<PAGE> 1
SUPPLEMENT TO THE COMMON CLASS PROSPECTUS
WARBURG PINCUS MAJOR FOREIGN MARKETS FUND
WARBURG PINCUS INTERNATIONAL EQUITY FUND
WARBURG PINCUS INTERNATIONAL SMALL COMPANY FUND
WARBURG PINCUS EMERGING MARKETS FUND
WARBURG PINCUS GLOBAL POST-VENTURE CAPITAL FUND
The following information supersedes the section in the funds' Common Class
Prospectus entitled "Other Information -- About the Distributor".
Provident Distributors, Inc. (PDI), Four Falls Corporate Center, West
Conshohocken, PA 19428-2961, is the funds' distributor and is responsible for
making the funds available to you.
As part of their business strategies, each of the funds except the International
Equity Fund has adopted a Rule 12b-1 shareholder-servicing and distribution plan
to compensate Credit Suisse Asset Management Securities, Inc. (CSAMSI) for
providing certain shareholder and other services related to the sale of the
Common Class. Under the plan, CSAMSI receives fees at an annual rate of 0.25% of
average daily net assets of the funds' Common Class. Because the fees are paid
out of a fund's assets on an ongoing basis, over time they will increase the
cost of your investment and may cost you more than paying other types of sales
charges.
Portfolio Manager Changes. The following information replaces certain
information in the funds' Common Class Prospectus:
WARBURG PINCUS EMERGING MARKETS FUND
Harold E. Sharon and Vincent J. McBride serve as Co-Portfolio Managers of the
fund and Jun Sung Kim and Federico D. Laffan serve as Associate Portfolio
Managers of the fund. Morid Kamshad no longer serves as Associate Portfolio
Manager of the fund.
Dated: January 3, 2000 WPISF-16-0100
<PAGE> 2
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 22, 1999
AS REVISED JANUARY 3, 2000
WARBURG PINCUS MAJOR FOREIGN MARKETS FUND
WARBURG PINCUS INTERNATIONAL EQUITY FUND
WARBURG PINCUS INTERNATIONAL SMALL COMPANY FUND
WARBURG PINCUS EMERGING MARKETS FUND
WARBURG PINCUS GLOBAL POST-VENTURE CAPITAL FUND
This combined Statement of Additional Information provides information about
Warburg Pincus Major Foreign Markets Fund (the "Major Foreign Markets Fund"),
Warburg Pincus International Equity Fund (the "International Equity
Fund"),Warburg Pincus International Small Company Fund (the "International
Small Company Fund"), Warburg Pincus Emerging Markets Fund (the "Emerging
Markets Fund") and Warburg Pincus Global Post-Venture Capital Fund (the "Global
Post-Venture Capital Fund") (collectively, the "Funds") that supplements
information in the combined Prospectus for the Common Shares of the Funds,
dated February 22, 1999, the Prospectus for the Advisor Shares of the
International Equity Fund, dated February 22, 1999, the Prospectus for the
Advisor Shares of the Emerging Markets Fund and Global Post-Venture Capital
Fund, dated February 22, 1999 (as revised March 22, 1999) and the Prospectus
for the Institutional Shares of the Emerging Markets Fund, dated December 10,
1999, as amended or supplemented from time to time (collectively, the
"Prospectus").
Each Fund's audited Annual Report dated October 31, 1999, which either
accompanies this Statement of Additional Information or has previously been
provided to the investor to whom this Statement of Additional Information is
being sent, is incorporated herein by reference.
This Statement of Additional Information is not itself a prospectus and no
investment in shares of the Funds should be made solely upon the information
contained herein. Copies of the Prospectus, Annual Reports and information
regarding each Fund's current performance can be obtained by writing or
telephoning:
<TABLE>
<CAPTION>
Common Shares Advisor Shares Institutional Shares
-------------------- ----------------------------- -------------------------
<S> <C> <C>
Warburg Pincus Funds Warburg Pincus Advisor Funds CSAM Institutional Shares
P.O. Box 9030 P.O. Box 9030 P.O. Box 8500
Boston, MA 02205-9030 Boston, MA 02205-9030 Boston, MA 02266-8500
800-WARBURG Attn.: Institutional Services 800-WARBURG
800-222-8977
</TABLE>
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
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INVESTMENT OBJECTIVES AND POLICIES................................................................................1
Options on Securities and Securities Indices and Currency Exchange Transactions..............................4
Securities Options.......................................................................................4
Securities Index Options.................................................................................7
OTC Options..............................................................................................7
Futures Activities.......................................................................................8
Futures Contracts...................................................................................8
Options on Futures Contracts........................................................................9
Currency Exchange Transactions..........................................................................10
Forward Currency Contracts.........................................................................10
Currency Options...................................................................................11
Currency Hedging...................................................................................11
Swaps...................................................................................................12
Hedging Generally.......................................................................................12
Asset Coverage for Forward Contracts, Options, Futures, Options on Futures and Swaps....................13
Additional Information on Other Investment Practices........................................................14
U.S. Government Securities..................................................................................14
Money Market Obligations....................................................................................15
Repurchase Agreements...................................................................................15
Money Market Mutual Funds...............................................................................16
Convertible Securities......................................................................................16
Debt Securities.............................................................................................16
Below Investment Grade Securities.......................................................................17
Structured Securities.......................................................................................18
Mortgage-Backed Securities..............................................................................18
Asset-Backed Securities.................................................................................20
Structured Notes, Bonds or Debentures...................................................................20
Loan Participations and Assignments.....................................................................20
REITs.......................................................................................................21
Securities of Other Investment Companies....................................................................21
Lending of Portfolio Securities.............................................................................22
Foreign Investments.........................................................................................22
Foreign Currency Exchange...............................................................................23
Euro Conversion.........................................................................................23
Information.............................................................................................23
Political Instability...................................................................................24
Foreign Markets.........................................................................................24
Increased Expenses......................................................................................24
Foreign Debt Securities.................................................................................24
Sovereign Debt..........................................................................................25
Depositary Receipts.....................................................................................26
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<TABLE>
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Privatizations..........................................................................................26
Brady Bonds.............................................................................................26
Emerging Markets........................................................................................27
Japanese Investments........................................................................................27
Domestic Politics.......................................................................................28
Economic Background.....................................................................................29
Economic Trends.........................................................................................29
Currency Fluctuation....................................................................................31
Securities Markets......................................................................................32
Other Factors...........................................................................................33
Short Sales.................................................................................................33
Short Sales "Against the Box................................................................................33
Warrants....................................................................................................34
Non-Publicly Traded and Illiquid Securities.................................................................35
Rule 144A Securities....................................................................................36
Borrowing...................................................................................................36
Stand-By Commitments........................................................................................37
Reverse Repurchase Agreements...............................................................................37
When-Issued Securities and Delayed-Delivery Transactions....................................................38
Emerging Growth and Small Companies; Unseasoned Issuers.....................................................39
Dollar Rolls................................................................................................39
Temporary Defensive Strategies..............................................................................40
Debt Securities.........................................................................................40
Money Market Obligations................................................................................40
Non-Diversified Status (Emerging Markets Fund Only).....................................................40
Strategies Available to the Global Post-Venture Capital Fund Only...........................................40
Private Fund Investments....................................................................................40
Other Strategies............................................................................................42
INVESTMENT RESTRICTIONS..........................................................................................42
All Funds...................................................................................................42
Major Foreign Markets Fund..................................................................................42
International Equity Fund...................................................................................44
International Small Company Fund............................................................................46
Emerging Markets Fund.......................................................................................47
Global Post-Venture Capital Fund............................................................................49
PORTFOLIO VALUATION..............................................................................................51
PORTFOLIO TRANSACTIONS...........................................................................................52
PORTFOLIO TURNOVER...............................................................................................55
MANAGEMENT OF THE FUNDS..........................................................................................56
Officers and Board of Directors.............................................................................56
Directors' Total Compensation...............................................................................60
Portfolio Managers of the Funds.............................................................................64
Major Foreign Markets Fund..............................................................................64
</TABLE>
(ii)
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International Small Company Fund........................................................................65
International Equity Fund and Emerging Markets Fund.....................................................66
Global Post-Venture Capital Fund........................................................................66
Investment Advisers and Co-Administrators...................................................................67
Custodians and Transfer Agent...............................................................................70
Organization of the Funds...................................................................................70
Distribution and Shareholder Servicing......................................................................72
Distributor.............................................................................................72
Common Shares...........................................................................................72
Advisor Shares..........................................................................................73
Institutional Shares....................................................................................75
General.................................................................................................75
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...................................................................75
Automatic Cash Withdrawal Plan..............................................................................75
EXCHANGE PRIVILEGE...............................................................................................76
ADDITIONAL INFORMATION CONCERNING TAXES..........................................................................76
The Funds and Their Investments.............................................................................77
Passive Foreign Investment Companies........................................................................79
Fund Taxes on Swaps.........................................................................................80
Dividends and Distributions.................................................................................80
Sales of Shares.............................................................................................81
Foreign Taxes...............................................................................................81
Backup Withholding..........................................................................................81
Notices.....................................................................................................82
Other Taxation..............................................................................................82
DETERMINATION OF PERFORMANCE.....................................................................................82
TOTAL RETURN.....................................................................................................82
INDEPENDENT ACCOUNTANTS AND COUNSEL..............................................................................87
MISCELLANEOUS....................................................................................................87
FINANCIAL STATEMENTS.............................................................................................87
APPENDIX - DESCRIPTION OF RATINGS...............................................................................A-1
</TABLE>
(iii)
<PAGE> 6
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each
Fund's investment objective and policies in the Prospectus. There are no
assurances that the Funds will achieve their investment objectives.
Major Foreign Markets Fund. The investment objective of the
Major Foreign Markets Fund is long-term capital appreciation, which it seeks to
achieve by investing, under normal market conditions, at least 65% of its total
assets in securities of issuers, wherever organized, having their principal
business activities and interests in countries considered to be major foreign
securities markets ("Major Foreign Markets").
Determinations as to whether an issuer has its principal
business activities and interests in a Major Foreign Market will be made by
Credit Suisse Asset Management, LLC ("CSAM") based on publicly available
information and inquiries made to the issuers. In making such determinations,
CSAM will consider the following factors: (i) whether the issuer's principal
securities trading market is in a Major Foreign Market; (ii) whether the issuer
derives at least 50% of its revenues or earnings, either alone or on a
consolidated basis, from goods produced or sold, investments made or services
performed in a Major Foreign Markets, or has at least 50% of its total or net
assets situated in one or more Major Foreign Markets; or (iii) whether the
issuer is organized under the laws of, and has a principal office in, a Major
Foreign Market.
International Equity Fund. The investment objective of the
International Equity Fund is long-term capital appreciation, which it seeks to
achieve by investing in international equity securities that are considered by
CSAM to have above-average potential for appreciation.
International Small Company Fund. The investment objective of
the International Small Company Fund is capital appreciation, which it seeks to
achieve by investing in a portfolio of equity securities of small-sized
companies, wherever organized, that in CSAM's judgment have their principal
business activities and interests outside of the U.S. The Fund will invest
primarily in companies whose securities are traded on national securities
exchanges or in an organized over-the-counter ("OTC") market, such as the Japan
Securities Dealers Association Automated Quotation Systems ("JASDAQ"), the
European Association of Securities Dealers Automated Quotation System
("EASDAQ") and the U.K. Alternative Investment Market ("AIM").
In appropriate circumstances, such as when a direct
investment by the International Small Company Fund in the securities of a
particular country cannot be made or when the securities of an investment
company are more liquid than the underlying portfolio securities, the Fund may,
consistent with the provisions of the Investment Company Act of 1940, as
amended (the "1940 Act"), invest in the securities of closed-end investment
companies that invest in foreign securities. As a shareholder in a closed-end
investment company, the Fund will bear its ratable share of the investment
company's expenses, including management fees, and will remain subject to
payment of the Fund's administration fees and other expenses with respect to
assets so invested.
<PAGE> 7
Emerging Markets Fund. The investment objective of the
Emerging Markets Fund is growth of capital, which it seeks to achieve by
investing primarily in equity securities of non-U.S. issuers consisting of
companies in emerging securities markets ("Emerging Markets"). The Fund will
not necessarily seek to diversify investments on a geographical basis or on the
basis of the level of economic development of any particular country and the
Emerging Markets in which the Fund invests will vary from time to time. An
equity security of an issuer in an Emerging Market is defined as common stock
and preferred stock (including convertible preferred stock); bonds, notes and
debentures convertible into common or preferred stock; stock purchase warrants
and rights; equity interests in trusts and partnerships; and depositary
receipts of an issuer: (i) the principal securities trading market for which is
in an Emerging Market; (ii) which derives at least 50% of its revenues or
earnings, either alone or on a consolidated basis, from goods produced or sold,
investments made or services performed in an Emerging Market, or which has at
least 50% of its total or net assets situated in one or more Emerging Markets;
or (iii) that is organized under the laws of, and with a principal office in,
an Emerging Market. Determinations as to whether an issuer is an Emerging
Markets issuer will be made by CSAM, based on publicly available information
and inquiries made to the issuers.
Among the countries which CSAM currently considers to be
Emerging Markets are the following: Algeria, Angola, Antigua, Argentina,
Armenia, Azerbaijan, Bangladesh, Barbuda, Barbados, Belarus, Belize, Bhutan,
Bolivia, Botswana, Brazil, Bulgaria, Cambodia, Chile, People's Republic of
China, Republic of China (Taiwan), Colombia, Cyprus, Czech Republic, Dominica,
Ecuador, Egypt, Estonia, Georgia, Ghana, Greece, Grenada, Guyana, Hong Kong,
Hungary, India, Indonesia, Israel, Ivory Cost, Jamaica, Jordan, Kazakhstan,
Kenya, Republic of Korea (South Korea), Latvia, Lebanon, Lithuania, Malawi,
Malaysia, Mauritius, Mexico, Moldova, Mongolia, Montserrat, Morocco,
Mozambique, Myanmar (Burma), Namibia, Nepal, Nigeria, Pakistan, Panama, Papua
New Guinea, Paraguay, Peru, Philippines, Poland, Portugal, Romania, Russia,
Saudi Arabia, Singapore, Slovakia, Slovenia, South Africa, Sri Lanka, St. Kitts
and Nevis, St. Lucia, St. Vincent and the Grenadines, Swaziland, Tanzania,
Thailand, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Uganda, Ukraine,
Uruguay, Uzbekistan, Venezuela, Vietnam, Yugoslavia, Zambia and Zimbabwe. Among
the countries that will not be considered Emerging Markets are: Australia,
Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy,
Japan, Luxembourg, The Netherlands, New Zealand, Norway, Spain, Sweden,
Switzerland, the United Kingdom and the United States.
The Emerging Markets Fund may invest in securities of
companies of any size, whether traded on or off a national securities exchange.
The Fund's holdings may include emerging growth companies, which are small- or
medium-sized companies that have passed their start-up phase and that show
positive earnings and prospects for achieving profit and gain in a relatively
short period of time.
In appropriate circumstances, such as when a direct
investment by the Emerging Markets Fund in the securities of a particular
country cannot be made or when the securities of an investment company are more
liquid than the underlying portfolio securities, the Fund may, consistent with
the provisions of the 1940 Act, invest in the securities of closed-end
investment companies that invest in foreign securities. As a shareholder in a
closed-end investment
2
<PAGE> 8
company, the Fund will bear its ratable share of the investment company's
expenses, including management fees, and will remain subject to payment of the
Fund's administration fees and other expenses with respect to assets so
invested.
Global Post-Venture Capital Fund. The investment objective of
the Global Post-Venture Capital Fund is long-term growth of capital, which it
seeks to achieve by investing primarily in equity securities of U.S. and
foreign issuers considered by CSAM to be in their post-venture capital stage of
development. The Fund pursues an aggressive investment strategy. A post-venture
capital company will be considered to be located in the country where (i) the
company is organized, (ii) where its principal activities are conducted and
where at least 50% of its revenues or profits from goods produced and sold are
derived, investments are made or services are performed, or where at least 50%
of its total or net assets are situated; or (iii) where the principal trading
market for the company's securities is located. The Fund intends to invest in
post-venture capital companies, traded on national securities exchanges and in
OTC markets and other public markets in various developed countries as well as
emerging markets. Due to the nature of the venture-capital to post-venture
cycle, the Fund anticipates that the average market capitalization of companies
in which the Fund invests will be less than $1 billion at the time of
investment. CSAM believes that venture capital participation in a company's
capital structure can lead to revenue/earnings growth rates above those of
older, public companies such as those in the Dow Jones Industrial Average, the
Fortune 500 or the Morgan Stanley Capital International Europe, Australasia,
Far East ("EAFE") Index. Venture capitalists finance start-up companies,
companies in the early stages of developing new products or services and
companies undergoing a restructuring or recapitalization, since these companies
may not have access to conventional forms of financing (such as bank loans or
public issuances of stock). Venture capitalists may hold substantial positions
in companies that may have been acquired at prices significantly below the
initial public offering ("IPO") price. This may create a potential adverse
impact in the short-term on the market price of a company's stock due to sales
in the open market by venture capitalists or others who acquired the stock at
lower prices prior to the company's IPO. CSAM will consider the impact of such
sales in selecting post-venture capital investments. Venture capitalists may be
individuals or funds organized by venture capitalists which are typically
offered only to large institutions, such as pension funds and endowments, and
certain accredited investors. Outside of the U.S., venture capitalists may also
consist of merchant banks and other banking institutions that provide venture
capital financing in a manner similar to U.S. venture capitalists. Venture
capital participation in a company is often reduced when the company engages in
an IPO of its securities or when it is involved in a merger, tender offer or
acquisition.
Unless otherwise indicated, all of the Funds are permitted,
but not obligated to, engage in the following investment strategies, subject to
any percentage limitations set forth below.
The Funds are not obligated to pursue any of the following
strategies and do not represent that these techniques are available now or will
be available at any time in the future.
3
<PAGE> 9
Options on Securities and Securities Indices and Currency Exchange Transactions
Each Fund may purchase and write (sell) options on
securities, securities indices and currencies for hedging purposes or to
increase total return, which may involve speculation. Up to 25% of each Fund's
total assets may be at risk in connection with these strategies. The amount of
assets considered to be "at risk" is, in the case of purchasing options, the
amount of premium paid, and, in the case of writing options, the value of the
underlying obligation. Options may be traded on an exchange or over-the-counter
("OTC").
Securities Options. Each Fund may write covered put and call
options on stock and debt securities and each Fund may purchase such options
that are traded on foreign and U.S. exchanges, as well as OTC options. A Fund
realizes fees (referred to as "premiums") for granting the rights evidenced by
the options it has written. A put option embodies the right of its purchaser to
compel the writer of the option to purchase from the option holder an
underlying security at a specified price for a specified time period or at a
specified time. In contrast, a call option embodies the right of its purchaser
to compel the writer of the option to sell to the option holder an underlying
security at a specified price for a specified time period or at a specified
time.
The potential loss associated with purchasing an option is
limited to the premium paid, and the premium would partially offset any gains
achieved from its use. However, for an option writer the exposure to adverse
price movements in the underlying security or index is potentially unlimited
during the exercise period. Writing securities options may result in
substantial losses to a Fund, force the sale or purchase of portfolio
securities at inopportune times or at less advantageous prices, limit the
amount of appreciation the Fund could realize on its investments or require the
Fund to hold securities its would otherwise sell.
The principal reason for writing covered options on a
security is to attempt to realize, through the receipt of premiums, a greater
return than would be realized on the securities alone. In return for a premium,
a Fund as the writer of a covered call option forfeits the right to any
appreciation in the value of the underlying security above the strike price for
the life of the option (or until a closing purchase transaction can be
effected). A Fund that writes call options retains the risk of an increase in
the price of the underlying security. The size of the premiums that a Fund may
receive may be adversely affected as new or existing institutions, including
other investment companies, engage in or increase their option-writing
activities.
If security prices rise, a put writer would generally expect
to profit, although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that the
writer will also profit, because it should be able to close out the option at a
lower price. If security prices decline, the put writer would expect to suffer
a loss. This loss may be less than the loss from purchasing the underlying
instrument directly to the extent the premium received offsets the effects of
the decline.
In the case of options written by a Fund that are deemed
covered by virtue of the Fund's holding convertible or exchangeable preferred
stock or debt securities, the time required to convert or exchange and obtain
physical delivery of the underlying common stock
4
<PAGE> 10
with respect to which the Fund has written options may exceed the time within
which the Fund must make delivery in accordance with an exercise notice. In
these instances, the Fund may purchase or temporarily borrow the underlying
securities for purposes of physical delivery. By so doing, the Fund will not
bear any market risk, since the Fund will have the absolute right to receive
from the issuer of the underlying security an equal number of shares to replace
the borrowed securities, but the Fund may incur additional transaction costs or
interest expenses in connection with any such purchase or borrowing.
Additional risks exist with respect to certain of the
securities for which a Fund may write covered call options. For example, if a
Fund writes covered call options on mortgage-backed securities, the
mortgage-backed securities that it holds as cover may, because of scheduled
amortization or unscheduled prepayments, cease to be sufficient cover. If this
occurs, the Fund will compensate for the decline in the value of the cover by
purchasing an appropriate additional amount of mortgage-backed securities.
Options written by a Fund will normally have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. A Fund may write (i) in-the-money call
options when CSAM expects that the price of the underlying security will remain
flat or decline moderately during the option period, (ii) at-the-money call
options when CSAM expects that the price of the underlying security will remain
flat or advance moderately during the option period and (iii) out-of-the-money
call options when CSAM expects that the premiums received from writing the call
option plus the appreciation in market price of the underlying security up to
the exercise price will be greater than the appreciation in the price of the
underlying security alone. In any of the preceding situations, if the market
price of the underlying security declines and the security is sold at this
lower price, the amount of any realized loss will be offset wholly or in part
by the premium received. Out-of-the-money, at-the-money and in-the-money put
options (the reverse of call options as to the relation of exercise price to
market price) may be used in the same market environments that such call
options are used in equivalent transactions. To secure its obligation to
deliver the underlying security when it writes a call option, a Fund will be
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the Options Clearing Corporation (the "Clearing
Corporation") and of the securities exchange on which the option is written.
Prior to their expirations, put and call options may be sold
in closing sale or purchase transactions (sales or purchases by a Fund prior to
the exercise of options that it has purchased or written, respectively, of
options of the same series) in which a Fund may realize a profit or loss from
the sale. An option position may be closed out only where there exists a
secondary market for an option of the same series on a recognized securities
exchange or in the OTC market. When a Fund has purchased an option and engages
in a closing sale transaction, whether the Fund realizes a profit or loss will
depend upon whether the amount received in the closing sale transaction is more
or less than the premium the Fund initially paid for the original option plus
the related transaction costs. Similarly, in cases where a Fund has
5
<PAGE> 11
written an option, it will realize a profit if the cost of the closing purchase
transaction is less than the premium received upon writing the original option
and will incur a loss if the cost of the closing purchase transaction exceeds
the premium received upon writing the original option. A Fund may engage in a
closing purchase transaction to realize a profit, to prevent an underlying
security with respect to which it has written an option from being called or put
or, in the case of a call option, to unfreeze an underlying security (thereby
permitting its sale or the writing of a new option on the security prior to the
outstanding option's expiration). The obligation of a Fund under an option it
has written would be terminated by a closing purchase transaction (a Fund would
not be deemed to own an option as a result of the transaction). So long as the
obligation of a Fund as the writer of an option continues, the Fund may be
assigned an exercise notice by the broker-dealer through which the option was
sold, requiring the Fund to deliver the underlying security against payment of
the exercise price. This obligation terminates when the option expires or a Fund
effects a closing purchase transaction. A Fund cannot effect a closing purchase
transaction with respect to an option once it has been assigned an exercise
notice.
There is no assurance that sufficient trading interest will
exist to create a liquid secondary market on a securities exchange for any
particular option or at any particular time, and for some options no such
secondary market may exist. A liquid secondary market in an option may cease to
exist for a variety of reasons. In the past, for example, higher than
anticipated trading activity or order flow or other unforeseen events have at
times rendered certain of the facilities of the Clearing Corporation and
various securities exchanges inadequate and resulted in the institution of
special procedures, such as trading rotations, restrictions on certain types of
orders or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. Moreover,
a Fund's ability to terminate options positions established in the OTC market
may be more limited than for exchange-traded options and may also involve the
risk that securities dealers participating in OTC transactions would fail to
meet their obligations to the Fund. The Funds, however, intend to purchase OTC
options only from dealers whose debt securities, as determined by CSAM, are
considered to be investment grade. If, as a covered call option writer, the
Fund is unable to effect a closing purchase transaction in a secondary market,
it will not be able to sell the underlying security and would continue to be at
market risk on the security.
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class which may be held
or written, or exercised within certain time periods by an investor or group of
investors acting in concert (regardless of whether the options are written on
the same or different securities exchanges or are held, written or exercised in
one or more accounts or through one or more brokers). It is possible that a
Fund 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 Fund will
be able to purchase on a particular security.
6
<PAGE> 12
Securities Index Options. Each Fund may purchase and write
exchange-listed and OTC put and call options on securities indices. 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 stock at a specified price, an option on a securities
index gives the holder the right to receive a cash "exercise settlement amount"
equal to (a) the amount, if any, by which the fixed exercise price of the
option exceeds (in the case of a put) or is less than (in the case of a call)
the closing value of the underlying index on the date of exercise, multiplied
by (b) a fixed "index multiplier." Receipt of this cash amount will depend upon
the closing level of the securities index upon which the option is based being
greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the index and the exercise price of the option times a
specified multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Securities index options may
be offset by entering into closing transactions as described above for
securities options.
OTC Options. A Fund may purchase OTC or dealer options or
sell covered OTC options. Unlike exchange-listed options where an intermediary
or clearing corporation, such as the Clearing Corporation, assures that all
transactions in such options are properly executed, the responsibility for
performing all transactions with respect to OTC options rests solely with the
writer and the holder of those options. A listed call option writer, for
example, is obligated to deliver the underlying securities to the clearing
organization if the option is exercised, and the clearing organization is then
obligated to pay the writer the exercise price of the option. If a Fund were to
purchase a dealer option, however, it would rely on the dealer from whom it
purchased the option to perform if the option were exercised. If the dealer
fails to honor the exercise of the option by a Fund, the Fund would lose the
premium it paid for the option and the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid
market while OTC or dealer options do not. Consequently, a Fund will generally
be able to realize the value of a dealer option it has purchased only by
exercising it or reselling it to the dealer who issued it. Similarly, when a
Fund writes a dealer option, it generally will be able to close out the option
prior to its expiration only by entering into a closing purchase transaction
with the dealer to which the Fund originally wrote the option. Although a Fund
will seek to enter into dealer options only with dealers who will agree to and
that are expected to be capable of entering into closing transactions with the
Fund, there can be no assurance that the Fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. The
inability to enter into a closing transaction may result in material losses to
the Fund. Until a Fund, as a covered OTC call option writer, is able to effect
a closing purchase transaction, it will not be
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able to liquidate securities (or other assets) used to cover the written option
until the option expires or is exercised. This requirement may impair a Fund's
ability to sell portfolio securities at a time when such sale might be
advantageous.
