<PAGE> 1
SUPPLEMENT TO THE PROSPECTUSES
WARBURG PINCUS FUNDS
The following information supersedes certain information in the Funds'
Prospectuses.
New Adviser. Effective today, the Funds' investment adviser, Credit Suisse
Asset Management, became Credit Suisse Asset Management, LLC (CSAM LLC). In
addition, as a result of the closing of the previously announced acquisition of
Warburg Pincus Asset Management, Inc. (Warburg Pincus) by Credit Suisse Group
(Credit Suisse), Warburg Pincus was combined with CSAM LLC. Credit Suisse Asset
Management had changed its name from BEA Associates effective January 1, 1999.
Accordingly, all references in the Prospectuses to BEA Associates are now to
CSAM LLC.
CSAM LLC is an indirect wholly-owned U.S. subsidiary of Credit Suisse. CSAM LLC,
together with its predecessor firms, has been engaged in the investment advisory
business for over 60 years and has assets under management of approximately
$58.7 billion. CSAM LLC's principal business address is 153 East 53rd Street,
New York, New York 10022.
Change of Name of Distributor. Counsellors Securities Inc., the Funds'
distributor, has changed its name to Credit Suisse Asset Management Securities,
Inc. to reflect its ownership by Credit Suisse.
Address Change. The following address replaces the current address provided in
the Prospectus for overnight or courier service: Boston Financial, Attn: Warburg
Pincus Funds, 66 Brooks Drive, Braintree, MA 02184.
Dated: July 6, 1999
<PAGE> 2
WARBURG PINCUS FUNDS
SHAREHOLDER
GUIDE
Common Class
December 3, 1998
As Revised July 6, 1999
This Shareholder Guide is incorporated into and legally part of each
Warburg Pincus (Common Class) prospectus.
[Warburg Pincus Funds Logo]
<PAGE> 3
BUYING SHARES
OPENING AN ACCOUNT
Your account application provides us with key information we need to set up
your account correctly. It also lets you authorize services that you may find
convenient in the future.
If you need an application, call our Shareholder Service Center to receive
one by mail or fax. Or you can download it from our Internet Web site:
www.warburg.com.
You can make your initial investment by check or wire. The "By Wire" method
in the table enables you to buy shares on a particular day at that day's closing
NAV.
ADDING TO AN ACCOUNT
You can add to your account in a variety of ways, as shown in the table. If
you want to use ACH transfer, be sure to complete the "ACH on Demand" section of
the account application.
INVESTMENT CHECKS
Please use either a personal or bank check payable in U.S. dollars to Warburg
Pincus Funds. Unfortunately, we cannot accept "starter" checks that do not have
your name preprinted on them. We also cannot accept checks payable to you or to
another party and endorsed to the order of Warburg Pincus Funds. These types of
checks may be returned to you and your purchase order may not be processed.
Limited exceptions include properly endorsed IRA Rollover and government checks.
MINIMUM INITIAL INVESTMENT
<TABLE>
<S> <C>
Cash Reserve Fund: $ 1,000
New York Tax Exempt
Fund: $ 1,000
Balanced Fund: $ 1,000
Growth & Income Fund: $ 1,000
WorldPerks(R) Funds: $ 5,000
Long-Short Funds $ 25,000
All other funds: $ 2,500
IRAs: $ 500*
Transfers/Gifts to
Minors: $ 500*
* $25,000 minimum for Long-Short
Funds.
</TABLE>
WIRE INSTRUCTIONS
State Street Bank and Trust Company
ABA# 0110 000 28
Attn: Mutual Funds/Custody Dept.
[Warburg Pincus Fund Name]
DDA# 9904-649-2
F/F/C: [Account Number and Registration]
HOW TO REACH US
SHAREHOLDER SERVICE CENTER
Toll free: 800 -WARBURG
(800 -927-2874)
Fax: 212-370-9833
MAIL
Warburg Pincus Funds
P.O. Box 9030
Boston, MA 02205-9030
OVERNIGHT/COURIER SERVICE
Boston Financial
Attn: Warburg Pincus Funds
66 Brooks Drive
Braintree, MA 02184
INTERNET WEB SITE
www.warburg.com
2
<PAGE> 4
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C>
BY CHECK
- - Complete the New Account Application. - Make your check payable to Warburg
For IRAs use the Universal IRA Pincus Funds.
Application. - Write the account number and the fund
- - Make your check payable to Warburg name on your check.
Pincus Funds. - Mail to Warburg Pincus Funds.
- - Mail to Warburg Pincus Funds. - Minimum amount is $100.
BY EXCHANGE
- - Call our Shareholder Service Center to - Call our Shareholder Service Center to
request an exchange. Be sure to read request an exchange.
the current prospectus for the new - Minimum amount is $250.
fund. Also please observe the minimum If you do not have telephone privileges,
initial investment. mail or fax a signed letter of
If you do not have telephone privileges, instruction.
mail or fax a signed letter of
instruction.
