<PAGE> 1
As filed with the U.S. Securities and Exchange Commission
on April 26, 2000
Securities Act File No. 333-19175
Investment Company Act File No. 811-07999
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 5 [x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
Amendment No. 6 [x]
(Check appropriate box or boxes)
Warburg, Pincus Trust II
(Exact Name of Registrant as Specified in Charter)
466 Lexington Avenue
New York, New York 10017-3147
........................................ ..................
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code:
(212) 878-0600
Hal Liebes, Esq.
Warburg, Pincus Trust II
466 Lexington Avenue
New York, New York 10017-3147
.........................................
(Name and Address of Agent for Service)
Copy to:
Rose F. DiMartino, Esq.
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019-6099
<PAGE> 2
Approximate Date of Proposed Public Offering: May 1, 2000
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[x] on May 1, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
<PAGE> 3
[Warburg Pincus Logo] [Credit Suisse Logo]
PROSPECTUS
May 1, 2000
WARBURG PINCUS TRUST II
- FIXED INCOME PORTFOLIO
Warburg Pincus Trust II shares are not available directly to
individual investors, but may be offered only through certain
insurance products and pension and retirement plans.
As with all mutual funds, the Securities and Exchange Commission
has not approved these securities, nor has it passed upon the
adequacy or accuracy of this Prospectus. It is a criminal
offense to state otherwise.
The Trust is advised by Credit Suisse Asset Management, LLC.
<PAGE> 4
CONTENTS
<TABLE>
<S> <C>
KEY POINTS........................ ......................... 4
Goal and Principal Strategies............................ 4
Investor Profile......................................... 4
A Word About Risk........................................ 5
PERFORMANCE SUMMARY.................... .................... 6
Year-by-Year Total Returns............................... 6
Average Annual Total Returns............................. 7
INVESTOR EXPENSES..................... ..................... 8
Fees and Portfolio Expenses.............................. 8
Example.................................................. 8
THE PORTFOLIO IN DETAIL.................. .................. 9
The Management Firm...................................... 9
Portfolio Information Key................................ 9
Goal and Strategies...................................... 10
Portfolio Investments.................................... 10
Risk Factors............................................. 10
Portfolio Management..................................... 10
Investor Expenses........................................ 10
Financial Highlights..................................... 11
MORE ABOUT RISK...................... ...................... 12
Introduction............................................. 12
Types of Investment Risk................................. 12
Certain Investment Practices............................. 14
MEET THE MANAGER..................... ...................... 16
ABOUT YOUR ACCOUNT.................... ..................... 17
Share Valuation.......................................... 17
Distributions............................................ 17
Taxes.................................................... 17
BUYING AND SELLING SHARES................. ................. 18
FOR MORE INFORMATION................... .................... back cover
</TABLE>
3
<PAGE> 5
KEY POINTS
GOAL AND PRINCIPAL STRATEGIES
<TABLE>
<CAPTION>
PORTFOLIO/RISK FACTORS GOAL STRATEGIES
<S> <C> <C>
FIXED INCOME PORTFOLIO Total return consistent with prudent - Invests in fixed-income securities
Risk factors: investment management denominated primarily in U.S. dollars
Market risk - Normally maintains a weighted-average
Interest-rate risk portfolio maturity of 10 years or less
Credit risk - Favors investment-grade securities, but
Non-diversified status may diversify credit quality in pursuit of
its goal
</TABLE>
INVESTOR PROFILE
THIS PORTFOLIO IS DESIGNED FOR INVESTORS WHO:
- are seeking investment income
- are looking for higher potential returns than money-market funds and are
willing to accept moderate risk and volatility
- want to diversify their investments with a fixed-income fund
IT MAY NOT BE APPROPRIATE IF YOU:
- are investing for maximum return over a long time horizon
- require stability of your principal
You should base your investment decision on your own goals, risk preferences
and time horizon.
4
<PAGE> 6
A WORD ABOUT RISK
All investments involve some level of risk. Simply defined, risk is the
possibility that you will lose money or not make money.
Principal risk factors for the portfolio are discussed below. Before you
invest, please make sure you understand the risks that apply to the portfolio.
As with any mutual fund, you could lose money over any period of time.
Investments in the portfolio are not bank deposits and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
MARKET RISK
The market value of a security may move up and down, sometimes rapidly and
unpredictably. These fluctuations, which are often referred to as "volatility,"
may cause a security to be worth less than it was worth at an earlier time.
Market risk may affect a single issuer, industry, sector of the economy, or the
market as a whole. Market risk is common to most investments--including stocks
and bonds, and the mutual funds that invest in them.
Bonds and other fixed-income securities generally involve less market risk
than stocks. However, the risk of bonds can vary significantly depending upon
factors such as issuer and maturity. The bonds of some companies may be riskier
than the stocks of others.
INTEREST-RATE RISK
Changes in interest rates may cause a decline in the market value of an
investment. With bonds and other fixed-income securities, a rise in interest
rates typically causes a fall in values, while a fall in interest rates
typically causes a rise in values.
CREDIT RISK
The issuer of a security or the counterparty to a contract may default or
otherwise become unable to honor a financial obligation.
NON-DIVERSIFIED STATUS
The portfolio is considered a non-diversified portfolio under the Investment
Company Act of 1940 and is permitted to invest a greater proportion of its
assets in the securities of a smaller number of issuers. As a result, the
portfolio may be subject to greater volatility with respect to its investments
than a portfolio that is more broadly diversified.
5
<PAGE> 7
PERFORMANCE SUMMARY
The bar chart below and the table on the next page provide an indication of the
risks of investing in this portfolio. The bar chart shows you how the
portfolio's performance has varied from year to year for up to 10 years. The
table compares the portfolio's performance over time to that of a broadly based
securities market index. The bar chart and table do not reflect additional
charges and expenses which are, or may be, imposed under the variable contracts
or plans; such charges and expenses are described in the prospectus of the
insurance company separate account or in the plan documents or other
informational materials supplied by plan sponsors. Inclusion of these charges
and expenses would reduce the total return for the periods shown. As with all
mutual funds, past performance is not a prediction of the future.
YEAR-BY-YEAR TOTAL RETURNS
[Total Returns Performance Graphic]
<TABLE>
<CAPTION>
YEAR ENDED 12/31: 1998 1999
- -------------------------------------------------------------
<S> <C> <C>
FIXED INCOME PORTFOLIO 8.08% 0.27%
</TABLE>
Best Quarter: 4.56%(Q398)
Worst Quater: 0.0%(Q498)
Inception Date: 3/31/97
6
<PAGE> 8
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS 10 YEARS LIFE OF INCEPTION
PERIOD ENDED 12/31/99: 1999 1995-1999 1990-1999 FUND DATE
<S> <C> <C> <C> <C> <C>
FIXED INCOME PORTFOLIO 0.27% NA NA 6.22% 3/31/97
LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND
INDEX(*) 0.38% NA NA 5.61%
</TABLE>
(*) The Lehman Brothers Intermediate Government/Corporate Bond Index is an
unmanaged index (with no defined investment objective) of intermediate-term
government and corporate bonds, and is calculated by Lehman Brothers Inc.
UNDERSTANDING PERFORMANCE
- TOTAL RETURN tells you how much an investment in the portfolio has
changed in value over a given time period. It assumes that all dividends
and capital gains (if any) were reinvested in additional shares. The
change in value can be stated either as a cumulative return or as an
average annual rate of return.
- A CUMULATIVE TOTAL RETURN is the actual return of an investment for a
specified period. The year-by-year total returns in the bar chart are
examples of one-year cumulative total returns.
- An AVERAGE ANNUAL TOTAL RETURN applies to periods longer than one year.
It smoothes out the variations in year-by-year performance to tell you
what constant annual return would have produced the investment's actual
cumulative return. This gives you an idea of an investment's annual
contribution to your portfolio, assuming you held it for the entire
period.
- Because of compounding, the average annual total returns in the table
cannot be computed by averaging the returns in the bar chart.
7
<PAGE> 9
INVESTOR EXPENSES
FEES AND PORTFOLIO EXPENSES
This table describes the fees and expenses you may bear as a shareholder. Annual
portfolio operating expense figures are for the fiscal year ended December 31,
1998. The table does not reflect additional charges and expenses which are, or
may be, imposed under the variable contracts or plans; such charges and expenses
are described in the prospectus of the insurance company separate account or in
the plan documents or other informational materials supplied by plan sponsors.
<TABLE>
<CAPTION>
<S> <C>
SHAREHOLDER FEES
(paid directly from your investment)
Sales charge "load" on purchases NONE
DEFERRED SALES CHARGE "LOAD" NONE
SALES CHARGE "LOAD" ON REINVESTED DISTRIBUTIONS NONE
REDEMPTION FEES NONE
EXCHANGE FEES NONE
ANNUAL PORTFOLIO OPERATING EXPENSES
(deducted from portfolio assets)
Management fee 0.50%
Distribution and service (12b-1) fee NONE
OTHER EXPENSES 2.57%
TOTAL ANNUAL PORTFOLIO OPERATING EXPENSES* 3.07%
</TABLE>
* Estimated fees and expenses (after fee waivers and expense reimbursements) for
the fiscal year ended December 31, 2000 are shown below. Fee waivers and
expense reimbursements or credits are expected to reduce expenses for the
portfolio during 2000 but may be discontinued at any time:
<TABLE>
<CAPTION>
EXPENSES AFTER
WAIVERS AND
REIMBURSEMENTS
<S> <C>
Management fee .00%
Distribution and service (12b-1) fee NONE
OTHER EXPENSES 1.50%
----
TOTAL ANNUAL PORTFOLIO OPERATING EXPENSES 1.50%
</TABLE>
EXAMPLE
This example may help you compare the cost of investing in the portfolio with
the cost of investing in other mutual funds. Because it uses hypothetical
conditions, your actual costs may be higher or lower.
Assume you invest $10,000, the portfolio returns 5% annually, expense ratios
remain as listed in the first table above (before fee waivers and expense
reimbursements and credits), and you close your account at the end of each of
the time periods shown. Based on these assumptions, your cost would be:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS
<S> <C> <C>
$304 $930 $1,581
<CAPTION>
ONE YEAR 10 YEARS
<S> <C>
$304 $3,327
</TABLE>
8
<PAGE> 10
THE PORTFOLIO IN DETAIL
THE MANAGEMENT FIRM
CREDIT SUISSE ASSET MANAGEMENT, LLC
One Citicorp Center
153 East 53rd Street
New York, NY 10022
- Investment adviser for the portfolio
- Responsible for managing the portfolio's assets according to its goal and
strategies
- A member of Credit Suisse Asset Management, the institutional asset
management and mutual fund arm of Credit Suisse Group (Credit Suisse), one of
the world's leading banks
- Credit Suisse Asset Management companies manage approximately $72 billion in
the U.S. and $203 billion globally as of December 1999
- Credit Suisse Asset Management has offices in 14 countries, including
SEC-registered offices in New York and London; other offices (such as those in
Budapest, Frankfurt, Milan, Moscow, Paris, Prague, Sydney, Tokyo, Warsaw and
Zurich) are not registered with the U.S. Securities and Exchange Commission
For easier reading, Credit Suisse Asset Management, LLC will be referred to
as "CSAM" or "we" throughout this Prospectus.
PORTFOLIO INFORMATION KEY
A concise description of the portfolio begins on the next page. The
description provides the following information:
GOAL AND STRATEGIES
The portfolio's particular investment goal and the strategies it intends to
use in pursuing that goal. Percentages of portfolio assets are based on total
assets unless indicated otherwise.
PORTFOLIO INVESTMENTS
The primary types of securities in which the portfolio invests. Secondary
investments are described in "More About Risk."
RISK FACTORS
The major risk factors associated with the portfolio. Additional risk factors
are included in "More About Risk."
PORTFOLIO MANAGEMENT
The individuals designated by the investment adviser to handle the
portfolio's day-to-day management.
INVESTOR EXPENSES
Expected portfolio expenses (after fee waivers and reimbursements) for the
2000 fiscal year. Future expenses may be higher or lower. Additional expenses
are, or may be, imposed under the variable contracts or plans.
- MANAGEMENT FEE The fee paid to the investment adviser for providing
investment advice to the portfolio. Expressed as a percentage of average net
assets after waivers.
- OTHER EXPENSES Fees paid by the portfolio for items such as administration,
transfer agency, custody, auditing, legal and registration fees and
miscellaneous expenses. Expressed as a percentage of average net assets after
waivers, credits and reimbursements.
FINANCIAL HIGHLIGHTS
A table showing the portfolio's audited financial performance for up to five
years.
- TOTAL RETURN How much you would have earned on an investment in the
portfolio, assuming you had reinvested all dividend and capital-gain
distributions.
- PORTFOLIO TURNOVER An indication of trading frequency.
The portfolio may sell securities without regard to the length of time they
have been held. A high turnover rate may increase the portfolio's transaction
costs and negatively affect its performance.
The Annual Report includes the auditor's report, along with the portfolio's
financial statements. It is available free upon request.
9
<PAGE> 11
GOAL AND STRATEGIES
The portfolio seeks total return consistent with prudent investment
management. To pursue these goals, it invests in fixed-income securities.
Under normal market conditions:
- at least 65% of the portfolio's fixed-income securities will be investment
grade
- the portfolio will maintain a weighted-average maturity of 10 years or less
PORTFOLIO INVESTMENTS
Under normal market conditions, the portfolio invests at least 65% of assets
in fixed income securities such as:
- corporate bonds, debentures and notes
- convertible debt securities
- preferred stocks
- government securities
- municipal securities
- mortgage-backed securities
- repurchase agreements involving portfolio securities
The portfolio may invest:
- without limit in U.S. dollar-denominated, investment-grade foreign securities
- up to 35% of assets in non-dollar-denominated foreign securities
- up to 35% of assets in fixed-income securities rated below investment grade
(junk bonds)
To a limited extent, the portfolio may also engage in other investment
practices.