Futures Activities. Each Fund may enter into futures
contracts on securities, securities indices, foreign currencies and interest
rates, and purchase and write (sell) related options traded on exchanges
designated by the Commodity Futures Trading Commission (the "CFTC") or, if
consistent with CFTC regulations, on foreign exchanges for hedging purposes or
to increase total return. These futures contracts are standardized contracts
for the future delivery of a non-U.S. currency, an interest rate sensitive
security or, in the case of index futures contracts or certain other futures
contracts, a cash settlement with reference to a specified multiplier times the
change in the index. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract.
The Funds may enter into futures contracts and options on
futures contracts on securities, securities indices and currencies for both
hedging purposes and to increase total return, which may involve speculation.
Aggregate initial margin and premiums required to establish
positions other than those considered by the CFTC to be "bona fide hedging"
will not exceed 5% of a Fund's net asset value, after taking into account
unrealized profits and unrealized losses on any such contracts.
A Fund reserves the right to engage in transactions involving
futures contracts and options on futures contracts to the extent allowed by
CFTC regulations in effect from time to time and in accordance with the Fund's
policies. There is no overall limit on the percentage of Fund assets that may
be at risk with respect to futures activities.
Futures Contracts. A foreign currency futures contract
provides for the future sale by one party and the purchase by the other party
of a certain amount of a specified non-U.S. currency at a specified price,
date, time and place. An interest rate futures contract provides for the future
sale by one party and the purchase by the other party of a certain amount of a
specific interest rate sensitive financial instrument (debt security) at a
specified price, date, time and place. Securities indexes are capitalization
weighted indexes which reflect the market value of the securities represented
in the indexes. An index futures contract is an agreement to be settled by
delivery of an amount of cash equal to a specified multiplier times the
difference between the value of the index at the close of the last trading day
on the contract and the price at which the agreement is made.
No consideration is paid or received by a Fund upon entering
into a futures contract. Instead, the Fund is required to deposit in a
segregated account with its custodian an amount of cash or liquid securities
acceptable to the broker, equal to approximately 1% to 10% of the contract
amount (this amount is subject to change by the exchange on which the contract
is traded, and brokers may charge a higher amount). This amount is known as
"initial margin" and is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon termination of the
futures contract, assuming all contractual obligations have been satisfied. The
broker will have access to amounts in the
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<PAGE> 14
margin account if the Fund fails to meet its contractual obligations. Subsequent
payments, known as "variation margin," to and from the broker, will be made
daily as the financial instrument or securities index underlying the futures
contract fluctuates, making the long and short positions in the futures contract
more or less valuable, a process known as "marking-to-market." A Fund will also
incur brokerage costs in connection with entering into futures transactions.
At any time prior to the expiration of a futures contract, a
Fund may elect to close the position by taking an opposite position, which will
operate to terminate the Fund's existing position in the contract. Positions in
futures contracts and options on futures contracts (described below) may be
closed out only on the exchange on which they were entered into (or through a
linked exchange). No secondary market for such contracts exists. Although the
Funds may enter into futures contracts only if there is an active market for
such contracts, there is no assurance that an active market will exist at any
particular time. Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the
daily limit has been reached in a particular contract, no trades may be made
that day at a price beyond that limit or trading may be suspended for specified
periods during the day. It is possible that futures contract prices could move
to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions at an
advantageous price and subjecting a Fund to substantial losses. In such event,
and in the event of adverse price movements, a Fund would be required to make
daily cash payments of variation margin. In such situations, if a Fund had
insufficient cash, it might have to sell securities to meet daily variation
margin requirements at a time when it would be disadvantageous to do so. In
addition, if the transaction is entered into for hedging purposes, in such
circumstances a Fund may realize a loss on a futures contract or option that is
not offset by an increase in the value of the hedged position. Losses incurred
in futures transactions and the costs of these transactions will affect a
Fund's performance.
Options on Futures Contracts. A Fund may purchase and write
put and call options on foreign currency, interest rate and stock index futures
contracts and may enter into closing transactions with respect to such options
to terminate existing positions. There is no guarantee that such closing
transactions can be effected; the ability to establish and close out positions
on such options will be subject to the existence of a liquid market.
An option on a currency, interest rate or securities index
futures contract, as contrasted with the direct investment in such a contract,
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract at a specified exercise price at any time prior
to the expiration date of the option. The writer of the option is required upon
exercise to assume an offsetting futures position (a short position if the
option is a call and a long position if the option is a put). Upon exercise of
an option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
futures contract. The potential loss related to the purchase of an option on a
futures contract is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is
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<PAGE> 15
fixed at the point of sale, there are no daily cash payments by the purchaser to
reflect changes in the value of the underlying contract; however, the value of
the option does change daily and that change would be reflected in the net asset
value of a Fund.
Currency Exchange Transactions. The value in U.S. dollars of
the assets of a Fund that are invested in foreign securities may be affected
favorably or unfavorably by a variety of factors not applicable to investment
in U.S. securities, and the Fund may incur costs in connection with conversion
between various currencies. Currency exchange transactions may be from any
non-U.S. currency into U.S. dollars or into other appropriate currencies. A
Fund will conduct its currency exchange transactions (i) on a spot (i.e., cash)
basis at the rate prevailing in the currency exchange market, (ii) through
entering into futures contracts or options on such contracts (as described
above), (iii) through entering into forward contracts to purchase or sell
currency or (iv) by purchasing exchange-traded currency options. Risks
associated with currency forward contracts and purchasing currency options are
similar to those described herein for futures contracts and securities and
stock index options. In addition, the use of currency transactions could result
in losses from the imposition of foreign exchange controls, suspension of
settlement or other governmental actions or unexpected events.
The Funds may engage in currency exchange transactions for
both hedging purposes and to increase total return, which may involve
speculation.
Forward Currency Contracts. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the contract as
agreed upon by the parties, at a price set at the time of the contract. These
contracts are entered into in the interbank market conducted directly between
currency traders (usually large commercial banks and brokers) and their
customers. Forward currency contracts are similar to currency futures
contracts, except that futures contracts are traded on commodities exchanges
and are standardized as to contract size and delivery date.
At or before the maturity of a forward contract, a Fund may
either sell a portfolio security and make delivery of the currency, or retain
the security and fully or partially offset its contractual obligation to
deliver the currency by negotiating with its trading partner to enter into an
offsetting transaction. If a Fund retains the portfolio security and engages in
an offsetting transaction, the Fund, at the time of execution of the offsetting
transaction, will incur a gain or a loss to the extent that movement has
occurred in forward contract prices.
Currency Options. The Funds may purchase exchange-traded put
and call options on foreign currencies. Put options convey the right to sell
the underlying currency at a price which is anticipated to be higher than the
spot price of the currency at the time the option is exercised. Call options
convey the right to buy the underlying currency at a price which is expected to
be lower than the spot price of the currency at the time the option is
exercised.
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Currency Hedging. A Fund's currency hedging will be limited
to hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward currency with respect to
specific receivables or payables of the Fund generally accruing in connection
with the purchase or sale of its portfolio securities. Position hedging is the
sale of forward currency with respect to portfolio security positions. A Fund
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 a Fund's securities are denominated will reduce the U.S. dollar value of
the securities, even if their value in the foreign currency remains constant.
The use of currency hedges does not eliminate fluctuations in the underlying
prices of the securities, but it does establish a rate of exchange that can be
achieved in the future. For example, in order to protect against diminutions in
the U.S. dollar value of non-dollar denominated securities it holds, a Fund may
purchase foreign currency put options. If the value of the foreign currency
does decline, a Fund will have the right to sell the currency for a fixed
amount in dollars and will thereby offset, in whole or in part, the adverse
effect on the U.S. dollar value of its securities that otherwise would have
resulted. Conversely, if a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby potentially
increasing the cost of the securities, a Fund may purchase call options on the
particular currency. The purchase of these options could offset, at least
partially, the effects of the adverse movements in exchange rates. The benefit
to a Fund derived from purchases of currency options, like the benefit derived
from other types of options, will be reduced by premiums and other transaction
costs. Because transactions in currency exchange are generally conducted on a
principal basis, no fees or commissions are generally involved. Currency
hedging involves some of the same risks and considerations as other
transactions with similar instruments. Although currency hedges limit the risk
of loss due to a decline in the value of a hedged currency, at the same time,
they also limit any potential gain that might result should the value of the
currency increase. If a devaluation is generally anticipated, a Fund may not be
able to contract to sell a currency at a price above the devaluation level it
anticipates.
While the values of currency futures and options on futures,
forward currency contracts and currency options may be expected to correlate
with exchange rates, they will not reflect other factors that may affect the
value of a Fund's investments and a currency hedge may not be entirely
successful in mitigating changes in the value of the Fund's investments
denominated in that currency. A currency hedge, for example, should protect a
Yen-denominated bond against a decline in the Yen, but will not protect a Fund
against a price decline if the issuer's creditworthiness deteriorates.
Swaps. Each Fund may enter into swaps relating to indexes,
currencies, interest rates, equity and debt interests of foreign issuers
without limit. A swap transaction is an agreement between a Fund and a
counterparty to act in accordance with the terms of the swap contract. Index
swaps involve the exchange by a Fund 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
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<PAGE> 17
exchange streams of payments computed by reference to a notional amount based
on the performance of a basket of stocks or a single stock. Each Fund may enter
into these transactions 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 a Fund anticipates purchasing at a later date. Each Fund
may also use these transactions for speculative purposes, such as to obtain the
price performance of a security without actually purchasing the security in
circumstances, 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.
A Fund 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 a Fund 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 a Fund is contractually obligated to make. If the counterparty to a swap
defaults, a Fund's risk of loss consists of the net amount of payments that a
Fund 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 1940 Act and, accordingly, will not treat them as
being subject to a Fund's borrowing restrictions. Where swaps are entered into
for other than hedging purposes, a Fund will segregate an amount of cash or
liquid securities having a value equal to the accrued excess of its obligations
over entitlements with respect to each swap on a daily basis.
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, a Fund may
enter into these transactions as hedges to reduce investment risk, generally by
making an investment expected to move in the opposite direction of a portfolio
position. A hedge is designed to offset a loss in a portfolio position with a
gain in the hedged position; at the same time, however, a properly correlated
hedge will result in a gain in the portfolio position being offset by a loss in
the hedged position. As a result, the use of options, futures and currency
exchange transactions for hedging purposes could limit any potential gain from
an increase in the value of the position hedged. In addition, the movement in
the portfolio position hedged may not be of the same magnitude as movement in
the hedge. With respect to futures contracts, since the value of portfolio
securities will far exceed the value of the futures contracts sold by a Fund,
an increase in the value of the futures contracts could only mitigate, but not
totally offset, the decline in the value of the Fund's assets.
In hedging transactions based on an index, whether a Fund
will realize a gain or loss depends upon movements in the level of securities
prices in the stock market generally or, in the case of certain indexes, in an
industry or market segment, rather than movements in the price of a particular
security. The risk of imperfect correlation increases as the composition of a
Fund's portfolio varies from the composition of the index. In an effort to
compensate for imperfect correlation of relative movements in the hedged
position and the hedge, a Fund's
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<PAGE> 18
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 a Fund's net investment results if market movements are not as
anticipated when the hedge is established. Securities index futures transactions
may be subject to additional correlation risks. First, all participants in the
futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions which would distort the normal
relationship between the securities index and futures markets. Secondly, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market also may cause
temporary price distortions. Because of the possibility of price distortions in
the futures market and the imperfect correlation between movements in a
securities index and movements in the price of securities index futures, a
correct forecast of general market trends by CSAM still may not result in a
successful hedging transaction.
A Fund will engage in hedging transactions only when deemed
advisable by CSAM, and successful use by the Fund of hedging transactions will
be subject to CSAM's ability to predict trends in currencies, interest rates or
securities markets, as the case may be, and to predict correctly movements in
the directions of the hedge and the hedged position and the correlation between
them, which predictions could prove to be inaccurate. This requires different
skills and techniques than predicting changes in the price of individual
securities, and there can be no assurance that the use of these strategies will
be successful. Even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior or trends. Losses incurred in hedging
transactions and the costs of these transactions will affect a Fund's
performance.
To the extent that a Fund engages in the strategies described
above, the Fund may experience losses greater than if these strategies had not
been utilized. In addition to the risks described above, these instruments may
be illiquid and/or subject to trading limits, and the Fund may be unable to
close out a position without incurring substantial losses, if at all. The Fund
is also subject to the risk of a default by a counterparty to an off-exchange
transaction.
Asset Coverage for Forward Contracts, Options, Futures,
Options on Futures and Swaps. Each Fund will comply with guidelines established
by the Securities and Exchange Commission (the "SEC") and other applicable
regulatory bodies with respect to coverage of options written by a Fund on
securities and indexes; currency, interest rate and security index futures
contracts and options on these futures contracts; and forward currency
contracts. These guidelines may, in certain instances, require segregation by
the Fund of cash or liquid securities with its custodian or a designated
sub-custodian to the extent the Fund's obligations with respect to these
strategies are not otherwise "covered" through ownership of the underlying
security or financial instrument or by other portfolio positions or by other
means consistent with applicable regulatory policies. Segregated assets cannot
be sold or transferred unless equivalent assets are substituted in their place
or it is no longer necessary to segregate them. As a result, there is a
possibility that segregation of a large percentage of a
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<PAGE> 19
Fund's assets could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
For example, a call option written by a Fund on securities
may require the Fund to hold the securities subject to the call (or securities
convertible into the securities without additional consideration) or to
segregate assets (as described above) sufficient to purchase and deliver the
securities if the call is exercised. A call option written by a Fund on an
index may require the Fund to own portfolio securities that correlate with the
index or to segregate assets (as described above) equal to the excess of the
index value over the exercise price on a current basis. A put option written by
a Fund may require the Fund to segregate assets (as described above) equal to
the exercise price. A Fund could purchase a put option if the strike price of
that option is the same or higher than the strike price of a put option sold by
the Fund. If a Fund holds a futures contract, the Fund could purchase a put
option on the same futures contract with a strike price as high or higher than
the price of the contract held. A Fund may enter into fully or partially
offsetting transactions so that its net position, coupled with any segregated
assets (equal to any remaining obligation), equals its net obligation. Asset
coverage may be achieved by other means when consistent with applicable
regulatory policies.
Additional Information on Other Investment Practices.
U.S. Government Securities. The obligations issued or
guaranteed by the U.S. government in which a Fund may invest include: direct
obligations of the U.S. Treasury and obligations issued by U.S. government
agencies and instrumentalities. Included among direct obligations of the U.S.
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 U.S. are: instruments that are supported by the full
faith and credit of the U.S. (such as certificates issued by the Government
National Mortgage Association ("GNMA")); instruments that are supported by the
right of the issuer to borrow from the U.S. Treasury (such as securities of
Federal Home Loan Banks); and instruments that are supported by the credit of
the instrumentality (such as Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC") bonds).
Other U.S. government securities the Funds may invest in
include securities issued or guaranteed by the Federal Housing Administration,
Farmers Home Loan Administration, Export-Import Bank of the U.S., Small
Business Administration, General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Intermediate Credit Banks,
Federal Land Banks, Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board and Student Loan Marketing Association.
Because the U.S. government is not obligated by law to provide support to an
instrumentality it sponsors, a Fund will invest in obligations issued by such
an instrumentality only if CSAM determines that the credit risk with respect to
the instrumentality does not make its securities unsuitable for investment by
the Fund.
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Money Market Obligations. Each Fund is authorized to invest,
under normal market conditions up to 20% of its total assets in domestic and
foreign short-term (one year or less remaining to maturity) money market
obligations and (with the exception of the Major Foreign Markets Fund)
medium-term (five years or less remaining to maturity) money market
obligations. 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 banks, domestic
savings and loans and similar institutions) that are high quality investments;
commercial paper rated no lower than A-2 by Standard & Poor's Ratings Services
("S&P") or Prime-2 by Moody's Investors Service, Inc. ("Moody's") or the
equivalent from another major rating service or, if unrated, of an issuer
having an outstanding, unsecured debt issue then rated within the three highest
rating categories; and repurchase agreements with respect to the foregoing.
Repurchase Agreements. Each Fund may invest in repurchase
agreement transactions with member banks of the Federal Reserve System and
certain non-bank dealers. Repurchase agreements are contracts under which the
buyer of a security simultaneously commits to resell the security to the seller
at an agreed-upon price and date. Under the terms of a typical repurchase
agreement, a Fund would acquire any underlying security for a relatively short
period (usually not more than one week) subject to an obligation of the seller
to repurchase, and the Fund to resell, the obligation at an agreed-upon price
and time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the underlying
securities will at all times be at least equal to the total amount of the
purchase obligation, including interest. The Fund bears a risk of loss in the
event that the other party to a repurchase agreement defaults on its
obligations or becomes bankrupt and the Fund is delayed or prevented from
exercising its right to dispose of the collateral securities, including the
risk of a possible decline in the value of the underlying securities during the
period while the Fund seeks to assert this right. CSAM monitors the
creditworthiness of those bank and non-bank dealers with which the Fund enters
into repurchase agreements to evaluate this risk. A repurchase agreement is
considered to be a loan under the 1940 Act.
Money Market Mutual Funds. Where CSAM believes that it would
be beneficial to a Fund and appropriate considering the factors of return and
liquidity, a Fund may invest up to 5% of its net assets in securities of money
market mutual funds that are unaffiliated with the Fund 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, a Fund will bear its ratable share of the
mutual fund's expenses, including management fees, and will remain subject to
payment of the Fund's administration fees, including management fees and other
expenses with respect to assets so invested.
Convertible Securities. Convertible securities in which a
Fund may invest, including both convertible debt and convertible preferred
stock, may be converted at either a stated price or stated rate into underlying
shares of common stock. Because of this feature,
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convertible securities enable an investor to benefit from increases in the
market price of the underlying common stock. Convertible securities provide
higher yields than the underlying equity securities, but generally offer lower
yields than non-convertible securities of similar quality. The value of
convertible securities fluctuates in relation to changes in interest rates like
bonds and, in addition, fluctuates in relation to the underlying common stock.
Subsequent to purchase by a Fund, convertible securities may cease to be rated
or a rating may be reduced. Neither event will require sale of such securities,
although CSAM will consider such event in its determination of whether the Fund
should continue to hold the securities.
Debt Securities. Each Fund may invest with respect to up to
35% of its total assets in investment grade debt securities (other than money
market obligations). Each Fund may also invest to a limited extent in zero
coupon securities. See "Additional Information Concerning Taxes" for a
discussion of the tax consequences to shareholders of a Fund that invests 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, S&P or, if unrated, is
determined to be of comparable quality by CSAM. Bonds rated in the fourth
highest grade 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. Debt obligations of corporations in which the Funds may invest
include corporate bonds, debentures, debentures convertible into common stocks
and notes. Debt securities convertible into common stock and certain preferred
stocks may have risks similar to those described below. The interest income to
be derived may be considered as one factor in selecting debt securities for
investment by CSAM. The market value of debt obligations may be expected to
vary depending upon, among other factors, interest rates, the ability of the
issuer to repay principal and interest, any change in investment rating and
general economic conditions. Because the market value of debt obligations can
be expected to vary inversely to changes in prevailing interest rates,
investing in debt obligations may provide an opportunity for capital
appreciation when interest rates are expected to decline. The success of such a
strategy is dependent upon CSAM's ability to accurately forecast changes in
interest rates. Subsequent to its purchase by a Fund, an issue of securities
may cease to be rated or its rating may be reduced below the minimum required
for purchase by the Fund. Neither event will require sale of such securities,
although CSAM will consider such event in its determination of whether the Fund
should continue to hold the securities. Any percentage limitation on a Fund's
ability to invest in debt securities will not be applicable during periods when
the Fund pursues a temporary defensive strategy as discussed below.
Below Investment Grade Securities. Each Fund may (with
respect to the Emerging Markets Fund up to 35% of its net assets) invest up to
5% of its total assets in debt securities (including convertible debt
securities) rated below investment grade and as low as C by Moody's or D by
S&P, or in unrated securities considered to be of equivalent quality. Debt
securities held by a Private Fund (as defined below) in which the Global
Post-Venture Capital Fund invests will tend to be rated below investment grade
and may be rated as low as C by Moody's or D by S&P. A security will be deemed
to be investment grade if it is rated below the four highest grades by Moody's
or S&P or, if unrated, is determined to be a comparable quality by CSAM. A
Fund's holdings of debt securities rated below investment grade (commonly
referred to as "junk bonds") may be rated as low as C by Moody's or D by
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S&P at the time of purchase, or may be unrated securities considered to be of
equivalent quality. Securities that are rated C by Moody's comprise the lowest
rated class and can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Debt rated D by S&P is in default or is
expected to default upon maturity or payment date. Bonds rated below investment
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.
Investors should be aware that ratings are relative and subjective and are not
absolute standards of quality.
Securities rated below investment grade and comparable
unrated securities: (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 predominately speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligation.
While the market values of medium- and lower-rated securities
and unrated securities of comparable quality tend to react less to fluctuations
in interest rate levels than do those of higher-rated securities, the market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
higher-quality securities. In addition, medium- and lower-rated securities and
comparable unrated securities generally present a higher degree of credit risk.
Issuers of medium- and lower-rated securities and unrated securities are often
highly leveraged and may not have more traditional methods of financing
available to them so that their ability to service their obligations during an
economic downturn or during sustained periods of rising interest rates may be
impaired. Investors should be aware that ratings are relative and subjective
and are not absolute standards of quality. The risk of loss due to default by
such issuers is significantly greater because medium- and lower-rated
securities and unrated securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness.
An economic recession could disrupt severely the market for
such securities and may adversely affect the value of such securities and the
ability of the issuers of such securities to repay principal and pay interest
thereon. A Fund may have difficulty disposing of certain of these securities
because there may be a thin trading market. Because there is no established
retail secondary market for many of these securities, the Funds anticipate that
these securities could be sold only to a limited number of dealers or
institutional investors. To the extent a secondary trading market for these
securities does exist, it generally is not as liquid as the secondary market
for higher-rated securities. The lack of a liquid secondary market, as well as
adverse publicity and investor perception with respect to these securities, may
have an adverse impact on market price and a Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. The lack of a liquid secondary market for
certain securities also may make it more difficult for a Fund to obtain
accurate market quotations for purposes of valuing the Fund and calculating its
net asset value.
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The market value of securities in medium- and lower-rated
categories is also more volatile than that of higher quality securities.
Factors adversely impacting the market value of these securities will adversely
impact a Fund's net asset value. A Fund will rely on the judgment, analysis and
experience of CSAM in evaluating the creditworthiness of an issuer. In this
evaluation, in addition to relying on ratings assigned by Moody's or S&P, CSAM
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters.
Interest rate trends and specific developments which may affect individual
issuers will also be analyzed. Subsequent to its purchase by a Fund, an issue
of securities may cease to be rated or its rating may be reduced. Neither event
will require sale of such securities, although CSAM will consider such event in
its determination of whether a Fund should continue to hold the securities.
Normally, medium- and lower-rated and comparable unrated securities are not
intended for short-term investment. A Fund may incur additional expenses to the
extent it is required to seek recovery upon a default in the payment of
principal or interest on its portfolio holdings of such securities. At times,
adverse publicity regarding lower-rated securities has depressed the prices for
such securities to some extent.
Structured Securities. The Funds may purchase any type of
publicly traded or privately negotiated fixed income security, including
mortgage - and asset - backed securities, structured notes, bonds or
debentures, and assignments of and participations in loans.
Mortgage-Backed Securities. Each Fund may invest in
mortgage-backed securities sponsored by U.S. and foreign issuers as well as
non-governmental issuers. Non-government issued mortgage-backed securities may
offer higher yields than those issued by government entities, but may be
subject to greater price fluctuations. Mortgage-backed securities represent
direct or indirect participations in, or are secured by and payable from,
mortgage loans secured by real property. The mortgages backing these securities
include, among other mortgage instruments, conventional 30-year fixed-rate
mortgages, 15-year fixed-rate mortgages, graduated payment mortgages and
adjustable rate mortgages. Although there may be government or private
guarantees on the payment of interest and principal of these securities, the
guarantees do not extend to the securities' yield or value, which are likely to
vary inversely with fluctuations in interest rates, nor do the guarantees
extend to the yield or value of the Fund's shares. These securities generally
are "pass-through" instruments, through which the holders receive a share of
all interest and principal payments from the mortgages underlying the
securities, net of certain fees. Some mortgage-backed securities, such as
collateralized mortgage obligations ("CMOs"), make payments of both principal
and interest at a variety of intervals; others make semiannual interest
payments at a predetermined rate and repay principal at maturity (like a
typical bond).
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
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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. 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-backed 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 a Fund's
yield.
The rate of interest on mortgage-backed securities is lower
than the interest rates paid on the mortgages included in the underlying pool
due to the annual fees paid to the servicer of the mortgage pool for passing
through monthly payments to certificate holders and to any guarantor, such as
GNMA, and due to any yield retained by the issuer. Actual yield to the holder
may vary from the coupon rate, even if adjustable, if the mortgage-backed
securities are purchased or traded in the secondary market at a premium or
discount. In addition, there is normally some delay between the time the issuer
receives mortgage payments from the 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. Each Fund may invest in U.S. and
foreign governmental and private asset-backed securities. Asset-backed
securities, which represent participations in, or are secured by and payable
from, pools of consumer loans on assets such as motor vehicle installment
sales, installment loan contracts, leases of various types of real and personal
property and receivables from revolving credit (credit card) agreements. Such
assets are securitized through the use of trusts and special purpose
corporations. Payments or distributions of principal and interest ultimately
depend on payments in respect of the underlying loans by individuals and 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 a Fund may invest. Automobile
receivables generally are secured by automobiles. Most issuers of automobile
receivables permit the loan servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that
of the holders of the asset-backed securities. In addition, because of the
large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have a proper security interest in the underlying
automobiles. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities. Credit card receivables are generally unsecured, and the debtors
are entitled to the protection of a number
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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. The remaining maturity of any asset-backed
security a Fund invests in will be 397 days or less. A Fund may purchase
asset-backed securities that are unrated.