BY WIRE
- - Complete and sign the New Account - Call our Shareholder Service Center by
Application. 4 p.m. ET to inform us of the incoming
- - Call our Shareholder Service Center and wire. Please be sure to specify your
fax the signed New Account Application name, the account number and the fund
by 4 p.m. ET. name on your wire advice.
- - Shareholder Services will telephone you - Wire the money for receipt that day.
with your account number. Please be - Minimum amount is $500.
sure to specify your name, the account
number and the fund name on your wire
advice.
- - Wire your initial investment for
receipt that day.
- - Mail the original, signed application
to Warburg Pincus Funds.
This method is not available for IRAs.
BY AUTOMATED CLEARING HOUSE (ACH) TRANSFER
- - Cannot be used to open an account. - Call our Shareholder Service Center to
request an ACH transfer from your bank.
- Your purchase will be effective at the
next NAV calculated after we receive your
order in proper form.
- Minimum amount is $50.
Requires ACH on Demand privileges.
</TABLE>
800-WARBURG (800-927-2874)
MONDAY - FRIDAY, 8 A.M. - 8 P.M. ET SATURDAY, 8 A.M. - 4 P.M. ET
3
<PAGE> 5
SELLING SHARES(*)
<TABLE>
<CAPTION>
SELLING SOME OR ALL OF YOUR SHARES CAN BE USED FOR
<S> <C>
BY MAIL
Write us a letter of instruction that - Accounts of any type.
includes: - Sales of any amount.
- - your name(s) and signature(s) For IRAs please use the IRA Distribution
- - the fund name and account number Request Form.
- - the dollar amount you want to sell
- - how to send the proceeds
Obtain a signature guarantee or other
documentation, if required (see "Selling
Shares
in Writing").
Mail the materials to Warburg Pincus
Funds.
If only a letter of instruction is
required, you can fax it to the
Shareholder Service Center.
BY EXCHANGE
- - Call our Shareholder Service Center to - Accounts with telephone privileges.
request an exchange. Be sure to read If you do not have telephone privileges,
the current prospectus for the new fund. mail or fax a letter of instruction to
Also please observe the minimum initial exchange shares.
investment.
BY PHONE
Call our Shareholder Service Center to - Non-IRA accounts with telephone
request a redemption. You can receive the privileges.
proceeds as:
- - a check mailed to the address of record
- - an ACH transfer to your bank ($50
minimum)
- - a wire to your bank ($500 minimum)
See "By Wire or ACH Transfer" for
details.
BY WIRE OR ACH TRANSFER
- - Complete the "Wire Instructions" or - Non-IRA accounts with wire-redemption
"ACH on Demand" section of your New or ACH on Demand privileges.
Account Application. - Requests by phone or mail.
- - For federal-funds wires, proceeds will
be wired on the next business day. For
ACH transfers, proceeds will be
delivered within two business days.
</TABLE>
()* For the Central & Eastern Europe Fund only: A short-term trading fee of 1.0%
of the amount redeemed will be deducted from the redemption proceeds if you sell
shares of the fund after holding them less than six months. This fee, which is
currently being waived, does not apply to shares acquired through reinvestment
of distributions. For purposes of computing the short-term trading fee, any
shares bought through reinvestment of distributions will be redeemed first
without charging the fees, followed by the shares held longest.
4
<PAGE> 6
SELLING SHARES IN WRITING
Some circumstances require a written sell order, along with a signature
guarantee. These include:
- accounts whose address of record has been changed within the past 30 days
- redemption in certain large amounts (other than by exchange)
- requests to send the proceeds to a different payee or address
- shares represented by certificates, which must be returned with your sell
order
A signature guarantee helps protect against fraud. You can obtain one from
most banks or securities dealers, but not from a notary public.
RECENTLY PURCHASED SHARES
If the fund has not yet collected payment for the shares you are selling, it
will delay sending you the proceeds until your purchase payment clears. This may
take up to 10 calendar days after the purchase. To avoid the collection period,
consider buying shares by bank wire, bank check, certified check or money order.
LOW-BALANCE ACCOUNTS
If your account balance falls below the minimum required to keep it open due
to redemptions or exchanges, the fund may ask you to increase your balance. If
it is still below the minimum after 60 days, the fund may close your account and
mail you the proceeds.