RISK FACTORS
This portfolio's principal risk factors are:
- market risk
- interest-rate risk
- credit risk
- non-diversified status
You should expect fluctuations in share price, yield and total return,
particularly with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of fixed-income securities. There is also
the risk that an issuer of a debt security will fail to make timely payments of
principal or interest to the portfolio.
Compared to a diversified mutual fund, a non-diversified portfolio may invest
a greater portion of its assets in the securities of fewer issuers. Because the
portfolio is non-diversified, its share price and yield might fluctuate more
than they would for a diversified fund.
To the extent that it invests in certain securities, the portfolio may be
affected by additional risks:
- mortgage-backed securities: extension and prepayment risks
- junk bonds: above-average credit, information, market and other risks
- foreign securities: currency, information and political risks
These risks are defined in "More About Risk." That section also details
certain other investment practices the portfolio may use. Please read "More
About Risk" carefully before you invest.
PORTFOLIO MANAGEMENT
M. Anthony E. van Daalen manages the portfolio. You can find out more about
him in "Meet the Manager."
INVESTOR EXPENSES
Management fee .00%
All other expenses 1.50%
-------------
Total expenses 1.50%
10
<PAGE> 12
FINANCIAL HIGHLIGHTS
The figures below have been audited by the portfolio's independent auditors,
PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
PERIOD ENDED: 12/99 12/98 12/97(1)
<S> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period $10.32 $9.97 $10.00
Investment activities:
Net investment income 0.36 0.24 0.44
Net gains (losses) on investments (both realized and
unrealized) (0.33) 0.57 0.45
Total from investment activities 0.03 0.81 0.89
Distributions:
Dividends from net investment income (0.36) (0.24) (0.41)
Dividends in excess of net investment income 0.00 (0.04) (0.31)
Distributions from realized capital gains 0.00 (0.18) (0.20)
Total distributions (0.36) (0.46) (0.92)
Net asset value, end of period $9.99 $10.32 $9.97
Total return 0.27% 8.08% 8.96%(2)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) $4,552 $2,827 $599
Ratio of expenses to average net assets(3) 1.00% .99% .99%(4)
Ratio of net income to average net assets 5.07% 4.69% 5.29%(4)
Decrease reflected in above operating expense ratios due to
waivers/reimbursements 2.07% 4.33% 12.05%(4)
Portfolio turnover rate 173% 319% 138%(2)
</TABLE>
(1) For the period March 31, 1997 (Commencement of Operations) through December
31, 1997.
(2) Not annualized.
(3) Interest earned on uninvested cash balances is used to offset portions of
transfer agent expense. These arrangements resulted in a reduction to the
expense ratio of .01%, .00% and .00% for the years or period ended December
31, 1999, 1998 and 1997, respectively. The operating expense ratio after
reflecting these arrangements was .99% for each of the years or period ended
December 31, 1999, 1998 and 1997.
(4) Annualized.
11
<PAGE> 13
MORE ABOUT RISK
INTRODUCTION
The portfolio's goal and principal strategies largely determine its risk
profile. You will find a concise description of the portfolio's risk profile in
"Key Points." The preceding discussion of the portfolio contains more detailed
information. This section discusses other risks that may affect the portfolio.
The portfolio may use certain investment practices that have higher risks
associated with them. However, the portfolio has limitations and policies
designed to reduce many of the risks. The "Certain Investment Practices" table
describes these practices and the limitations on their use.
The portfolio offers its shares to (i) insurance company separate accounts
that fund both variable contracts and variable life insurance contracts and (ii)
tax-qualified pension and retirement plans including participant-directed plans
which elect to make the portfolio an investment option for plan participants.
Due to differences of tax treatment and other considerations, the interests of
various variable contract owners and plan participants participating in the
portfolio may conflict. The Board of Trustees will monitor the portfolio for any
material conflicts that may arise and will determine what action, if any, should
be taken. If a conflict occurs, the Board may require one or more insurance
company separate accounts and/or plans to withdraw its investments in the
portfolio, which may cause the portfolio to sell securities at disadvantageous
prices and disrupt orderly portfolio management. The Board also may refuse to
sell shares of the portfolio to any variable contract or plan or may suspend or
terminate the offering of shares of the portfolio if such action is required by
law or regulatory authority or is in the best interests of the shareholders of
the portfolio.
TYPES OF INVESTMENT RISK
The following risks are referred to throughout this Prospectus.
ACCESS RISK Some countries may restrict the portfolio's access to investments
or offer terms that are less advantageous than those for local investors. This
could limit the attractive investment opportunities available to the portfolio.
CORRELATION RISK The risk that changes in the value of a hedging instrument
will not match those of the investment being hedged.
CREDIT RISK The issuer of a security or the counterparty to a contract may
default or otherwise become unable to honor a financial obligation.
CURRENCY RISK Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. Adverse changes in
exchange rates may erode or reverse any gains produced by foreign-
currency-denominated investments and may widen any losses.
EXPOSURE RISK The risk associated with investments (such as derivatives) or
practices (such as short selling) that increase the amount of money the
portfolio could gain or lose on an investment.
- HEDGED Exposure risk could multiply losses generated by a derivative or
practice used for hedging purposes. Such losses should be substantially
offset by gains on the hedged investment. However, while hedging can reduce
or eliminate losses, it can also reduce or eliminate gains.
- SPECULATIVE To the extent that a derivative or practice is not used as a
hedge, the portfolio is directly exposed to its risks. Gains or losses from
speculative positions in a derivative may be much greater than the
derivative's original cost. For example, potential losses from writing
uncovered call options and from speculative short sales are unlimited.
12
<PAGE> 14
EXTENSION RISK An unexpected rise in interest rates may extend the life of a
mortgage-backed security beyond the expected prepayment time, typically reducing
the security's value.
INFORMATION RISK Key information about an issuer, security or market may be
inaccurate or unavailable.
INTEREST-RATE RISK Changes in interest rates may cause a decline in the
market value of an investment. With bonds and other fixed-income securities, a
rise in interest rates typically causes a fall in values, while a fall in
interest rates typically causes a rise in values.
LIQUIDITY RISK Certain portfolio securities may be difficult or impossible to
sell at the time and the price that the portfolio would like. The portfolio may
have to lower the price, sell other securities instead or forego an investment
opportunity. Any of these could have a negative effect on portfolio management
or performance.
MARKET RISK The market value of a security may move up and down, sometimes
rapidly and unpredictably. These fluctuations, which are often referred to as
"volatility," may cause a security to be worth less than it was worth at an
earlier time. Market risk may affect a single issuer, industry, sector of the
economy, or the market as a whole. Market risk is common to most
investments--including stocks and bonds, and the mutual funds that invest in
them.
Bonds and other fixed-income securities generally involve less market risk
than stocks. However, the risk of bonds can vary significantly depending upon
factors such as issuer and maturity. The bonds of some companies may be riskier
than the stocks of others.
OPERATIONAL RISK Some countries have less-developed securities markets (and
related transaction, registration and custody practices) that could subject the
portfolio to losses from fraud, negligence, delay or other actions.
POLITICAL RISK Foreign governments may expropriate assets, impose capital or
currency controls, impose punitive taxes, or nationalize a company or industry.
Any of these actions could have a severe effect on security prices and impair
the portfolio's ability to bring its capital or income back to the U.S. Other
political risks include economic policy changes, social and political
instability, military action and war.
PREPAYMENT RISK Securities with high stated interest rates may be prepaid
prior to maturity. During periods of falling interest rates, the portfolio would
generally have to reinvest the proceeds at lower rates.
VALUATION RISK The lack of an active trading market may make it difficult to
obtain an accurate price for a portfolio security.
13
<PAGE> 15
CERTAIN INVESTMENT PRACTICES
For each of the following practices, this table shows the applicable investment
limitation. Risks are indicated for each practice.
KEY TO TABLE:
<TABLE>
<S> <C>
[-] Permitted without limitation; does not indicate actual use
20% Italic type (e.g., 20%) represents an investment limitation as a percentage of NET
portfolio assets; does not indicate actual use
20% Roman type (e.g., 20%) represents an investment limitation as a percentage of TOTAL
portfolio assets; does not indicate actual use
[ ] Permitted, but not expected to be used to a significant extent
- -- Not permitted
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT PRACTICE LIMIT
<S> <C>
BORROWING The borrowing of money from banks to meet
redemptions or for other temporary or emergency purposes.
Speculative exposure risk. 30%
- ---------------------------------------------------------------------
CURRENCY TRANSACTIONS Instruments, such as options, futures,
forwards or swaps, intended to manage portfolio exposure to
currency risk or to enhance total return. Options, futures
or forwards involve the right or obligation to buy or sell a
given amount of foreign currency at a specified price and
future date. Swaps involve the right or obligation to
receive or make payments based on two different currency
rates. Correlation, credit, currency, hedged exposure,
liquidity, political, speculative exposure, valuation
risks.(1) [ ]
- ---------------------------------------------------------------------
EMERGING MARKETS Countries generally considered to be
relatively less developed or industrialized. Emerging
markets often face economic problems that could subject the
portfolio to increased volatility or substantial declines in
value. Deficiencies in regulatory oversight, market
infrastructure, shareholder protections and company laws
could expose the portfolio to risks beyond those generally
encountered in developed countries. Access, currency,
information, liquidity, market, operational, political,
valuation risks. 35%
- ---------------------------------------------------------------------
FOREIGN SECURITIES Securities of foreign issuers. May
include depositary receipts. Currency, information,
liquidity, market, operational, political, valuation risks. 35%
- ---------------------------------------------------------------------
FUTURES AND OPTIONS ON FUTURES Exchange-traded contracts
that enable the portfolio to hedge against or speculate on
future changes in currency values, interest rates or stock
indexes. Futures obligate the portfolio (or give it the
right, in the case of options) to receive or make payment at
a specific future time based on those future changes.(1)
Correlation, currency, hedged exposure, interest-rate,
market, speculative exposure risks.(2) [ ]
- ---------------------------------------------------------------------
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES Debt securities
backed by pools of mortgages, including passthrough
certificates and other senior classes of collateralized
mortgage obligations (CMOs) or other receivables. Credit,
extension, interest-rate, liquidity, prepayment risks. [-]
- ---------------------------------------------------------------------
NON-INVESTMENT-GRADE DEBT SECURITIES Debt securities and
convertible securities rated below the fourth-highest grade
(BBB/Baa) by Standard & Poor's or Moody's rating service,
and unrated securities of comparable quality. Commonly
referred to as junk bonds. Credit, information,
interest-rate, liquidity, market, valuation risks. 35%
- ---------------------------------------------------------------------
OPTIONS Instruments that provide a right to buy (call) or
sell (put) a particular security or an index of securities
at a fixed price within a certain time period. The portfolio
may purchase or sell (write) both put and call options for
hedging or speculative purposes.(1) Correlation, credit,
hedged exposure, liquidity, market, speculative exposure,
valuation risks. 25%
- ---------------------------------------------------------------------
RESTRICTED AND OTHER ILLIQUID SECURITIES Certain securities
with restrictions on trading, or those not actively traded.
May include private placements. Liquidity, market, valuation
risks. 15%
- ---------------------------------------------------------------------
SECURITIES LENDING Lending portfolio securities to financial
institutions; the portfolio receives cash, U.S. government
securities or bank letters of credit as collateral. Credit,
liquidity, market, operational risks. 33 1/3%
- ---------------------------------------------------------------------
SHORT SALES "AGAINST THE BOX" A short sale when the
portfolio owns enough shares of the security involved to
cover the borrowed securities, if necessary. Liquidity,
market, speculative exposure risks. 10%
- ---------------------------------------------------------------------
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
INVESTMENT PRACTICE LIMIT
<S> <C>
START-UP AND OTHER SMALL COMPANIES Companies with small
relative market capitalizations, including those with
continuous operations of less than three years. Information,
liquidity, market, valuation risks. [-]
- ---------------------------------------------------------------------
STRUCTURED INSTRUMENTS Swaps, structured securities and
other instruments that allow the portfolio to gain access to
the performance of a benchmark asset (such as an index or
selected stocks or currency or interest rates) that may be
more attractive or accessible than the portfolio's direct
investment. Credit, currency, information, interest-rate,
liquidity, market, political, speculative exposure,
valuation risks. [ ]
- ---------------------------------------------------------------------
TEMPORARY DEFENSIVE TACTICS Placing some or all of the
portfolio's assets in investments such as money-market
obligations and investment-grade debt securities for
defensive purposes. Although intended to avoid losses in
adverse market, economic, political or other conditions,
defensive tactics might be inconsistent with the portfolio's
principal investment strategies and might prevent the
portfolio from achieving its goal. [ ]
- ---------------------------------------------------------------------
WARRANTS Options issued by a company granting the holder the
right to buy certain securities, generally common stock, at
a specified price and usually for a limited time. Liquidity,
market, speculative exposure risks. 10%
- ---------------------------------------------------------------------
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS The purchase
or sale of securities for delivery at a future date; market
value may change before delivery. Liquidity, market,
speculative exposure risks. 20%
- ---------------------------------------------------------------------
</TABLE>
(1) The portfolio is not obligated to pursue any hedging strategy. In addition,
hedging practices may not be available, may be too costly to be used
effectively or may be unable to be used for other reasons.
(2) The portfolio is limited to 5% of net assets for initial margin and premium
amounts on futures positions considered to be speculative by the Commodity
Futures Trading Commission.