Structured Notes, Bonds or Debentures. Typically, the value
of the principal and/or interest on these instruments is determined by
reference to changes in the value of specific currencies, interest rates,
commodities, indexes or other financial indicators (the "Reference") or the
relevant change in two or more References. The interest rate or the principal
amount payable upon maturity or redemption may be increased or decreased
depending upon changes in the applicable Reference. The terms of the structured
securities may provide that in certain circumstances no principal is due at
maturity and, therefore, may result in the loss of a Fund's entire investment.
The value of structured securities may move in the same or the opposite
direction as the value of the Reference, so that appreciation of the Reference
may produce an increase or decrease in the interest rate or value of the
security at maturity. In addition, the change in interest rate or the value of
the security at maturity may be a multiple of the change in the value of the
Reference so that the security may be more or less volatile than the Reference,
depending on the multiple. Consequently, structured securities may entail a
greater degree of market risk and volatility than other types of debt
obligations.
Loan Participations and Assignments. The Funds may invest in
fixed and floating rate loans ("Loans") arranged through private negotiations
between a foreign government and one or more financial institutions
("Lenders"). The majority of a Fund's investments in Loans are expected to be
in the form of participations in Loans ("Participants") and assignments of
portions of Loans from third parties ("Assignments"). Participations typically
will result in a Fund having a contractual relationship only with the Lender,
not with the borrower. A participating Fund will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participation and only upon receipt by the Lender of the
payments from the borrower. In connection with purchasing Participations, a
Fund generally will have no right to enforce compliance by the borrower with
the terms of the loan agreement relating to the Loan ("Loan Agreement"), nor
any rights of set-off against the borrower, and a Fund may not directly benefit
from any collateral supporting the Loan in which it has purchased the
Participation. As a result, a participating Fund will assume the credit risk of
both the borrower and the Lender that is selling the Participation. In the
event of the insolvency of the Lender selling a Participation, a Fund may be
treated as a general creditor of the Lender and may not benefit from any
set-off between the Lender and the borrower. A Fund will acquire Participations
only if the Lender interpositioned between a Fund and the borrower is
determined by the Adviser to be creditworthy. A Fund's rights and obligations
as the purchaser of an Assignment may differ from, and be more limited than,
those held by the assigning Lender. The lack of a liquid secondary market for
both Participations and Assignments will have an adverse impact on the value of
such securities and on a Fund's ability to dispose of Participations or
Assignments. The lack of a liquid market for assignments and participations
also may make it more difficult
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for a Fund to assign a value to these securities for purposes of valuing a
Fund's portfolio and calculating its net asset value.
REITs. Each Fund may invest in real estate investment trusts
("REITs"), which are pooled investment vehicles that invest primarily in
income-producing real estate or real estate related loans or interests. Like
regulated investment companies such as the Funds, REITs are not taxed on income
distributed to shareholders provided they comply with several requirements of
the Internal Revenue Code of 1986, amended (the "Code"). By investing in a
REIT, a Fund will indirectly bear its proportionate share of any expenses paid
by the REIT in addition to the expenses of the Fund.
Investing in REITs involves certain risks. A REIT may be
affected by changes in the value of the underlying property owned by such REIT
or by the quality of any credit extended by the REIT. REITs are dependent on
management skills, are not diversified (except to the extent the Code
requires), and are subject to the risks of financing projects. REITs are
subject to heavy cash flow dependency, default by borrowers, self-liquidation,
the possibilities of failing to qualify for the exemption from tax for
distributed income under the Code and failing to maintain their exemptions from
the 1940 Act. REITs are also subject to interest rate risks.
Securities of Other Investment Companies. A Fund may invest
in securities of other investment companies to the extent permitted under the
1940 Act. Presently, under the 1940 Act, a Fund may hold securities of another
investment company in amounts which (i) do not exceed 3% of the total
outstanding voting stock of such company, (ii) do not exceed 5% of the value of
the Fund's total assets and (iii) when added to all other investment company
securities held by the Fund, do not exceed 10% of the value of the Fund's total
assets.
Lending of Portfolio Securities. Each Fund may lend portfolio
securities to brokers, dealers and other financial organizations that meet
capital and other credit requirements or other criteria established by the
Fund's Board of Directors. These loans, if and when made, may not exceed 33
1/3% of each Fund's total assets taken at value (including the loan
collateral). A Fund 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 Fund. From time to time, a Fund may return a part of the
interest earned from the investment of collateral received for securities
loaned to the borrower and/or a third party that is unaffiliated with the Fund
and that is acting as a "finder."
By lending its securities, a Fund can increase its income by
continuing to receive interest and any dividends on the loaned securities as
well as by either investing the collateral received for securities loaned in
short-term instruments or obtaining yield in the form of interest paid by the
borrower when U.S. government securities are used as collateral. A Fund will
adhere to the following conditions whenever its portfolio securities are
loaned: (i) the Fund must receive at least 100% cash collateral or equivalent
securities of the type
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discussed in the preceding paragraph from the borrower; (ii) the borrower must
increase such collateral whenever the market value of the securities rises above
the level of such collateral; (iii) the Fund must be able to terminate the loan
at any time; (iv) the Fund must receive reasonable interest on the loan, as well
as any dividends, interest or other distributions on the loaned securities and
any increase in market value; (v) the Fund may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower, provided, however, that if a material event
adversely affecting the investment occurs, the Board must terminate the loan and
regain the right to vote the securities. Loan agreements involve certain risks
in the event of default or insolvency of the other party including possible
delays or restrictions upon a Fund's ability to recover the loaned securities or
dispose of the collateral for the loan.
Foreign Investments. Each Fund may invest its assets in the
securities of foreign issuers. Investors should recognize that investing in
foreign companies involves certain risks, including those discussed below,
which are in addition to those associated with investing in U.S. issuers.
Individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency, and balance of
payments positions. A Fund 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 Funds will invest in
securities denominated in currencies other than the U.S. dollar, and since a
Fund may temporarily hold funds in bank deposits or other money market
investments denominated in foreign currencies, a Fund'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
dollar. A change in the value of a foreign currency relative to the U.S. dollar
will result in a corresponding change in the dollar value of the Fund'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 to shareholders by a Fund. Unless otherwise
contracted, the rate of exchange between the U.S. dollar and other currencies
is determined by the forces of supply and demand in the foreign exchange
markets. Changes in the exchange rate may result over time from the interaction
of many factors directly or indirectly affecting economic and political
conditions in the U.S. and a particular foreign country, including economic and
political developments in other countries. The Fund bears a risk of loss in the
event that the other party to the loan agreement defaults on its obligations or
becomes bankrupt and the Fund is delayed or prevented from exercising its right
to retrieve and dispose of the loaned securities, including the risk of a
possible decline in the value of the loaned securities during the period in
which the Fund seeks to assert its rights. Governmental intervention may also
play a significant role. National governments rarely voluntarily allow their
currencies to float freely in response to economic forces. Sovereign
governments use a variety of techniques, such as intervention by a country's
central bank or imposition of regulatory controls or taxes, to affect the
exchange rates of their currencies. A Fund may use hedging techniques with the
objective of protecting against loss through the fluctuation of the valuation
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of foreign currencies against the U.S. dollar, particularly the forward market
in foreign exchange, currency options and currency futures.
Euro Conversion. The introduction of a single European
currency, the euro, on January 1, 1999 for participating European nations in
the Economic and Monetary Union presents unique risks and uncertainties for
investors in those countries, including (i) the functioning of the payment and
operational systems of banks and other financial institutions; (ii) the
creation of suitable clearing and settlement payment schemes for the euro;
(iii) the fluctuation of the euro relative to non-euro currencies during the
transition period from January 1, 1999 to December 31, 2000 and beyond; and
(iv) whether the interest rate, tax and labor regimes of the European countries
participating in the euro will converge over time. Further, the conversion of
the currencies of other Economic Monetary Union countries, such as the United
Kingdom, and the admission of other countries, including Central and Eastern
European countries, to the Economic and Monetary Union could adversely affect
the euro. These or other factors may cause market disruptions and could
adversely affect the value of foreign securities and currencies held by the
Funds.
Information. The majority of the foreign securities held by a
Fund 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 the securities and about the foreign company or
government issuing them than is available about a domestic company or
government entity. Foreign companies are generally subject to financial
reporting standards, practices and requirements that are either not uniform or
less rigorous than those applicable to U.S. companies.
Political Instability. With respect to some foreign
countries, there is the possibility of expropriation, nationalization, or
confiscatory taxation and limitations on the use or removal of funds or other
assets of a Fund, including the withholding of dividends. Political or social
instability, or domestic developments could affect U.S. investments in those
and neighboring countries.
Foreign Markets. Securities of some foreign companies are
less liquid and their prices are more volatile than securities of comparable
U.S. companies. Certain foreign countries are known to experience long delays
between the trade and settlement dates of securities purchased or sold which
may result in increased exposure to market and foreign exchange fluctuations
and increased illiquidity.
Increased Expenses. The operating expenses of a Fund, to the
extent it invests in foreign securities, may be higher than that of an
investment company investing exclusively in U.S. securities, since the expenses
of the Fund, such as the cost of converting foreign currency into U.S. dollars,
the payment of fixed brokerage commissions on foreign exchanges, custodial
costs, valuation costs and communication costs, may be higher than those costs
incurred by investment companies not investing in foreign securities. In
addition, foreign securities may be subject to foreign government taxes that
would reduce the net yield on such securities.
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Foreign Debt Securities. Each Fund may invest up to 35% of
its assets in 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 Funds may
invest generally consist of obligations issued or backed by national, state or
provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt obligations
of supranational entities, which include international organizations designated
or backed by governmental entities to promote economic reconstruction or
development, international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank"), the European Coal and Steel Community, the
Asian Development Bank and the InterAmerican Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt securities
of quasi-governmental agencies are issued by entities owned by either a
national, state or equivalent government or are obligations of a political unit
that is not backed by the national government's full faith and credit and
general taxing powers. An example of a multinational currency unit is the
European Currency Unit ("ECU"). An ECU represents specified amounts of the
currencies of certain member states of the European Economic Community. The
specific amounts of currencies comprising the ECU may be adjusted by the
Council of Ministers of the European Union to reflect changes in relative
values of the underlying currencies.
Sovereign Debt. Investments in sovereign debt involve special
risks. The issuer of the debt or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal or interest
when due in accordance with the terms of such debt, and a Fund may have limited
legal recourse in the event of a default.
Sovereign debt differs from debt obligations issued by
private entities in that, generally, remedies for defaults must be pursued in
the courts of the defaulting party. Legal recourse is therefore somewhat
limited. Political conditions, especially a sovereign entity's willingness to
meet the terms of its debt obligations, are of considerable significance. Also,
there can be no assurance that the holders of commercial bank loans to the same
sovereign entity may not contest payments to the holders of sovereign debt in
the event of default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay
principal and pay interest in a timely manner may be affected by, among other
factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is
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due, the relative size of the debt service burden to the economy as a whole, the
sovereign debtor's policy toward principal international lenders and the
political constraints to which a sovereign debtor may be subject. Increased
protectionism on the part of a country's trading partners, or political changes
in those countries, could also adversely affect its exports. Such events could
diminish a country's trade account surplus, if any, or the credit standing of a
particular local government or agency.
The occurrence of political, social or diplomatic changes in
one or more of the countries issuing sovereign debt could adversely affect a
Fund's investments. Political changes or a deterioration of a country's
domestic economy or balance of trade may affect the willingness of countries to
service their sovereign debt. While CSAM intends to manage the Funds in a
manner that will minimize the exposure to such risks, there can be no assurance
that adverse political changes will not cause a Fund to suffer a loss of
interest or principal on any of its holdings.
Investors should also be aware that certain sovereign debt
instruments in which a Fund may invest involve great risk. Sovereign debt
issued by issuers in many emerging markets generally is deemed to be the
equivalent in terms of quality to securities rated below investment grade by
Moody's and S&P. Such securities are regarded as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations and involve major risk exposure to
adverse conditions. Some of such sovereign debt, which may not be paying
interest currently or may be in payment default, may be comparable to
securities rated "D" by S&P or "C" by Moody's. A Fund may have difficulty
disposing of certain sovereign debt obligations because there may be a limited
trading market for such securities. Because there is no liquid secondary market
for many of these securities, the Funds anticipate that such securities could
be sold only to a limited number of dealers or institutional investors. The
lack of a liquid secondary market may have an adverse impact on the market
price of such securities and a Fund's ability to dispose of particular issues
when necessary to meet a Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the issuer.
The lack of a liquid secondary market for certain securities also may make it
more difficult for a Fund to obtain accurate market quotations for purposes of
valuing a Fund's portfolio and calculating its net asset value. When and if
available, fixed income securities may be purchased by a Fund at a discount
from face value. However, the Funds do not intend to hold such securities to
maturity for the purpose of achieving potential capital gains, unless current
yields on these securities remain attractive. From time to time, a Fund may
purchase securities not paying interest at the time acquired if, in the opinion
of CSAM, such securities have the potential for future income or capital
appreciation.
Depositary Receipts. The assets of a Fund may be invested in
the securities of foreign issuers in the form of American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and International Depositary
Receipts ("IDRs"). Certain of the risks relating to investments in foreign
securities may be involved with respect to investments in ADRs, EDRs and IDRs.
These securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by a U.S. bank or trust company which evidence ownership of underlying
securities
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issued by a foreign corporation. EDRs, which are sometimes referred to as
Continental Depositary Receipts ("CDRs"), are receipts issued in Europe, and
IDRs, which are sometimes referred to as Global Depository Receipts ("GDRs"),
are receipts issued outside the U.S. EDRs (CDRs) and IDRs (GDRs) are typically
issued by non-U.S. banks and trust companies that evidence ownership of either
foreign or domestic securities. Generally, ADRs in registered form are designed
for use in U.S. securities markets, and EDRs (CDRs) and IDRs (GDRs) in bearer
form are designed for use in European securities markets and non-U.S. securities
markets, respectively.
Privatizations. Each Fund may invest in privatizations (i.e.
foreign government programs of selling interests in government-owned or
controlled enterprises). The Major Foreign Markets Fund, the International
Equity Fund, the International Small Company Fund and the Emerging Markets Fund
could invest to a significant extent in Privatizations. The ability of U.S.
entities, such as the Funds, to participate in privatizations may be limited by
local law, or the terms for participation may be less advantageous than for
local investors. There can be no assurance that privatization programs will be
available or successful.
Brady Bonds. Each Fund may invest in so-called "Brady Bonds,"
which are securities created through the exchange of existing commercial bank
loans to public and private entities for new bonds in connection with debt
restructurings under a debt restructuring plan announced by former U.S.
Secretary of the Treasury Nicholas F. Brady. The Major Foreign Markets Fund,
the International Equity Fund, the International Small Company Fund and the
Emerging Markets Fund could invest to a significant extent in Brady Bonds.
Brady Bonds may be collateralized or uncollateralized, are issued in various
currencies (primarily the U.S. dollar) and are currently actively traded in the
OTC secondary market for debt instruments. Brady Bonds have been issued only
recently and therefore do not have a long payment history. In light of the
history of commercial bank loan defaults by Latin American public and private
entities, investments in Brady Bonds may be viewed as speculative.
Dollar-denominated, collateralized Brady Bonds, which may be
fixed rate par bonds or floating rate discount bonds, are collateralized in
full as to principal by U.S. Treasury zero coupon bonds having the same
maturity as the bonds. Interest payment on these Brady Bonds generally are
collateralized by cash or securities in the amount that, in the case of fixed
rate bonds, is equal to at least one year of rolling interest payments or, in
the case of floating rate bonds, initially is equal to at least one year's
rolling interest payments based on the applicable interest rate at that time
and is adjusted at regular intervals thereafter.
Brady Bonds are often viewed as having three or four
valuation components: the collateralized repayment of principal at final
maturity; the collateralized interest payments; the uncollateralized interest
payments; and any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constituting the "residual risk").
Emerging Markets. Each Fund may (in the case of the Major
Foreign Markets Fund, with respect to up to 10% of its net assets, and in the
case of the International Small Company Fund, up to 25% of its net assets)
invest in securities of issuers located in "emerging markets" (less developed
countries located outside of the U.S.). Investing in emerging markets involves
not only the risks described above with respect to investing in foreign
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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 and the first half of 1998. Other characteristics of
emerging markets that may affect investment 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 structures
governing private and foreign investments and private property. The typically
small size of the markets of 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.
Japanese Investments. Because the International Equity and
Major Foreign Markets Funds may from time to time have large positions in
Japanese securities and the International Small Company Fund may also invest in
Japanese securities, these Funds may be subject to general economic and
political conditions in Japan. These conditions include future political and
economic developments, the possible imposition of, or changes in, exchange
controls or other Japanese governmental laws or restrictions applicable to such
investments, diplomatic developments, political or social unrest and natural
disasters.
Securities in Japan are denominated and quoted in "yen." Yen
are fully convertible and transferable based on floating exchange rates. In
determining the net asset value of shares of the Fund, assets or liabilities
initially expressed in terms of Japanese yen will be translated into U.S.
dollars at the current selling rate of Japanese yen against U.S. dollars. As a
result, the value of the Fund's assets as measured in U.S. dollars may be
affected favorably or unfavorably by fluctuations in the value of Japanese yen
relative to the U.S. dollar.
The decline in the Japanese securities markets since 1989 has
contributed to a weakness in the Japanese economy, and the impact of a further
decline cannot be ascertained. The common stocks of many Japanese companies
continue to trade at high price-earnings ratios in comparison with those in the
U.S., even after the recent market decline. Differences in accounting methods
make it difficult to compare the earnings of Japanese companies with those of
companies in other countries, especially the U.S.
THE INFORMATION SET FORTH IN THIS SECTION HAS BEEN EXTRACTED
FROM VARIOUS GOVERNMENTAL PUBLICATIONS AND OTHER SOURCES. THE FUNDS MAKE NO
REPRESENTATION AS TO THE ACCURACY OF THE INFORMATION, NOR HAVE THE FUNDS
ATTEMPTED TO VERIFY IT. FURTHERMORE, NO REPRESENTATION IS MADE THAT ANY
CORRELATION EXISTS BETWEEN JAPAN OR ITS ECONOMY IN GENERAL AND THE PERFORMANCE
OF EACH FUND.
Domestic Politics
Japan has a parliamentary form of government. The legislative
power is vested in the Japanese Diet, which consists of a House of
Representatives (lower house) and a House of Councillors (upper house). Various
political parties are represented in the Diet, including
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<PAGE> 33
the conservative Liberal Democratic Party ("LDP"), which until August 1993, had
been in power nationally since its formation in 1955. The LDP ceased to have a
majority of the lower house in June 1993, when certain members of the lower
house left the LDP and formed two new political parties. After several years of
political unrest, the LDP elected Ryutaro Hashimoto in August 1995, the minister
for international trade and industry, as its new leader, and in January 1996, he
became prime minister. Mr. Hashimoto dissolved the Diet and called a general
election in October 1996, in which the LDP won 239 of the 500 lower-house seats.
As a result, LDP members filled all the new cabinet seats for the first time in
three years. The LDP, along with its former coalition partners (the Social
Democratic Party and Shinto Sakigake) agreed to continue to work together, but
only in loose alliance. Meanwhile, many dissatisfied Diet members from the main
opposition party have left the party to join the LDP. By September 1997, enough
Diet members from the main opposition party and other parties had defected to
the LDP for the LDP to regain its simple majority in the lower house. In August
of 1998, Keizo Obuchi, foreign minister under Hashimoto, was elected to the
office of prime minister. Japan's continuing political instability may hamper
its ability to establish and maintain effective economic and fiscal policies,
and recent and future political developments may lead to changes in policy that
might adversely affect the Funds' investments.
Economic Background
Generally. Since the end of World War II, Japan has
experienced significant economic development. Since the mid-1980's, Japan has
become a major creditor nation. With the exception of the periods associated
with the oil crises of the 1970's, Japan has generally experienced very low
levels of inflation. There is no guarantee, however, that these favorable trends
will continue.
The Japanese government has called for a transformation of
the economy away from its high dependency on export-led growth towards greater
stimulation of the domestic economy. In addition, there has been a move toward
more economic liberalization and discounting in the consumer sector. These
shifts have already begun to take place and may cause disruption in the
Japanese economy.
Strains in the system have also been one of the major causes
of Japan's economic weakness. The non-performing loans of financial
institutions have hampered their ability to take on risk, thus obstructing the
flow of funds into capital outlays as well as equities. The large commercial
banks are having to bear a heavy burden of the bad-debt problem (e.g., in
accepting write-offs of loans they have extended to distressed smaller
institutions, in recapitalizing failed institutions and in stepping up
contributions to the Deposit Insurance Corporation, an organization jointly
established in 1971 by the government and private financial institutions to
protect depositors). While the banking system appears to be making some
progress in its attempt to deal with non-performing assets, it is extremely
difficult to gauge the true extent of the bad-debt problem which could lead to
a crisis in the banking system.
Japan's economy is a market economy in which industry and
commerce are predominantly privately owned and operated. However, the Japanese
government is involved
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<PAGE> 34
in establishing and meeting objectives for developing the economy and improving
the standard of living of the Japanese people.
Japan is largely dependent upon foreign economies for raw
materials. For instance, almost all of its oil is imported, the majority from
the Middle East. In the past, oil prices have had a major impact on the
domestic economy, but more recently Japan has worked to reduce its dependence
on oil by encouraging energy conservation and use of alternative fuels. In
addition, a restructuring of industry, with emphasis shifting from basic
industries to processing and assembly-type industries, has contributed to the
reduction of oil consumption. However, there is no guarantee this favorable
trend will continue.
Economic Trends. The following tables set forth Japan's
gross domestic product and certain other economic indicators for the years
shown.
GROSS DOMESTIC PRODUCT (GDP)
(yen in billions)
<TABLE>
<CAPTION>
1998* 1997 1996 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consumption
Expenditures
Private........... Yen303,050 Yen308,472 Yen299,440 Yen290,515 Yen286,154 Yen278,703 Yen272,294 Yen261,891 Yen249,288
Government........ 50,083 50,239 48,969 47,555 45,743 44,771 43,262 41,356 38,807
Gross Fixed
Capital Formation. 133,044 143,217 148,190 136,792 137,291 140,433 143,525 143,998 136,467
Increase (Decrease)
in Stocks......... 914 828 1,058 947 50 620 1,489 3,453 2,430
Exports of Goods
and Services...... 56,355 55,979 49,598 45,393 44,410 44,197 47,384 46,723 45,920
Imports of Goods
and Services.. 46,753 51,331 46,900 38,272 34,387 33,343 36,891 39,121 42,872
GDP (Expenditures).. 499,191 507,403 500,356 482,930 479,260 475,381 471,064 458,299 430,040
Change in GDP from
Preceding Year...... (1.6)% 1.4% 3.6% 0.8% 0.8% 0.9% 2.8% 6.6% --
</TABLE>
Source: International Monetary Fund, International Financial Statistics
- ------------------
* Average of the first and second quarters of 1998.
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<PAGE> 35
<TABLE>
<CAPTION>
WHOLESALE PRICE INDEX CONSUMER PRICE INDEX
(Base Year: 1990) (Base Year: 1990)
All Change from Change from
Year Commodities Preceding Year General Preceding Year
---- ----------- -------------- ------- --------------
<S> <C> <C> <C> <C>
1990 100.0 -- 100.0 --
1991 100.2 0.2 103.3 3.3
1992 98.7 (1.5) 105.1 1.8
1993 95.0 (3.7) 106.4 1.3
1994 93.0 (2.0) 107.1 0.7
1995 92.2 (0.8) 107.0 (0.1)
1996 92.3 0.1 107.2 0.2
1997 93.7 1.4 109.0 0.5
1998 91.7* (2.0) 109.6** 0.6
Source: International Monetary Fund, Source: International Monetary Fund,
International Financial Statistics International Financial Statistics
</TABLE>
- ------------------
* Average of the first eleven months of 1998.
** Average of the first ten months of 1998.
Currency Fluctuation. Investments by a Fund in Japanese
securities will be denominated in yen and most income received by these Funds
from such investments will be in yen. However, the Funds' net asset value will
be reported, and distributions will be made, in U.S. dollars. Therefore, a
decline in the value of the yen relative to the U.S. dollar could have an
adverse effect on the value of a Fund's Japanese investments. The following
table presents the average exchange rates of Japanese yen for U.S. dollars for
the years shown:
AVERAGE CURRENCY EXCHANGE RATES
<TABLE>
<CAPTION>
Year Yen Per U.S. Dollar
---- -------------------
<S> <C>
1990 144.79
1991 134.71
1992 126.65
1993 111.20
1994 102.21
1995 94.06
1996 108.78
1997 120.99
1998 139.11*
</TABLE>
Source: International Monetary Fund, International Financial Statistics
- ------------------
* Average of the first eleven months of 1998.
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<PAGE> 36
Securities Markets
The Exchange Market. The Japanese exchange market is a highly
systematized, government regulated market currently consisting of eight stock
exchanges. The three main Japanese Exchanges (Tokyo, Osaka and Nagoya) are
comprised of First and Second Sections. The First Sections have more stringent
listing standards with respect to a company's number of years in existence,
number of outstanding shares and trading volume and, accordingly, list larger,
more established companies than the Second Sections. The Tokyo Stock Exchange
("TSE") is the largest exchange and, as of December 31, 1998, the First Section
of the TSE listed 1,340 companies with market capitalization of approximately
267.8 trillion yen (approximately $2.3 trillion as of such date). The Second
Sections of the main Japanese Exchanges generally list smaller, less
capitalized companies than those traded on the First Sections. As of December
31, 1998, the Second Section of the TSE listed 498 companies with market
capitalization of approximately 7.4 trillion yen (approximately $64 billion as
of such date).