MINIMUM TO KEEP AN ACCOUNT OPEN
<TABLE>
<S> <C>
Cash Reserve Fund: $ 750
New York Tax Exempt Fund: $ 750
Balanced Fund: $ 500
Growth & Income Fund: $ 500
WorldPerks Funds: $ 750
All other funds: $2,000
IRAs: $ 250
Transfers/Gifts to
Minors: $ 250
</TABLE>
800-WARBURG (800-927-2874)
MONDAY - FRIDAY, 8 A.M. - 8 P.M. ET SATURDAY, 8 A.M. - 4 P.M. ET
5
<PAGE> 7
SHAREHOLDER SERVICES
AUTOMATIC SERVICES
Buying or selling shares automatically is easy with the services described
below. You can set up most of these services with your account application or by
calling our Shareholder Service Center.
AUTOMATIC MONTHLY INVESTMENT PLAN
For making automatic investments ($50 minimum) from a designated bank
account.
AUTOMATIC WITHDRAWAL PLAN
For making automatic monthly, quarterly, semiannual or annual withdrawals of
$250 or more.
DISTRIBUTION SWEEP
For automatically reinvesting your dividend and capital-gain distributions
into another identically registered Warburg Pincus fund. Not available for IRAs.
RETIREMENT PLANS
Warburg Pincus offers a range of tax-advantaged retirement accounts,
including:
- Traditional IRAs
- Roth IRAs
- Roth Conversion IRAs
- Spousal IRAs
- Rollover IRAs
- SEP IRAs
To transfer your IRA to Warburg Pincus, use the IRA Transfer/Direct Rollover
Form. If you are opening a new IRA, you will also need to complete the Universal
IRA Application. Please consult your tax professional concerning your IRA
eligibility and tax situation.
TRANSFERS/GIFTS TO MINORS
Depending on state laws, you can set up a custodial account under the Uniform
Transfers-to-Minors Act (UTMA) or the Uniform Gifts-to-Minors Act (UGMA). Please
consult your tax professional about these types of accounts.
ACCOUNT CHANGES
Call our Shareholder Service Center to update your account records whenever
you change your address. Shareholder Services can also help you change your
account information or privileges.
6
<PAGE> 8
OTHER POLICIES
TRANSACTION DETAILS
You are entitled to capital-gain and earned dividend distributions as soon as
your purchase order is executed. For the Intermediate Maturity Government, New
York Intermediate Municipal and Fixed Income Funds and the Money Market Funds,
you begin to earn dividend distributions the business day after your purchase
order is executed. However, if we receive your purchase order and payment to
purchase shares of a Money Market Fund before 12 p.m. (noon), you begin to earn
dividend distributions on that day.
Your purchase order will be canceled and you may be liable for losses or fees
incurred by the fund if:
- your investment check or ACH transfer does not clear
- you place a telephone order by 4 p.m. ET and we do not receive your wire that
day
If you wire money without first calling Shareholder Services to place an
order, and your wire arrives after the close of regular trading on the NYSE,
then your order will not be executed until the end of the next business day. In
the meantime, your payment will be held uninvested. Your bank or other
financial-services firm may charge a fee to send or receive wire transfers.
While we monitor telephone servicing resources carefully, during periods of
significant economic or market change it may be difficult to place orders by
telephone.
Uncashed redemption or distribution checks do not earn interest.
SPECIAL SITUATIONS
A fund reserves the right to:
- refuse any purchase or exchange request, including those from any person or
group who, in the fund's view, is likely to engage in excessive trading
- change or discontinue its exchange privilege after 30 days' notice to current
investors, or temporarily suspend this privilege during unusual market
conditions
- change its minimum investment amounts after 15 days' notice to current
investors of any increases
- charge a wire-redemption fee
- make a "redemption in kind"--payment in portfolio securities rather than
cash--for certain large redemption amounts that could hurt fund operations
- suspend redemptions or postpone payment dates as permitted by the Investment
Company Act of 1940 (such as during periods other than weekends or holidays
when the NYSE is closed or trading on the NYSE is restricted, or any other
time that the SEC permits)
- modify or waive its minimum investment requirements for employees and clients
of its adviser, sub-adviser, distributor and their affiliates and, for the
Long-Short Funds, investments through certain financial-services firms
($10,000 minimum) and through retirement plan programs (no minimum)
- stop offering its shares for a period of time (such as when management
believes that a substantial increase in assets could adversely affect it)
800-WARBURG (800-927-2874)
MONDAY - FRIDAY, 8 A.M. - 8 P.M. ET SATURDAY, 8 A.M. - 4 P.M. ET
7
<PAGE> 9
[WARBURG PINCUS FUNDS LOGO]
P.O. BOX 9030, BOSTON, MA 02205-9030
800-WARBURG (800-927-2874) B www.warburg.com
CREDIT SUISSE ASSET MANAGEMENT SECURITIES, INC.,DISTRIBUTOR. WPCOM-31-1298Dc
<PAGE> 10
STATEMENT OF ADDITIONAL INFORMATION
December 3, 1998
As Revised July 6, 1999
----------
WARBURG PINCUS EUROPEAN EQUITY FUND
WARBURG PINCUS CENTRAL & EASTERN EUROPE FUND
P.O. Box 9030, Boston, Massachusetts 02205-9030
For information, call 800-WARBURG
----------
CSAM INSTITUTIONAL SHARES
WARBURG PINCUS EUROPEAN EQUITY FUND
WARBURG PINCUS CENTRAL & EASTERN EUROPE FUND
P.O. Box 8500, Boston, Massachusetts 02266-85000
For information, call 800-401-2230
----------
This combined Statement of Additional Information is meant to be
read in conjunction with the Prospectuses for the Common Shares of Warburg
Pincus European Equity Fund (the "European Equity Fund") and Warburg Pincus
Central & Eastern Europe Fund (the "Central & Eastern Europe Fund")
(collectively the "Funds"), and with the Prospectuses for the Institutional
Shares of each Fund, each dated December 3, 1998, as amended or supplemented
from time to time (collectively, the "Prospectus"), and is incorporated by
reference in its entirety into the Prospectus. Shares of the Central & Eastern
Europe Fund, however, are not currently offered. This Statement of Additional
Information is not a prospectus. It should be read in conjunction with the
Prospectus, copies of which can be obtained by calling Warburg Pincus funds at
800-WARBURG (800-927-2874) (Common Shares) or CSAM Institutional Shares at
800-401-2230 (Institutional Shares). Information regarding the status of
shareholder accounts may also be obtained by calling the above numbers or by
writing to a Fund, P.O. Box 9030, Boston, Massachusetts 02205-9030 (Common
Shares) or P.O. Box 8500, Boston, Massachusetts 02266-8500 (Institutional
Shares).
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