15
<PAGE> 17
MEET THE MANAGER
[VAN DAALEN PHOTO]
M. ANTHONY E. VAN DAALEN, CFA
Director
- Portfolio Manager, Fixed Income Portfolio since inception
- With CSAM since 1999 as a result of Credit Suisse's acquisition of Warburg
Pincus Asset Management, Inc. (Warburg Pincus)
- With Warburg Pincus since 1992
Job title indicates position with the investment adviser.
16
<PAGE> 18
ABOUT YOUR ACCOUNT
SHARE VALUATION
The price of your shares is also referred to as their net asset value (NAV).
The NAV is determined at the close of regular trading on the New York Stock
Exchange (NYSE) (usually 4 p.m. Eastern Time) each day the NYSE is open for
business. It is calculated by dividing the portfolio's total assets, less its
liabilities, by the number of shares outstanding.
The portfolio values its securities based on market quotations when it
calculates its NAV. If market quotations are not readily available, securities
and other assets are valued by another method that the Board of Trustees
believes accurately reflects fair value. Debt obligations that will mature in 60
days or less are valued on the basis of amortized cost, unless the Board
determines that using this method would not reflect an investment's value.
Some portfolio securities may be listed on foreign exchanges that are open on
days (such as U.S. holidays) when the portfolio does not compute its price. This
could cause the value of the portfolio's investments to be affected by trading
on days when you cannot buy or sell shares.
DISTRIBUTIONS
Investors in the portfolio are entitled to a share of the portfolio's net
income and gains on investments. The portfolio passes these earnings along to
its shareholders as distributions.
The portfolio earns dividends from stocks and interest from bond,
money-market and other investments. These are passed along as dividend
distributions. The portfolio realizes capital gains whenever it sells securities
for a higher price than it paid for them. These are passed along as capital-gain
distributions.
The portfolio typically distributes dividends and capital gains annually,
usually in December. Distributions will be reinvested automatically in
additional shares of the portfolio.
TAXES
For a discussion of the tax status of a variable contract or pension plan,
refer to the prospectus of the sponsoring participating insurance company
separate account or plan documents or other informational materials supplied by
plan sponsors.
Because shares of the portfolio may be purchased only through variable
contracts and plans, income dividends or capital-gain distributions from the
portfolio are taxable, if at all, to the participating insurance companies and
plans and will be exempt from current taxation of the variable-contract owner or
plan participant if left to accumulate within the variable contract or plan.
The portfolio intends to comply with the diversification requirements
currently imposed by the Internal Revenue Service on separate accounts of
insurance companies as a condition of maintaining the tax-deferred status of
variable contracts.
17
<PAGE> 19
BUYING AND SELLING SHARES
You may not buy or sell shares of the portfolio directly; you may only buy or
sell shares through variable-annuity contracts and variable life insurance
contracts offered by separate accounts of certain insurance companies or through
tax-qualified pension and retirement plans. The portfolio may not be available
in connection with a particular contract or plan.
An insurance company's separate accounts buy and sell shares of the portfolio
at NAV, without any sales or other charges. Each insurance company receives
orders from its contract holders to buy or sell shares of the portfolio on any
business day that the portfolio calculates its NAV. If the order is received by
the insurance company prior to the close of regular trading on the NYSE, the
order will be executed at that day's NAV.
Plan participants may buy shares of the portfolio through their plan by
directing the plan trustee to buy shares for their account in a manner similar
to that described above for variable annuity and variable life insurance
contracts. You should contact your plan sponsor concerning the appropriate
procedure for investing in the portfolio.
The portfolio reserves the right to:
- refuse any specific purchase or exchange request, including those from any
person or group who, in the portfolio's view, is likely to engage in excessive
trading
- change or discontinue its exchange privilege after 30 days' notice to current
investors, or temporarily suspend this privilege during unusual market
conditions
- make a "redemption in kind"--payment in portfolio securities rather than
cash--for certain large redemption amounts that could hurt portfolio
operations
- suspend redemptions or postpone payment dates as permitted by the Investment
Company Act of 1940 (such as during periods other than weekends or holidays
when the NYSE is closed or trading on the NYSE is restricted, or any other
time that the SEC permits)
- stop offering the portfolio's shares for a period of time (such as when
management believes that a substantial increase in assets could adversely
affect it)
18
<PAGE> 20
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<PAGE> 21
FOR MORE INFORMATION
This Prospectus is intended for use in connection with certain insurance
products and pension and retirement plans. Please refer to the prospectus of the
sponsoring participating insurance company separate account or to the plan
documents or other informational materials supplied by plan sponsors for
information regarding distributions and instructions on purchasing or selling a
variable contract and on how to select a portfolio as an investment option for a
variable contract or plan. More information about the portfolio is available
free upon request, including the following:
ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS
Includes financial statements, portfolio investments and detailed performance
information.
The Annual Report also contains a letter from the portfolio manager
discussing market conditions and investment strategies that significantly
affected portfolio performance during its past fiscal year.
OTHER INFORMATION
A current Statement of Additional Information (SAI), which provides more
details about the portfolio, is on file with the Securities and Exchange
Commission (SEC) and is incorporated by reference.
You may visit the SEC's Internet Web site (www.sec.gov) to view the SAI,
material incorporated by reference and other information. You can also obtain
copies by visiting the SEC's Public Reference Room in Washington, DC (phone
202-942-8090) or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009 or electronically at
[email protected].
Please contact the Trust to obtain, without charge, the SAI and Annual and
Semiannual Reports and to make shareholder inquiries:
BY TELEPHONE:
800-222-8977
BY MAIL:
Warburg Pincus Trust II
P.O. Box 9030
Boston, MA 02205-9030
BY OVERNIGHT OR COURIER SERVICE:
Boston Financial
Attn: Warburg Pincus Trust II
66 Brooks Drive
Braintree, MA 02184
ON THE INTERNET:
www.warburg.com
SEC FILE NUMBER:
Warburg Pincus Trust II 811-07999
[Warburg Pincus Funds Logo]
P.O. BOX 9030, BOSTON, MA 02205-9030
800-222-8977 [-] www.warburg.com
PROVIDENT DISTRIBUTORS, INC., DISTRIBUTOR. TRFIX-1-0500
<PAGE> 22
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
WARBURG PINCUS TRUST II
FIXED INCOME PORTFOLIO
This Statement of Additional Information provides information about Warburg
Pincus Trust II (the "Trust"), relating to the Fixed Income Portfolio (the
"Portfolio") that supplements information contained in the Prospectus or
Prospectus for the Portfolio (the "Prospectus") dated May 1, 2000.
The Trust's audited Annual Report dated December 31, 1999, which either
accompanies this Statement of Additional Information or has previously been
provided to the investor to whom this Statement of Additional Information is
being sent, is incorporated herein by reference.
This Statement of Additional Information is not itself a Prospectus, no
investment in shares of the Portfolio should be made solely upon the information
contained herein. Copies of the Trust's Prospectus, Annual Report and
information regarding the Portfolio's current performance may be obtained by
writing or telephoning:
Warburg Pincus
P.O. Box 9030
Boston, MA 02205-9030
800-222-8977
<PAGE> 23
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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...........................................................................12
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..................................................................21
Repurchase Agreements.................................................................21
Money Market Mutual Funds.............................................................21
Temporary Defensive Strategies........................................................22
Foreign Investments.......................................................................22
Foreign Currency Exchange.............................................................22
Information...........................................................................22
Political Instability.................................................................23
Foreign Markets.......................................................................23
Increased Expenses....................................................................23
Privatizations........................................................................23
Foreign Debt Securities...............................................................23
</TABLE>
(i)
<PAGE> 24
<TABLE>
<S> <C>
Brady Bonds...........................................................................24
Depositary Receipts...................................................................24
Emerging Markets......................................................................24
Euro Conversion.......................................................................24
Securities of Other Investment Companies..................................................25
Lending of Portfolio Securities...........................................................25
Reverse Repurchase Agreements and Dollar Rolls............................................26
When-Issued Securities and Delayed-Delivery Transactions..................................26
Short Sales "Against the Box".............................................................27
REITs.....................................................................................28
Warrants..................................................................................28
Non-Publicly Traded and Illiquid Securities...............................................28
Rule 144A Securities..................................................................29
Small Capitalization and Emerging Growth Companies; Unseasoned Issuers....................30
"Special Situation" Companies.............................................................30
Borrowing.................................................................................30
Non-Diversified Status....................................................................31
Other Investment Limitations..............................................................31
PORTFOLIO VALUATION.......................................................................33
PORTFOLIO TRANSACTIONS....................................................................34
PORTFOLIO TURNOVER........................................................................36
MANAGEMENT OF THE TRUST...................................................................37
Officers and Board of Trustees............................................................37
Trustees' Compensation....................................................................40
Portfolio Manager.........................................................................40
Code of Ethics............................................................................41
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............................................45
ADDITIONAL INFORMATION CONCERNING TAXES...................................................46
DETERMINATION OF PERFORMANCE..............................................................48
INDEPENDENT ACCOUNTANTS AND COUNSEL.......................................................51
FINANCIAL STATEMENTS......................................................................51
</TABLE>
(ii)
<PAGE> 25
<TABLE>
<S> <C>
MISCELLANEOUS.............................................................................51
APPENDIX..................................................................................A-1
</TABLE>
(iii)
<PAGE> 26
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the descriptions of the
Portfolio's investment objective and policies in the Prospectus. There are no
assurances that the Portfolio will achieve its investment objective. The
investment objective of the Portfolio is total return consistent with prudent
investment management.
Unless otherwise indicated, the Portfolio is permitted, but not
obligated, to engage in the following investment strategies, subject to any
percentage limitations set forth below.
The Portfolio is not obligated to pursue any of the following
strategies and does 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
The 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 the 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. The 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.
The 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. 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 the 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.
<PAGE> 27
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, the
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). When the Portfolio writes call options it 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 the 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 Portfolio may write covered call options. For example, if the
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 the 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," "at-the-money" and
"out-of-the-money," respectively. The Portfolio may write (i) in-the-money call
options when Credit Suisse Asset Management, LLC, the Portfolio's investment
adviser ("CSAM"), expects that the price of the underlying security will remain
flat or decline moderately during the option period, (ii) at-the-money call
options when CSAM expects that the price of the underlying security will remain
flat or advance moderately during the option period and (iii) out-of-the-money
call options when CSAM expects that the
-2-
<PAGE> 28
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, the 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. The Portfolio cannot effect a
closing purchase transaction with respect to an option once it has been assigned
an exercise notice.
There is no assurance that sufficient trading interest will exist
to create a liquid secondary market on a securities exchange for any particular
option or at any particular time, and for some options no such secondary market
may exist. A liquid secondary market in an option may cease to exist for a
variety of reasons. In the past, for example, higher than anticipated trading
activity or order flow or other unforeseen events have at times rendered certain
of the facilities of the Clearing Corporation and various securities exchanges
inadequate and resulted in the institution of special procedures, such as
trading rotations, restrictions on
-3-
<PAGE> 29
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, the 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 the 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
the Portfolio will be able to purchase on a particular security.
Securities Index Options. The 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 than, in the case of a call, or less than, in the case of a put, the
exercise price of the index and the exercise price of the option times a
specified multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Securities index options may
be offset by entering into closing transactions as described above for
securities options.
-4-
<PAGE> 30
OTC Options. The Portfolio 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 the 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 Portfolio 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 Portfolio, there can be no assurance that the 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 the Portfolio. Until the 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 the 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. The
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 the imposition of foreign exchange controls, suspension of
settlement or other governmental actions or unexpected events. The Portfolio may
engage in currency exchange transactions for both hedging purposes and to
increase total return.
Forward Currency Contracts. A forward currency contract involves
an obligation to purchase or sell a specific currency at a future date, which
may be any fixed
-5-
<PAGE> 31
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 Portfolio 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 Portfolio's currency hedging will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward currency with
respect to specific receivables or payables of the 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. The 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, the
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 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
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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. The 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 Portfolio reserves the right to engage in
transactions involving futures contracts and options on futures contracts to the
extent allowed by CFTC regulations in effect from time to time and in accordance
with the 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
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
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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 the 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 Portfolio will also incur brokerage costs in connection
with entering into futures transactions.
At any time prior to the expiration of a futures contract, the
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 Portfolio 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 the 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. The 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. 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.
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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, the 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 the 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 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
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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.
The 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 the 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. The Portfolio may enter into swaps relating to interest
rates, indexes, currencies and equity interests of foreign issuers. A swap
transaction is an agreement between the 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. The 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 Portfolio 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 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.
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The 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 the Portfolio's borrowing restrictions. Where swaps are entered into for
other than hedging purposes, the 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. The 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 the 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 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.
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Debt Securities. The 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.
The 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 the 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 the 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. The 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 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
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<PAGE> 38
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.
The 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 Portfolio
anticipates that these securities could be sold only to a limited number of
dealers or institutional investors. To the extent a secondary trading market for
these securities does exist, it generally is not as liquid as the secondary
market for 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 Portfolio to obtain
accurate market quotations for purposes of valuing the Portfolio and calculating
its net asset value.
The market value of below investment grade securities is more
volatile than that of investment grade securities. Factors adversely impacting
the market value of these securities will adversely impact the Portfolio's net
asset value. The Portfolio will rely on the judgment, analysis and experience of
CSAM in evaluating the creditworthiness of an issuer. In this evaluation, CSAM
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters.