The OTC Market. The Japanese OTC market ("JASDAQ") is less
systematized than the stock exchanges. Trading of equity securities through the
JASDAQ market is conducted by securities firms in Japan, primarily through an
organization which acts as a "matching agent," as opposed to a recognized stock
exchange. Consequently, securities traded through JASDAQ may, from time to
time, and especially in falling markets, become illiquid and experience
short-term price volatility and wide spreads between bid and offer prices. This
combination of limited liquidity and price volatility may have an adverse
effect on the investment performance of a Fund. In periods of rapid price
increases, the limited liquidity of JASDAQ restricts a Fund's ability to adjust
its portfolio quickly in order to take full advantage of a significant market
increase, and conversely, during periods of rapid price declines, it restricts
the ability of a Fund to dispose of securities quickly in order to realize
gains previously made or to limit losses on securities held in its portfolio.
In addition, although JASDAQ has generally experienced sustained growth in
aggregate market capitalization and trading volume, there have been periods in
which aggregate market capitalization and trading volume have declined.
As of December 31, 1998, 868 issues were traded through
JASDAQ, having an aggregate market capitalization in excess of 7.7 trillion yen
(approximately $67.8 billion as of such date). The entry requirements for
JASDAQ were amended on December 1, 1998. As of February 22, 1999, there was no
English translation of the amendments available. JASDAQ has generally attracted
small growth companies or companies whose major shareholders wish to sell only
a small portion of the company's equity.
Market Risks. Although the market for Japanese equities
traded on the First Section of the TSE is substantial in terms of trading
volume and liquidity, the TSE has nonetheless exhibited significant market
volatility in the past several years. With respect to the OTC market, trades of
certain stocks may not be effected on days when the matching of buy and sell
orders for such stocks does not occur. The liquidity of the Japanese OTC
market, as well as that of the Second Sections of the exchanges, although
increasing in recent years, is limited by the small number of publicly held
shares which trade on a regular basis. Overall,
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<PAGE> 37
Japanese securities markets have declined significantly since 1989 which has
contributed to a weakness in the Japanese economy and the impact of a further
decline cannot be ascertained.
Other Factors
The islands of Japan lie in the western Pacific Ocean, off
the eastern coast of the continent of Asia. Japan has in the past experienced
earthquakes and tidal waves of varying degrees of severity, and the risks of
such phenomena, and the damage resulting therefrom, continue to exist. The
long-term economic effects of such geological factors on the Japanese economy
as a whole, and on the Fund's investments, cannot be predicted. In addition,
Japan has one of the world's highest population densities. A significant
percentage of the total population of Japan is concentrated in the metropolitan
areas of Tokyo, Yokohama, Osaka and Nagoya.
Short Sales. The International Small Company Fund and the
Global Post-Venture Capital Fund may from time to time sell securities short. A
short sale is a transaction in which the Fund sells securities it does not own
in anticipation of a decline in the market price of the securities. The current
market value of the securities sold short (excluding short sales "against the
box") will not exceed 10% of each Fund's net assets.
To deliver the securities to the buyer, the Fund must arrange
through a broker to borrow the securities and, in so doing, the Fund becomes
obligated to replace the securities borrowed at their market price at the time
of replacement, whatever that price may be. The Fund will make a profit or
incur a loss as a result of a short sale depending on whether the price of the
securities decreases or increases between the date of the short sale and the
date on which the Fund purchases the security to replace the borrowed
securities that have been sold. The amount of any loss would be increased (and
any gain decreased) by any premium or interest the Fund is required to pay in
connection with a short sale.
The Fund's obligation to replace the securities borrowed in
connection with a short sale will be secured by cash or liquid securities
deposited as collateral with the broker. In addition, the Fund will place in a
segregated account with its custodian or a qualified subcustodian an amount of
cash or liquid securities equal to the difference, if any, between (i) the
market value of the securities sold at the time they were sold short and (ii)
any cash or liquid securities deposited as collateral with the broker in
connection with the short sale (not including the proceeds of the short sale).
Until it replaces the borrowed securities, a Fund will maintain the segregated
account daily at a level so that (a) the amount deposited in the account plus
the amount deposited with the broker (not including the proceeds from the short
sale) will equal the current market value of the securities sold short and (b)
the amount deposited in the account plus the amount deposited with the broker
(not including the proceeds from the short sale) will not be less than the
market value of the securities at the time they were sold short.
Short Sales "Against the Box". With the exception of the
International Equity Fund, each Fund may use up to 10% of its net assets (taken
at current value) as collateral for short sales against the box. In a short
sale, a Fund sells a borrowed security and has a corresponding obligation to
the lender to return the identical security. The seller does not
32
<PAGE> 38
immediately deliver the securities sold and is said to have a short position in
those securities until delivery occurs. A Fund may engage in a short sale if at
the time of the short sale the Fund owns or has the right to obtain without
additional cost an equal amount of the security being sold short. This
investment technique is known as a short sale "against the box." It may be
entered into by a Fund to, for example, lock in a sale price for a security the
Fund does not wish to sell immediately. If a Fund engages in a short sale, the
collateral for the short position will be segregated in an account with the
Fund's custodian or qualified sub-custodian.
The Funds do not intend to engage in short sales against the
box for investment purposes. Each Fund may, however, make a short sale as a
hedge, when it believes that the price of a security may decline, causing a
decline in the value of a security owned by the Fund (or a security convertible
or exchangeable for such security). In such case, any future losses in the
Fund's long position should be offset by a gain in the short position and,
conversely, any gain in the long position should be reduced by a loss in the
short position. The extent to which such gains or losses are reduced will
depend upon the amount of the security sold short relative to the amount the
Fund owns. There will be certain additional transaction costs associated with
short sales against the box, but a Fund will endeavor to offset these costs
with the income from the investment of the cash proceeds of short sales.
If a Fund effects a short sale of securities at a time when
it has an unrealized gain on the securities, it may be required to recognize
that gain as if it had actually sold the securities (as a "constructive sale")
on the date it effects the short sale. However, such constructive sale
treatment may not apply if the Fund closes out the short sale with securities
other than the appreciated securities held at the time of the short sale and if
certain other conditions are satisfied. Uncertainty regarding the tax
consequences of effecting short sales may limit the extent to which a Fund may
effect short sales.
Warrants. Each Fund may invest up to 10% of its net assets
(in the case of the Major Foreign Markets and Global Post-Venture Capital
Funds, up to 10% of total assets) in warrants. Warrants are securities that
give the holder the right, but not the obligation to purchase equity issues of
the company issuing the warrants, or a related company, at a fixed price either
on a date certain or during a set period. A Fund may invest in warrants to
purchase equity securities consisting of common and preferred stock. The equity
security underlying a warrant is authorized at the time the warrant is issued
or is issued together with the warrant.
Investing in warrants can provide a greater potential for
profit or loss than an equivalent investment in the underlying security, and,
thus, can be a speculative investment. At the time of issue, the cost of a
warrant is substantially less than the cost of the underlying security itself,
and price movements in the underlying security are generally magnified in the
price movements of the warrant. This leveraging effect enables the investor to
gain exposure to the underlying security with a relatively low capital
investment. This leveraging increases an investor's risk, however, in the event
of a decline in the value of the underlying security and can result in a
complete loss of the amount invested in the warrant. In addition, the price of
a warrant tends to be more volatile than, and may not correlate exactly to, the
price of the
33
<PAGE> 39
underlying security. If the market price of the underlying security is below the
exercise price of the warrant on its expiration date, the warrant will generally
expire without value. The value of a warrant may decline because of a decline in
the value of the underlying security, the passage of time, changes in interest
rates or in the dividend or other policies of the company whose equity underlies
the warrant or a change in the perception as to the future price of the
underlying security, or any combination thereof. Warrants generally pay no
dividends and confer no voting or other rights other than to purchase the
underlying security.
Non-Publicly Traded and Illiquid Securities. Each Fund may
not invest more than 15% of its net assets (10% of total assets in the case of
the International Equity Fund) in non-publicly traded and illiquid securities,
including securities that are illiquid by virtue of the absence of a readily
available market, time deposits maturing in more than seven days, certain Rule
144A Securities (as defined below), Private Funds (in the case of the Global
Post-Venture Capital Fund), and repurchase agreements which have a maturity of
longer than seven days. Securities that have legal or contractual restrictions
on resale but have a readily available market are not considered illiquid for
purposes of this limitation. Repurchase agreements subject to demand are deemed
to have a maturity equal to the notice period.
Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which have
not been registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market. Non-publicly traded securities (including Rule 144A
Securities and, with respect to the Global Post-Venture Capital Fund, Private
Funds) may involve a high degree of business and financial risk and may result
in substantial losses. These securities may be less liquid than publicly traded
securities, and a Fund may take longer to liquidate these positions than would
be the case for publicly traded securities. Companies whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements applicable to companies whose securities are publicly
traded. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven days. A
Fund's investment in illiquid securities is subject to the risk that should the
Fund 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
Fund's net assets could be adversely affected. 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
34
<PAGE> 40
fact that there are contractual or legal restrictions on resale to the general
public or to certain institutions may not be indicative of the liquidity of such
investments.
Rule 144A Securities. Rule 144A under the Securities Act
adopted by the SEC allows for a broader institutional trading market for
securities otherwise subject to restriction on resale to the general public.
Rule 144A establishes a "safe harbor" from the registration requirements of the
Securities Act for resales of certain securities to qualified institutional
buyers. CSAM anticipates that the market for certain restricted securities such
as institutional commercial paper will expand further as a result of this
regulation and use of automated systems for the trading, clearance and
settlement of unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of Securities Dealers,
Inc.
An investment in Rule 144A Securities will be considered
illiquid and therefore subject to the Fund's limit on the purchase of illiquid
securities unless the Board or its delegates determines that the Rule 144A
Securities are liquid. In reaching liquidity decisions, the Board and its
delegates may consider, inter alia, the following factors: (i) the unregistered
nature of the security; (ii) the frequency of trades and quotes for the
security; (iii) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (iv) dealer undertakings to make
a market in the security and (v) the nature of the security and the nature of
the marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer).
Investing in Rule 144A Securities could have the effect of
increasing the level of illiquidity in the Funds to the extent that qualified
institutional buyers are unavailable or uninterested in purchasing such
securities from the Funds. The Boards may adopt guidelines and delegate to CSAM
the daily function of determining and monitoring the liquidity of Rule 144A
Securities, although each Board will retain ultimate responsibility for any
liquidity determinations.
Borrowing. A Fund may borrow up to 30% of its total assets
for temporary or emergency purposes, including to meet portfolio redemption
requests so as to permit the orderly disposition of portfolio securities or to
facilitate settlement transactions on portfolio securities, so long as there is
asset coverage of at least 300% for all borrowings of the Fund and each Fund
may pledge its assets to the extent necessary to secure permitted borrowings
(up to 10% of its total assets in the case of the International Equity Fund).
Additional investments (including roll-overs) will not be made when borrowings
(including reverse repurchase agreements) exceed 5% of a Fund's total assets
(net assets in the case of the Global Post-Venture Capital Fund). Although the
principal of such borrowings will be fixed, the Fund's assets may change in
value during the time the borrowing is outstanding. Each Fund expects that some
of its borrowings may be made on a secured basis. In such situations, either
the custodian will segregate the pledged assets for the benefit of the lender
or arrangements will be made with a suitable subcustodian, which may include
the lender.
Stand-By Commitments. The Major Foreign Markets Fund, the
Emerging Markets Fund, the International Small Company Fund and the Global
Post-Venture Capital Fund may invest in stand-by commitments with respect to
securities held in their portfolios.
35
<PAGE> 41
Under a stand-by commitment, a dealer agrees to purchase at a Fund's option
specified securities at a specified price. A Fund's right to exercise stand-by
commitments is unconditional and unqualified. Stand-by commitments acquired by a
Fund may also be referred to as "put" options. A stand-by commitment is not
transferable by a Fund, although a Fund can sell the underlying securities to a
third party at any time.
The principal risk of stand-by commitments is that the writer
of a commitment may default on its obligation to repurchase the securities
acquired with it. When investing in stand-by commitments, the Funds 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. A Fund acquires stand-by commitments only in
order to facilitate portfolio liquidity and does not expect to exercise its
rights under stand-by commitments for trading purposes.
The amount payable to a Fund upon its exercise of a stand-by
commitment is normally (i) a Fund's acquisition cost of the securities
(excluding any accrued interest which the Fund paid on their acquisition), less
any amortized market premium or plus any amortized market or original issue
discount during the period a Fund owned the securities, plus (ii) all interest
accrued on the securities since the last interest payment date during that
period.
Each Fund expects that stand-by commitments will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, a Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding stand-by commitments held in a Fund's portfolio will not
exceed 1/2 of 1% of the value of a Fund'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 a Fund would be valued at zero in determining net asset
value. Where a Fund 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 a Fund. Stand-by commitments
would not affect the average weighted maturity of a Fund's portfolio.
Reverse Repurchase Agreements. With the exception of the
International Equity Fund, each Fund may enter into reverse repurchase
agreements with member banks of the Federal Reserve System and certain non-bank
dealers, although none of the Funds intend to enter into reverse repurchase
agreements in the coming year. Reverse repurchase agreements involve the sale
of securities held by a Fund pursuant to its agreement to repurchase them at a
mutually agreed upon date, price and rate of interest. At the time a Fund
enters into a reverse repurchase agreement, it will segregate with an approved
custodian cash or liquid high-grade debt securities having a value not less
than the repurchase price (including accrued interest). The segregated assets
will be marked-to-market daily and additional assets
36
<PAGE> 42
will be segregated on any day in which the assets fall below the repurchase
price (plus accrued interest). A Fund's liquidity and ability to manage its
assets might be affected when it sets aside cash or portfolio securities to
cover such commitments. Reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale may decline below the
price of the securities the Fund has sold but is obligated to repurchase. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce a Fund's obligation
to repurchase the securities, and the Fund's use of the proceeds of the reverse
repurchase agreement may effectively be restricted pending such decision.
When-Issued Securities and Delayed-Delivery Transactions.
Each Fund may utilize up to 20% of its total assets to purchase securities on a
"when-issued" basis or purchase or sell securities for delayed delivery (i.e.,
payment or delivery occur beyond the normal settlement date at a stated price
and yield). In these transactions, payment for and delivery of the securities
occur beyond the regular settlement dates, normally within 30-45 days after the
transaction. The Funds will enter into a when-issued transaction for the
purpose of acquiring portfolio securities and not for the purpose of leverage,
but may sell the securities before the settlement date if CSAM deems it
advantageous to do so. The payment obligation and the interest rate that will
be received on when-issued and delayed-delivery securities are fixed at the
time the buyer enters into the commitment. Due to fluctuations in the value of
securities purchased or sold on a when-issued or delayed-delivery basis, the
yields obtained on such securities may be higher or lower than the yields
available in the market on the dates when the investments are actually
delivered to the buyers. When-issued securities may include securities
purchased on a "when, as and if issued" basis, under which the issuance of the
security depends on the occurrence of a subsequent event, such as approval of a
merger, corporate reorganization or debt restructuring.
When a Fund agrees to purchase when-issued or
delayed-delivery securities, its custodian will set aside cash or certain
liquid securities that are acceptable as collateral to the appropriate
regulatory authority equal to the amount of the commitment in a segregated
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment, and in such a case, a Fund may be required subsequently
to place additional assets in the segregated account in order to ensure that
the value of the account remains equal to the amount of the Fund's commitment.
It may be expected that a Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. When a Fund engages in when-issued or delayed-delivery
transactions, it relies on the other party to consummate the trade. Failure of
the seller to do so may result in a Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
Emerging Growth and Small Companies; Unseasoned Issuers. Each
Fund may invest its assets in the securities of Emerging Growth, Small Companies
and unseasoned issuers. Investments in emerging growth and small-sized
companies, as well as 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
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established, larger-capitalization issuers, including reduced and less reliable
information about issuers and markets, less stringent financial disclosure
requirements and accounting standards, illiquidity of securities and markets,
higher brokerage commissions and fees and greater market risk in general. In
addition, securities of emerging growth and small-sized companies and unseasoned
issuers may involve greater risks since these securities may have limited
marketability and, thus, may be more volatile. Because such companies normally
have fewer shares outstanding than larger companies, it may be more difficult
for a Fund to buy or sell significant amounts of such shares without an
unfavorable impact on prevailing prices. These companies may have limited
product lines, markets or financial resources and may lack management depth. In
addition, these companies are typically subject to a greater degree of changes
in earnings and business prospects than are larger, more established companies.
There is typically less publicly available information concerning these
companies than for larger, more established ones.
Although investing in securities of these companies 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
Funds may involve a greater degree of risk than an investment in other mutual
funds that seek capital appreciation by investing in more established, larger
companies.
Special Situation Companies. Each Fund may invest in "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.
Dollar Rolls. With the exception of the International Equity
Fund, each Fund also may enter into "dollar rolls," in which the Fund sells
fixed-income securities for delivery in the current month and simultaneously
contracts to repurchase similar but not identical (same type, coupon and
maturity) securities on a specified future date. During the roll period, the
Fund would forego principal and interest paid on such securities. The Fund
would be compensated by the difference between the current sale price and the
forward price for the future purchase, as well as by the interest earned on the
cash proceeds of the initial sale. At the time the Fund enters into a dollar
roll transaction, it will segregate with an approved custodian cash or liquid
securities having a value not less than the repurchase price (including accrued
interest) and will subsequently monitor the segregated assets to ensure that
its value is maintained.
Temporary Defensive Strategies.
Debt Securities. When CSAM believes that a defensive posture
is warranted, each Fund may invest temporarily without limit in investment
grade debt obligations and in domestic and foreign money market obligations,
including repurchase agreements.
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Money Market Obligations. Each Fund, for temporary defensive
purposes, may invest in domestic and foreign short-term (one year or less
remaining to maturity) and medium-term (five years or less remaining to
maturity) money market obligations without limit.
Non-Diversified Status (Emerging Markets Fund Only). The Emerging Markets Fund
is classified as a non-diversified investment company under the 1940 Act, which
means that the Fund is not limited by the 1940 Act in the proportion of its
assets that it may invest in the obligations of a single issuer. As a
non-diversified investment company, the Fund may invest a greater proportion of
its assets in the obligations of a small number of issuers and, as a result,
may be subject to greater risk with respect to portfolio securities. To the
extent that the Fund assumes large positions in the securities of a small
number of issuers, its return may fluctuate to a greater extent than that of a
diversified company as a result of changes in the financial condition or in the
market's assessment of the issuers.
The Fund's investments will be limited, however, in order to
qualify as a "regulated investment company" for purposes of the Internal
Revenue Code of 1986, as amended (the "Code"). To qualify, the Fund will comply
with certain requirements, including limiting its investments so that at the
close of each quarter of the taxable year (i) not more than 25% of the market
value of its total assets will be invested in the securities of a single
issuer, 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 Fund will not own more than 10% of
the outstanding voting securities of a single issuer.
Strategies Available to the Global Post-Venture Capital Fund Only
Private Fund Investments. Up to 10% of the Fund's net assets
may be invested in U.S. or foreign private limited partnerships or other
investment funds ("Private Funds") that themselves invest in equity or debt
securities of (a) companies in the venture capital or post-venture capital
stages of development or (b) companies engaged in special situations or changes
in corporate control, including buyouts. In selecting Private Funds for
investment, Abbott attempts to invest in a mix of Private Funds that will
provide an above average internal rate of return (i.e., the discount rate at
which the present value of an investment's future cash inflows (dividend income
and capital gains) are equal to the cost of the investment). CSAM believes that
the Fund's investments in Private Funds offer individual investors a unique
opportunity to participate in venture capital and other private investment
funds, providing access to investment opportunities typically available only to
large institutions and accredited investors. Although the Fund's investments in
Private Funds are limited to a maximum of 10% of the Fund's assets, these
investments are highly speculative and volatile and may produce gains or losses
in this portion of the Fund that exceed those of the Fund's other holdings and
of more mature companies generally.
Because Private Funds generally are investment companies for
purposes of the 1940 Act, the Fund's ability to invest in them will be limited.
In addition, Fund shareholders will remain subject to the Fund's expenses while
also bearing their pro rata share of the operating expenses of the Private
Funds. The ability of the Fund to dispose of interests in Private Funds is very
limited and will involve certain risks. In valuing the Fund's holdings of
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<PAGE> 45
interests in Private Funds, the Fund will be relying on the most recent reports
provided by the Private Funds themselves prior to calculation of the Fund's net
asset value. These reports, which are provided on an infrequent basis, often
depend on the subjective valuations of the managers of the Private Funds and, in
addition, would not generally reflect positive or negative subsequent
developments affecting companies held by the Private Fund. Debt securities held
by a Private Fund will tend to be rated below investment grade and may be rated
as low as C by Moody's or D by S&P. Securities in these rating categories are in
payment default or have extremely poor prospects of attaining any investment
standing.
Although investments in Private Funds offer the opportunity
for significant capital gains, these investments involve a high degree of
business and financial risk that can result in substantial losses in the
portion of a Fund's portfolio invested in these investments. Among these are
the risks associated with investment in companies in an early stage of
development or with little or no operating history, companies operating at a
loss or with substantial variation in operation results from period to period,
companies with the need for substantial additional capital to support expansion
or to maintain a competitive position, or companies with significant financial
leverage. Such companies may also face intense competition from others
including those with greater financial resources or more extensive development,
manufacturing, distribution or other attributes, over which the Fund will have
no control.
Interests in the Private Funds in which a Fund may invest
will be subject to substantial restrictions on transfer and, in some instances,
may be non-transferable for a period of years. Private Funds may participate in
only a limited number of investments and, as a consequence, the return of a
particular Private Fund may be substantially adversely affected by the
unfavorable performance of even a single investment. Certain of the Private
Funds in which the Fund may invest may pay their investment managers a fee
based on the performance of the Fund, which may create an incentive for the
manager to make investments that are riskier or more speculative than would be
the case if the manager was paid a fixed fee. Private Funds are not registered
under the 1940 Act and, consequently, are not subject to the restrictions on
affiliated transactions and other protections applicable to regulated
investment companies. The valuation of companies held by Private Funds, the
securities of which are generally unlisted and illiquid, may be very difficult
and will often depend on the subjective valuation of the managers of the
Private Funds, which may prove to be inaccurate. Inaccurate valuations of a
Private Fund's portfolio holdings may affect the Fund's net asset value
calculations. Private Funds in which the Fund invests will not borrow to
increase the amount of assets available for investment or otherwise engage in
leverage.
The Fund may also hold non-publicly traded equity securities
of companies in the venture capital and post-venture capital stages of
development, such as those of closely-held companies or private placements of
public companies. The portion of the Fund's assets invested in these
non-publicly traded securities will vary over time depending on investment
opportunities and other factors. The Fund's illiquid assets, including Private
Funds and other non-publicly traded securities, may not exceed 15% of the
Fund's net assets.
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Other Strategies. The Fund will invest in securities of
post-venture capital companies that are traded on a national securities
exchange or in an organized OTC market, such as The Nasdaq Stock Market, Inc.,
JASDAQ, EASDAQ and AIM. The Fund may invest, directly or through Private Funds,
in securities of issuers engaged at the time of purchase in "special
situations," such as a restructuring or recapitalization; an acquisition,
consolidation, merger or tender offer; a change in corporate control or
investment by a venture capitalist. For temporary defensive purposes, such as
during times of international political or economic uncertainty, all of the
Fund's investments may be made temporarily in the U.S.
INVESTMENT RESTRICTIONS
All Funds. Certain investment limitations of each Fund may
not be changed without the affirmative vote of the holders of a majority of the
Fund's outstanding shares ("Fundamental Restrictions"). Such majority is
defined as the lesser of (i) 67% or more of the shares present at the meeting,
if the holders of more than 50% of the outstanding shares of the Fund are
present or represented by proxy, or (ii) more than 50% of the outstanding
shares.
Major Foreign Markets Fund. The investment limitations
numbered 1 through 9 may not be changed without the affirmative vote of the
holders of a majority of the Fund's outstanding shares. Investment limitations
10 through 14 may be changed by a vote of the Board at any time. The Major
Foreign Markets Fund may not:
1. Borrow money except that the Fund may (a) borrow from
banks for temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the
Fund's total assets at the time of such borrowing. For purposes of this
restriction, short sales, the entry into currency transactions, options,
futures contracts, options on futures contracts, forward commitment
transactions and dollar roll transactions that are not accounted for as
financings (and the segregation of assets in connection with any of the
foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of
the value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of U.S.
Government Securities.
3. Purchase the securities of any issuer if as a result more
than 5% of the value of the Fund's total assets would be invested in the
securities of such issuer, except that this 5% limitation does not apply to
U.S. Government Securities and except that up to 25% of the value of the Fund's
total assets may be invested without regard to this 5% limitation.
4. Make loans, except that the Fund may purchase or hold
fixed-income securities, including loan participations, assignments and
structured securities, lend portfolio securities and enter into repurchase
agreements.
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5. Underwrite any securities issued by others except to the
extent that the investment in restricted securities and the sale of securities
in accordance with the Fund's investment objective, policies and limitations
may be deemed to be underwriting.
6. Purchase or sell real estate or invest in oil, gas or
mineral exploration or development programs, except that the Fund may invest in
(a) securities secured by real estate, mortgages or interests therein and (b)
securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
7. Purchase securities on margin, except that the Fund may
obtain any short-term credits necessary for the clearance of purchases and
sales of securities. For purposes of this restriction, the deposit or payment
of initial or variation margin in connection with transactions in currencies,
options, futures contracts or related options will not be deemed to be a
purchase of securities on margin.
8. Invest in commodities, except that the Fund may purchase
and sell futures contracts, including those relating to securities, currencies
and indexes, and options on futures contracts, securities, currencies or
indexes, purchase and sell currencies on a forward commitment or
delayed-delivery basis and enter into stand-by commitments.
9. Issue any senior security except as permitted in the
Fund's investment limitations.
10. Purchase securities of other investment companies except
in connection with a merger, consolidation, acquisition, reorganization or
offer of exchange, or as otherwise permitted under the 1940 Act.
11. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to
the deposit of assets in escrow in connection with purchase of securities on a
forward commitment or delayed-delivery basis and collateral and initial or
variation margin arrangements with respect to currency transactions, options,
futures contracts, and options on futures contracts.
12. Invest more than 15% of the Fund's net assets in
securities which may be illiquid because of legal or contractual restrictions
on resale or securities for which there are no readily available market
quotations. For purposes of this limitation, repurchase agreements with
maturities greater than seven days shall be considered illiquid securities.
13. Make additional investments (including roll-overs) if the
Fund's borrowings exceed 5% of its net assets.
14. Make short sales of securities or maintain a short
position, except that the Fund may maintain short positions in forward currency
contracts, options and futures contracts and make short sales "against the
box."