ORGANIZATION OF THE FUNDS................................................. 1
INVESTMENT OBJECTIVES AND POLICIES........................................ 1
The European Equity Fund............................................ 1
The Central & Eastern Europe Fund................................... 2
General Investment Strategies.......................................... 2
Options, Futures and Currency Exchange Transactions................. 2
Securities Options.................................................. 2
Securities Index Options............................................ 5
OTC Options......................................................... 6
Futures Activities.................................................. 7
Futures Contracts.............................................. 8
Options on Futures Contracts................................... 9
Currency Exchange Transactions..................................... 10
Forward Currency Contracts.................................... 10
Currency Options.............................................. 10
Currency Hedging.............................................. 10
Swaps.............................................................. 11
Hedging Generally.................................................. 12
Asset Coverage for Forward Contracts, Options, Futures and
Options on Futures.............................................. 13
Additional Information on Other Investment Practices.................. 14
Foreign Investments................................................ 14
Foreign Currency Exchange..................................... 14
Euro Conversion............................................... 15
Information................................................... 16
Political Instability......................................... 16
Emerging Markets.............................................. 16
Delays........................................................ 16
Increased Expenses............................................ 17
Foreign Debt Securities....................................... 17
General....................................................... 18
Sovereign Debt................................................ 18
Privatizations................................................ 19
Central and Eastern European Countries............................. 20
Fixed Income Securities............................................ 25
Below Investment Grade Securities.................................. 25
Securities of Other Investment Companies........................... 27
Lending of Portfolio Securities.................................... 27
When-Issued Securities, Delayed-Delivery Transactions and Forward
Commitments..................................................... 28
Brady Bonds........................................................ 28
Repurchase Agreements.............................................. 29
Loan Participations and Assignments................................ 30
Convertible Securities............................................. 30
Structured Notes................................................... 31
Short Sales........................................................ 32
Emerging Growth and Smaller Capitalization Companies; Unseasoned
Issuers......................................................... 33
Depositary Receipts................................................ 33
Temporary Investments.............................................. 33
Rights Offerings and Purchase Warrants............................. 34
Non-Publicly Traded and Illiquid Securities........................ 34
Rule 144A Securities.......................................... 35
</TABLE>
i
<PAGE> 12
<TABLE>
<S> <C>
Borrowing.......................................................... 35
Stand-By Commitments............................................... 36
OTHER INVESTMENT LIMITATIONS............................................. 37
PORTFOLIO VALUATION...................................................... 39
PORTFOLIO TRANSACTIONS................................................... 40
PORTFOLIO TURNOVER....................................................... 42
MANAGEMENT OF THE FUNDS.................................................. 43
Officers and Board of Directors....................................... 43
Directors' Estimated Compensation Through August 31, 1999............. 47
Portfolio Managers.................................................... 48
Control Persons and Principal Holders of Securities................... 48
Investment Advisers and Co-Administrators............................. 48
Custodians and Transfer Agents........................................ 51
Organization of the Funds............................................. 51
Distribution and Shareholder Servicing................................ 52
Distributor........................................................ 52
Common Shares...................................................... 52
Advisor Shares..................................................... 53
General............................................................ 54
Institutional Shares............................................... 54
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION........................... 55
Automatic Cash Withdrawal Plan........................................ 55
EXCHANGE PRIVILEGE....................................................... 56
ADDITIONAL INFORMATION CONCERNING TAXES.................................. 56
The Funds and Their Investments....................................... 56
Passive Foreign Investment Companies.................................. 59
Dividends and Distributions........................................... 60
Sales of Shares....................................................... 61
Foreign Taxes......................................................... 61
Backup Withholding.................................................... 62
Notices............................................................... 62
Other Taxation........................................................ 62
DETERMINATION OF PERFORMANCE............................................. 63
INDEPENDENT ACCOUNTANTS AND COUNSEL...................................... 64
MISCELLANEOUS............................................................ 64
FINANCIAL STATEMENTS..................................................... 64
APPENDIX - DESCRIPTION OF RATINGS........................................ A-1
</TABLE>
ii
<PAGE> 13
ORGANIZATION OF THE FUNDS
The Funds are diversified open-end management investment companies
that were incorporated under the laws of the State of Maryland on July 27, 1998.