Normally, below investment grade securities are not intended for short-term
investment. The 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 Portfolio may invest in
fixed and floating rate loans ("Loans") arranged through private negotiations
between a foreign government (a "Borrower") and one or more financial
institutions ("Lenders"). The majority of the Portfolio's investments in Loans
are expected to be in the form of participations in Loans ("Participations") and
assignments of portions of Loans from third parties ("Assignments").
Participations typically will result in the Portfolio having a contractual
relationship only with the Lender, not with the Borrower. The Portfolio will
have the right to receive payments of principal, interest and any fees to which
it is entitled only from the
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<PAGE> 39
Lender selling the Participation and only upon receipt by the Lender of the
payments from the Borrower. In connection with purchasing Participations, the
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, the 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, the 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. The Portfolio will acquire Participations only if the Lender
interpositioned between the Portfolio and the Borrower is determined by CSAM to
be creditworthy.
When the 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 the 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. The 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 the
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 the 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 the
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. The 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.
Mortgage-Backed Securities. The 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
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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.
Asset-Backed Securities. The 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
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<PAGE> 41
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 the 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 Portfolio may acquire
"stand-by commitments" with respect to securities held in its portfolio. Under a
stand-by commitment, a dealer agrees to purchase at the 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 the Portfolio may also be referred to as "put" options. A stand-by
commitment is not transferable by the 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
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stand-by commitments, the Portfolio 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 Portfolio will acquire stand-by commitments only in order to facilitate
portfolio liquidity and does not intend to exercise its rights under stand-by
commitments for trading purposes.
The amount payable to the 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 Portfolio expects that stand-by commitments will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the Portfolio 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 the 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 acquisition of a stand-by commitment would not affect the
valuation or assumed maturity of the underlying securities. Stand-by commitments
acquired by the Portfolio would be valued at zero in determining net asset
value. Where the 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 the Portfolio.
Variable Rate and Master Demand Notes. The 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 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
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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 the
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 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
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Appendix attached hereto for further information concerning the ratings of
Moody's and S&P and their significance.
Among other instruments, the 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. The 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 the 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.
The 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
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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
Portfolio 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 the Portfolio's borrowing
restriction.
The 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 the 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 Portfolio 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 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. The
Portfolio may also invest in instruments that are supported by the right of the
issuer to
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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, the 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. The 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. The 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, the 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 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 the Portfolio and appropriate considering the factors of return
and liquidity, the 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 mutual fund generally does
not purchase securities with a remaining maturity of more than one year. As a
shareholder in any mutual fund, the 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.
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Temporary Defensive Strategies. For temporary defensive
purposes, the Portfolio may invest without limit in short-term money market
obligations.
Foreign Investments. The 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. The 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 Portfolio may invest in
securities denominated in currencies other than the U.S. dollar, and since the
Portfolio may temporarily hold funds in bank deposits or other money market
investments denominated in foreign currencies, the 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 the
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 the 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. The 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 the Portfolio
will not be registered with, nor the issuers thereof be subject to reporting
requirements of, the SEC. 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.
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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 the Portfolio invests in
foreign securities, the operating expenses of the Portfolio may be expected to
be higher than those of an investment company investing exclusively in U.S.
securities, since the expenses of the 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. The 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 Portfolio, 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 Portfolio may
invest generally consist of obligations issued or backed by national, state or
provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt obligations
of supranational entities, which include international organizations designated,
or backed by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples include the International Bank for Reconstruction and Development (the
"World Bank"), the European Coal and Steel Community, the Asian Development Bank
and the InterAmerican Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt securities
of quasi-governmental agencies are
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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. The 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. The 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 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
Monetary Union
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presented unique risks and uncertainties for investors in those countries,
including (i) the functioning of the payment and operational systems of banks
and other financial institutions; (ii) the creation of suitable clearing and
settlement payment schemes for the euro; (iii) the fluctuation of the euro
relative to non-euro currencies during the transition period from January 1,
1999 to December 31, 2000 and beyond; and (iv) whether the interest rate, tax
and labor regimes of the European countries participating in the euro will
converge over time. Further, the conversion of the currencies of other Economic
Monetary Union countries, such as the United Kingdom, and the admission of other
countries, including Central and Eastern European countries, to the Economic
Monetary Union could adversely affect the euro. These or other factors may cause
market disruptions and could adversely affect the value of foreign securities
and currencies held by the Portfolio.
Securities of Other Investment Companies. The Portfolio may
invest in securities of other investment companies to the extent permitted under
the 1940 Act. Presently, under the 1940 Act, the 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. The 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 the Portfolio's total assets (including the Loan collateral)
taken at value. The 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, the 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, the 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. The 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 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
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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. The 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 the 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 Portfolio 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.
When-Issued Securities and Delayed-Delivery Transactions. The
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). The 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
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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 the
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". The Portfolio may enter into short
sales "against the box." Not more than 10% of the Portfolio's net assets (taken
at current value) may be held as collateral for such sales at any one time. In a
short sale, the 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 the Portfolio does not own, a short sale is "against the box" to the
extent that the 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 Portfolio does not intend to engage in short sales against
the box for investment purposes. The 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 short sales.
If the 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,
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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 the Portfolio may effect short sales.
REITs. The 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"). When the Portfolio
invests in a REIT, it will indirectly bear its proportionate share of any
expenses paid by the REIT in addition to the expenses of the Portfolio.
Warrants. The 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. The 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. The 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 which have a maturity of longer
than seven days, time deposits maturing in more than seven calendar days and
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
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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 the 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. The 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 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
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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 determine 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 Portfolio to the extent that
qualified institutional buyers are unavailable or uninterested in purchasing
such securities from the Portfolio. The Board has adopted guidelines and
delegated 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 the 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.
Borrowing. The Portfolio may borrow up to 30% of its total assets
for temporary or emergency purposes, including to meet portfolio redemption
requests so as to
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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. The
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. The 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, the 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. The Portfolio's investments will be limited, however, in
order to qualify as a "regulated investment company" for purposes of the Code.
To qualify, the Portfolio will comply with certain requirements, including
limiting its investments so that at the close of each quarter of its 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 the
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.
The 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 commitment transactions and dollar roll transactions that are
not accounted for as financings
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(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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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 the
Portfolio in valuing its assets.
Securities listed on an exchange or traded in an
over-the-counter market will be valued at the closing price on the exchange or
market on which the security is primarily traded (the "Primary Market") at the
time of valuation (the "Valuation Time"). If the security did not trade on the
Primary Market, the security will be valued at the closing price on another
exchange or market where it trades at the Valuation Time. If there are no such
sales prices, the security will be valued at the most recent bid quotation as of
the Valuation Time or at the lowest asked quotation in the case of a short sale
of securities. If there are no such quotations, the value of the security will
be taken to be the most recent bid quotation on the exchange or market. In
determining the market value of portfolio investments, the Portfolio may employ
outside organizations (each, a "Pricing Service") which may use a matrix,
formula or other objective method that takes into consideration market indexes,
matrices, yield curves and other specific adjustments. The procedures of Pricing
Services are reviewed periodically by the officers of the Trust under the
general supervision and responsibility of the Board, which may replace a Pricing
Service at any time. If a Pricing Service is not able to supply closing prices
and bid/asked quotations, and there are two or more dealers, brokers or market
makers in the security, the security will be valued at the mean between the
highest bid and the lowest asked quotations from at least two dealers, brokers
or market makers or, if such dealers, brokers or market makers only provide bid
quotations, at the mean between the highest and the lowest bid quotations
provided. If a Pricing Service is not able to supply closing prices and
bid/asked quotations, and there is only one dealer, broker or market maker in
the security, the security will be valued at the mean between the bid and the
asked quotations provided, unless the dealer, broker or market maker can only
provide a bid quotation in which case the security will be valued at such bid
quotation. Options contracts will be valued similarly. Futures contracts will be
valued at the most recent settlement price at the time of valuation. Short-term
obligations with maturities of 60 days or less are valued at amortized cost,
which constitutes fair value as determined by the Board. Amortized cost involves
valuing a portfolio instrument at its initial cost and thereafter
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assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. The amortized cost method of valuation may also be used with
respect to other debt obligations with 60 days or less remaining to maturity.
Securities, options, futures contracts and other assets which cannot be valued
pursuant to the foregoing will be valued at their fair value as determined in
good faith pursuant to consistently applied procedures established by the Board.
In addition, the Board or its delegates may value a security at fair value if it
determines that such security's value determined by the methodology set forth
above does not reflect its fair value.
Trading in securities in certain foreign countries is completed
at various times prior to the close of business on each business day in New York
(i.e., a day on which The New York Stock Exchange, Inc. (the "NYSE") is open for
trading). In addition, securities trading in a particular country or countries
may not take place on all business days in New York. Furthermore, trading takes
place in various foreign markets on days which are not business days in New York
and days on which the Portfolio's net asset value is not calculated. As a
result, calculation of the 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 the 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 the 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.
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CSAM will select specific portfolio investments and effect
transactions for the Portfolio. In selecting broker-dealers, CSAM does business
exclusively with those broker-dealers that, in CSAM's judgment, can be expected
to provide the best service. The service has two main aspects: the execution of
buy and sell orders and the provision of research. In negotiating commissions
with broker-dealers, CSAM will pay no more for execution and research services
than it considers either, or both together, to be worth. The worth of execution
service depends on the ability of the broker-dealer to minimize costs of
securities purchased and to maximize prices obtained for securities sold. The
worth of research depends on its usefulness in optimizing portfolio composition
and its changes over time. Commissions for the combination of execution and
research services that meet CSAM's standards may be higher than for execution
services alone or for services that fall below CSAM's standards. CSAM believes
that these arrangements may benefit all clients and not necessarily only the
accounts in which the particular investment transactions occur that are so
executed. Further, CSAM will only receive brokerage or research service in
connection with securities transactions that are consistent with the "safe
harbor" provisions of Section 28(e) of the Securities Exchange Act of 1934 when
paying such higher commissions. Research services may include research on
specific industries or companies, macroeconomic analyses, analyses of national
and international events and trends, evaluations of thinly traded securities,
computerized trading screening techniques and securities ranking services, and
general research services. For the fiscal year ended December 31, 1999, no
brokerage commissions were paid by the Portfolio 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 the Portfolio are not reduced by reason of its
receiving any brokerage and research services.
The Portfolio paid $18 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 did not pay any
commissions to broker-dealers for execution of portfolio transactions during the
fiscal years ended December 31, 1998 and 1999.
All orders for transactions in securities or options on behalf
of the Portfolio are placed by CSAM with broker-dealers that it selects,
including Credit Suisse Asset Management Securities, Inc. ("CSAMSI") and
affiliates of Credit Suisse Group ("Credit Suisse"). The Portfolio may utilize
CSAMSI or affiliates of Credit Suisse in connection with a purchase or sale of
securities when CSAM believes that the charge for the transaction does not
exceed usual and customary levels and when doing so is consistent with
guidelines adopted by the Board.
Investment decisions for the 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 the
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
Portfolio.
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In some instances, this investment procedure may adversely affect the
price paid or received by the Portfolio or the size of the position obtained or
sold for the Portfolio. To the extent permitted by law, securities to be sold or
purchased for the 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 CSAMSI or Credit Suisse First Boston ("CS First Boston") or any
affiliated person of such companies.
Transactions for the Portfolio may be effected on foreign
securities exchanges. In transactions for securities not actively traded on a
foreign securities exchange, the Portfolio 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.
The 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. The 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
The 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 Portfolio does not intend to seek profits through short-term
trading, but the rate of turnover will not be a limiting factor when the
Portfolio deems it desirable to sell or purchase securities. Certain practices
that may be employed by the 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
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purchased in anticipation of a rise in the price of the underlying security
(market rise) and later sold.
It is not possible to predict the Portfolio's 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.
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<PAGE> 63
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.
<TABLE>
<CAPTION>
<S> <C>
Richard H. Francis (67) Trustee
40 Grosvenor Road Currently retired; Executive Vice President and Chief Financial Officer of Pan Am
Short Hills, New Jersey 07078 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 Fritz Broadcasting, Inc. and Fritz
P.O. Box 483 Communications (developers and operators of radio stations); Director/Trustee of
Wilson, Wyoming 83014 other Warburg Pincus Funds.
</TABLE>
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<PAGE> 64
<TABLE>
<S> <C>
James S. Pasman, Jr. (69) Trustee
29 The Trillium Currently retired; President and Chief Operating Officer of National InterGroup,
Pittsburgh, Pennsylvania 15238 Inc. from April 1989 to March 1991; Chairman of Permian Oil Co. from April 1989
to March 1991; Director of Education Management Corp., Tyco International Ltd.;
Trustee, BT Insurance Funds Trust; Director/Trustee of other Warburg Pincus Funds
and other CSAM-advised investment companies.
William W. Priest* (58) Chairman of the Board
153 East 53rd Street Chairman- Management Committee, Chief Executive Officer and Managing Director of
New York, New York 10022 CSAM since 1990; 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. (on-line accounting service) since 1997; Executive Vice
New York, New York 10022 President of Loanet, Inc. from 1994 to 1997; Director, President, North American
Operations, and former Executive Vice President from 1992 to 1993 of Worldwide
Operations of Metallurg Inc.; Executive Vice President, Telerate, Inc. from 1987
to 1992; Partner in the law firm of Hartman & Craven until 1987; Director/Trustee
of other Warburg Pincus Funds and other CSAM-advised investment companies.
</TABLE>
- ---------------------------
* Indicates a Director/Trustee who is an "interested person" of the Fund as
defines in the 1940 Act.