If a percentage restriction (other than the percentage
limitation set forth in No. 1 and No. 12 above) is adhered to at the time of an
investment, a later increase or decrease in
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the percentage of assets resulting from a change in the values of portfolio
securities or in the amount of the Fund's assets will not constitute a violation
of such restriction.
International Equity Fund. The investment limitations
numbered 1 through 11 are Fundamental Restrictions. Investment limitations 12
through 14 may be changed by a vote of the Board at any time. The International
Equity Fund may not:
1. Borrow money or issue senior securities except that the
Fund may (a) borrow from banks for temporary or emergency purposes, and not for
leveraging, and then in amounts not in excess of 30% of the value of the Fund's
total assets at the time of such borrowing and (b) enter into futures
contracts; or mortgage, pledge or hypothecate any assets except in connection
with any bank borrowing and in amounts not in excess of the lesser of the
dollar amounts borrowed or 10% of the value of the Fund's total assets at the
time of such borrowing. Whenever borrowings described in (a) exceed 5% of the
value of the Fund's total assets, the Fund will not make any investments
(including roll-overs). For purposes of this restriction, (a) the deposit of
assets in escrow in connection with the purchase of securities on a when-issued
or delayed-delivery basis and (b) collateral arrangements with respect to
initial or variation margin for futures contracts will not be deemed to be
pledges of the Fund's assets.
2. Purchase the securities of any issuer if as a result more
than 5% of the value of the Fund's total assets would be invested in the
securities of such issuer, except that this 5% limitation does not apply to
U.S. Government Securities and except that up to 25% of the value of the Fund's
total assets may be invested without regard to this 5% limitation.
3. Purchase any securities which would cause 25% or more of
the value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of U.S.
government securities.
4. Make loans, except that the Fund may purchase or hold
publicly distributed fixed-income securities, lend portfolio securities and
enter into repurchase agreements.
5. Underwrite any issue of securities except to the extent
that the investment in restricted securities and the purchase of fixed-income
securities directly from the issuer thereof in accordance with the Fund's
investment objective, policies and limitations may be deemed to be
underwriting.
6. Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that the Fund may invest in
(a) fixed-income securities secured by real estate, mortgages or interests
therein, (b) securities of companies that invest in or sponsor oil, gas or
mineral exploration or development programs and (c) futures contracts and
related options. The entry into forward foreign currency exchange contracts is
not and shall not be deemed to involve investing in commodities.
7. Make short sales of securities or maintain a short
position.
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8. Purchase, write or sell puts, calls, straddles, spreads or
combinations thereof, except that the Fund may (a) purchase put and call
options on securities, (b) write covered call options on securities, (c)
purchase and write put and call options on stock indices and (d) enter into
options on futures contracts.
9. Purchase securities of other investment companies except
in connection with a merger, consolidation, acquisition, reorganization or
offer of exchange, or as otherwise permitted under the 1940 Act.
10. Purchase more than 10% of the voting securities of any
one issuer, more than 10% of the securities of any class of any one issuer or
more than 10% of the outstanding debt securities of any one issuer; provided
that this limitation shall not apply to investments in U.S. government
securities.
11. Purchase securities on margin, except that the Fund may
obtain any short-term credits necessary for the clearance of purchases and
sales of securities. For purposes of this restriction, the deposit or payment
of initial or variation margin in connection with futures contracts or related
options will not be deemed to be a purchase of securities on margin.
12. Invest more than 10% of the value of the Fund's total
assets in securities which may be illiquid because of legal or contractual
restrictions on resale or securities for which there are no readily available
market quotations. For purposes of this limitation, (a) repurchase agreements
with maturities greater than seven days and (b) time deposits maturing in more
than seven calendar days shall be considered illiquid securities.
13. Invest in warrants (other than warrants acquired by the
Fund as part of a unit or attached to securities at the time of purchase) if,
as a result, the investments (valued at the lower of cost or market) would
exceed 10% of the value of the Fund's net assets.
14. Invest in oil, gas, or mineral leases.
If a percentage restriction (other than the percentage
limitation set forth in No. 1 and No. 12) is adhered to at the time of
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
Fund's assets will not constitute a violation of such restriction.
International Small Company Fund. The investment limitations
numbered 1 through 9 may not be changed without the affirmative vote of the
holders of a majority of the Fund's outstanding shares. Investment limitations
10 through 14 may be changed by a vote of the Board at any time. The
International Small Company Fund may not:
1. Borrow money except that the Fund may (a) borrow from
banks for temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the
Fund's total assets at the time of such borrowing. For purposes of this
restriction, short sales and the entry into currency transactions, options,
futures contracts,
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<PAGE> 50
options on futures contracts, forward commitment transactions and dollar roll
transactions that are not accounted for as financings (and the segregation of
assets in connection with any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of
the value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of U.S.
government securities.
3. Purchase the securities of any issuer if as a result more
than 5% of the value of the Fund's total assets would be invested in the
securities of such issuer, except that this 5% limitation does not apply to
U.S. Government Securities and except that up to 25% of the value of the Fund's
total assets may be invested without regard to this 5% limitation.
4. Make loans, except that the Fund may purchase or hold
fixed-income securities, including structured securities, lend portfolio
securities and enter into repurchase agreements.
5. Underwrite any securities issued by others except to the
extent that the investment in restricted securities and the sale of securities
in accordance with the Fund's investment objective, policies and limitations
may be deemed to be underwriting.
6. Purchase or sell real estate or invest in oil, gas or
mineral exploration or development programs, except that the Fund may invest in
(a) securities secured by real estate, mortgages or interests therein and (b)
securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
7. Purchase securities on margin, except that the Fund may
obtain any short-term credits necessary for the clearance of purchases and
sales of securities. For purposes of this restriction, the deposit or payment
of initial or variation margin in connection with transactions in currencies,
options, futures contracts or related options will not be deemed to be a
purchase of securities on margin.
8. Invest in commodities, except that the Fund may purchase
and sell futures contracts, including those relating to securities, currencies
and indices, and options on futures contracts, securities, currencies or
indices, and purchase and sell currencies on a forward commitment or
delayed-delivery basis and enter into stand-by commitments.
9. Issue any senior security except as permitted in the
Fund's investment limitations.
10. Purchase securities of other investment companies except
in connection with a merger, consolidation, acquisition, reorganization or
offer of exchange, or as otherwise permitted under the 1940 Act.
11. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to
the deposit of assets in escrow and in
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<PAGE> 51
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 arrangements with respect to currency transactions,
options, futures contracts, and options on futures contracts.
12. Invest more than 15% of the Fund's net assets in
securities which may be illiquid because of legal or contractual restrictions
on resale or securities for which there are no readily available market
quotations. For purposes of this limitation, repurchase agreements with
maturities greater than seven days shall be considered illiquid securities.
13. Invest in warrants (other than warrants acquired by the
Fund as part of a unit or attached to securities at the time of purchase) if,
as a result, the investments (valued at the lower of cost or market) would
exceed 10% of the value of the Fund's net assets.
14. Make additional investments (including roll-overs) if the
Fund's borrowings exceed 5% of its net assets.
If a percentage restriction (other than the percentage
limitation set forth in No. 1 and No. 12) 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
Fund's assets will not constitute a violation of such restriction.
Emerging Markets Fund. The investment limitations numbered 1
through 9 are Fundamental Restrictions. Investment limitations 10 through 14
may be changed by a vote of the Board at any time. The Emerging Markets Fund
may not:
1. Borrow money except that the Fund may (a) borrow from
banks for temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the
Fund's total assets at the time of such borrowing. For purposes of this
restriction, short sales, the entry into currency transactions, options,
futures contracts, options on futures contracts, forward commitment
transactions and dollar roll transactions that are not accounted for as
financings (and the segregation of assets in connection with any of the
foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of
the value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of U.S.
Government Securities.
3. Make loans, except that the Fund may purchase or hold
fixed-income securities, including loan participations, assignments and
structured securities, lend portfolio securities and enter into repurchase
agreements.
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<PAGE> 52
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 Fund'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, except that the Fund may invest in
(a) securities secured by real estate, mortgages or interests therein and (b)
securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
6. Make short sales of securities or maintain a short
position, except that the Fund may maintain short positions in forward currency
contracts, options, futures contracts and options on futures contracts and may
enter into short sales "against the box".
7. Purchase securities on margin, except that the Fund may
obtain any short-term credits necessary for the clearance of purchases and
sales of securities. For purposes of this restriction, the deposit or payment
of initial or variation margin in connection with transactions in currencies,
options, futures contracts or related options will not be deemed to be a
purchase of securities on margin.
8. Invest in commodities, except that the Fund may purchase
and sell futures contracts, including those relating to securities, currencies
and indexes, and options on futures contracts, securities, currencies or
indexes, purchase and sell currencies on a forward commitment or
delayed-delivery basis and enter into stand-by commitments.
9. Issue any senior security except as permitted in the
Fund's investment limitations.
10. Purchase securities of other investment companies except
in connection with a merger, consolidation, acquisition, reorganization or
offer of exchange, or as otherwise permitted under the 1940 Act.
11. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to
the deposit of assets in escrow in connection with the purchase of securities
on a forward commitment or delayed-delivery basis and collateral and initial or
variation margin arrangements with respect to currency transactions, options,
futures contracts, and options on futures contracts.
12. Invest more than 15% of the Fund's net assets in
securities which may be illiquid because of legal or contractual restrictions
on resale or securities for which there are no readily available market
quotations. For purposes of this limitation, repurchase agreements with
maturities greater than seven days shall be considered illiquid securities.
13. Invest in warrants (other than warrants acquired by the
Fund as part of a unit or attached to securities at the time of purchase) if,
as a result, the investments (valued at the lower of cost or market) would
exceed 10% of the value of the Fund's net assets.
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14. Make additional investments (including roll-overs) if the
Fund's borrowings exceed 5% of its net assets.
If a percentage restriction (other than the percentage
limitation set forth in No. 1 and No. 12) is adhered to at the time of
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
Fund's assets will not constitute a violation of such restriction.
Global Post-Venture Capital Fund. The investment limitations
numbered 1 through 9 are Fundamental Restrictions. Investment limitations 10
through 13 may be changed by a vote of the Board at any time. The Global
Post-Venture Capital Fund may not:
1. Borrow money except that the Fund may (a) borrow from
banks for temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the
Fund's total assets at the time of such borrowing. For purposes of this
restriction, short sales, the entry into currency transactions, options,
futures contracts, options on futures contracts, forward commitment
transactions and dollar roll transactions that are not accounted for as
financings (and the segregation of assets in connection with any of the
foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of
the value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of U.S.
Government Securities.
3. Purchase the securities of any issuer if as a result more
than 5% of the value of the Fund's total assets would be invested in the
securities of such issuer, except that this 5% limitation does not apply to
U.S. Government Securities and except that up to 25% of the value of the Fund's
total assets may be invested without regard to this 5% limitation.
4. Make loans, except that the Fund may purchase or hold
fixed-income securities, including loan participations, assignments and
structured securities, lend portfolio securities and enter into repurchase
agreements.
5. Underwrite any securities issued by others except to the
extent that the investment in restricted securities and the sale of securities
in accordance with the Fund's investment objective, policies and limitations
may be deemed to be underwriting.
6. Purchase or sell real estate or invest in oil, gas or
mineral exploration or development programs, except that the Fund may invest in
(a) securities secured by real estate, mortgages or interests therein and (b)
securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
7. Purchase securities on margin, except that the Fund may
obtain any short-term credits necessary for the clearance of purchases and
sales of securities. For purposes of
48
<PAGE> 54
this restriction, the deposit or payment of initial or variation margin in
connection with transactions in currencies, options, futures contracts or
related options will not be deemed to be a purchase of securities on margin.
8. Invest in commodities, except that the Fund may purchase
and sell futures contracts, including those relating to securities, currencies
and indexes, and options on futures contracts, securities, currencies or
indexes, purchase and sell currencies on a forward commitment or
delayed-delivery basis and enter into stand-by commitments.
9. Issue any senior security except as permitted in the
Fund's investment limitations.
10. Purchase securities of other investment companies except
in connection with a merger, consolidation, acquisition, reorganization or
offer of exchange, or as otherwise permitted under the 1940 Act.
11. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to
the deposit of assets in escrow in connection with the purchase of securities
on a forward commitment or delayed-delivery basis and collateral and initial or
variation margin arrangements with respect to currency transactions, options,
futures contracts, and options on futures contracts.
12. Invest more than 15% of the Fund's net assets in
securities which may be illiquid because of legal or contractual restrictions
on resale or securities for which there are no readily available market
quotations. For purposes of this limitation, repurchase agreements with
maturities greater than seven days shall be considered illiquid securities.
13. Make additional investments (including roll-overs) if the
Fund's borrowings exceed 5% of its net assets.
If a percentage restriction (other than the percentage
limitation set forth in No. 1 and No. 12) is adhered to at the time of
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
Fund's assets will not constitute a violation of such restriction.
PORTFOLIO VALUATION
The following is a description of the procedures used by the
Funds in valuing their assets.
Securities listed on a U.S. securities exchange (including
securities traded through the Nasdaq National Market System) or foreign
securities exchange or traded in an OTC market will be valued at the most
recent sale as of the time the valuation is made or, in the absence of sales,
at the mean between the highest bid and lowest asked quotations. If there are
no such quotations, the value of the securities will be taken to be the most
recent bid quotation on the exchange or market. Options contracts will be
valued similarly. Futures contracts will be valued at the most recent
settlement price at the time of valuation. A security
49
<PAGE> 55
which is listed or traded on more than one exchange is valued at the quotation
on the exchange determined to be the primary market for such security. The
valuation of short sales of securities, which are not traded on a national
exchange, will be at the mean of bid and asked prices. In determining the market
value of portfolio investments, the Fund may employ outside organizations (each
a "Pricing Service") which may use a matrix, formula or other objective method
that takes into consideration market indexes, matrices, yield curves and other
specific adjustments. The procedures of Pricing Services are reviewed
periodically by the officers of each Fund under the general supervision and
responsibility of the Board, which may replace a Pricing Service at any time.
Short-term obligations with maturities of 60 days or less are valued at
amortized cost, which constitutes fair value as determined by the Board.
Amortized cost involves valuing a portfolio instrument at its initial cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. The amortized cost method of valuation may also be used
with respect to other debt obligations with 60 days or less remaining to
maturity. The Global Post-Venture Capital Fund's investments in Private Funds
will be valued initially at cost and, thereafter, in accordance with periodic
reports received by Abbott from the Private Funds (generally quarterly). Because
the issuers of securities held by Private Funds are generally not subject to the
reporting requirements of the federal securities laws, interim changes in the
value of investments in Private Funds will not generally be reflected in the
Fund's net asset value. However, CSAM will report to the Board of the Fund
information about certain holdings of Private Funds that, in its judgment, could
have a material impact on the valuation of a Private Fund. The Board of the Fund
will take these reports into account in valuing Private Funds.
Securities, options, futures contracts and other assets for
which market quotations are not available, including with respect to the Global
Post-Venture Capital Fund, Private Funds, 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, "NYSE", is open
for trading). The NYSE is currently scheduled to be closed on New Year's Day,
Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day, and on the
preceding Friday or subsequent Monday when one of these holidays falls on a
Saturday or Sunday, respectively. In addition, securities trading in a
particular country or countries may not take place on all business days in New
York. Furthermore, trading takes place in various foreign markets on days which
are not business days in New York and days on which a Fund's net asset value is
not calculated. As a result, calculation of the Fund's net asset value may not
take place contemporaneously with the determination of the prices of certain
foreign portfolio securities used in such calculation. Events affecting the
values of portfolio securities that occur between the time their prices are
determined and the close of regular trading on the NYSE will not be reflected
in the Fund's calculation of net asset value unless the Board or its delegates
deems that the particular event would materially affect net asset value, in
which case
50
<PAGE> 56
an adjustment may be made. All assets and liabilities initially expressed in
foreign currency values will be converted into U.S. dollar values at the
prevailing rate as quoted by a Pricing Service as of 12:00 noon (Eastern time).
If such quotations are not available, the rate of exchange will be determined in
good faith pursuant to consistently applied procedures established by the Board.
PORTFOLIO TRANSACTIONS
CSAM is responsible for establishing, reviewing and, where
necessary, modifying a Fund's investment program to achieve its investment
objective. Purchases and sales of newly issued portfolio securities are usually
principal transactions without brokerage commissions effected directly with the
issuer or with an underwriter acting as principal. Other purchases and sales
may be effected on a securities exchange or OTC, depending on where it appears
that the best price or execution will be obtained. The purchase price paid by a
Fund to underwriters of newly issued securities usually includes a concession
paid by the issuer to the underwriter, and purchases of securities from
dealers, acting as either principals or agents in the after market, are
normally executed at a price between the bid and asked price, which includes a
dealer's mark-up or mark-down. Transactions on U.S. stock exchanges and some
foreign stock exchanges involve the payment of negotiated brokerage
commissions. On exchanges on which commissions are negotiated, the cost of
transactions may vary among different brokers. On most foreign exchanges,
commissions are generally fixed. Purchases of Private Funds through a broker or
placement agent may also involve a commission or other fee. There is generally
no stated commission in the case of securities traded in domestic or foreign
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. No brokerage commissions are typically
paid on purchases and sales of U.S. Government Securities.
Except for Private Funds managed by Abbott (with respect to
the Global Post-Venture Capital Fund), CSAM will select specific portfolio
investments and effect transactions for a Fund and in doing so seeks to obtain
the overall best execution of portfolio transactions. In evaluating prices and
executions, CSAM will consider the factors it deems relevant, which may include
the breadth of the market in the security, the price of the security, the
financial condition and execution capability of a broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis.
CSAM may, in its discretion, effect transactions in portfolio
securities with dealers who provide brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to a
Fund and/or other accounts over which CSAM exercises investment discretion.
CSAM may place portfolio transactions with a broker or dealer with whom it has
negotiated a commission that is in excess of the commission another broker or
dealer would have charged for effecting the transaction if CSAM determines in
good faith that such amount of commission was reasonable in relation to the
value of such brokerage and research services provided by such broker or dealer
viewed in terms of either
51
<PAGE> 57
that particular transaction or of the overall responsibilities of CSAM. Research
and other services received due to brokerage business on behalf of the Funds may
be useful to CSAM in serving its other clients and, conversely, research or
other services obtained by the placement of business of other clients may be
useful to CSAM in carrying out its obligations to the Funds. Research may
include furnishing advice, either directly or through publications or writings,
as to the value of securities, the advisability of purchasing or selling
specific securities and the availability of securities or purchasers or sellers
of securities; furnishing seminars, information, analyses and reports concerning
issuers, industries, securities, trading markets and methods, legislative
developments, changes in accounting practices, economic factors and trends and
portfolio strategy; access to research analysts, corporate management personnel,
industry experts, economists and government officials; comparative performance
evaluation and technical measurement services and quotation services; and
products and other services (such as third party publications, reports and
analyses, and computer and electronic access, equipment, software, information
and accessories that deliver, process or otherwise utilize information,
including the research described above) that assist CSAM in carrying out its
responsibilities. Research received from brokers or dealers is supplemental to
CSAM's own research program. For the fiscal year ended October 31, 1998,
$9,749.88, $867,683.19, $9.00, $8,276.36 and $1,448.00 of total brokerage
commissions was paid by the Major Foreign Markets Fund, the International Equity
Fund, the International Small Company Fund, the Emerging Markets Fund and the
Global Post-Venture Capital Fund, respectively, to brokers and dealers who
provided such research and other services.
The following table details amounts paid by each Fund in
commissions to broker-dealers for execution of portfolio transactions during
the indicated fiscal years or periods ended October 31.
<TABLE>
<CAPTION>
FUND 1996 1997 1998
- ------------------------------------------------ ------------------- --------------------- ---------------------
<S> <C> <C> <C>
Major Foreign Markets Fund N/A $19,273 (1) $192,591 (2)
- ------------------------------------------------ ------------------- --------------------- ---------------------
International Equity Fund $8,400,700 $12,784,100(3) $13,044,983
- ------------------------------------------------ ------------------- --------------------- ---------------------
International Small Company Fund N/A N/A $5,459
- ------------------------------------------------ ------------------- --------------------- ---------------------
Emerging Markets Fund $1,416,683 $2,287,575 (3) $1,052,556(4)
- ------------------------------------------------ ------------------- --------------------- ---------------------
Global Post-Venture Capital Fund $3,819 $15,386 (2) $15,541
- ------------------------------------------------ ------------------- --------------------- ---------------------
</TABLE>
(1) During the period March 31, 1997 (commencement of operations) through
October 31, 1997; commissions paid by the Warburg, Pincus
Institutional Fund, Inc. on behalf of the Managed EAFE(R) Countries
Portfolio.
(2) The increased size in commissions payments in the 1998 fiscal year
(with respect to the Major Foreign Markets Fund) and in the 1996 and
1997 fiscal years (with respect to the Global Post-Venture Capital
Fund) was attributable to the increased size of those Funds and
increased equity investments.
(3) The increase in brokerage commissions paid by the International Equity
and Emerging Markets Funds in 1997 was a result of sharp increases in
the volume of share-related activity as the Funds experienced large
inflows or outflows of capital, as the case may be.
52
<PAGE> 58
(4) The decrease in brokerage commissions paid by the Emerging Markets
Fund in 1998 was a result of fluctuations in the net asset value of
the Fund.
The table below shows the amount of outstanding repurchase
agreements that each Fund had, as of October 31, 1998, with State Street Bank &
Co., one of the regular broker-dealers of each Fund.
<TABLE>
<S> <C>
Major Foreign Markets Fund $4,736,000
------------------------------------------------------ -------------------------
International Equity Fund $139,336,000
------------------------------------------------------ -------------------------
International Small Company Fund $201,000
------------------------------------------------------ -------------------------
Emerging Markets Fund $3,968,000
------------------------------------------------------ -------------------------
Global Post-Venture Capital Fund $178,000
------------------------------------------------------ -------------------------
</TABLE>
Investment decisions for a Fund concerning specific portfolio
securities are made independently from those for other clients advised by CSAM
or, in the case of the Global Post-Venture Capital Fund, Abbott. Such other
investment clients may invest in the same securities as the Fund. When
purchases or sales of the same security are made at substantially the same time
on behalf of such other clients, transactions are averaged as to price and
available investments allocated as to amount, in a manner which CSAM or Abbott,
as the case may be, believes to be equitable to each client, including the
Funds. In some instances, this investment procedure may adversely affect the
price paid or received by the Fund or the size of the position obtained or sold
for the Fund. To the extent permitted by law, CSAM may aggregate the securities
to be sold or purchased for the Fund with those to be sold or purchased for
such other investment clients in order to obtain best execution.
In no instance will portfolio securities be purchased from or
sold to CSAM, Credit Suisse Asset Management Securities, Inc. ("CSAMSI"), or
Credit Suisse First Boston ("CS First Boston") or, Abbott (in the case of the
Global Post-Venture Capital Fund) or any affiliated person of the foregoing
entities except as permitted by SEC exemptive order or by applicable law. In
addition, a Fund will not give preference to any institutions with whom the
Fund enters into distribution or shareholder servicing agreements concerning
the provision of distribution services or support services.
Transactions for a Fund may be effected on foreign securities
exchanges. In transactions for securities not actively traded on a foreign
securities exchange, the Fund will deal directly with the dealers who make a
market in the securities involved, except in those circumstances where better
prices and execution are available elsewhere. Such dealers usually are acting
as principal for their own account. On occasion, securities may be purchased
directly from the issuer. Such portfolio securities are generally traded on a
net basis and do not normally involve brokerage commissions. Securities firms
may receive brokerage commissions on certain portfolio transactions, including
options, futures and options on
53
<PAGE> 59
futures transactions and the purchase and sale of underlying securities upon
exercise of options.
A Fund may participate, if and when practicable, in bidding
for the purchase of securities for the Fund's portfolio directly from an issuer
in order to take advantage of the lower purchase price available to members of
such a group. The Fund will engage in this practice, however, only when CSAM,
in its sole discretion, believes such practice to be otherwise in the Fund's
interest.
PORTFOLIO TURNOVER
The Funds do not intend to seek profits through short-term
trading, but the rate of turnover will not be a limiting factor when the Fund
deems it desirable to sell or purchase securities. A Fund's portfolio turnover
rate is calculated by dividing the lesser of purchases or sales of its
portfolio securities for the year by the monthly average value of the portfolio
securities. Securities with remaining maturities of one year or less at the
date of acquisition are excluded from the calculation.
Certain practices that may be employed by a Fund could result
in high portfolio turnover. For example, options on securities may be sold in
anticipation of a decline in the price of the underlying security (market
decline) or purchased in anticipation of a rise in the price of the underlying
security (market rise) and later sold. To the extent that its portfolio is
traded for the short-term, a Fund will be engaged essentially in trading
activities based on short-term considerations affecting the value of an
issuer's stock instead of long-term investments based on fundamental valuation
of securities. Because of this policy, portfolio securities may be sold without
regard to the length of time for which they have been held.
It is not possible to predict the Funds' portfolio turnover
rates. High portfolio turnover rates (100% or more) may result in higher
brokerage commissions, dealer markups or underwriting commissions as well as
other transaction costs. In addition, gains realized from portfolio turnover
may be taxable to shareholders.
MANAGEMENT OF THE FUNDS
Officers and Board of Directors
The business and affairs of each Fund are managed by the
Board of Directors in accordance with the laws of the State of Maryland. Each
Board elects officers who are responsible for the day-to-day operations of a
Fund and who execute policies authorized by the Board. Under each Fund's
Charter, a Board may classify or reclassify any unissued shares of the Funds
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. A 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 Funds.
54
<PAGE> 60
The names (and ages) of each Fund's Directors and officers,
their addresses, present positions and principal occupations during the past
five years and other affiliations are set forth below.
<TABLE>
<S> <C>
Richard H. Francis (67) Director/Trustee
40 Grosvenor Road Currently retired; Executive Vice President and Chief
Short Hills, New Jersey 07078 Financial Officer of Pan Am Corporation and Pan American
World Airways, Inc. from 1988 to 1991; Director of The
Infinity Mutual Funds, BISYS Group Incorporated;
Director/Trustee of other Warburg Pincus Funds and other
CSAM-advised investment companies.
Jack W. Fritz (72) Director/Trustee
2425 North Fish Creek Road Private investor; Consultant and Director of Fritz
P.O. Box 483 Broadcasting, Inc. and Fritz Communications (developers and
Wilson, Wyoming 83014 operators of radio stations); Director of Advo, Inc.