Each Fund is authorized to offer three classes of shares, one of which, the
Institutional Shares, is offered as the "CSAM Institutional Shares." Unless
otherwise indicated, references to a "Fund" apply to all classes of shares of
that Fund as a group, including its Institutional Shares.
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each Fund's
investment objectives and policies in the Prospectus. There are no assurances
that the Funds will achieve their investment objectives.
The investment objective of the European Equity Fund is capital
appreciation, which it seeks to achieve by investing primarily in equity
securities of Western European companies. The investment objective of the
Central & Eastern Europe Fund is capital appreciation, which it seeks to achieve
by investing primarily in equity securities of Central and Eastern European
companies.
The European Equity Fund: As stated in the Prospectus, the European
Equity Fund, under normal circumstances, will invest at least 65% of its total
assets in equity securities of companies (i) whose principal trading market is
in any Western European country, provided that, alone or on a consolidated
basis, they derive 50% or more of their annual revenue from either goods
produced, sales made or services performed in Western European markets, or which
have at least 50% of their assets situated in one or more Western European
markets; (ii) that are organized under the laws of, and with a principal office
in, a Western European country; or (iii) the principal securities trading market
for which is in a Western European market. Determinations as to eligibility will
be made by Credit Suisse Asset Management, LLC ("CSAM") or, if applicable,
Credit Suisse Asset Management Limited ("CSAM Ltd."), each Fund's investment
adviser and sub-investment adviser, respectively (each an "Adviser") based on
publicly available information and inquiries made to the companies. The European
Equity Fund intends to invest at least 80% of its assets in equity securities of
Western European companies. The Fund considers Western Europe to currently
include the European Union, Norway and Switzerland. The European Equity Fund may
also invest in other European countries. The European Equity Fund has not
established limitations on the allocation of investments among the Western
European countries, but intends to diversify its investments across different
countries. At times, it may invest a significant amount of its assets in a
single country.
The Central & Eastern Europe Fund: As stated in the Prospectus, the
Central & Eastern Europe Fund, under normal
<PAGE> 14
circumstances, will invest at least 65% of its total assets in equity securities
of companies (i) whose principal trading market is in any Central or Eastern
European country, provided that, alone or on a consolidated basis, they derive
50% or more of their annual revenue from either goods produced, sales made or
services performed in Central or Eastern European markets, or which have at
least 50% of their assets situated in one or more Central and Eastern European
markets; (ii) that are organized under the laws of, and with a principal office
in, a Central or Eastern European country; or (iii) the principal securities
trading market for which is in a Central or Eastern European market.
Determinations as to eligibility will be made by the Fund's Adviser based on
publicly available information and inquiries made to the companies. The Fund
considers Central Europe to be the area north of Italy and the former
Yugoslavia, west of Romania and the former Soviet Union, east of Switzerland and
Germany and south of the Baltic Sea. The Fund considers Eastern Europe to be
currently comprised of, but not limited to, the countries of the former Warsaw
Pact and the European successor states of the former Soviet Union. Investment
companies that invest principally in securities of Central or Eastern European
companies will also be considered to be Central or Eastern European companies,
as will American Depositary Receipts and Global Depositary Receipts with respect
to those securities. By investing in shares of investment companies that invest
in Central and Eastern Europe, the Fund will indirectly pay a portion of the
operating expenses, management expenses and brokerage costs of such companies.
General Investment Strategies
Options, Futures and Currency Exchange Transactions
Securities Options. Each Fund may write covered put and call
options on stock and debt securities and may purchase covered put and call
options that are traded on foreign and U.S. exchanges, as well as
over-the-counter ("OTC").
