, they face 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
have 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
<PAGE> 59
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 from
"AA" to "CCC" may be modified by the addition of a plus or minus sign to show
relative standing within this major rating category.
D - Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The following summarizes the ratings used by Moody's for corporate
bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal
<PAGE> 60
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 are 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.
Short-Term Note Ratings
The following summarizes the two highest ratings used by S&P for
short-term notes:
SP-1 - Loans bearing this designation evidence a very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics will be given a plus sign designation.
SP-2 - Loans bearing this designation evidence a satisfactory capacity
to pay principal and interest.
The following summarizes the two highest ratings used by Moody's for
short-term notes and variable rate demand obligations:
MIG-1/VMIG-1 - Obligations bearing these designations are of the best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established and broad-based access to the market for
refinancing, or both.
<PAGE> 61
MIG-2/VMIG-2 - Obligations bearing these designations are of high
quality with margins of protection ample although not so large as in the
preceding group.
Commercial Paper Ratings
The following summarizes the two highest ratings for commercial paper
used by S&P and Moody's, respectively:
Commercial paper rated A-1 by S&P's 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. 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.
Municipal Obligations Ratings
The following summarizes the ratings used by S&P for Municipal
Obligations:
AAA - This is the highest rating assigned by S&P to a debt obligation
and indicates an extremely strong capacity to pay interest and repay principal.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although they are 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 has an
adequate capacity to pay interest and repay principal. Although adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than in
higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C 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 C the highest degree of
speculation. While such bonds will likely have
<PAGE> 62
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB - Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, they face 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 - Bonds rated B have a greater vulnerability to default but currently
have 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 from
"AA" to "CCC" may be modified by the addition of a plus or minus sign to show
relative standing within this major rating category.
D - Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The following summarizes the highest four municipal ratings used by
Moody's:
Aaa - Bonds which 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 edge."
<PAGE> 63
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 which are rated as are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
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.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1, and B1.
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 are 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.