(direct mail advertising); Director/Trustee of other
Warburg Pincus Funds.
Jeffrey E. Garten (53) Director/Trustee
Box 208200 Dean of Yale School of Management and William S. Beinecke
New Haven, Connecticut 06520-8200 Professor in the Practice of International Trade and
Finance; Undersecretary of Commerce for International Trade
from November 1993 to October 1995; Professor at Columbia
University from September 1992 to November 1993;
Director/Trustee of other Warburg Pincus Funds.
James S. Pasman, Jr. (69) Director/Trustee
29 The Trillium Currently retired; President and Chief Operating Officer of
Pittsburgh, Pennsylvania 15238 National InterGroup, Inc. from April 1989 to March 1991;
Chairman of Permian Oil Co. from April 1989 to March 1991;
Director of Education Management Corp., Tyco International
Ltd.; Trustee, BT Insurance Funds Trust; Director/Trustee
of other Warburg Pincus Funds and other CSAM-advised
investment companies.
</TABLE>
55
<PAGE> 61
<TABLE>
<S> <C>
William W. Priest* (58) Chairman of the Board
153 East 53rd Street Chairman-Management Committee, Chief Executive Officer and
New York, New York 10022 Managing Director of CSAM (U.S.) since 1990; Director of
TIG Holdings, Inc.; Director/Trustee of other Warburg
Pincus Funds and other CSAM-advised investment companies.
Steven N. Rappaport (51) Director/Trustee
40 East 52nd Street President of Loanet, Inc. since 1997; Executive Vice
New York, New York 10022 President of Loanet, Inc. from 1994 to 1997; Director,
President, North American Operations, and former Executive
Vice President from 1992 to 1993 of Worldwide Operations of
Metallurg Inc.; Executive Vice President, Telerate, Inc.
from 1987 to 1992; Partner in the law firm of Hartman &
Craven until 1987; Director/Trustee of other Warburg Pincus
Funds and other CSAM-advised investment companies.
Alexander B. Trowbridge (70) Director/Trustee
1317 F Street, N.W., 5th Floor Currently retired; President of Trowbridge Partners, Inc.
Washington, DC 20004 (business consulting) from January 1990 to November 1996;
Director or Trustee of New England Mutual Life Insurance
Co., ICOS Corporation (biopharmaceuticals), IRI
International (energy services), The Rouse Company (real
estate development), Harris Corp. (electronics and
communications equipment), The Gillette Co. (personal care
products) and Sunoco, Inc. (petroleum refining and
marketing); Director/Trustee of other Warburg Pincus Funds.
Eugene L. Podsiadlo (42) President
466 Lexington Avenue Managing Director of CSAM; Associated with CSAM since CSAM
New York, New York 10017-3147 acquired the Funds' predecessor adviser in July 1999;
with the predecessor adviser since 1991; Vice President of
Citibank, N.A. from 1987 to 1991; Officer of CSAMSI and of
other Warburg Pincus Funds.
</TABLE>
- ----------------------
* Indicates a Director/Trustee who is an "interested person" of the Fund
as defined in the 1940 Act.
56
<PAGE> 62
<TABLE>
<S> <C>
Hal Liebes, Esq. (35) Vice President and Secretary
153 East 53rd Street Managing Director and General Counsel of CSAM; Associated
New York, New York 10022 with Lehman Brothers, Inc. from 1996 to 1997; Associated
with CSAM from 1995 to 1996; Associated with CS First
Boston Investment Management from 1994 to 1995; Associated
with Division of Enforcement, U.S. Securities and Exchange
Commission from 1991 to 1994; Officer of CSAMSI, other
Warburg Pincus Funds and other CSAM-advised investment
companies.
Michael A. Pignataro (40) Treasurer and Chief Financial Officer
CSAM; 153 East 53rd Street Vice President and Director of Fund Administration of
New York, New York 10022 Pincus Associated with CSAM since 1984; Officer of other Warburg
Funds and other CSAM-advised investment companies.
Stuart J. Cohen, Esq. (31) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel of CSAM; Associated
New York, New York 10017-3147 with CSAM since CSAM acquired the Funds' predecessor
adviser in July 1999; with the predecessor adviser since
1997; Associated with the law firm of Gordon Altman
Butowsky Weitzen Shalov & Wein from 1995 to 1997; Officer
of other Warburg Pincus Funds.
Rocco A. DelGuercio (36) Assistant Treasurer
153 East 53rd Street Assistant Vice President and Administrative Officer of
New York, New York 10022 CSAM; Associated with CSAM since June 1996; Assistant
Treasurer, Bankers Trust Corp. -- Fund Administration from
March 1994 to June 1996; Mutual Fund Accounting Supervisor,
Dreyfus Corporation from April 1987 to March 1994; Officer
of other Warburg Pincus Funds and other CSAM-advised
investment companies.
</TABLE>
57
<PAGE> 63
No employee of CSAM, PFPC Inc. ("PFPC") or CSAMSI, the
Funds' co-administrators, or any of their affiliates receives any compensation
from the Funds for acting as an officer or director/trustee of a Fund. Each
Director who is not a director, trustee, officer or employee of CSAM, PFPC or
CSAMSI or any of their affiliates receives the following annual and per-meeting
fees:
<TABLE>
<CAPTION>
Fee for Each Audit
Fee for Each Meeting Committee Meeting
Fund Annual Fee Attended Attended
- --------------------------------------- ----------------------- ------------------------ ------------------------
<S> <C> <C> <C>
Major Foreign Markets Fund $750 $250 $250 *
- --------------------------------------- ----------------------- ------------------------ ------------------------
International Equity Fund $750 $250 $250 *
- --------------------------------------- ----------------------- ------------------------ ------------------------
International Small Company Fund $750 $250 $250 *
- --------------------------------------- ----------------------- ------------------------ ------------------------
Emerging Markets Fund $750 $250 $250 *
- --------------------------------------- ----------------------- ------------------------ ------------------------
Global Post-Venture Capital Fund $750 $250 $250 *
- --------------------------------------- ----------------------- ------------------------ ------------------------
</TABLE>
* Alexander B. Trowbridge will receive $325 per fund serving as chairman of
the Audit Committee.
Each Director is reimbursed for expenses incurred in
connection with attendance at Board meetings.
Directors' Total Compensation
(for the fiscal period ended October 31, 1998);
<TABLE>
<CAPTION>
ALL INVESTMENT
INTERNATIONAL MAJOR GLOBAL COMPANIES IN
NAME OF EMERGING INTERNATIONAL SMALL FOREIGN POST-VENTURE WARBURG PINCUS
DIRECTOR/TRUSTEE MARKETS FUND EQUITY FUND COMPANY FUND MARKETS FUND CAPITAL FUND FUND COMPLEX*
- ------------------------ ------------- ------------- ------------- ------------- ------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
William W. Priest** None None None None None None
- ------------------------ ------------- ------------- ------------- ------------- ------------- --------------------
Arnold M. Reichman+ None None None None None None
- ------------------------ ------------- ------------- ------------- ------------- ------------- --------------------
Richard N. Cooper*** $1,900 $2,400 $500 $1,900 $1,900 $56,600
- ------------------------ ------------- ------------- ------------- ------------- ------------- --------------------
Donald J. Donahue*** $475 $600 None $475 $475 $13,525
- ------------------------ ------------- ------------- ------------- ------------- ------------- --------------------
Richard H. Francis**** None None None None None None
- ------------------------ ------------- ------------- ------------- ------------- ------------- --------------------
Jack W. Fritz $2,150 $2,650 $500 $2,150 $2,150 $63,100
- ------------------------ ------------- ------------- ------------- ------------- ------------- --------------------
Jeffrey E. Garten**** $1,675 $2,050 $500 $1,675 $1,675 $49,325
- ------------------------ ------------- ------------- ------------- ------------- ------------- --------------------
Thomas A. Melfe*** $2,150 $2,650 $500 $2,150 $2,150 $60,700
- ------------------------ ------------- ------------- ------------- ------------- ------------- --------------------
James S. Pasman, Jr.**** None None None None None None
- ------------------------ ------------- ------------- ------------- ------------- ------------- --------------------
</TABLE>
58
<PAGE> 64
<TABLE>
- ------------------------ ------------- ------------- ------------- ------------- ------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Steven N. Rappaport**** None None None None None None
- ------------------------ ------------- ------------- ------------- ------------- ------------- --------------------
Alexander B. Trowbridge $2,250 $2,750 $500 $2,250 $2,250 $64,000
- ------------------------ ------------- ------------- ------------- ------------- ------------- --------------------
</TABLE>
* Each Director/Trustee serves as a Director or Trustee of 51 investment
companies and portfolios in the Warburg Pincus family of funds.
** Mr. Priest receives compensation as an employee of CSAM, and,
accordingly, receives no compensation from any Fund or any other
investment company advised by CSAM.
*** Mr. Donahue resigned as a Director/Trustee of each Fund effective
February 6, 1998. Messrs. Cooper and Melfe resigned as a
Director/Trustee of each Fund effective July 6, 1999.
**** Mr. Garten became a Director/Trustee of each Fund effective February
6, 1998. Messrs. Francis, Pasman and Rappaport became
Directors/Trustees of the Funds effective July 6, 1999.
+ Mr. Reichman resigned as a Director/Trustee of each Fund effective
August 18, 1999. Mr. Reichman had been an employee of CSAM and,
accordingly, had received no compensation from any Fund or any other
investment company advised by CSAM.
As of October 31, 1999, Directors or officers of the Funds as a group
owned less than 1% of the outstanding shares of each Fund. As of that date, the
following shareholders beneficially owned 5% or more of each Fund's outstanding
shares.
MAJOR FOREIGN MARKETS FUND
<TABLE>
<S> <C> <C>
COMMON SHARES The Northern Trust Co TTEE* 18.41%
FBO Gatx Master Trust Ret Trust
DTD 12/19/79
500 W Monroe St.
Chicago, IL 60661-3630
Charles Schwab & Co Inc* 11.18%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual funds
101 Montgomery St
San Francisco, CA 94104-4122
Agnes E. Williams 6.96%
8901 Durham Drive
Potomac, MD 20854-4613
</TABLE>
59
<PAGE> 65
<TABLE>
<S> <C> <C>
INTERNATIONAL EQUITY FUND
COMMON SHARES Charles Schwab & Co. Inc.* 27.65%
Special Custody Account For The Exclusive
Benefit of Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104-4122
Nat'l Financial Svcs Corp.* 10.71%
FBO Customers
Church St. Station
PO Box 3908
New York, NY 10008-3908
ADVISOR SHARES Connecticut General Life Ins. Co.* 99.41%
On Behalf Of Its Separate Account
55F c/o Melissa Spencer M110
CIGNA Corp PO Box 2975
Hartford, CT 06104-2975
INTERNATIONAL SMALL COMPANY FUND
COMMON SHARES Charles Schwab & Co Inc* 25.52%
Special Custody Account For The
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery St
San Francisco, CA 94104-4122
Nat'l Financial Svcs Corp* 16.71%
FBO Customers
Church St Station
P.O. Box 3908
New York, NY 10008-3908
National Investor Services Corp* 12.35%
For the Exclusive Benefit of
Our Customers
55 Water St Fl 32
New York, NY 10041-3299
</TABLE>
60
<PAGE> 66
<TABLE>
<S> <C> <C>
Donaldson Lufkin & Jenrette* 7.19%
Securities Corp Pershing Division
Mutual Fund Balancing
1 Pershing Plz Fl 14
Jersey City, NJ 07399-0001
Charles V. Prothro 5.53%
2304 Midwestern Pkwy Ste 200
Wichita Falls, TX 76308-2334
EMERGING MARKETS FUND
COMMON SHARES Charles Schwab & Co Inc.* 28.88%
Special Custody Account For The
Exclusive Benefit Of Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104-4122
Salomon Smith Barney Inc.* 16.12%
Book Entry Account
Attn: Matt Maesstri
333 West 34th Street
7th Floor, Mutual Fund Dept.
New York, NY 10001-2483
Nat'l Financial Svcs. Corp.* 12.73%
FBO Customers
P.O. Box 3908
Church St. Station
New York, NY 10008-3908
ADVISOR SHARES Donaldson Lufkin & Jenrette Secs* 43.07%
PO Box 2052
Jersey City, NJ 07303-2052
Lewco Securities Corp*
FBO A/C # W68-202016-9-01 21.49%
34 Exchange Place 4th Floor
Jersey City, NJ 07302-3885
Bear Stearns Securities Corp* 10.24%
FBO 523-00435-14
1 Metrotech Center North
Brooklyn, NY 11201-3870
</TABLE>
61
<PAGE> 67
<TABLE>
<S> <C> <C>
Bank of America Securities LLC* 8.95%
110-41287-16
Attn: Mutual Funds - 4th Floor
600 Montgomery Street
San Francisco, CA 94111-2702
Bank of America Securities LLC* 8.53%
110-41287-13
Attn: Mutual Funds - 4th Floor
600 Montgomery Street
San Francisco, CA 94111-2702
Bank of America Securities LLC* 5.12%
110-39647-12
Attn: Mutual Funds: 4th Floor
600 Montgomery St.
San Francisco, CA 94111-2702
GLOBAL POST VENTURE CAPITAL FUND
COMMON SHARES Charles Schwab & Co. Inc.* 19.72%
Special Custody Account For The
Exclusive Benefit Of Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104-4122
Donaldson Lufkin & Jenrette* 16.35%
Securities Corp Pershing Division
Mutual Fund Balancing
1 Pershing Plz Fl 14
Jersey City, NJ 07399-0001
Nat'l Financial Svcs Corp* 7.39%
FBO Customers
P.O. Box 3908
Church St Station
New York, NY 10008-3908
Elizabeth B. Dater 5.52%
c/o Credit Suisse Asset Management
466 Lexington Avenue
Floor 12
New York, NY 10017
</TABLE>
62
<PAGE> 68
<TABLE>
<S> <C> <C>
ADVISOR SHARES SEMA & Co. * 96.15%
95400141
12 E 49th St 41st Fl
New York, NY 10017-1038
</TABLE>
*Each Fund believes these entities are not the beneficial owners of shares held
of record by them.
Portfolio Managers of the Funds
Major Foreign Markets Fund.
P. Nicholas Edwards is Co-Portfolio Manager of the Major
Foreign Markets Fund. Mr. Edwards has been associated with CSAM since CSAM
acquired the Fund's predecessor adviser in July 1999 and joined the predecessor
adviser in 1995. Mr. Edwards was a director at Jardine Fleming Investment
Advisers, Tokyo from 1984 to 1995. Mr. Edwards earned M.A. degrees from Oxford
University and Hiroshima University in Japan.
Harold W. Ehrlich is Co-Portfolio Manager of the Major
Foreign Markets Fund. Mr. Ehrlich has been associated with CSAM since CSAM
acquired the Fund's predecessor adviser in July 1999 and joined the predecessor
adviser in 1995. Mr. Ehrlich was a senior vice president, portfolio manager
and analyst at Templeton Investment Counsel Inc. from 1987 to 1995. He was a
research analyst and assistant portfolio manager at Fundamental Management
Corporation from 1985 to 1986, and a research analyst at First Equity
Corporation of Florida from 1983 to 1985. Mr. Ehrlich earned a B.S.B.A. degree
from the University of Florida and earned his Chartered Financial Analyst
designation in 1990.
Vincent J. McBride is an Associate Portfolio Manager of the
Major Foreign Markets Fund. Mr. McBride has been associated with CSAM since
CSAM acquired the Fund's predecessor adviser in July 1999 and joined the
predecessor adviser in 1994. Mr. McBride was an international equity analyst
at Smith Barney Inc. from 1993 to 1994, and at General Electric Investment
Corp. from 1992 to 1993. He was also a portfolio manager/analyst at United
Jersey Bank from 1989 to 1992 and a portfolio manager at First Fidelity Bank
from 1987 to 1989. Mr. McBride earned a B.S. degree from the University of
Delaware and an M.B.A. degree from Rutgers University.
Nancy Nierman is an Associate Portfolio Manager of the Major
Foreign Markets Fund. Ms. Nierman has been associated with CSAM since CSAM
acquired the Fund's predecessor adviser in July 1999 and joined the predecessor
adviser in 1996. She was a vice president at Fiduciary Trust Company
International from 1990 to 1996 and an international equity trader at TIAA-CREF
from 1985 to 1990. She received her B.B.A. degree from Baruch College in 1985.
J.H. Cullum Clark, CFA, is an Associate Portfolio Manager of
the Major Foreign Markets Fund. Mr. Clark has been associated with CSAM since
CSAM acquired the Fund's predecessor adviser in July 1999 and joined the
predecessor adviser in 1996. Mr.
63
<PAGE> 69
Clark was an analyst and portfolio manager at Brown Brothers Harriman from 1993
to 1996 and a research assistant at the U.S. Senate Select Committee on
Intelligence from 1992 to 1993. Mr. Clark received an A.M. degree from Harvard
University and a B.A. degree from Yale University. Mr. Clark also studied at the
Stanford Inter-University Center for Japanese Language Studies in 1990.
Todd Jacobson, CFA, is an Associate Portfolio Manager and
Research Analyst of the Major Foreign Markets Fund. Mr. Jacobson has been
associated with CSAM since CSAM acquired the Fund's predecessor adviser in July
1999 and joined the predecessor adviser in 1997. He was an analyst at Brown
Brothers Harriman from 1993 to 1997. Mr. Jacobson was also an analyst with
Value Line from 1989 to 1991. Mr. Jacobson received his M.B.A. degree in
Finance from the Wharton School and his B.A. degree Phi Beta Kappa in Economics
from the State University of New York - Binghamton.
International Small Company Fund.
Harold E. Sharon is Co-Portfolio Manager of the International
Small Company Fund and manages other Warburg Pincus funds. Mr. Sharon has been
associated with CSAM since CSAM acquired the Fund's predecessor adviser in July
1999 and joined the predecessor adviser in 1998. Mr. Sharon was an executive
director and portfolio manager at CIBC Oppenheimer from 1994 to 1998. Mr.
Sharon was previously a Vice President and Portfolio Manager at Warburg from
1990 to 1994. Mr. Sharon earned a B.S. Degree with honors from the University
of Rochester and an M.S. degree in Management from the Sloan School of
Management, M.I.T.
J.H. Cullum Clark is a CFA and Co-Portfolio Manager of the
International Small Company Fund (see biography above).
International Equity Fund and Emerging Markets Fund.
P. Nicholas Edwards is Co-Portfolio Manager of the
International Equity Fund (see biography above).
Harold W. Ehrlich is Co-Portfolio Manager of the
International Equity Fund (see biography above).
Vincent J. McBride is Co-Portfolio Manager of the
International Equity Fund and the Emerging Markets Fund (see biography above).
Harold E. Sharon is Co-Portfolio Manager of the International
Equity Fund and the Emerging Markets Fund (see biography above).
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<PAGE> 70
Jun Sung Kim is an Associate Portfolio Manager of the Emerging Markets Fund.
Mr. Kim has been associated with CSAM since CSAM acquired the Fund's
predecessor adviser in July 1999 and joined the predecessor adviser in 1997. He
was an investment manager with Asset Korea Ltd., Seoul from 1994 to 1995. He
was also an assistant investment manager with Koeneman Capital Management,
Singapore from 1992 to 1994.
Federico D. Laffan is an Associate Portfolio Manager of the
Emerging Markets Fund. Mr. Laffan has been associated with CSAM since CSAM
acquired the Fund's predecessor adviser in July 1999 and joined the predecessor
adviser in 1997. He was a senior manager and partner with Green Cay Asset
Management from 1996 to 1997 and a senior portfolio manager and director with
Foreign & Colonial Emerging Markets, London from 1990 to 1996.
Global Post-Venture Capital Fund.
Elizabeth B. Dater is a Co-Portfolio Manager of the Fund and
manages other Warburg Pincus funds. Ms. Dater has been associated with CSAM
since CSAM acquired the Fund's predecessor adviser in July 1999 and joined the
predecessor adviser in 1978. Prior to that, she was a vice president of
research at Fiduciary Trust Company of New York and an institutional sales
assistant at Lehman Brothers. Ms. Dater has been a regular panelist on
Maryland Public Television's Wall Street Week with Louis Rukeyser since 1976.
Ms. Dater earned a B.A. degree from Boston University in Massachusetts.
J.H. Cullum Clark is Co-Portfolio Manager of the Global
Post-Venture Capital Fund (see biography above).
Harold E. Sharon is Co-Portfolio Manager of the Global
Post-Venture Capital Fund (see biography above).
Raymond L. Held and Thaddeus I. Gray, Investment Managers and
Managing Directors of Abbott, manage the Global Post-Venture Capital Fund's
investments in Private Funds. Abbott also acts as sub-investment adviser for
other Warburg Pincus Funds. Prior to co-founding a predecessor of Abbott in
1986, Mr. Held had been an investment analyst and portfolio manager at
Manufacturers Hanover Investment Corporation since 1970, before which time he
had been a security analyst with Weis, Voisin, Cannon, Inc., L.M. Rosenthal &
Co., Shearson, Hammill & Co. and Standard & Poor's Corporation. Mr. Held
earned an M.B.A. from New York University, an M.A. from Columbia University and
a B.A. from Queens College. Prior to joining a predecessor of Abbott in 1989,
Mr. Gray served as an assistant vice president at Commerzbank Capital Markets
Corporation and as an associate with Credit Commercial de France in Paris in
the Corporate Finance Department. Mr. Gray received his B.A. in History from
the University of Pennsylvania and his M.B.A. in Finance from New York
University. He is also a Chartered Financial Analyst.
65
<PAGE> 71
Investment Advisers and Co-Administrators
CSAM, located at 153 East 53rd Street, New York, New York
10022, serves as investment adviser to each Fund pursuant to a written
agreement (the "Advisory Agreement"). CSAM is an indirect wholly-owned U.S.
subsidiary of Credit Suisse ("Credit Suisse"). Credit Suisse is a global
financial services company, providing a comprehensive range of banking and
insurance products. Active on every continent and in all major financial
centers, Credit Suisse comprises five business units -- Credit Suisse Asset
Management (asset management); Credit Suisse First Boston (investment banking);
Credit Suisse Private Banking (private banking); Credit Suisse (retail
banking); and Winterthur (insurance). Credit Suisse has approximately $680
billion of global assets under management and employs approximately 62,000
people worldwide. The principal business address of Credit Suisse is
Paradeplatz 8, CH 8070, Zurich, Switzerland.
Prior to July 6, 1999, Warburg Pincus Asset Management, Inc.
("Warburg") served as investment adviser to each Fund. On that date, Credit
Suisse acquired Warburg and combined Warburg with Credit Suisse's existing
U.S.-based asset management business ("Credit Suisse Asset Management").
Consequently, the combined entity, CSAM, became the Funds' investment adviser.
Credit Suisse Asset Management, formerly known as BEA Associates, together with
its predecessor firms, has been engaged in the investment advisory business for
over 60 years.
Abbott, located at 50 Rowes Wharf, Suite 240, Boston,
Massachusetts 02110-3328, serves as sub-investment adviser to the Global
Post-Venture Capital Fund pursuant to a written agreement. Abbott, in
accordance with the investment objective and policies of the Global
Post-Venture Capital Fund, makes investment decisions for the Fund regarding
investments in Private Funds, effects transactions in interests in Private
Funds on behalf of the Fund and assists in administrative functions relating to
investments in Private Funds. Abbott is an independent specialized investment
firm with assets under management of approximately $2.3 billion. Abbott is a
registered investment adviser which concentrates on venture capital, buyout and
special situations partnership investments. Abbott's management team provides
full-service private equity programs to clients. The predecessor firm to Abbott
was organized in 1986 as a Delaware limited partnership and converted to a
Delaware limited liability company effective July 1, 1997.
CSAMSI and PFPC serve as co-administrators to each Fund
pursuant to separate written agreements. CSAMSI became co-administrator to each
Fund on November 1, 1999. Prior to that, Counsellors Funds Service, Inc.
("Counsellors Service") served as co-administrator to the Funds. CSAMSI
provides shareholder liaison services to each Fund 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 Funds and
their various service providers, furnishing certain corporate secretarial
services, which include preparing materials for meetings of the Board,
assisting with proxy statements and annual and semiannual reports, assisting in
the preparation of tax returns and monitoring and developing certain compliance
procedures for the Funds. As compensation, the Common Shares and
66
<PAGE> 72
Advisor Shares of each Fund pay CSAMSI a fee calculated at an annual rate of
.10% of their respective average daily net assets. CSAMSI receives no
compensation for the services provided to the Institutional Shares.
PFPC calculates each Fund's net asset value, provides all
accounting services for each Fund and assists in related aspects of each Fund's
operations. As compensation, each Fund pays PFPC a fee calculated at an annual
rate of .12% of a Fund's first $250 million in average daily net assets, .10%
of the next $250 million in average daily net assets, .08% of the next $250
million in average daily net assets, and .05% of average daily net assets over
$750 million, subject in each case to a minimum annual fee and exclusive of
out-of-pocket expenses. PFPC has its principal offices at 400 Bellevue Parkway,
Wilmington, Delaware 19809.
Each class of shares of a Fund bears its proportionate share
of fees payable to CSAM, CSAMSI and PFPC in the proportion that its assets bear
to the aggregate assets of the Fund at the time of calculation. These fees are
calculated at an annual rate based on a percentage of a Fund's average daily
net assets. Each Fund's co-administrators may voluntarily waive a portion of
their fees from time to time and temporarily limit the expenses to be borne by
a Fund.