Each Fund will realize 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 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
2
<PAGE> 15
transaction can be effected). A Fund that writes call options retains the risk
of a decline in the price of the underlying security. The size of the premiums
that a Fund may receive may be adversely affected as new or existing
institutions, including other investment companies, engage in or increase their
option-writing activities.
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 fall, the put writer would expect to suffer a
loss. This loss should be less than the loss from purchasing the underlying
instrument directly, however, because the premium received for writing the
option should mitigate the effects of the decline.
In the case of options written by a Fund that are deemed covered by
virtue of a Fund's holding convertible or exchangeable preferred stock or debt
securities, the time required to convert or exchange and obtain physical
delivery of the underlying common stock with respect to which a Fund has written
options may exceed the time within which a Fund must make delivery in accordance
with an exercise notice. In these instances, a Fund may purchase or temporarily
borrow the underlying securities for purposes of physical delivery. By so doing,
a Fund will not bear any market risk, since a 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 a 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, a Fund
will compensate for the decline in the value of the cover by purchasing an
appropriate additional amount of mortgage-backed securities.
Options written by a Fund will normally have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. Each Fund may write (i) in-the-money call
options when a Fund's Adviser 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 the Adviser expects that the price of the
underlying security will remain flat or advance moderately during the option
3
<PAGE> 16
period and (iii) out-of-the-money call options when the Adviser expects that the
premiums received from writing the call option plus the appreciation in market
price of the underlying security up to the exercise price will be greater than
the appreciation in the price of the underlying security alone. In any of the
preceding situations, if the market price of the underlying security declines
and the security is sold at this lower price, the amount of any realized loss
will be offset wholly or in part by the premium received. Out-of-the-money,
at-the-money and in-the-money put options (the reverse of call options as to the
relation of exercise price to market price) may be used in the same market
environments that such call options are used in equivalent transactions. To
secure its obligation to deliver the underlying security when it writes a call
option, each Fund will be required to deposit in escrow the underlying security
or other assets in accordance with the rules of the Options Clearing Corporation
(the "Clearing Corporation") and of the securities exchange on which the option
is written.
Prior to their expirations, put and call options may be sold in
closing sale or purchase transactions (sales or purchases by a Fund prior to the
exercise of options that it has purchased or written, respectively, of options
of the same series) in which a Fund may realize a profit or loss from the sale.
An option position may be closed out only where there exists a secondary market
for an option of the same series on a recognized securities exchange or in the
OTC market. When a Fund has purchased an option and engages in a closing sale
transaction, whether a 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 a Fund initially paid for the original option plus the related
transaction costs. Similarly, in cases where a Fund has written an option, it
will realize a profit if the cost of the closing purchase transaction is less
than the premium received upon writing the original option and will incur a loss
if the cost of the closing purchase transaction exceeds the premium received
upon writing the original option. A Fund may engage in a closing purchase
transaction to realize a profit, to prevent an underlying security with respect
to which it has written an option from being called or put or, in the case of a
call option, to unfreeze an underlying security (thereby permitting its sale or
the writing of a new option on the security prior to the outstanding option's
expiration). The obligation of a Fund under an option it has written would be
terminated by a closing purchase transaction, but 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, a Fund may be assigned an exercise
notice by the broker-dealer through which the option was sold, requiring a 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.
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<PAGE> 17
There is no assurance that sufficient trading interest will exist to
create a liquid secondary market on a securities exchange for any particular
option or at any particular time, and for some options, no such secondary market
may exist. A liquid secondary market in an option may cease to exist for a
variety of reasons. In the past, for example, higher than anticipated trading
activity or order flow or other unforeseen events have at times rendered certain
of the facilities of the Clearing Corporation and various securities exchanges
inadequate and resulted in the institution of special procedures, such as
trading rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that similar
events, or events that may otherwise interfere with the timely execution of
customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. Moreover, a Fund's ability to
terminate options positions established in the OTC market may be more limited
than for exchange-traded options and may also involve the risk that securities
dealers participating in OTC transactions would fail to meet their obligations
to the Fund. Each Fund, however, intends to purchase OTC options only from
dealers whose debt securities, as determined by its Adviser are considered to be
investment grade. If, as a covered call option writer, a 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 and could face higher transaction costs, including brokerage
commissions.
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class which may be held
or written, or exercised within certain time periods by an investor or group of
investors acting in concert (regardless of whether the options are written on
the same or different securities exchanges or are held, written or exercised in
one or more accounts or through one or more brokers). It is possible that the
Funds and other clients of their Advisers and certain of their 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 Funds will
be able to purchase on a particular security.