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<PAGE> 65
<TABLE>
<S> <C>
Alexander B. Trowbridge (70) Trustee
1317 F Street, N.W., 5th Floor President of Trowbridge Partners, Inc. (business consulting) since January 1990;
Washington, DC 20004 Director or Trustee of New England Mutual Life Insurance Co., ICOS Corporation
(biopharmaceuticals), IRI International (energy services), The Rouse Company
(real estate development), Harris Corp. (electronics and communications
equipment), The Gillette Co. (personal care products) and Sunoco, Inc. (petroleum
refining and marketing); Director/Trustee of other Warburg Pincus Funds.
Eugene L. Podsiadlo (42) President
466 Lexington Avenue Managing Director of CSAM; Associated with CSAM since Credit Suisse acquired the
New York, New York 10017-3147 Portfolio's predecessor adviser in July 1999; with the predecessor adviser since
1991; Vice President of Citibank, N.A. from 1987 to 1991; Officer of CSAMSI and
of other Warburg Pincus Funds.
Hal Liebes, Esq. (35) Vice President and Secretary
153 East 53rd Street Managing Director and General Counsel of CSAM; Associated with Lehman Brothers,
New York, New York 10022 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
East 53rd Street Vice President and Director of Fund Administration of CSAM; Associated with CSAM 153
New York, New York 10022 since 1984; Officer of other Warburg Pincus Funds and other CSAM-advised
investment companies.
</TABLE>
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<PAGE> 66
<TABLE>
<S> <C>
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 Credit Suisse acquired the Portfolio's predecessor
adviser in July 1999; with the predecessor adviser since 1997; Associated with the
law firm of Gordon Altman Butowsky Weitzen Shalov & Wein from 1995 to 1997; Officer
of other Warburg Pincus Funds.
Rocco A. DelGuercio (36) Assistant Treasurer
153 East 53rd Street Assistant Vice President and Administrative Officer of CSAM; Associated with CSAM
New York, New York 10022 since June 1996; Assistant Treasurer, Bankers Trust Co. -- Fund Administration
from March 1994 to June 1996; Mutual Fund Accounting Supervisor, Dreyfus
Corporation from April 1987 to March 1994; Officer of other Warburg Pincus Funds
and other CSAM-advised investment companies.
</TABLE>
No employee of CSAM 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 $750 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, 1999)
<TABLE>
<CAPTION>
Total Compensation
from
Total all Investment
Compensation from Companies in Warburg
Name of Trustee Trust Pincus Fund Complex(1)
- -------------------------------------- ------------------- ---------------------
<S> <C> <C>
William W. Priest(2) None None
Arnold M. Reichman(3) None None
Richard N. Cooper(4) $563 $47,500
Richard H. Francis(5) $500 $38,250
Jack W. Fritz $1,125 $94,250
</TABLE>
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<PAGE> 67
<TABLE>
<S> <C> <C>
Jeffrey E. Garten(3) $1,125 $94,250
Thomas A. Melfe(4) $688 $40,750
James S. Pasman, Jr.(5) $500 $38,250
Steven N. Rappaport(5) $500 $38,250
Alexander B. Trowbridge $1,163 $97,100
</TABLE>
- --------------------------
1 Each Trustee also serves as a Director or Trustee of 45 investment
companies or portfolios in the Warburg Pincus family of funds, except
for Mr. Garten, who also serves as a Director or Trustee of 14
investment companies in the Warburg Pincus family of funds.
2 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.
3 Mr. Reichman resigned as a Trustee of the Trust effective August 18,
1999. Mr. Garten resigned as a Trustee of the Trust effective February
3, 2000.
4 Messrs. Cooper and Melfe resigned as Trustees of the Trust effective
July 6, 1999.
5 Messrs. Francis, Pasman and Rappaport became Trustees of the Trust
effective July 6, 1999.
As of March 31, 2000, no Trustees or officers of the Trust owned any
of the outstanding shares of the Portfolio.
Portfolio Manager
M. Anthony E. van Daalen, Portfolio Manager of the Portfolio,
also manages other Warburg Pincus Funds. Mr. van Daalen has been associated with
CSAM since Credit Suisse acquired the Portfolio's 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.
Code of Ethics
The Trust, CSAM and CSAMSI have each adopted a written Code of
Ethics (the "Code"), which permits personnel covered by the Code ("Covered
Persons") to invest in securities, including securities that may be purchased or
held by the Portfolio. The Code also contains provisions designed to address the
conflicts of interest that could arise from personal trading by advisory
personnel, including: (1) all Covered Persons must report their personal
securities transactions at the end of each quarter; (2) with certain limited
exceptions, all Covered Persons must obtain preclearance before executing any
personal securities transactions; (3) Covered Persons may not execute personal
trades in a security if there are any pending orders in that security by the
Portfolio; and (4) Covered Persons may not invest in initial public offerings.
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<PAGE> 68
The Board reviews the administration of the Code at least
annually and may impose sanctions for violations of the Code.
Investment Adviser and Co-Administrators
CSAM, located at 153 East 53rd Street, New York, New York 10022,
serves as investment adviser to the Portfolio. CSAM is an indirect wholly-owned
U.S. subsidiary of Credit Suisse. Credit Suisse is a global financial services
company, providing a comprehensive range of banking and insurance products.
Active on every continent and in all major financial 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). 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 Portfolio. 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 Portfolio's investment
adviser. Credit Suisse Asset Management, formerly known as BEA Associates,
together with its predecessor firms, has been engaged in the investment advisory
business for over 60 years.
CSAMSI and PFPC serve as a co-administrators to the Trust
pursuant to separate written 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 Portfolio in accordance with the Portfolio's investment objective and stated
investment policies. CSAM makes investment decisions for the 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 .50% of the Portfolio's average daily net
assets. CSAM and the Portfolio's co-administrators may voluntarily waive a
portion of their fees from time to time and temporarily limit the expenses to be
borne by the Portfolio.
As co-administrator, CSAMSI provides shareholder liaison
services to the Portfolio, 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 the 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
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<PAGE> 69
monitoring compliance procedures for the Portfolio. As compensation, the
Portfolio pays CSAMSI a fee calculated at an annual rate of .10% of the
Portfolio's average daily net assets.
As a co-administrator, PFPC calculates the Portfolio's net asset
value, provides all accounting services for the Portfolio and assists in related
aspects of the Portfolio's operations. As compensation, the 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 and its predecessor, Warburg,
the co-administration fees earned by PFPC and the aggregate co-administration
fees earned by CSAMSI and Counsellors Service (the Portfolio's predecessor
co-administrator), respectively, for the period from March 31, 1997
(commencement of operations) to December 31, 1997 and for the fiscal years ended
December 31, 1998 and 1999 are described below.
Advisory Fees earned by Warburg for the fiscal period or years ended December 31
(portions of fees waived, if any, are noted in parentheses next to the amount
earned)*
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
- ---------------------------- ---------------------- -------------------------
<S> <C> <C> <C> <C> <C>
$ 2,166 ($2,166) $ 6,619 ($ 6,619) $15,523 ($15,523)
- ---------------- ----------- --------- ------------ ----------- -------------
</TABLE>
- ------------------
* During the period and years ended December 31, 1997, 1998 and 1999,
CSAM/Warburg also reimbursed expenses of $53,791, $50,074 and $52,205,
respectively, to the Portfolio.
Co-Administration Fees earned by PFPC for the fiscal period or years ended
December 31 (portions of fees waived, if any, are noted in parentheses next to
the amount earned)
<TABLE>
<CAPTION>
1997 1998 1999
- ----------------------- ------------------ ------------------------
<S> <C> <C> <C> <C> <C>
$216 ($216) $4,662 ($662) $7,677 ($1,552)
- ---------- ------------ --------- -------- ---------- -------------
</TABLE>
Co-Administration Fees earned by CSAMSI/Counsellors Service (the Portfolio's
predecessor co-administrator) for the fiscal period or years ended December 31
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
--------------- --------------- -----------------
<S> <C> <C>
$433 $1,324 $3,105
--------------- --------------- -----------------
</TABLE>
Custodians and Transfer Agent
PFPC Trust Company ("PFPC Trust") serves as custodian of the
Portfolio's U.S. assets and State Street Bank and Trust Company ("State Street")
serves as custodian of the Portfolio's non-U.S. assets. Each custodian serves
pursuant to separate custodian agreements (the "Custodian Agreements"). Under
the Custodian Agreements PFPC Trust and State Street each (i) maintains a
separate account or accounts in the name of the Portfolio,
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<PAGE> 70
(ii) holds and transfers portfolio securities on account of the Portfolio, (iii)
makes receipts and disbursements of money on behalf of the Portfolio, (iv)
collects and receives all income and other payments and distributions on account
of the 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 Portfolio. 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 the
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
distributor of the Portfolio's shares. PDI offers the Portfolio's shares on a
continuous basis. No compensation is payable by the Portfolio to PDI for
distribution services, however, pursuant to a separate agreement with CSAM, PDI
is compensated for the services provided to the Portfolio. PDI's principal
business address is 3200 Horizon Drive, King of Prussia, Pennsylvania 19406.
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
Portfolio's net asset value next computed after they are accepted by the Service
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<PAGE> 71
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 the 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, one of which constitutes the
interests in the Portfolio. Shares of the other series are not currently
offered. 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
the 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 series 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.
Massachusetts law provides that shareholders could, under
certain circumstances, be held personally liable for the obligations of the
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 the Portfolio's property for all losses and expenses of any shareholder
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<PAGE> 72
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 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
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 the 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.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Portfolio 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 the Portfolio an investment option for Plan participants. The offering
price of the Portfolio's shares is equal to its per share net asset value.
Under the 1940 Act, the 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. (The 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, the 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 has elected, however, to be governed by Rule 18f-1 under the
1940 Act as a result of which the Portfolio is obligated to redeem shares, with
respect to any one shareholder during any 90 day period, solely in cash up to
the lesser of $250,000 or 1% of the net asset value of the Portfolio at the
beginning of the period.
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
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<PAGE> 73
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 the Portfolio.
The Portfolio intends to qualify as a "regulated investment
company" under Subchapter M of the Code. If it qualifies as a regulated
investment company, the Portfolio will effectively pay no federal income taxes
on its investment company taxable income (that is, any excess of its net
realized long-term capital gains over its net realized short-term capital losses
("net realized capital gains")) and on its net realized capital gains that are
distributed to shareholders. To qualify under Subchapter M, the 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 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 which are determined to be in the
same or similar trades or businesses or related trades or businesses.
If, in any taxable year, the 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 the 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 the 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 with respect to certain of its assets (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.
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<PAGE> 74
In addition, the Portfolio intends to comply with the
diversification requirements of Section 817(h) of the Code which relate to the
tax-deferred status of insurance company separate accounts. To comply with
regulations under Section 817(h) of the Code, the 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 of 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
ever, these pronouncements may be issued. In the event that rules or regulations
are adopted, there can be no assurance that the Portfolio will be able to
operate as currently described, or that the Trust will not have to change the
investment goal or investment policies of the Portfolio. While the 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 the 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.
The 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 the
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. The 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.
-49-
<PAGE> 75
Investments by the 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 the 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 the Portfolio from investments in foreign
securities may be subject to withholding and other taxes imposed by foreign
countries. The foreign taxes paid by the Portfolio will reduce its return from
investments in such Portfolio.
DETERMINATION OF PERFORMANCE
From time to time, the 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 Portfolio for the fiscal periods ended
December 31, 1999, were as follows (performance figures calculated without the
waiver of fees by the Portfolio's service providers, if any, are noted in
italics):
<TABLE>
<CAPTION>
One-Year Since Inception (3/31/97)
- ------------------------------------ ----------------------------------------
<S> <C> <C> <C>
0.27% (1.14)% 6.22% 2.19%
- ------------------- ---------------- ------------------ ---------------------
</TABLE>
These total return figures show the average percentage change in
value of an investment in the 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
n
formula: P (1 + T) = ERV. For purposes of this formula, "P" is a hypothetical
investment of $1,000; "T" is average annual total return; "n" is number of
years; and "ERV" is the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the one-, five- or ten-year periods (or fractional
portion thereof). Total return or "T" is computed by finding the average annual
change in the value of an initial $1,000
-50-
<PAGE> 76
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 the
Portfolio's return over a longer market cycle. The Portfolio may also advertise
aggregate total return figures for various periods, representing the cumulative
change in value of an investment in the 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).
The Portfolio may advertise, from time to time, comparisons of
its performance with that of one or more other mutual funds with similar
investment objectives. The 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 the 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.
The Portfolio's 30-day annualized current yield as of December
31, 1999 was 5.44% (4.23% before the waiver of fees by the Portfolio's service
provider(s)).
The 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, the 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 Portfolio include the
effect of deducting the Portfolio's expenses, but may not include
-51-
<PAGE> 77
charges and expenses attributable to any particular Variable Contract or Plan,
which would reduce the returns described in this section.
The 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) the
Lehman Intermediate Government/Corporate Bond Index (an unmanaged index of
government and corporate bonds calculated by Lehman Brothers); or (iii) other
appropriate indexes of investment securities or with data developed by CSAM
derived from such indexes. The 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, the 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, the 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, the 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.
The 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, 1999, which
either accompanies this Statement of Additional Information or has previously
been provided to the
-52-
<PAGE> 78
investor to whom this Statement of Additional Information is being sent, is
incorporated herein by reference with respect to all information regarding the
Portfolio 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.
MISCELLANEOUS
The Portfolio 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 Portfolio or any member of
the public regarding the advisability of investing in securities generally or in
the Portfolio 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 Portfolio's net asset value, nor is
Warburg, Pincus & Co. a distributor of the Portfolio. Warburg, Pincus & Co. has
no obligation or liability in connection with the administration, marketing or
trading of the Portfolio.