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<PAGE> 73
For the fiscal years ended October 31, 1996, October 31, 1997
and October 31, 1998 during which a Fund had investment operations, investment
advisory fees earned by CSAM's predecessor, waivers and net advisory fees for
each Fund were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------- --------------------- ------------------ --------------- -------------------
GROSS NET
FUND YEAR/ PERIOD ENDED ADVISORY FEE WAIVER ADVISORY FEE
- ---------------------------------------- --------------------- ------------------ --------------- -------------------
<S> <C> <C> <C> <C>
Major Foreign Markets Fund October 31, 1997* $12,662 $12,662 0
--------------------- ------------------ --------------- -------------------
(commenced operations on 10/24/97) October 31, 1998 $230,682 $202,603 $28,079
- ---------------------------------------- --------------------- ------------------ --------------- -------------------
International Equity Fund October 31, 1996 $30,605,750 None $30,605,750
--------------------- ------------------ --------------- -------------------
October 31, 1997 $33,440,864 None $33,440,864
--------------------- ------------------ --------------- -------------------
October 31, 1998 $21,710,859 $21,710,859
- ---------------------------------------- --------------------- ------------------ --------------- -------------------
International Small Company Fund October 31, 1998 $5,026 $5,026 0
(commenced operations on 4/2/98)
- ---------------------------------------- --------------------- ------------------ --------------- -------------------
Emerging Markets Fund October 31, 1996 $1,789,738 $1,031,252 $758,486
--------------------- ------------------ --------------- -------------------
October 31, 1997 $3,124,684 $1,146,495 $1,978,189
--------------------- ------------------ --------------- -------------------
October 31, 1998 $1,232,557 $524,180 $708,377
- ---------------------------------------- --------------------- ------------------ --------------- -------------------
Global Post-Venture Capital Fund October 31, 1996 $2,470 $2,470 0
--------------------- ------------------ --------------- -------------------
(commenced operations on 9/30/96) October 31, 1997 $49,452 $49,452 0
--------------------- ------------------ --------------- -------------------
October 31, 1998 $43,604 $43,604 0
--------------------- ------------------ --------------- -------------------
</TABLE>
PFPC and Counsellors Service (the Funds' predecessor
co-administrator) earned the following amounts in co-administration fees
(portions of fees waived, if any, noted in parenthesis).
<TABLE>
<CAPTION>
- --------------------------------------- ----------------------- -------------------------- --------------------------
FUND YEAR PFPC COUNSELLORS SERVICE
- --------------------------------------- ----------------------- -------------------------- --------------------------
<S> <C> <C> <C>
Major Foreign Markets Fund October 31, 1997* $1,899 ($1,899) $1,583 ($1,583)
----------------------- -------------------------- --------------------------
(commenced operations on 10/24/97) October 31, 1998 $44,290 ($27,841) $23,200
- --------------------------------------- ----------------------- -------------------------- --------------------------
International Equity Fund October 31, 1996 $1,905,288 $3,060,575
----------------------- -------------------------- --------------------------
October 31, 1997 $2,047,043 $3,344,086
----------------------- -------------------------- --------------------------
October 31, 1998 $1,486,215 $2,171,086
- --------------------------------------- ----------------------- -------------------------- --------------------------
International Small Company Fund October 31, 1998 $3,988 ($548) $457
(commenced operations on 4/2/98)
- --------------------------------------- ----------------------- -------------------------- --------------------------
Emerging Markets Fund October 31, 1996 $171,815 ($71,109) $143,179
----------------------- -------------------------- --------------------------
October 31, 1997 $297,624 $249,975
----------------------- -------------------------- --------------------------
October 31, 1998 $133,902 ($11,373) $98,604
- --------------------------------------- ----------------------- -------------------------- --------------------------
Global Post-Venture Capital Fund October 31, 1996 $237 ($237) $198
----------------------- -------------------------- --------------------------
(commenced operations on 9/30/96) October 31, 1997 $4,747 ($4,747) $3,956
----------------------- -------------------------- --------------------------
October 31, 1998 $9,320 ($4,186) $3,489
- --------------------------------------- ----------------------- -------------------------- --------------------------
</TABLE>
- -----------------------
* With respect to the Managed EAFE(R) Countries Portfolio of the
Warburg, Pincus Institutional Fund, Inc. during the fiscal period from
March 31, 1997 (commencement of operations) to October 31, 1997.
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<PAGE> 74
Custodians and Transfer Agent
PFPC Trust Company ("PFPC Trust") and State Street Bank and
Trust Company serve as custodians of each Funds' U.S. and non-U.S. assets,
respectively, pursuant to separate custodian agreements (the "Custodian
Agreements"). Under the Custodian Agreements, PFPC and State Street each (i)
maintains a separate account or accounts in the name of the Fund, (ii) holds
and transfers portfolio securities on account of the Fund, (iii) makes receipts
and disbursements of money on behalf of the Fund, (iv) collects and receives
all income and other payments and distributions for the account of the Fund's
portfolio securities held by it and (v) makes periodic reports to the Board
concerning the Fund's custodial arrangements. PFPC may delegate its duties
under its Custodian Agreement with the Fund to a wholly owned direct or
indirect subsidiary of PFPC or PNC Bank Corp. upon notice to the Fund and upon
the satisfaction of certain other conditions. With the approval of the Board,
State Street is authorized to select one or more foreign banking institutions
and foreign securities depositories to serve as sub-custodian on behalf of the
Fund and PFPC Trust is authorized to select one or more domestic banks or trust
companies to serve as sub-custodian on behalf of the Funds. PFPC Trust has
entered into a sub-custodian agreement with PNC Bank, National Association
("PNC"), pursuant to which PNC provides asset safekeeping and securities
clearing services. PFPC Trust and PNC are indirect, wholly owned subsidiaries
of PNC Bank Corp. and their principal business address is Attn: Mutual Fund
Custody Services, 200 Stevens Drive, Lester, Pennsylvania 19113. The principal
business address of State Street is 225 Franklin Street, Boston, Massachusetts
02110.
State Street also acts as the shareholder servicing, transfer
and dividend disbursing agent of each Fund pursuant to a Transfer Agency and
Service Agreement, under which State Street (i) issues and redeems shares of
the Fund, (ii) addresses and mails all communications by the Fund to record
owners of Fund shares, including reports to shareholders, dividend and
distribution notices and proxy material for its meetings of shareholders, (iii)
maintains shareholder accounts and, if requested, sub-accounts and (iv) makes
periodic reports to the Board concerning the transfer agent's operations with
respect to the Fund. State Street has delegated to Boston Financial Data
Services, Inc., an affiliate of State Street ("BFDS"), responsibility for most
shareholder servicing functions. BFDS's principal business address is 2
Heritage Drive, Boston, Massachusetts 02171.
Organization of the Funds
The Major Foreign Markets Fund was incorporated on October
24, 1997 under the laws of the State of Maryland under the name "Warburg,
Pincus Managed EAFE Countries Fund, Inc." On December 22, 1997, the Fund
acquired all of the assets and liabilities of the Managed EAFE(R) Countries
Portfolio of Warburg, Pincus Institutional Fund, Inc. On February 9, 1998, the
Fund changed its name to "Warburg, Pincus Major Foreign Markets Fund, Inc." The
International Equity Fund was incorporated on February 9, 1989 under the laws
of the State of Maryland under the name "Counsellors International Equity Fund,
Inc." On October 27, 1995, the Fund amended its Charter to change its name to
"Warburg, Pincus International Equity Fund, Inc." The International Small
Company Fund was incorporated on April 2, 1998 under the laws of the State of
Maryland under the name
69
<PAGE> 75
"Warburg, Pincus International Small Company Fund, Inc." The Emerging Markets
Fund was incorporated on December 23, 1993 under the laws of the State of
Maryland under the name "Warburg, Pincus Emerging Markets Fund, Inc." The Global
Post-Venture Capital Fund was incorporated on July 16, 1996 under the laws of
the State of Maryland under the name "Warburg, Pincus Global Post-Venture
Capital Fund, Inc."
Each Fund (with the exception of the Major Foreign Markets
Fund, the International Small Company Fund and the Emerging Markets Fund)
currently offers two classes of shares, Common Shares and Advisor Shares. The
Major Foreign Markets Fund and the International Small Company Fund currently
offer only Common Shares. The Emerging Markets Fund currently offers three
classes of shares, Common Shares, Advisor Shares and Institutional Shares.
Unless otherwise indicated, references to a "Fund" apply to each class of
shares of that Fund.
With the exception of the Emerging Markets Fund which is
non-diversified, each Fund is a diversified, open-end investment management
company.
Each Fund's charter (with the exception of the Emerging
Markets Fund) authorizes the Board to issue three billion full and fractional
shares of common stock, $.001 par value per share, of which one billion shares
are designated "Common Shares" and two billion shares are designated "Advisor
Shares". The Emerging Market Fund's charter authorizes the board to issue three
billion full and fractional shares of common stock, $.001 par value per share,
of which one billion shares are designated "Common Shares," one billion shares
are designated "Advisor Shares" and one billion shares are designated
"Institutional Shares."
All shareholders of the Fund in each class, upon liquidation,
will participate ratably in the Fund's net assets. Shares do not have
cumulative voting rights, which means that holders of more than 50% of the
shares voting for the election of Directors can elect all Directors. Shares are
transferable but have no preemptive, conversion or subscription rights.
Investors in a Fund are entitled to one vote for each full
share held and fractional votes for fractional shares held. Shareholders of a
Fund will vote in the aggregate except where otherwise required by law and
except that each class will vote separately on certain matters pertaining to
its distribution and shareholder servicing arrangements. There will normally be
no meetings of investors for the purpose of electing members of the governing
Board unless and until such time as less than a majority of the members holding
office have been elected by investors. Any Director of a Fund may be removed
from office upon the vote of shareholders holding at least a majority of the
relevant Fund's outstanding shares, at a meeting called for that purpose. A
meeting will be called for the purpose of voting on the removal of a Board
member at the written request of holders of 10% of the outstanding shares of a
Fund.
70
<PAGE> 76
Distribution and Shareholder Servicing
Distributor. Provident Distributors, Inc. ("PDI") serves as
distributor of the Funds' shares. PDI offers each Fund's shares on a
continuous basis. No compensation is payable by the Funds to PDI for
distribution services, however, pursuant to a separate agreement with CSAM, PDI
is compensated for the services provided to the Funds. PDI's principal
business address is Four Falls Corporate Center, West Conshohocken,
Pennsylvania 19428-2961.
Common Shares. With the exception of the International Equity
Fund, each Fund has adopted a Shareholder Servicing and Distribution Plan (the
"Common Shares 12b-1 Plan"), pursuant to Rule 12b-1 under the 1940 Act,
pursuant to which the Fund pays CSAMSI a fee calculated at an annual rate of
.25% of the average daily net assets of the Common Shares of the Fund. The fee
is intended to compensate CSAMSI, or to enable CSAMSI to compensate other
persons ("Service Providers"), for providing Services (as defined below) to the
Funds. Services performed by CSAMSI or Service Providers include (i) services
that are primarily intended to result in, or that are primarily attributable
to, the sale of the Common Shares, as set forth in the Common Shares 12b-1 Plan
("Selling Services") and (ii) ongoing servicing and/or maintenance of the
accounts of Common Shareholders of the Fund, as set forth in the Common Shares
12b-1 Plan ("Shareholder Services", together with Selling Services,
"Services"). Shareholder Services may include, without limitation, responding
to Fund shareholder inquiries and providing services to shareholders not
otherwise provided by the Funds' distributor or transfer agent. Selling
Services may include, without limitation, (a) the printing and distribution to
prospective investors in Common Shares of prospectuses and statements of
additional information describing the Funds; (b) the preparation, including
printing, and distribution of sales literature, advertisements and other
informational materials relating to the Common Shares; (c) providing telephone
services relating to the Funds, including responding to inquiries of
prospective Fund investors; (d) formulating and implementing marketing and
promotional activities, including, but not limited to, direct mail promotions
and television, radio, newspaper, magazine and other mass media advertising;
and (e) obtaining whatever information, analyses and reports with respect to
marketing and promotional activities that the Funds may, from time to time,
deem advisable. In providing compensation for Services in accordance with this
Plan, CSAMSI is expressly authorized (i) to make, or cause to be made, payments
to Service Providers reflecting an allocation of overhead and other office
expenses related to providing Services and (ii) to make, or cause to be made,
payments to compensate selected dealers or other authorized persons for
providing any Services.
Payments under the Common Shares 12b-1 Plan are not tied
exclusively to the distribution expenses actually incurred by CSAMSI and the
payments may exceed distribution expenses actually incurred.
71
<PAGE> 77
Pursuant to the Common Shares 12b-1 Plan, CSAMSI provides the
Board with periodic reports of amounts expended under the Common Shares 12b-1
Plan and the purpose for which the expenditures were made.
The Common Shares 12b-1 Plan was adopted on November 1, 1999.
Prior to that date, a substantially similar plan was in place with respect to
the Common Shares (the "Prior Common Shares 12b-1 Plan"). For the period or
year ended October 31, 1998, the Funds' Common Shares paid the following
amounts pursuant to the Prior Common Shares 12b-1 Plan, all of which was spent
on advertising, marketing communications and public relations.
<TABLE>
<CAPTION>
FUND PAYMENT
- ---------------------------------------------- ---------------------
<S> <C>
Major Foreign Markets Fund $2,142
- ---------------------------------------------- ---------------------
International Small Company Fund $1,143
- ---------------------------------------------- ---------------------
Emerging Markets Fund $246,045
- ---------------------------------------------- ---------------------
Global Post-Venture Capital Fund $8,718
- ---------------------------------------------- ---------------------
</TABLE>
Each Fund has authorized certain broker-dealers, financial
institutions, recordkeeping organizations and other financial intermediaries
(collectively, "Service Organizations") or, if applicable, their designees to
enter confirmed purchase and redemption orders on behalf of their clients and
customers, with payment to follow no later than the Fund's pricing on the
following business day. If payment is not received by such time, the Service
Organization could be held liable for resulting fees or losses. The Fund may be
deemed to have received a purchase or redemption order when a Service
Organization, or, if applicable, its authorized designee, accepts the order.
Such orders received by the Fund in proper form will be priced at the Fund's
net asset value next computed after they are accepted by the Service
Organization or its authorized designee. Service Organizations may impose
transaction or administrative charges or other direct fees, which charges or
fees would not be imposed if Fund shares are purchased directly from the Funds.
For administration, subaccounting, transfer agency and/or
other services, CSAM or its affiliates may pay Service Organizations a fee up
to .40% of the average annual value of accounts with the Funds maintained by
such Service Organizations (the "Service Fee"). Service Organizations may also
be reimbursed for marketing costs. The Service Fee payable to any one Service
Organization is determined based upon a number of factors, including the nature
and quality of services provided, the operations processing requirements of the
relationship and the standardized fee schedule of the Service Organization or
recordkeeper. The Funds may reimburse part of the Service Fee at rates they
would normally pay to the transfer agent for providing the services.
Advisor Shares. The Funds may enter into agreements
("Agreements") with institutional shareholders of record, broker-dealers,
financial institutions, depository
72
<PAGE> 78
institutions, retirement plans and financial intermediaries ("Institutions") to
provide certain distribution, shareholder servicing, administrative and/or
accounting services for their clients or customers (or participants in the case
of retirement plans) ("Customers") who are beneficial owners of Advisor Shares.
Agreements will be governed by a distribution plan (the "Advisor Shares 12b-1
Plan") pursuant to Rule 12b-1 under the 1940 Act, pursuant to which the Fund
pays in consideration for services, a fee calculated at an annual rate of .50%
of the average daily net assets of the Advisor Shares of the Fund. Such payments
may be paid to Institutions directly by a Fund or by CSAMSI on behalf of the
Fund. The Advisor Shares 12b-1 Plan requires the Board, at least quarterly, to
receive and review written reports of amounts expended under the Advisor Shares
12b-1 Plan and the purposes for which such expenditures were made. The Advisor
Shares 12b-1 Plan was adopted on November 1, 1999. Prior to that date, a
substantially similar plan was in place with respect to the Advisor Shares (the
"Prior Advisor Shares 12b-1 Plan"). For the years or periods ended October 31,
1998, the Funds paid the following fees pursuant to the Prior Advisor Shares
12b-1 Plan, all of which were paid to Institutions:
<TABLE>
<CAPTION>
FUND PAYMENT
- ---------------------------------------------- ---------------------
<S> <C>
International Equity Fund $1,982,695
- ---------------------------------------------- ---------------------
Emerging Markets Fund $1,242
- ---------------------------------------------- ---------------------
Global Post-Venture Capital Fund $6
- ---------------------------------------------- ---------------------
</TABLE>
Certain Institutions may receive additional fees from the
CSAMSI, CSAM or their affiliates for providing supplemental services in
connection with investments in the Funds. Institutions may also be reimbursed
for marketing costs. Additional fees may be up to 0.10% per year of the value
of Fund accounts maintained by the firm. Fees payable to any particular
Institution are determined based upon a number of factors, including the nature
and quality of the services provided, the operations processing requirements of
the relationship and the standardized fee schedules of the Institutions. To the
extent that CSAMSI, CSAM, or their affiliates provide additional compensation
or reimbursements for marketing expenses, such payments would not represent an
additional expense to the Funds or their shareholders.
An Institution with which a Fund has entered into an
Agreement with respect to its Advisor Shares may charge a Customer one or more
of the following types of fees, as agreed upon by the Institution and the
Customer, with respect to the cash management or other services provided by the
Institution: (i) account fees (a fixed amount per month or per year); (ii)
transaction fees (a fixed amount per transaction processed); (iii) compensation
balance requirements (a minimum dollar amount a Customer must maintain in order
to obtain the services offered); or (iv) account maintenance fees (a periodic
charge based upon the percentage of assets in the account or of the dividend
paid on those assets). Services provided by an Institution to Customers are in
addition to, and not duplicative of, the services to be provided under the
Fund's co-administration and distribution and shareholder servicing
arrangements. A Customer of an Institution should read the relevant Prospectus
and this
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<PAGE> 79
Statement of Additional Information in conjunction with the Agreement and other
literature describing the services and related fees that would be provided by
the Institution to its Customers prior to any purchase of Fund shares.
Prospectuses are available from the Funds' distributor upon request. No
preference will be shown in the selection of Fund portfolio investments for the
instruments of Institutions.
Institutional Shares. CSAMSI serves as the distributor for
the Institutional Shares of the Emerging Markets Fund. CSAMSI offers the Fund's
Institutional Shares on a continuous basis. No compensation is payable to
CSAMSI for distribution services for the Fund's Institutional Class.
General. The Common Shares 12b-1 Plan and the Advisor Shares
12b-1 Plan will continue in effect for so long as their continuance is
specifically approved at least annually by the Board, including a majority of
the Directors who are not interested persons of the Fund and who have no direct
or indirect financial interest in the operation of the Distribution Plans or
the 12b-1 Plan ("Independent Directors"). Any material amendment of the Common
Shares 12b-1 Plan and the Advisor Shares 12b-1 Plan would require the approval
of the Board in the same manner. Neither the Common Shares 12b-1 Plan nor the
Advisor Shares 12b-1 Plan may be amended to increase materially the amount to
be spent thereunder without shareholder approval of the relevant class of
shares. The Common Shares 12b-1 Plan and the Advisor Shares 12b-1 Plan may be
terminated at any time, without penalty, by vote of a majority of the
Independent Directors or by a vote of a majority of the outstanding voting
securities of the relevant class of shares of a Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of a Fund's shares is equal to the per
share net asset value of the relevant class of shares of the Fund.
Under the 1940 Act, a Fund may suspend the right of
redemption or postpone the date of payment upon redemption for any period
during which the NYSE is closed, other than customary weekend and holiday
closings, or during which trading on the NYSE is restricted, or during which
(as determined by the SEC) an emergency exists as a result of which disposal or
fair valuation of portfolio securities is not reasonably practicable, or for
such other periods as the SEC may permit. (A Fund may also suspend or postpone
the recordation of an exchange of its shares upon the occurrence of any of the
foregoing conditions.)
If conditions exist which make payment of redemption proceeds
wholly in cash unwise or undesirable, a Fund may make payment wholly or partly
in securities or other investment instruments which may not constitute
securities as such term is defined in the applicable securities laws. If a
redemption is paid wholly or partly in securities or other property, a
shareholder would incur transaction costs in disposing of the redemption
proceeds. The Funds will comply with Rule 18f-1 promulgated under the 1940 Act
with respect to redemptions in kind.
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<PAGE> 80
Automatic Cash Withdrawal Plan. An automatic cash withdrawal
plan (the "Plan") is available to shareholders who wish to receive specific
amounts of cash periodically. Withdrawals may be made under the Plan by
redeeming as many shares of a Fund as may be necessary to cover the stipulated
withdrawal payment. To the extent that withdrawals exceed dividends,
distributions and appreciation of a shareholder's investment in a Fund, there
will be a reduction in the value of the shareholder's investment and continued
withdrawal payments may reduce the shareholder's investment and ultimately
exhaust it. Withdrawal payments should not be considered as income from
investment in a Fund.
EXCHANGE PRIVILEGE
An exchange privilege with certain other funds advised by
CSAM is available to investors in each Fund. A Common Shareholder may exchange
Common Shares of a Fund for Common Shares of another Warburg Pincus fund at
their respective net asset values. An Advisor Shareholder may exchange Advisor
Shares of a Fund for Advisor Shares of another Warburg Pincus fund at their
respective net asset values. An Institutional Shareholder may exchange
Institutional Shares of a Fund for Institutional Shares of another Warburg
Pincus fund at their respective net asset values. If an exchange request is
received by Warburg Pincus Funds or their agent prior to the close of regular
trading on the NYSE, the exchange will be made at each Fund's net asset value
determined at the end of that business day. Exchanges will be effected without
a sales charge but must satisfy the minimum dollar amount necessary for new
purchases. The Fund may refuse exchange purchases at any time without prior
notice.
The exchange privilege is available to shareholders residing
in any state in which the Shares being acquired may legally be sold. When an
investor effects an exchange of shares, the exchange is treated for federal
income tax purposes as a redemption. Therefore, the investor may realize a
taxable gain or loss in connection with the exchange. Investors wishing to
exchange Shares of a Fund for Shares in another Warburg Pincus fund should
review the prospectus of the other fund prior to making an exchange. For
further information regarding the exchange privilege or to obtain a current
prospectus for another Warburg Pincus fund, an investor should contact Warburg
Pincus Funds at 800-222-8977.
The Funds reserve the right to refuse exchange purchases by
any person or group if, in CSAM's judgment, a Fund would be unable to invest
the money effectively in accordance with its investment objective and policies,
or would otherwise potentially be adversely affected. Examples of when an
exchange purchase could be refused are when the Fund receives or anticipates
receiving large exchange orders at or about the same time and/or when a pattern
of exchanges within a short period of time (often associated with a "market
timing" strategy) is discerned. The Funds reserve the right to terminate or
modify the exchange privilege at any time upon 30 days' notice to shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is a summary of the material United States
federal income tax considerations regarding the purchase, ownership and
disposition of shares in each Fund. Each prospective shareholder is urged to
consult his own tax adviser with respect to the
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specific federal, state, local and foreign tax consequences of investing in a
Fund. The summary is based on the laws in effect on the date of this Statement
of Additional Information, which are subject to change.
The Funds and Their Investments.
Each Fund intends to continue to qualify to be treated as a
regulated investment company each taxable year under the Code. To so qualify,
the Fund must, among other things: (a) derive at least 90% of its gross income
in each taxable year from dividends, interest, payments with respect to
securities, loans and gains from the sale or other disposition of stock or
securities or foreign currencies, or other income (including, but not limited
to, gains from options, futures or forward contracts) derived with respect to
its business of investing in such stock, securities or currencies; and (b)
diversify its holdings so that, at the end of each quarter of the Fund's
taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash, securities of other regulated investment companies, United
States government securities and other securities, with such other securities
limited, in respect of any one issuer, to an amount not greater than 5% of the
Fund's assets and not greater than 10% of the outstanding voting securities of
such issuer and (ii) not more than 25% of the value of its assets is invested
in the securities (other than U.S. Government Securities or securities of other
regulated investment companies) of any one issuer or any two or more issuers
that the Fund controls and are determined to be engaged in the same or similar
trades or businesses or related trades or businesses.
As a regulated investment company, each Fund will not be
subject to United States federal income tax on its net investment income (i.e.,
income other than its net realized long- and short-term capital gains) and its
net realized long- and short-term capital gains, if any, that it distributes to
its shareholders, provided that an amount equal to at least 90% of the sum of
its investment company taxable income (i.e., 90% of its taxable income minus
the excess, if any, of its net realized long-term capital gains over its net
realized short-term capital losses (including any capital loss carryovers),
plus or minus certain other adjustments as specified in the Code) and its net
tax-exempt income for the taxable year is distributed, but will be subject to
tax at regular corporate rates on any taxable income or gains that it does not
distribute. Any dividend declared by a Fund in October, November or December of
any calendar year and payable to shareholders of record on a specified date in
such a month shall be deemed to have been received by each shareholder on
December 31 of such calendar year and to have been paid by the Fund not later
than such December 31, provided that such dividend is actually paid by the Fund
during January of the following calendar year.
Each Fund intends to distribute annually to its shareholders
substantially all of its investment company taxable income. The Board of each
Fund will determine annually whether to distribute any net realized long-term
capital gains in excess of net realized short-term capital losses (including
any capital loss carryovers). Each Fund currently expects to distribute any
excess annually to its shareholders. However, if a Fund retains for investment
an amount equal to all or a portion of its net long-term capital gains in
excess of its net short-term capital losses and capital loss carryovers, it
will be subject to a corporate tax (currently at a rate of 35%) on the amount
retained. In that event, a Fund will designate such retained
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<PAGE> 82
amounts as undistributed capital gains in a notice to its shareholders who (a)
will be required to include in income for United States federal income tax
purposes, as long-term capital gains, their proportionate shares of the
undistributed amount, (b) will be entitled to credit their proportionate shares
of the 35% tax paid by the Fund on the undistributed amount against their United
States federal income tax liabilities, if any, and to claim refunds to the
extent their credits exceed their liabilities, if any, and (c) will be entitled
to increase their tax basis, for United States federal income tax purposes, in
their shares by an amount equal to 65% of the amount of undistributed capital
gains included in the shareholder's income. Organizations or persons not subject
to federal income tax on such capital gains will be entitled to a refund of
their pro rata share of such taxes paid by the Fund upon filing appropriate
returns or claims for refund with the Internal Revenue Service (the "IRS").
The Code imposes a 4% nondeductible excise tax on a Fund to
the extent the Fund does not distribute by the end of any calendar year at
least 98% of its net investment income for that year and 98% of the net amount
of its capital gains (both long-and short-term) for the one-year period ending,
as a general rule, on October 31 of that year. For this purpose, however, any
income or gain retained by the Fund that is subject to corporate income tax
will be considered to have been distributed by year-end. In addition, the
minimum amounts that must be distributed in any year to avoid the excise tax
will be increased or decreased to reflect any underdistribution or
overdistribution, as the case may be, from the previous year. Each Fund
anticipates that it will pay such dividends and will make such distributions as
are necessary in order to avoid the application of this tax.