Securities Index Options. Each Fund may purchase and write
exchange-listed and OTC put and call options on securities indexes. A securities
index measures the movement of a certain group of securities by assigning
relative values to the securities included in the index, fluctuating with
changes in the market values of the securities included in the index. Some
securities index options are based on a broad market index, such as the NYSE
Composite Index, or a narrower market index such as the Standard & Poor's 100.
Indexes may also be based on a particular industry or market segment.
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<PAGE> 18
Options on securities indexes are similar to options on securities
except that (i) the expiration cycles of securities index options are monthly,
while those of securities options are currently quarterly, and (ii) the delivery
requirements are different. Instead of giving the right to take or make delivery
of securities at a specified price, an option on a securities index gives the
holder the right to receive a cash "exercise settlement amount" equal to (a) the
amount, if any, by which the fixed exercise price of the option exceeds (in the
case of a put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (b) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the securities index upon which the option is based being greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
index and the exercise price of the option times a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Securities index options may be offset by entering into
closing transactions as described above for securities options.
OTC Options. Each Fund may purchase OTC or dealer options or sell
covered OTC options. Unlike exchange-listed options where an intermediary or
clearing corporation, such as the Clearing Corporation, assures that all
transactions in such options are properly executed, the responsibility for
performing all transactions with respect to OTC options rests solely with the
writer and the holder of those options. A listed call option writer, for
example, is obligated to deliver the underlying securities to the clearing
organization if the option is exercised, and the clearing organization is then
obligated to pay the writer the exercise price of 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, a 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 a Fund originally wrote the option. Although each Fund will seek to
enter into dealer options only with dealers who will agree to and that are
expected to be capable of entering into closing transactions with a Fund, there
can be no assurance that a Fund will be able to liquidate a dealer option at a
favorable price at any time prior to expiration. The inability to enter into a
closing transaction may result in material losses to a Fund. Until a Fund, as a
covered OTC call option writer, is able to effect a closing purchase
transaction, it will not be able to liquidate securities (or other assets) used
to cover the written option until the
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<PAGE> 19
option expires or is exercised. This requirement may impair a Fund's ability to
sell portfolio securities or, with respect to currency options, currencies at a
time when such sale might be advantageous.
Futures Activities. Each Fund may enter into foreign currency,
interest rate and securities index futures contracts and purchase and write
(sell) related options traded on exchanges designated by the Commodity Futures
Trading Commission (the "CFTC") or consistent with CFTC regulations on foreign
exchanges. These futures contracts are standardized contracts for the future
delivery of 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 multiple times the change in the index.
An option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract. These transactions may
be entered into for "bona fide hedging" purposes as defined in CFTC regulations
and other permissible purposes including hedging against changes in the value of
portfolio securities due to anticipated changes in currency values, interest
rates and/or market conditions and increasing return.
No Fund will enter into futures contracts and related options for
which the aggregate initial margin and premiums (discussed below) required to
establish positions other than those considered to be "bona fide hedging" by the
CFTC exceed 5% of a Fund's net asset value after taking into account unrealized
profits and unrealized losses on any such contracts it has entered into. Each
Fund reserves the right to engage in transactions involving futures contracts
and options on futures contracts to the extent allowed by CFTC regulations in
effect from time to time and in accordance with a Fund's policies. There is no
overall limit on the percentage of a Fund's assets that may be at risk with
respect to futures activities.
The OTC market in forward foreign currency exchange contracts offers
less protection against defaults by the other party to such instruments than is
available for currency instruments traded on an exchange. Such contracts are
subject to the risk that the counterparty to the contract will default on its
obligations. Since these contracts are not guaranteed by an exchange or
clearinghouse, a default on the contract would deprive a Fund of unrealized
profits, transaction costs or the benefits of a currency hedge or force a Fund
to cover its purchase or sale commitments, if any, at the current market price.
Currency exchange rates may fluctuate significantly over short periods of time.
They generally are determined by the forces of supply and demand in the foreign
exchange markets and the relative merits of investments in different countries,
actual or perceived changes in interest rates and other complex factors as seen
from an international perspective. Currency exchange rates also can be affected
unpredictably by intervention by U.S. or foreign governments or central banks,
or the failure to
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<PAGE> 20
intervene, or by currency controls or political developments in the U.S. or
abroad.
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 listed represented in
the indexes. A securities index futures contract is an agreement to be settled
by delivery of an amount of cash equal to a specified multiplier times the
difference between the value of the index at the close of the last trading day
on the contract and the price at which the agreement is made.