-53-
<PAGE> 79
As of March 31, 2000, the following persons owned of record 5%
or more of the Portfolio's outstanding shares:
<TABLE>
<CAPTION>
<S> <C>
United Life & Annuity 83.90%
Separate Account One
c/o Sales Resource Center
Attn: Victoria P. Colclazier
851 SW Sixth Avenue
Portland, OR 97204
Credit Suisse Asset Management, LLC 16.10%
Attn: Howard Conroy
466 Lexington Ave.
New York, NY 10017-3140
</TABLE>
-54-
<PAGE> 80
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
A-1
<PAGE> 81
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
A-2
<PAGE> 82
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.
A-3
<PAGE> 83
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
A-4
<PAGE> 84
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."
A-5
<PAGE> 85
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.
A-6
<PAGE> 86
PART C
OTHER INFORMATION
WARBURG, PINCUS TRUST II
Item 23. Exhibits
Exhibit No. Description of Exhibit
- ----------- ----------------------
a(1) Agreement and Declaration of Trust.(1)
b(1) By-Laws.(1)
(2) Amendment to By-Laws.(2)
c Form of Share Certificates.(3)
d Investment Advisory Agreements.(4)
e Distribution Agreement with Provident
Distributors, Inc. ("PDI").(5)
f Not applicable.
g(1) Form of Custodian Services Agreement with
PFPC Trust Company.(6)
- ------------------------------
(1) Incorporated by reference to Registrant's Registration Statement on
Form N-1A filed on January 2, 1997 (Securities Act File No.
333-19175).
(2) Incorporated by reference; material provisions of this exhibit are
substantially similar to those of the corresponding exhibit to
Post-Effective Amendment No. 19 to the Registration Statement on
Form N-1A of Warburg, Pincus Capital Appreciation Fund filed on
February 23, 1998 (Securities Act File No. 33-12344; Investment
Company Act File No. 811-5041).
(3) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A filed on March
17, 1997 (Securities Act File No. 333-19175).
(4) Incorporated by reference; material provisions of this exhibit
substantially similar to those of the corresponding exhibit in the
Registration Statement on Form N-14 of Warburg, Pincus Global Post-
Venture Capital Fund, Inc. filed November 4, 1999 (Securities Act
File No. 333-90341).
(5) Incorporated by reference to Post-Effective Amendment No. 9 to the
Registration Statement on Form N-1A of Warburg, Pincus Balanced
Fund, Inc. filed on February 24, 2000 (Securities Act File No.
333-00533).
<PAGE> 87
(2) Form of Custodian Agreement between State
Street Bank and Trust Company and the Trust.(3)
(3) Form of Sub-Custodian Services Agreement
with PFPC Trust Company and PNC Bank,
National Association.(6)
h(1) Form of Transfer Agency Agreement.(3)
(2) Form of Co-Administration Agreement between
Credit Suisse Asset Management Securities
and the Trust.(7)
(3) Form of Co-Administration Agreement between
PFPC Inc. and the Trust.(3)
(4) Form of Participation Agreement.(3)
i(1) Opinion and Consent of Willkie Farr &
Gallagher, counsel to the Trust.
(2) Opinion and Consent of Sullivan & Worcester,
Massachusetts counsel to the Trust.(3)
j(1) Consent of PricewaterhouseCoopers LLP,
Independent Accountants.
(2) Powers of Attorney.(7)
k Not applicable.
l Form of Purchase Agreement.(3)
m Not applicable.
n Not applicable.
o Not applicable.
p Form of Code of Ethics.
- -------------------------------------------------------------------------------
(6) Incorporated by reference; material provisions of this exhibit are
substantially similar to those of the corresponding exhibit to Post-
Effective No. 10 to the Registration Statement on Form N-1A of
Warburg, Pincus Trust filed on April 16, 1999 (Securities Act File
No. 33-58125; Investment Company Act File No. 811-07261).
(7) Incorporated by reference to the Registration Statement on Form N-14
of Warburg, Pincus Global Post-Venture Capital Fund, Inc. filed
November 4, 1999 (Securities Act File No. 333-90341).
<PAGE> 88
Item 24. Persons Controlled by or Under Common Control with Registrant
From time to time, Credit Suisse Asset Management, LLC ("CSAM,
LLC"), may be deemed to control the Trust and other registered investment
companies it advises through its beneficial ownership of more than 25% of the
relevant fund's shares on behalf of discretionary advisory clients. CSAM, LLC
has three wholly-owned subsidiaries: Counsellors Securities Inc., a New York
corporation; Warburg, Pincus Asset Management, International, Inc., a Delaware
corporation; Warburg Pincus Asset Management (Japan), Inc., a Japanese
corporation; and Warburg Pincus Asset Management (Dublin) Limited, an Irish
corporation.
Item 25. Indemnification
Registrant and officers and directors of CSAM, LLC, Credit Suisse
Asset Management Securities, Inc. ("CSAM Securities") and Registrant are
covered by insurance policies indemnifying them for liability incurred in
connection with the operation of Registrant. Discussion of this coverage is
incorporated by reference to Item 27 of Part C of the Trust's initial
Registration Statement on Form N-1A filed on January 2, 1997.
[/R]
Item 26. Business and Other Connections of
Investment Adviser
CSAM, LLC acts as investment adviser to Registrant. CSAM, LLC
renders investment advice to a wide variety of individual and institutional
clients. The list required by this Item 26 of officers and directors of CSAM,
LLC, together with information as to their other business, profession, vocation
or employment of a substantial nature during the past two years, is
incorporated by reference to Schedules A and D of Form ADV filed by CSAM, LLC
(SEC File No. 801-37170).
Item 27. Principal Underwriter
(a) PDI will act as distributor for Registrant, as well as for
Warburg Pincus Balanced Fund; Warburg Pincus Capital Appreciation Fund; Warburg
Pincus Cash Reserve Fund; Warburg Pincus Central & Eastern Europe Fund; Warburg
Pincus Emerging Growth Fund; Warburg Pincus Emerging Markets Fund; Warburg
Pincus European Equity Fund; Warburg Pincus Fixed Income Fund; Warburg Pincus
Focus Fund; Warburg Pincus Global Fixed Income Fund; Warburg Pincus Global
Health Sciences Fund; Warburg Pincus Global Post-Venture Capital Fund; Warburg
Pincus Global Telecommunications Fund; Warburg Pincus High Yield Fund; Warburg
Pincus Institutional Fund; Warburg Pincus Intermediate Maturity Government
Fund; Warburg Pincus International Equity Fund; Warburg Pincus International
Growth Fund; Warburg Pincus International Small Company Fund; Warburg Pincus
Japan Small Company Fund; Warburg Pincus Japan Growth Fund; Warburg Pincus
<PAGE> 89
Long-Short Market Neutral Fund; Warburg Pincus Major Foreign Markets Fund;
Warburg Pincus Municipal Bond Fund; Warburg Pincus New York Intermediate
Municipal Fund; Warburg Pincus New York Tax Exempt Fund; Warburg Pincus Small
Company Growth Fund; Warburg Pincus Small Company Value Fund; Warburg Pincus
Strategic Global Fixed Income Fund; Warburg Pincus Trust; Warburg Pincus U.S.
Core Equity Fund; Warburg Pincus U.S. Core Fixed Income Fund; Warburg Pincus
Value Fund; Warburg Pincus WorldPerks Money Market Fund; and Warburg Pincus
WorldPerks Tax Free Money Market Fund.
PDI also acts as principal underwriter for the following investment
companies: International Dollar Reserve Fund I, Ltd.; Provident Institutional
Funds Trust; Columbia Common Stock Fund, Inc.; Columbia Growth Fund, Inc.;
Columbia International Stock Fund, Inc.; Columbia Special Fund, Inc.; Columbia
Small Cap Fund, Inc.; Columbia Real Estate Equity Fund, Inc.; Columbia Balanced
Fund, Inc.; Columbia Daily Income Company; Columbia U.S. Government Securities
Fund, Inc.; Columbia Fixed Income Securities Fund, Inc.; Columbia Municipal
Bond Fund, Inc.; Columbia High Yield Fund, Inc.; Columbia National Municipal
Bond Fund, Inc.; GAMNA Series Funds, Inc.; WT Investment Trust; Kalmar Pooled
Investment Trust; The RBB Fund, Inc.; Robertson Stephens Investment Trust; HT
Insight Funds, Inc.; Harris Insight Funds Trust; Hilliard-Lyons Government
Fund, Inc.; Hilliard-Lyons Growth Fund, Inc.; Hilliard-Lyons Research Trust;
Senbanc Fund; ABN AMRO Funds; Alleghany Funds; BT Insurance Funds Trust; First
Choice Funds Trust; Forward Funds, Inc.; IAA Trust Asset Allocation Fund, Inc.;
IAA Trust Growth Fund, Inc.; IAA Trust Tax Exempt Bond Fund, Inc.; IAA Trust
Taxable Fixed Income Series Fund, Inc.; IBJ Funds Trust; Light Index Funds,
Inc.; LKCM Funds; Matthews International Funds; McM Funds; Metropolitan West
Funds; New Covenant Funds, Inc.; Panorama Trust; Smith Breeden Series Funds;
Smith Breeden Trust; Stratton Growth Funds, Inc.; Stratton Monthly Dividend
REIT Shares, Inc.; The Stratton Funds, Inc.; The Galaxy Fund; The Galaxy VIP
Fund; Galaxy Fund II; The Govett Funds, Inc.; Trainer, Wortham First Mutual
Funds; Undiscovered Managers Funds; Wilshire Target Funds, Inc.; Weiss, Peck &
Greer Funds Trust; Weiss, Peck & Greer International Fund; WPG Growth and
Income Fund; WPG Growth Fund; WPG Tudor Fund; RWB/WPG U.S. Large Stock Fund;
Tomorrow Funds Retirement Trust; The BlackRock Funds, Inc. (distributed by
BlackRock Distributors, Inc. a wholly owned subsidiary of PDI); Northern Funds
Trust and Northern Institutional Funds Trust (distributed by Northern Funds
Distributors, LLC a wholly owned subsidiary of PDI); The Offit Investment Fund,
Inc. (distributed by Offit Funds Distributor, Inc. a wholly owned subsidiary of
PDI) and The Offit Variable Insurance Fund, Inc. (distributed by Offit Funds
Distributor, Inc. a wholly owned subsidiary of PDI).
(b) For information relating to each director, officer or partner
of PDI, reference is made to Form BD (SEC File No. 8-46564) filed by PDI under
the Securities Exchange Act of 1934.
<PAGE> 90
(c) None.
Item 28. Location of Accounts and Records
--------------------------------
(1) Warburg, Pincus Trust II
466 Lexington Avenue
New York, New York 10017-3147
(Registrant's Agreement and Declaration of
Trust, By-laws and minute books)
(2) Credit Suisse Asset Management, LLC.
One Citicorp Center
153 East 53rd Street
New York, New York 10022
(records relating to its functions as
investment adviser)
(3) Credit Suisse Asset Management Securities,
Inc. 466 Lexington Avenue New York, New York
10017-3147 (records relating to its
functions as co-administrator)
(4) PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
(records relating to its functions as
co-administrator)
(5) State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
(records relating to its functions as
custodian, shareholder servicing agent,
transfer agent and dividend disbursing
agent)
(6) Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, Massachusetts 02171
(records relating to its functions as
shareholder servicing agent, transfer agent
and dividend disbursing agent)
(7) PFPC Trust Company
Mutual Fund Custody Services
200 Stevens Drive
Suite 440
Lester, Pennsylvania 19113
(records relating to its functions as
custodian)
(8) Provident Distributors, Inc.
<PAGE> 91
3200 Horizon Drive
King of Prussia, PA 19406
(records relating to its functions as
distributor)
Item 29. Management Services
Not applicable.
Item 30. Undertakings
Not applicable.
<PAGE> 92
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended (the "Securities Act"), and the Investment Company Act of 1940, as
amended, the Registrant certifies that it meets all of the requirements for
effectiveness of this Amendment to the Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933, as amended, and has duly caused this
Amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York and the State of New York, on the 26th day
of April, 2000.
WARBURG, PINCUS TRUST II
By:/s/Eugene L. Podsiadlo
-------------------------
Eugene L. Podsiadlo
President
Pursuant to the requirements of the Securities Act, this Amendment
has been signed below by the following persons in the capacities and on the
date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/William W. Priest Chairman of the April 26, 2000
- -------------------------------------- Board of Trustees
William W. Priest
/s/Eugene L. Podsiadlo President April 26, 2000
- --------------------------------------
Eugene L. Podsiadlo
/s/Michael A. Pignataro Treasurer and April 26, 2000
- --------------------------------------- Chief Financial
Michael A. Pignataro Officer
/s/Richard H. Francis Trustee April 26, 2000
- ----------------------------------------
Richard H. Francis
/s/Jack W. Fritz Trustee April 26, 2000
- -----------------------------------------
Jack W. Fritz
/s/Jeffrey E. Garten Trustee April 26, 2000
- -----------------------------------------
Jeffrey E. Garten
/s/James S. Pasman, Jr. Trustee April 26, 2000
- -----------------------------------------
James S. Pasman, Jr.
/s/Steven N. Rappaport Trustee April 26, 2000
- -----------------------------------------
Steven N. Rappaport
/s/Alexander B. Trowbridge Trustee April 26, 2000
- -----------------------------------------
Alexander B. Trowbridge
*By:/s/Michael A. Pignataro
- -----------------------------------------
Michael A. Pignataro as
Attorney-in-Fact
</TABLE>
<PAGE> 93
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
i(1) Opinion and Consent of Willkie Farr & Gallagher, counsel
to the Trust.
j(1) Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
p Form of Code of Ethics.