With regard to each Fund's investments in foreign securities,
exchange control regulations may restrict repatriations of investment income
and capital or the proceeds of securities sales by foreign investors such as
the Fund and may limit the Fund's ability to pay sufficient dividends and to
make sufficient distributions to satisfy the 90% and excise tax distribution
requirements.
If, in any taxable year, a Fund fails to qualify as a
regulated investment company under the Code or fails to meet the distribution
requirement, it would be taxed in the same manner as an ordinary corporation
and distributions to its shareholders would not be deductible by the Fund in
computing its taxable income. In addition, in the event of a failure to
qualify, a Fund's distributions, to the extent derived from the Fund's current
or accumulated earnings and profits, would constitute dividends (eligible for
the corporate dividends-received deduction) which are taxable to shareholders
as ordinary income, even though those distributions might otherwise (at least
in part) have been treated in the shareholders' hands as long-term capital
gains. If a Fund fails to qualify as a regulated investment company in any
year, it must pay out its earnings and profits accumulated in that year in
order to qualify again as a regulated investment company. In addition, if the
Fund failed to qualify as a regulated investment company for a period greater
than one taxable year, the Fund may be required to recognize any net built-in
gains (the excess of the aggregate gains, including items of income, over
aggregate losses that would have been realized if it had been liquidated) in
order to qualify as a regulated investment company in a subsequent year.
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<PAGE> 83
A Fund's short sales against the box, if any, and
transactions in foreign currencies, forward contracts, options and futures
contracts (including options and futures contracts on foreign currencies) will
be subject to special provisions of the Code that, among other things, may
affect the character of gains and losses realized by the Fund (i.e., may affect
whether gains or losses are ordinary or capital), accelerate recognition of
income to the Fund and defer Fund losses. These rules could therefore affect
the character, amount and timing of distributions to shareholders. These
provisions also (a) will require the Fund to mark-to-market certain types of
the positions in its portfolio (i.e., treat them as if they were closed out)
and (b) may cause the Fund to recognize income without receiving cash with
which to pay dividends or make distributions in amounts necessary to satisfy
the distribution requirements for avoiding income and excise taxes. Each Fund
will monitor its transactions, will make the appropriate tax elections and will
make the appropriate entries in its books and records when it engages in a
short sale against the box or acquires any foreign currency, forward contract,
option, futures contract or hedged investment in order to mitigate the effect
of these rules and prevent disqualification of the Fund as a regulated
investment company.
A Fund's investments in zero coupon securities, if any, may
create special tax consequences. Zero coupon securities do not make interest
payments, although a portion of the difference between zero coupon security's
face value and its purchase price is imputed as income to the Fund each year
even though the Fund receives no cash distribution until maturity. Under the
U.S. federal tax laws, the Fund will not be subject to tax on this income if it
pays dividends to its shareholders substantially equal to all the income
received from, or imputed with respect to, its investments during the year,
including its zero coupon securities. These dividends ordinarily will
constitute taxable income to the shareholders of the Fund.
Passive Foreign Investment Companies.
If a Fund purchases shares in certain foreign investment
entities, called "passive foreign investment companies" (a "PFIC"), it may be
subject to United States federal income tax on a portion of any "excess
distribution" or gain from the disposition of such shares even if such income
is distributed as a taxable dividend by the Fund to its shareholders.
Additional charges in the nature of interest may be imposed on the Fund in
respect of deferred taxes arising from such distributions or gains. If a Fund
were to invest in a PFIC and elected to treat the PFIC as a "qualified electing
fund" under the Code, in lieu of the foregoing requirements, the Fund might be
required to include in income each year a portion of the ordinary earnings and
net capital gains of the qualified electing fund, even if not distributed to
the Fund, and such amounts would be subject to the 90% and excise tax
distribution requirements described above. In order to make this election, a
Fund would be required to obtain certain annual information from the passive
foreign investment companies in which it invests, which may be difficult or not
possible to obtain.
Alternatively, a Fund may make a mark-to-market election that
will result in a Fund being treated as if it had sold and repurchased all of
the PFIC stock at the end of each year. In this case, a Fund would report gains
as ordinary income and would deduct losses as ordinary losses to the extent of
previously recognized gains. The election, once made, would be effective for
all subsequent taxable years of the Fund, unless revoked with the consent of
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<PAGE> 84
the IRS. By making the election, a Fund could potentially ameliorate the adverse
tax consequences with respect to its ownership of shares in a PFIC, but in any
particular year may be required to recognize income in excess of the
distributions it receives from PFICs and its proceeds from dispositions of PFIC
company stock. A Fund may have to distribute this "phantom" income and gain to
satisfy its distribution requirement and to avoid imposition of the 4% excise
tax. Each Fund will make the appropriate tax elections if possible, and take any
additional steps that are necessary to mitigate the effect of these rules.
Fund Taxes on Swaps.
As a result of entering into index swaps, the Funds may make
or receive periodic net payments. They may also make or receive a payment when
a swap is terminated prior to maturity through an assignment of the swap or
other closing transaction. Periodic net payments will constitute ordinary
income or deductions, while termination of a swap will result in capital gain
or loss (which will be a long-term capital gain or loss if a Fund has been a
party to the swap for more than one year).
Dividends and Distributions.
Dividends of net investment income and distributions of net
realized short-term capital gains are taxable to a United States shareholder as
ordinary income, whether paid in cash or in shares. Distributions of
net-long-term capital gains, if any, that a Fund designates as capital gains
dividends are taxable as long-term capital gains, whether paid in cash or in
shares and regardless of how long a shareholder has held shares of the Fund.
Dividends and distributions paid by a Fund (except for the portion thereof, if
any, attributable to dividends on stock of U.S. corporations received by the
Fund) will not qualify for the deduction for dividends received by
corporations. Distributions in excess of a Fund's current and accumulated
earnings and profits will, as to each shareholder, be treated as a tax-free
return of capital, to the extent of a shareholder's basis in his shares of the
Fund, and as a capital gain thereafter (if the shareholder holds his shares of
the Fund as capital assets).
Shareholders receiving dividends or distributions in the form
of additional shares should be treated for United States federal income tax
purposes as receiving a distribution in the amount equal to the amount of money
that the shareholders receiving cash dividends or distributions will receive,
and should have a cost basis in the shares received equal to such amount.
Investors considering buying shares just prior to a dividend
or capital gain distribution should be aware that, although the price of shares
just purchased at that time may reflect the amount of the forthcoming
distribution, such dividend or distribution may nevertheless be taxable to
them.
If a Fund is the holder of record of any stock on the record
date for any dividends payable with respect to such stock, such dividends are
included in the Fund's gross income not as of the date received but as of the
later of (a) the date such stock became ex-dividend with respect to such
dividends (i.e., the date on which a buyer of the stock would not be entitled
to receive the declared, but unpaid, dividends) or (b) the date the Fund
acquired
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such stock. Accordingly, in order to satisfy its income distribution
requirements, the Fund may be required to pay dividends based on anticipated
earnings, and shareholders may receive dividends in an earlier year than would
otherwise be the case.
Sales of Shares.
Upon the sale or exchange of his shares, a shareholder will
realize a taxable gain or loss equal to the difference between the amount
realized and his basis in his shares. Such gain or loss will be treated as
capital gain or loss, if the shares are capital assets in the shareholder's
hands, and will be long-term capital gain or loss if the shares are held for
more than one year and short-term capital gain or loss if the shares are held
for one year or less. Any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of are replaced, including
replacement through the reinvesting of dividends and capital gains
distributions in a Fund, within a 61-day period beginning 30 days before and
ending 30 days after the disposition of the shares. In such a case, the basis
of the shares acquired will be increased to reflect the disallowed loss. Any
loss realized by a shareholder on the sale of a Fund share held by the
shareholder for six months or less will be treated for United States federal
income tax purposes as a long-term capital loss to the extent of any
distributions or deemed distributions of long-term capital gains received by
the shareholder with respect to such share.
Foreign Taxes.
A Fund may elect for U.S. income tax purposes to treat
foreign income taxes paid by it as paid by its shareholders if: (i) the Fund
qualifies as a regulated investment company, (ii) certain asset and
distribution requirements are satisfied, and (iii) more than 50% of the Fund's
total assets at the close of its fiscal year consists of stock or securities of
foreign corporations. A Fund may qualify for and make this election in some,
but not necessarily all, of its taxable years. If a Fund were to make an
election, shareholders of the Fund would be required to take into account an
amount equal to their pro rata portions of such foreign taxes in computing
their taxable income and then treat an amount equal to those foreign taxes as a
U.S. federal income tax deduction or as a foreign tax credit against their U.S.
federal income taxes. Shortly after any year for which it makes such an
election, a Fund will report to its shareholders the amount per share of such
foreign income tax that must be included in each shareholder's gross income and
the amount which will be available for the deduction or credit. No deduction
for foreign taxes may be claimed by a shareholder who does not itemize
deductions. Certain limitations will be imposed on the extent to which the
credit (but not the deduction) for foreign taxes may be claimed.
Backup Withholding.
A Fund may be required to withhold, for United States federal
income tax purposes, 31% of the dividends, distributions and redemption
proceeds payable to shareholders who fail to provide the Fund with their
correct taxpayer identification number or to make required certifications, or
who have been notified by the IRS that they are subject to backup withholding.
Certain shareholders are exempt from backup withholding. Backup
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withholding is not an additional tax and any amount withheld may be credited
against a shareholder's United States federal income tax liabilities.
Notices.
Shareholders will be notified annually by a Fund as to the
United States federal income tax status of the dividends, distributions and
deemed distributions attributable to undistributed capital gains (discussed
above in "The Funds and Their Investments") made by the Fund to its
shareholders. Furthermore, shareholders will also receive, if appropriate,
various written notices after the close of the Fund's taxable year regarding
the United States federal income tax status of certain dividends, distributions
and deemed distributions that were paid (or that are treated as having been
paid) by a Fund to its shareholders during the preceding taxable year.
Other Taxation
Distributions also may be subject to additional state, local
and foreign taxes depending on each shareholder's particular situation.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN MATERIAL TAX CONSEQUENCES AFFECTING
THE FUND AND ITS SHAREHOLDERS. SHAREHOLDERS ARE ADVISED TO CONSULT THEIR OWN
TAX ADVISERS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF AN
INVESTMENT IN A FUND.
DETERMINATION OF PERFORMANCE
From time to time, a Fund may quote the total return of its
Common Shares and/or Advisor Shares in advertisements or in reports and other
communications to shareholders. The net asset value of Common Shares is listed
in The Wall Street Journal each business day under the heading "Warburg Pincus
Funds." Current total return figures may be obtained by calling Warburg Pincus
Funds at 800-927-2874.
With respect to a Funds' Common and Advisor Shares, the
Fund's average annual total returns for the period ended October 31, 1998 were
as follows (performance figures calculated without the waiver of fees, if any,
are noted in parenthesis):
TOTAL RETURN
COMMON SHARES
<TABLE>
<CAPTION>
- --------------------- -------------------------- -------------------------- ------------------------------
FROM COMMENCEMENT OF
OPERATIONS OR TEN YEAR
FUND ONE-YEAR FIVE-YEAR (COMMENCEMENT DATE)
- --------------------- -------------------------- -------------------------- ------------------------------
<S> <C> <C> <C>
Major Foreign 2.26% (1.26%) N/A 8.06% (6.21%)
Markets Fund (3/31/97)
- --------------------- -------------------------- -------------------------- ------------------------------
International -6.11% 5.05% 9.48%
Equity Fund (5/2/89)
- --------------------- -------------------------- -------------------------- ------------------------------
</TABLE>
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<TABLE>
- --------------------- -------------------------- -------------------------- ------------------------------
<S> <C> <C> <C>
International Small N/A N/A -13.90% (-17.60%)
Company Fund (4/2/98)
- --------------------- -------------------------- -------------------------- ------------------------------
Emerging Markets -35.95% (-36.47%) N/A -8.55% (-9.86%)
Fund (12/30/94)
- --------------------- -------------------------- -------------------------- ------------------------------
Global Post-Venture -1.91% (-5.98) N/A 4.38% (-2.24%)
Capital Fund (9/30/96)
- --------------------- -------------------------- -------------------------- ------------------------------
</TABLE>
+Non-annualized.
ADVISOR SHARES
<TABLE>
<CAPTION>
FROM COMMENCEMENT OF
OPERATIONS
FUND ONE-YEAR FIVE-YEAR (COMMENCEMENT DATE)
- ----------------------- -------------------------- -------------------------- ------------------------------
<S> <C> <C> <C>
International Equity -6.49% 4.60% 6.99%
Fund (4/5/91)
- ----------------------- -------------------------- -------------------------- ------------------------------
-37.71% (-41.22%) N/A -9.34% (-12.67%)
Emerging Markets Fund (12/30/94)
- ----------------------- -------------------------- -------------------------- ------------------------------
Global Post-Venture
Fund -2.31% (-54.34%) N/A 4.00% (-8.61%)
- ----------------------- -------------------------- -------------------------- ------------------------------
</TABLE>
+Non-annualized.
The Institutional Shares of the Emerging Markets Fund had not
commenced operations as of the date of this SAI. The Institutional Class would
have substantially similar returns as the Common Class and Advisor Class.
However, since the Institutional Class is subject to slightly lower expenses,
the returns of the Institutional Class would have been slightly higher.
These total return figures show the average percentage change
in value of an investment in the Common Shares from the beginning of the
measuring period to the end of the measuring period. The figures reflect
changes in the price of Common Shares assuming that any income dividends and/or
capital gain distributions made by the Fund during the period were reinvested
in Common Shares of the Fund. Total return will be shown for recent one-, five-
and ten-year periods, and may be shown for other periods as well (such as from
commencement of the Fund's operations or on a year-by-year, quarterly or
current year-to-date basis).
These figures are calculated by finding the average annual
compounded rates of return for the one-, five- and ten- (or such shorter period
as the relevant class of shares has been offered) year periods that would equate
the initial amount invested to the ending redeemable value according to the
following formula: P (1 + T)(n) = ERV. For purposes of this formula, "P" is a
hypothetical investment of $1,000; "T" is average annual total return; "n" is
number of years; and "ERV" is the ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the one-, five- or ten-year periods (or
fractional portion thereof). Total return or "T" is computed by finding the
average annual change in the value of an initial $1,000 investment over the
period and assumes that all dividends and distributions are reinvested during
the period. Investors should note that this performance may not be
representative of a Fund's total return over longer market cycles.
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When considering average total return figures for periods
longer than one year, it is important to note that the annual total return for
one year in the period might have been greater or less than the average for the
entire period. When considering total return figures for periods shorter than
one year, investors should bear in mind that each Fund seeks long-term
appreciation and that such return may not be representative of any Fund's
return over a longer market cycle. Each Fund may also advertise aggregate total
return figures of its Common Shares for various periods, representing the
cumulative change in value of an investment in the Common Shares of the
specific period (again reflecting changes in share prices and assuming
reinvestment of dividends and distributions). Aggregate and average total
returns may be shown by means of schedules, charts or graphs and may indicate
various components of total return (i.e., change in value of initial
investment, income dividends and capital gain distributions).
A Fund may advertise, from time to time, comparisons of the
performance of its Common Shares and/or Advisor Shares with that of one or more
other mutual funds with similar investment objectives. The Fund may advertise
average annual calendar year-to-date and calendar quarter returns, which are
calculated according to the formula set forth in the preceding paragraph,
except that the relevant measuring period would be the number of months that
have elapsed in the current calendar year or most recent three months, as the
case may be. Investors should note that this performance may not be
representative of the Fund's total return in longer market cycles.
The performance of a class of Fund shares will vary from time
to time depending upon market conditions, the composition of the Fund's
portfolio and operating expenses allocable to it. As described above, total
return is based on historical earnings and is not intended to indicate future
performance. Consequently, any given performance quotation should not be
considered as representative of performance for any specified period in the
future. Performance information may be useful as a basis for comparison with
other investment alternatives. However, a Fund's performance will fluctuate,
unlike certain bank deposits or other investments which pay a fixed yield for a
stated period of time. Any fees charged by Institutions or other institutional
investors directly to their customers in connection with investments in Fund
shares are not reflected in a Fund's total return, and such fees, if charged,
will reduce the actual return received by customers on their investments.
In addition, reference may be made in advertising a class of
Fund shares to opinions of Wall Street economists and analysts regarding
economic cycles and their effects historically on the performance of small
companies, both as a class and relative to other investments. A Fund may also
discuss its beta, or volatility relative to the market, and make reference to
its relative performance in various market cycles in the United States.
CSAM believes that a diversified portfolio of international
equity securities, when combined with a similarly diversified portfolio of
domestic equity securities, tends to have a lower volatility than a portfolio
composed entirely of domestic securities. Furthermore, international equities
have been shown to reduce volatility in single asset portfolios regardless of
whether the investments are in all domestic equities or all domestic
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<PAGE> 89
fixed-income instruments, and research indicates that volatility can be
significantly decreased when international equities are added.
To illustrate this point, the performance of international
equity securities, as measured by the EAFE Index has equaled or exceeded that
of domestic equity securities, as measured by the S&P 500 Index in 14 of the
last 27 years. The following table compares annual total returns of the EAFE
Index and the S&P 500 Index for the calendar years shown.
<TABLE>
<CAPTION>
EAFE INDEX VS. S&P 500 INDEX
1972-1998
ANNUAL TOTAL RETURN+
YEAR EAFE INDEX S&P 500 INDEX
---- ---------- -------------
<S> <C> <C>
1972* 33.28 15.63
1973* -16.82 -17.37
1974* -25.60 -29.72
1975 31.21 31.55
1976 -.36 19.15
1977* 14.61 -11.50
1978* 28.91 1.06
1979 1.82 12.31
1980 19.01 25.77
1981* -4.85 -9.73
1982 -4.63 14.76
1983* 20.91 17.27
1984* 5.02 1.40
1985* 52.97 26.33
1986* 66.80 14.62
1987* 23.18 2.03
1988* 26.66 12.40
1989 9.22 27.25
1990 -24.71 -6.56
1991 10.19 26.31
1992 -13.89 4.46
1993* 30.49 7.06
1994* 6.24 -1.54
1995 9.42 34.11
1996 4.40 20.26
1997 0.24 31.01
1998 18.29 26.23
</TABLE>
- --------------------
+ Without reinvestment of dividends.
* The EAFE Index has outperformed the S&P 500 Index 14 out of the last 27 years.
The quoted performance information shown above is not
intended to indicate the future performance of the Funds.
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<PAGE> 90
Each Fund 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 or as set
forth in the publications listed below; (ii) in the case of the Major Foreign
Markets Fund, the Morgan Stanley Capital International Europe, Australasia, and
Far East ("EAFE") Index, the Salomon Russell Global Equity Index, the
FT-Actuaries World Indices (jointly compiled by the Financial Times, Ltd.,
Goldman, Sachs & Co. and NatWest Securities Ltd.) and the S&P 500 Index; in the
case of the International Equity Fund, the Morgan Stanley Capital International
All Country World Excluding the U.S. Index and/or other indexes prepared by
Morgan Stanley relating to securities represented in the Fund, the Salomon
Russell Global Equity Index, the FT-Actuaries World Indices (jointly compiled
by The Financial Times, Ltd., Goldman, Sachs & Co. and NatWest Securities Ltd.)
and the S&P 500 Index; in the case of the International Small Company Fund, the
Morgan Stanley Capital International EAFE(R) Small Cap Index and/or other
indexes prepared by Morgan Stanley that are appropriate benchmarks for
securities represented in the Fund; in the case of the Emerging Markets Fund,
with the IFC Emerging Market Free Index, the IFC Investible Index, the Lipper
Emerging Markets Funds Index or the Morgan Stanley Capital International
Emerging Markets Index; and in the case of the Global Post-Venture Capital
Fund, with the Venture Capital 100 Index (compiled by Venture Capital Journal),
appropriate indexes prepared by Frank Russell Company relating to securities
represented in the Fund, the Lipper Global Funds Index, the Morgan Stanley
Capital International EAFE Index, the Morgan Stanley Capital International
World Index, the Salomon Russell Global Equity Index, the FT-Actuaries World
Indices (jointly compiled by The Financial Times, Ltd., Goldman, Sachs & Co.
and NatWest Securities Ltd.) and the S&P 500 Index, all of which are unmanaged
indexes of common stocks; or (iii) other appropriate indexes of investment
securities or with data developed by CSAM derived from such indexes. A Fund may
include evaluations of the Fund published by nationally recognized ranking
services and by financial publications that are nationally recognized, such as
Barron's, Business Week, Financial Times, Forbes, Fortune, Inc., Institutional
Investor, Investor's Business Daily, Money, Morningstar, Mutual Fund Magazine,
Smart Money, The Wall Street Journal and Worth. Morningstar, Inc. rates funds
in broad categories based on risk/reward analyses over various time periods. In
addition, each Fund may from time to time compare the expense ratio of its
Common Shares to that of investment companies with similar objectives and
policies, based on data generated by Lipper Analytical Services, Inc. or
similar investment services that monitor mutual funds.
Advertising or supplemental sales literature relating to the
International Equity Fund may describe the percentage decline from all-time
high levels for certain foreign stock markets. It may also describe how the
Fund differs from the various indices in composition. Sales literature and
advertising may also discuss trends in the economy and corporate structure in
Japan, including the contrast between the sales growth, profit growth,
price/earnings ratios, and return on equity (ROE) of companies; it may discuss
the cultural changes taking place among consumers in Japan, including
increasing cost-consciousness and accumulation of purchasing power and wealth
among Japanese consumers, and the ability of new companies to take advantage of
these trends. The sales literature for the Fund may also discuss current
statistics and projections of the volume, market capitalization, sector
weightings and number of issues traded on Japanese exchanges and in Japanese
OTC markets, and may include graphs
85
<PAGE> 91
of such statistics in advertising and other sales literature. Advertising or
supplemental sales literature relating to the Global Post-Venture Capital Fund
may also discuss characteristics of venture capital financed companies and the
benefits expected to be achieved from investing in these companies.
In reports, investor communications or advertisements, each
Fund may include: (i) its total return performance; (ii) its performance
compared with various indexes or other mutual funds; (iii) published
evaluations by nationally recognized ranking services and financial
publications; (iv) descriptions and updates concerning its strategies and
portfolio investments; (v) its goals, risk factors and expenses compared with
other mutual funds; (vi) analysis of its investments by industry, country,
credit quality and other characteristics; (vii) a discussion of the risk/return
continuum relating to different investments; (viii) the potential impact of
adding foreign stocks to a domestic portfolio; (ix) the general biography or
work experience of the portfolio managers of the Funds; (x) portfolio manager
commentary or market updates; (xi) discussion of macroeconomic factors
affecting the Fund and its investments; (xii) research methodology underlying
stock selection or a Fund's investment objective; and (xiii) other information
of interest to investors.
INDEPENDENT ACCOUNTANTS AND COUNSEL
PricewaterhouseCoopers LLP ("PwC"), with principal offices at
2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as
independent accountants for each Fund. The financial statements for the Funds
that are incorporated by reference in this Statement of Additional Information
have been audited by PwC and have been included herein by reference in reliance
upon the report of such firm of independent accountants given upon their
authority as experts in accounting and auditing.
Willkie Farr & Gallagher serves as counsel for each Fund and
provides legal services from time to time for CSAM and CSAMSI.
MISCELLANEOUS
The Funds are not sponsored, endorsed, sold or promoted by
Warburg, Pincus & Co. Warburg, Pincus & Co. makes no representation or
warranty, express or implied, to the owners of the Funds or any member of the
public regarding the advisability of investing in securities generally or in
the Funds particularly. Warburg, Pincus & Co. licenses certain trademarks and
trade names of Warburg, Pincus & Co., and is not responsible for and has not
participated in the calculation of the Funds' net asset value, nor is Warburg,
Pincus & Co. a distributor of the Funds. Warburg, Pincus & Co. has no
obligation or liability in connection with the administration, marketing or
trading of the Funds.
FINANCIAL STATEMENTS
Each Fund's audited Annual Report dated October 31, 1999,
which either accompanies this Statement of Additional Information or has
previously been provided to the investor to whom this Statement of Additional
Information is being sent, is incorporated herein by
86
<PAGE> 92
reference with respect to all information regarding the relevant Fund included
therein. Each Fund will furnish without charge a copy of its Annual Report upon
request by calling Warburg Pincus Funds at 800-927-2874.
87
<PAGE> 93
APPENDIX
DESCRIPTION OF RATINGS
Commercial Paper Ratings
Commercial paper rated A-1 by Standard & Poor's Ratings
Services ("S&P") indicates that the degree of safety regarding timely payment
is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign designation. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating
assigned by Moody's Investors Services, Inc. ("Moody's"). Issuers rated Prime-1
(or related supporting institutions) are considered to have a superior capacity
for repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics of issuers rated Prime-1 but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
Short-Term Note Ratings
The following summarizes the two highest ratings used by S&P
for short-term notes:
SP-1 - Loans bearing this designation evidence a very strong
or strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics will be given a plus sign
designation.
SP-2 - Loans bearing this designation evidence a satisfactory
capacity to pay principal and interest.
The following summarizes the two highest ratings used by
Moody's for short-term notes and variable rate demand obligations:
MIG-1/VMIG-1 - Obligations bearing these designations are of
the best quality, enjoying strong protection from established cash flows of
funds for their servicing or from established and broad-based access to the
market for refinancing, or both.
MIG-2/VMIG-2 - Obligations bearing these designations are of
high quality with margins of protection ample although not so large as in the
preceding group.
A-1
<PAGE> 94
Corporate Bond and Municipal Obligations Ratings
The following summarizes the ratings used by S&P for
corporate bonds and Municipal Obligations:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA - Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB - This is the lowest investment grade. Debt rated BBB is
regarded as having an adequate capacity to pay interest and repay principal.
Although it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for bonds in this category than
for bonds in higher rated categories.
BB, B, CCC, CC and C - Debt rated BB and B are regarded, on
balance, as predominately speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
represents a lower degree of speculation than B, and CCC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to
default than other speculative issues. However, 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 economic conditions,
it is not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
A-2
<PAGE> 95
CC - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt rating. The C
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on
which no interest is being paid. Such debt is rated between debt rated C and
debt rated D.
To provide more detailed indications of credit quality, the
ratings may be modified by the addition of a plus or minus sign to show
relative standing within this major rating category.
D - Debt rated D is in payment default. The D rating category
is used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
The following summarizes the ratings used by Moody's for
corporate bonds and Municipal Obligations:
Aaa - Bonds that are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as
medium-grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
A-3
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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.
A-4