</TABLE>
<PAGE> 1
EXHIBIT i(1)
April 26, 2000
Warburg, Pincus Trust II
466 Lexington Avenue
New York, New York 10017-3147
Re: Post-Effective Amendment No. 5 to Registration Statement
(Securities Act File No. 333-19175; Investment Company Act
File No. 811-07999)
Ladies and Gentlemen:
You have requested us, as counsel to Warburg, Pincus Trust II (the "Trust"), a
business trust organized under the laws of the Commonwealth of Massachusetts, to
furnish you with this opinion in connection with the Trust's filing of
Post-Effective Amendment No. 5 (the "Amendment") to its Registration Statement
on Form N-1A (the "Registration Statement").
We have examined copies of the Trust's Declaration of Trust, to the date hereof
(the "Declaration"), the Trust's By-Laws, as amended to the date hereof(the
"By-Laws"), and the Amendment. We have also examined such other records,
documents, papers, statutes and authorities as we have deemed necessary to form
a basis for the opinion hereinafter expressed.
In our examination of material, we have assumed the genuineness of all
signatures and the conformity to original documents of all copies submitted to
us. As to various questions of fact material to our opinion, we have relied upon
statements and certificates of officers and representatives of the Trust and
others.
Based upon the foregoing, we are of the opinion that the shares of beneficial
interest of the Trust, par value $.001 per share (the "Shares"), when and if
duly sold, issued and paid for in accordance with the terms of the Declaration,
the By-Laws and the Registration Statement, will be will be valid, legally
issued, fully paid and non-assessable, assuming (i) that at the time of sale
such Shares are sold at a sales price in each case in excess of the par value of
the Shares; (ii) that the issuance of the Shares does not cause the number of
outstanding Shares to exceed that number of authorized shares provided for in
the Declaration, as amended to the date of issuance; and (iii) that resolutions
of the Board of Directors authorizing the issuance of the Shares that are in
effect on the date of issuance.
<PAGE> 2
Warburg, Pincus Trust II
April 26, 2000
Page 2
We hereby consent to the filing of this opinion as an exhibit to the Amendment,
to any reference to our name under the heading "Independent Accountants and
Counsel" in the Statement of Additional Information included as part of the
Amendment, and to the filing of this opinion as an exhibit to any application
made by or on behalf of the Trust or any distributor or dealer in connection
with the registration or qualification of the Trust or the Shares under the
securities laws of any state or other jurisdiction.
We are members of the Bar of the State of New York only and do not opine as to
the laws of any jurisdiction other than the laws of the State of New York and
the laws of the United States, and the opinions set forth above are,
accordingly, limited to the laws of those jurisdictions.
Very truly yours,
/s/Willkie Farr & Gallagher
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Post-Effective
Amendment No. 5 to the Registration Statement under the Securities Act of 1933
and Post-Effective Amendment No. 6 to the Registration Statement under the
Investment Company Act of 1940 on Form N-1A (File Nos. 333-19175 and 811-07999,
respectively) of our report dated February 3, 2000 on our audit of the financial
statements and financial highlights of Warburg, Pincus Trust II, which report is
included in the Annual Report to Shareholders for the year ended December 31,
1999 and for the respective periods then ended. We also consent to the reference
of our firm under the heading "Financial Highlights" in the Prospectus and
"Independent Accountants and Counsel" in the Statement of Additional
Information.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
April 25, 2000
2400 Eleven Penn Center
Philadelphia, Pennsylvania
<PAGE> 1
EXHIBIT p
CREDIT SUISSE ASSET MANAGEMENT, LLC
WARBURG PINCUS FUNDS/CSAM CLOSED-END FUNDS
CODE OF ETHICS
I. APPLICABILITY
This Code of Ethics establishes rules of conduct for "Access Persons" (as
defined below) of Credit Suisse Asset Management, LLC, its subsidiaries and
Credit Suisse Asset Management Securities, Inc. (collectively referred to as
"CSAM") and each U.S. registered investment company that adopts this Code
("Covered Fund") (CSAM and the Covered Funds are collectively referred to as the
"Covered Companies"). For purposes of this Code, "Access Person" shall mean:
- - any "Advisory Person" -- any employee or officer of CSAM and any natural
person in a control relationship to a Covered Company (except for a
natural persons who, but for their his or her holdings in a Covered Fund,
would not be considered an Advisory Person, unless they he or she obtains
information concerning recommendations made to the Covered Fund with
regard to the purchase or sale of securities by the Covered Fund, in which
case such person shall be considered an Advisory Person only with respect
to the Covered Fund); or
- - any director, trustee or officer of a Covered Fund, whether or not such
person is an Advisory Person, in which case such person shall be
considered an Access Person only with respect to the Covered Fund.
For purposes of this Code:
- - the term "security" shall include any option to purchase or sell, any
security that is convertible or exchangeable for, and any other derivative
interest relating to the security; and
- - the terms "purchase" and "sale" of a security shall include, among other
things, the writing of an option to purchase or sell a security; and
<PAGE> 2
- - all other terms .shall have the same meanings as under the Investment
Company Act of 1940 ("1940 Act"), unless indicated otherwise.
II. Statement of General Principles
In conducting personal investment activities, all Access Persons are required to
act consistent with the following general fiduciary principles:
- - the interests of CSAM clients, including Covered Funds, must always be
placed first, provided, however, that persons who are Access Persons only
with respect to certain Covered Funds shall place the interests of such
Covered Funds first;
- - all personal securities transactions must be conducted in such a manner
as to avoid any actual or potential conflict of interest or any abuse of
an individual's position of trust and responsibility; and
- - Access Persons must not take inappropriate advantage of their positions.
CSAM has a separate policy and procedures designed to detect and prevent insider
trading, which should be read together with this Code. Nothing contained in this
Code should be interpreted as relieving any Access Person from the obligation to
act in accordance with any applicable law, rule or regulation or any other
statement of policy or procedure adopted by any Covered Company.
III. Prohibitions
The following prohibitions and related requirements apply to Advisory Persons
and/or Access Persons (as stated) and accounts in which they have "Beneficial
Ownership" (as defined in Exhibit 1).
A. Short Term Trading. CSAM discourages Advisory Persons from short-term trading
(i.e., purchases and sales within a 60 day period), as such activity could be
viewed as being in conflict with CSAM's general fiduciary principles. In no
event, however, may an
<PAGE> 3
Advisory Person make a purchase and sale (or sale and purchase) of a security,
including shares of Covered Funds and other U.S. registered open-end investment
companies (other than money market funds), within five "Business Days" (meaning
days on which the New York Stock Exchange is open for trading). CSAM reserves
the right to extend this prohibition period for the short-term trading
activities of any or all Advisory Persons if CSAM determines that such
activities are being conducted in a manner that may be perceived to be in
conflict with CSAM's general fiduciary principles.
B. Side-by-Side Trading. No Access Person may purchase or sell (directly or
indirectly) any security for which there is a "buy" or "sell" order pending for
a CSAM client (except that this restriction does not apply to any Access Person
who is neither an Advisory Person nor an officer of a Covered Fund, unless he or
she knows, or in the ordinary course of fulfilling official duties with a
Covered Fund should know, that there is a "buy" or "sell" order pending with
respect to such security for a CSAM client), or that such Access Person knows
(or should know) at the time of such purchase or sale:
- - is being considered for purchase or sale by or for any CSAM client; or
- - is being purchased or sold by or for any CSAM client.
C. Blackout Periods. No Advisory Person may execute a securities transaction
within five Business Days before and one Business Day after a transaction in
that security for a CSAM client.
D. Public Offerings. No Advisory Person may directly or indirectly acquire
Beneficial Ownership in any security in a public offering in the primary
securities market.
E. Private Placements. No Advisory Person may directly or indirectly acquire or
dispose of any Beneficial Ownership in any privately placed security without
the express prior written approval of a supervisory person designated in
Section IX of this Code ("Designated Supervisory Person"). Approval will
<PAGE> 4
take into account, among other factors, whether the investment oportunity should
be reserved for a CSAM client, whether the opportunity is being offered to the
Advisory Person because of his or her position with CSAM or as a reward for past
transactions and whether the investment creates or may in the future create a
conflict of interest.
F. Short Selling. Advisory Persons are only permitted to engage in short selling
for hedging purposes. No Advisory Person may engage in any transaction that has
the effect of creating any net "short exposure" in an individual security.
G. Futures Contracts. No Advisory Person may invest in futures contracts, except
through the purchase of options on futures contracts.
H. Options. No Advisory Person may write (i.e., sell) any options except for
hedging purposes and only if the option is fully covered.
I. Trading, Hedging and Speculation in Credit Suisse Group Securities.
Transactions by employees, officers and directors of CSAM in securities of
Credit Suisse Group ("CSG") are prohibited for each period beginning 15 calendar
days before announcement of CSG yearly or half-yearly results and ending two
Business Days after the announcement. Employees, officers and directors of CSAM
may only hedge vested positions in CSG stock through short sales or derivative
instruments. Uncovered short exposure, through short sales or otherwise, is not
permitted without the express prior written approval of a Designated Supervisory
Person.
J. Investment Clubs. No Advisory Person may participate in an "investment
club" or similar activity.
K. Disclosure of Interest. No Advisory Person may recommend to or effect for any
CSAM client any securities transaction without having disclosed his or her
personal interest (actual or potential), if any, in the issuer of the
securities, including without limitation:
<PAGE> 5
- - any ownership or contemplated ownership of any privately placed securities of
the issuer or any of its affiliates;
- - any employment, management or official position with the issuer or any of its
affiliates;
- - any present or proposed business relationship between the Advisory Person and
the issuer or any of its affiliates; and
- - any additional factors that may be relevant to a conflict of interest
analysis.
Where the Advisory Person has a personal interest in an issuer, a decision to
purchase or sell securities of the issuer or any of its affiliates by or for a
CSAM client shall be subject to an independent review by a Designated
Supervisory Person.
L. Gifts. No Advisory Person may seek or accept any gift of more than a de
minimis value (approximately $250 per year) from any person or entity that does
business with or on behalf of a CSAM client, other than reasonable,
business-related meals and tickets to sporting events, theater and similar
activities. If any Advisory Person is unsure of the appropriateness of any gift,
a Designated Supervisory Person should be consulted.
M. Directorships and Other Outside Business Activities. No Advisory Person may
serve on the board of directors/trustees of any issuer without the express prior
written approval of a Designated Supervisory Person. Approval will be based upon
a determination that the board service would be consistent with the interests of
CSAM clients. Where board service is authorized, Advisory Persons serving as
directors will be isolated from those making investment decisions regarding the
securities of that issuer through "informational barrier" or other procedures
specified by a Designated Supervisory Person.
No Advisory Person may be employed (either for compensation or in a voluntary
capacity) outside his or her regular position with CSAM or its affiliated
<PAGE> 6
companies without the written approval of a Designated Supervisory Person.
IV. EXEMPT TRANSACTIONS
A. Exemptions from Prohibitions.
1. Purchases and sales of securities issued or guaranteed by the U.S.
government or any agencies or instrumentalities of the U.S. government,
municipal securities, and other non-convertible fixed income securities, which
are in each case rated investment grade, are exempt from the prohibitions
described in paragraphs C and D of Section III if such transactions are made in
compliance with the preclearance requirements of Section V(B) below.
2. Any securities transaction, or series of related transactions,
involving 500 shares or less of an issuer having a market capitalization
(outstanding shares multiplied by the current market price per share) greater
than $2.5 billion is exempt from the prohibition described in paragraph C of
Section III if such transaction is made in compliance with the preclearance
requirements of Section V(B) below.
B. Exemptions from Prohibitions and Preclearance. The prohibitions described in
paragraphs B through E of Section III and the preclearance requirements of
Section V(B) shall not apply to:
- - purchases and sales of securities that are direct obligations of the U.S.
government;
- - purchases and sales of securities of U.S. registered open-end investment
companies;
- - purchases and sales of bankers' acceptances, bank certificates of deposit, and
commercial paper;
- - purchases that are part of an automatic dividend reinvestment plan;
- - purchases and sales that are non-volitional on the part of either the Access
Person or the CSAM client;
<PAGE> 7
- - purchases and sales in any account maintained with a party that has no
affiliation with the Covered Companies and over which no Advisory Person
has, in the judgment of a Designated Supervisory Person after reviewing
the terms and circumstances, direct or indirect influence or control over
the investment or trading of the account; and
- - purchases by the exercise of rights offered by an issuer pro rata to all
holders of a class of its securities, to the extent that such rights were
acquired from the issuer, and sales of these rights.
C. Further Exemptions. Express prior written approval may be granted by a
Designated Supervisory Person if a purchase or sale of securities or other
outside activity is consistent with the purposes of this Code and Section 17(j)
of the Investment Company Act of 1940 ("1940 Act") and rules thereunder
(attached as Attachment B A is a form to request such approval). For example, a
purchase or sale may be considered consistent with those purposes if the
purchase or sale is not harmful to a CSAM client because such purchase or sale
would be unlikely to affect a highly institutional market, or because such
purchase or sale is clearly not related economically to the securities held,
purchased or sold by the CSAM client.
V. TRADING, PRE-CLEARANCE, REPORTING AND OTHER COMPLIANCE PROCEDURES
A. Trading Through CSAM. No Advisory Person shall purchase or sell securities
for an account in which he or she has Beneficial Ownership other than through
the CSAM trading desk persons designated by a Designated Supervisory Person,
unless express prior written approval is granted by a Designated Supervisory
Person.
B. Preclearance. Except as provided in Section IV, before any Advisory Person
purchases or sells any security for any account in which he or she has
Beneficial Ownership, preclearance shall be obtained in writing from a
Designated Supervisory Person (attached as Attachment BC is a form to request
such approval). If clearance is given for a purchase or sale and the
transaction is not effected on that Business Day, a new preclearance request
must be made.
<PAGE> 8
C. Reporting.
1. Initial Certification. Within 10 days after the commencement of his or her
employment with CSAM or his or her affiliation with any Covered Fund, each
Access Person shall submit to a Designated Supervisory Person an initial
certification in the form of Attachment CD to certify that:
- - he or she has read and understood this Code of Ethics and recognizes
that he or she is subject to its requirements; and
- - he or she has disclosed or reported all personal securities holdings in
which he or she has any direct or indirect Beneficial Ownership and all
accounts in which any securities are held for his or her direct or
indirect benefit.
2. Annual Certification. In addition, each Access Person shall submit to a
Designated Supervisory Person an annual certification in the form of Attachment
DE to certify that:
- - he or she has read and understood this Code of Ethics and recognizes
that he or she is subject to its requirements;
- - he or she has complied with all requirements of this Code of Ethics;
and
- - he or she has disclosed or reported (a) all personal securities
transactions for the previous year and (b) all personal securities
holdings in which he or she has any direct or indirect Beneficial
Ownership and accounts in which any securities are held for his or her
direct or indirect benefit as of a date no more than 30 days before the
annual certification is submitted.
Access Persons may comply with the initial and annual reporting requirements by
submitting account statements and/or Attachment E to a Designated Supervisory
Person within the prescribed periods. An Access Persons who is not an Advisory
Persons is not required to submit
<PAGE> 9
initial or annual certifications, unless such Access Person is an officer of a
Covered Fund.
Each Advisory Person shall annually disclose all directorships and outside
business activities (attached as Attachment F is a form for such disclosure).
3. Quarterly Reporting. Each All Advisory Persons and each Access Person who is
an officer of a Covered Fund shall also supply a Designated Supervisory Person,
on a timely basis, with duplicate copies of confirmations of all personal
securities transactions and copies of periodic statements for all securities
accounts, including confirmations and statements for transactions and accounts
described in Section IV(B) above (exempt from prohibitions and preclearance).
This information must be supplied at least once per calendar quarter, within 10
days after the end of the calendar quarter.
Each Access Persons who is neither an Advisory Persons nor an officer of a
Covered Fund is required to report a transaction only if he or she, at the time
of that transaction, knew (or in the ordinary course of fulfilling official
duties with a Covered Fund should have known) that during the 15-day period
immediately before or after the date of the transaction the security such
person purchased or sold was purchased or sold by the Covered Fund or was being
considered for purchase or sale by the Covered Fund.
VI. COMPLIANCE MONITORING AND SUPERVISORY REVIEW
A Designated Supervisory Person will periodically review reports from the CSAM
trading desk (or, if applicable, confirmations from brokers) to assure that all
transactions effected by Access Persons for accounts in which they have
Beneficial Ownership are in compliance with this Code and Rule 17j-1 under the
1940 Act.
Material violations of this Code and any sanctions imposed shall be reported
not less frequently than quarterly to the board of directors of each relevant
Covered Fund and to the senior management of CSAM. At least annually, each
Covered Company shall prepare a written report to the board of
directors/trustees of each Covered Fund, and to the senior management of CSAM,
that:
<PAGE> 10
- - describes issues that have arisen under the Code since the last report,
including, but not limited to, material violations of the Code or
procedures that implement the Code and any sanctions imposed in response
to those violations; and
- - certifies that each Covered Company has adopted procedures reasonably
necessary to prevent Access Persons from violating the Code.
Material changes to this Code of Ethics must be approved by the Board of
Directors of each Covered Fund no later than six months after the change is
adopted. That approval must be based on a determination that the changes are
reasonably necessary to prevent Access Persons from engaging in any conduct
prohibited by the Code and Rule 17j-1 under the 1940 Act. Board approval must
include a separate vote of a majority of the independent directors.
VII. SANCTIONS
Upon discovering that an Access Person has not complied with the requirements
of this Code, the senior management of the relevant Covered Company may impose
on that person whatever sanctions are deemed appropriate, including censure;
fine; reversal of transactions and disgorgement of profits; suspension; or
termination of employment.
VIII. CONFIDENTIALITY
All information obtained from any Access Person under this Code shall be kept
in strict confidence, except that reports of transactions will be made
available to the Securities and Exchange Commission or any other regulatory or
self-regulatory organization to the extent required by law or regulation.
IX. FURTHER INFORMATION
The Designated Supervisory Persons are Hal Liebes and James W. Bernaiche or
their designees in CSAM's legal and compliance department. Any questions
regarding the Code of Ethics should be directed to a Designated Supervisory
Person.
Dated: March 1, 2000
<PAGE> 11
EXHIBIT 1
CREDIT SUISSE ASSET MANAGEMENT, LLC
WARBURG PINCUS FUNDS
CODE OF ETHICS
DEFINITION OF BENEFICIAL OWNERSHIP
The term "Beneficial Ownership" as used in the attached Code of Ethics is to be
interpreted by reference to Rule 16a-1(a)(2) under the Securities Exchange Act
of 1934 ("Rule"). Under the Rule, a person is generally deemed to have
Beneficial Ownership of securities if the person (directly or indirectly),
through any contract, arrangement, understanding, relationship or otherwise, has
or shares a direct or indirect pecuniary interest in the securities.
The term "pecuniary interest" is generally defined in the Rule to mean the
opportunity (directly or indirectly) to profit or share in any profit derived
from a transaction in the securities. A person is deemed to have an "indirect
pecuniary interest" within the meaning of the Rule:
- in any securities held by members of the person's immediate family
sharing the same household; the term "immediate family" includes any
child, stepchild, grandchild, parent, stepparent, grandparent, spouse,
sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law or sister-in-law, as well as adoptive relationships;
- - a general partner's proportionate interest in the portfolio securities
held by a general or limited partnership;
- - a person's right to dividends that is separated or separable from the
underlying securities;
- - a person's interest in certain trusts; and
<PAGE> 12
- - a person's right to acquire equity securities through the exercise or
conversion of any derivative security, whether or not presently
exercisable.(1)
For purposes of the Rule, a person who is a shareholder of a corporation or
similar entity is not deemed to have a pecuniary interest in portfolio
securities held by the corporation or entity, so long as the shareholder is not
a controlling shareholder of the corporation or the entity and does not have or
share investment control over the corporation's or the entity's portfolio. The
term "control" means the power to exercise a controlling influence over
management or policies, unless the power is solely the result of an official
position with the company.
- --------
(1) The term "derivative security" is defined as any option, warrant,
convertible security, stock appreciation right of similar right
with an exercise or conversion privilege at price related to an
equity security (or similar securities) with a value derived from
the value of an equity security.
<PAGE> 13
ATTACHMENT A
Credit Suisse Asset Management, LLC
Warburg Pincus Funds/CSAM Closed-End Funds
Code of Ethics -- Special Approval Form
1. The following is a private placement of securities or other investment
requiring special approval in which I want to acquire or dispose of Beneficial
Ownership:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Name of Date to Amount Record Purchase How
- ------- ------- ------ ------ -------- ---
Private be to be Owner Price Acquired
- ------- -- ----- ----- ----- --------
Security Acquired Held (Broker/
- -------- -------- ---- --------
or Other Issuer)
- -------- -------
Investment
- ----------
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
Would this investment opportunity be appropriate for a CSAM client?
Yes No
- --- ---
2. I want to engage in the following outside business activity:
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3. I want special approval to place personal securities trades other than
through the CSAM trading desk (please describe):
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<PAGE> 14
I certify, as applicable, that I (a) am not aware of any non-public information
about the issuer, (b) have made all disclosures required by the Code of Ethics
and (c) will comply with all reporting requirements of the Code.
- ------------------- ------------------
Signature Date
- --------------------------------
Print Name
Approved
- ---
Not Approved
- ---
- --------------------------- -------------------------
Designated Supervisory Person Date
<PAGE> 15
ATTACHMENT B
Credit Suisse Asset Management, LLC
Warburg Pincus Funds/CSAM Closed-End Funds
Code of Ethics -- Personal Trading Pre-Clearance Form
This form should be filled out completely to expedite approval.
1. Security:
---------------------------------------
Ticker:
---------------------------------------
Purchase Sale
---- ----
2. Number of shares/bonds/units/contracts:
--------------
3. Account Name/Shortname:
---------------------------
4. Brokerage Firm and Account Number:
--------------------
5. Why do you want to purchase or sell? Is this an opportunity
appropriate for CSAM clients?
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6. Are you aware of a CSAM Advisory Person who is buying or selling or who
plans to buy or sell this security for his or her personal accounts or CSAM
clients?
Yes No
--- ---
If yes, who?
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7. If the amount is less than 500 shares, is the issuer market
capitalization greater than $2.5 billion?
<PAGE> 16
Yes No
---- -----
I certify that I (a) am not aware of any non-public information about the
issuer, (b) have made all disclosures required by the Code of Ethics and this
trade otherwise complies with the Code, including the prohibition on
investments in initial public offerings, and (c) will comply with all reporting
requirements of the Code.
- ---------------------------------- ---------------
Signature of Advisory Person Date
- ----------------------------------
Print Name
Approved
- ---
Not Approved
- ---
- ---------------------------------- -----------------
Designated Supervisory Person Date - Valid
this Business Day only.
<PAGE> 17
ATTACHMENT C
CREDIT SUISSE ASSET MANAGEMENT, LLC
WARBURG PINCUS FUNDS/CSAM CLOSED-END FUNDS
CODE OF ETHICS
INITIAL CERTIFICATION
I certify that I:
- - have read and understood the Code of Ethics for Credit Suisse Asset
Management, LLC, and the Warburg Pincus Funds and the CSAM Closed-End
Funds dated February 3, 2000 and recognize that I am subject to its
requirements; and
- - have disclosed or reported all ersonal securities holdings in which I
had any direct or indirect Beneficial Ownership and accounts in which any
securities were held for my direct or indirect benefit as of the date I
commenced employment with CSAM or the date I became affiliated with a
Covered Fund.
- -------------------------------- -------------------
Signature of Access Person Date
- --------------------------------
Print Name
<PAGE> 18
ATTACHMENT D
CREDIT SUISSE ASSET MANAGEMENT, LLC
WARBURG PINCUS FUNDS/CSAM CLOSED-END FUNDS
CODE OF ETHICS
ANNUAL CERTIFICATION
I certify that I:
- - have read and understood the Code of Ethics for Credit Suisse Asset
Management, LLC, and the Warburg Pincus Funds and the CSAM Closed-End
Funds dated February 3, 2000 and recognize that I am subject to its
requirements;
- - have complied with all requirements of the Code of Ethics and Policy and
Procedures Designed to Detect and Prevent Insider Trading in effect during
the year ended December 31, 1999; and
- - have disclosed or reported all personal securities transactions for the
year ended December 31, 1999 and all personal securities holdings in which
I had any direct or indirect Beneficial Ownership and all accounts in
which any securities were held for my direct or indirect benefit as of
December 31, 1999.
- -------------------------------- -------------------
Signature of Access Person Date
- --------------------------------
Print Name
<PAGE> 19
ATTACHMENT E
Credit Suisse Asset Management, LLC
Warburg Pincus Funds/CSAM Closed-End Funds
Code of Ethics - Personal Securities Account
Declaration
ALL ACCESS PERSONS MUST COMPLETE EACH APPLICABLE ITEM (1, 2, 3 OR 4) AND SIGN
BELOW.
1. The following is a list of securities/commodities accounts in which I have
Beneficial Ownership:
Broker/Dealer Account Title and Number
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2. The following is a list of securities/commodities accounts in which I had
Beneficial Ownership that have been opened or closed in the past year:
Broker/Dealer Account Title and Number
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3. The following is a list of any other securities or other investment holdings
in which I have Beneficial Ownership (for securities held in accounts other
than those disclosed in response to items 1 and 2):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Name of Date Amount Record Purchase How
Private Acquired Held Owner Price Acquired
Security (Broker/
or Other Issuer)
Investment
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 20
<TABLE>
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
4. I do not have Beneficial Ownership in any securities/commodities accounts or
otherwise have Beneficial Ownership of any securities or other instruments
subject to the Code of Ethics.
(Please initial.)
- -------------
Initials
I declare that the information given above is true and accurate:
- -------------------------------- --------------------
Signature of Access Person Date
- -------------------------------
Print Name
<PAGE> 21
ATTACHMENT F
CREDIT SUISSE ASSET MANAGEMENT, LLC
WARBURG PINCUS FUNDS/CSAM CLOSED-END FUNDS
CODE OF ETHICS
OUTSIDE BUSINESS ACTIVITIES
Outside business activities include, but are not limited to, the following:
- - self-employment;
- - receiving compensation from another person or company;
- - serving as an officer, director, partner, or consultant of another
business organization (including a family owned company); and
- - becoming a general or limited partner in a partnership or owning any
stock in a business, unless the stock is publicly traded and no control
relationship exists.
Outside business activities include serving with a governmental (federal, state
or local) or charitable organization whether or not for compensation.
All Advisory Persons must complete at least one choice (1 or 2) and sign below.
1. The following are my outside business activities:
<TABLE>
<CAPTION>
Approved By
Designated
Outside Business Description of Supervisory Person
Activity Activity (Yes/No)
- -------------------------------------------------------------------------------------
<S> <C> <C>
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
<PAGE> 22
2. I am not involved in any outside business activities. (Please initial)
------------
Initials
I declare that the information given above is true and accurate:
- -------------------------------- -------------------
Signature of Advisory Person Date
- --------------------------------
Print Name