No consideration is paid or received by a Fund upon entering into a
futures contract. Instead, a Fund is required to deposit in a segregated account
with its custodian an amount of cash or liquid securities acceptable to the
broker, equal to approximately 1% to 10% of the contract amount (this amount is
subject to change by the exchange on which the contract is traded, and brokers
may charge a higher amount). This amount is known as "initial margin" and is in
the nature of a performance bond or good faith deposit on the contract which is
returned to a Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. The broker will have access to
amounts in the margin account if a Fund fails to meet its contractual
obligations. Subsequent payments, known as "variation margin," to and from the
broker, will be made daily as the currency, financial instrument or securities
index underlying the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"marking-to-market." A Fund will also incur brokerage costs in connection with
entering into futures transactions.
At any time prior to the expiration of a futures contract, a Fund
may elect to close the position by taking an opposite position, which will
operate to terminate a Fund's existing position in the contract. Positions in
futures contracts and options on futures contracts (described below) may be
closed out only on the exchange on which they were entered into (or through a
linked exchange). No secondary market for such contracts exists. Although each
Fund intends to enter into futures contracts only if there is an active market
for such contracts, there is no assurance that an active market will exist at
any particular time. Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the day. It is possible that futures contract
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<PAGE> 21
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. Each Fund may purchase and write put
and call options on foreign currency, interest rate and stock index futures
contracts and may enter into closing transactions with respect to such options
to terminate existing positions. There is no guarantee that such closing
transactions can be effected; the ability to establish and close out positions
on such options will be subject to the existence of a liquid market.
An option on a currency, interest rate or securities index futures
contract, as contrasted with the direct investment in such a contract, gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract at a specified exercise price at any time prior to the
expiration date of the option. The writer of the option is required upon
exercise to assume an offsetting futures position (a short position if the
option is a call and a long position if the option is a put). Upon exercise of
an option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
futures contract. The potential loss related to the purchase of an option on a
futures contract is limited to the premium paid for the option (plus transaction
costs). Because the value of the option is fixed at the point of sale, there are
no daily cash payments by the purchaser to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of a Fund.
Currency Exchange Transactions. The value in U.S. dollars of the
assets of a Fund that are invested in foreign securities may be affected
favorably or unfavorably by a variety of factors not applicable to investment in
U.S. securities, and a Fund may incur costs in connection with conversion
between various currencies. Currency exchange transactions may be from any
non-U.S. currency into U.S. dollars or into other appropriate currencies. Each
Fund will conduct its currency exchange transactions (i) on a spot (i.e., cash)
basis at the rate
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<PAGE> 22
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.
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, a Fund, at the time of execution of the offsetting
transaction, will incur a gain or a loss to the extent that movement has
occurred in forward contract prices.
Currency Options. Each Fund may purchase exchange-traded put and
call options on foreign currencies. Put options convey the right to sell the
underlying currency at a price which is anticipated to be higher than the spot
price of the currency at the time the option is exercised. Call options convey
the right to buy the underlying currency at a price which is expected to be
lower than the spot price of the currency at the time the option is exercised.
Currency Hedging. Each Fund's currency hedging will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward currency with respect to
specific receivables or payables of a Fund generally accruing in connection with
the purchase or sale of its portfolio securities. Position hedging is the sale
of forward currency with respect to portfolio security positions. No Fund may
position hedge to an extent greater than the aggregate market value (at the time
of entering into the hedge) of the hedged securities.
A decline in the U.S. dollar value of a foreign currency in which a
Fund's securities are denominated will reduce the U.S. dollar value of the
securities, even if their value in the foreign currency remains constant. The
use of currency hedges does not eliminate fluctuations in the underlying prices
of the securities, but it does establish a rate of exchange that can be achieved
in the future. For example, in order to protect against diminutions in the U.S.
dollar value of non-dollar
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<PAGE> 23
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 a Fund's investments denominated in that
currency. A currency hedge, for example, should protect a bond denominated in a
foreign currency against a decline in the particular currency, 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 and equity interests of 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 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
11
<PAGE> 24
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
Each 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, the Adviser 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, each Fund may enter into these
transactions as hedges to reduce investment risk, generally by making an
investment expected to move in the opposite direction of a portfolio position. A
hedge is designed to offset a loss in a portfolio position with a gain in the
hedged position; at the same time, however, a properly correlated hedge will
result in a gain in the portfolio position being offset by a loss in the hedged
position. As a result, the use of options, futures, contracts and currency
exchange transactions for hedging purposes could limit any potential gain from
an increase in the value of the position hedged. In addition, the movement in
the portfolio position hedged may not be of the same magnitude as movement in
the hedge. With respect to futures contracts, since the value of portfolio
securities will far exceed the value of the futures contracts sold by a Fund, an
increase in the value of the futures contracts could only mitigate, but not
totally offset, the decline in the value of a 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
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<PAGE> 25
effort to compensate for imperfect correlation of relative movements in the
hedged position and the hedge, a Fund's hedge positions may be in a greater or
lesser dollar amount than the dollar amount of the hedged position. Such "over
hedging" or "under hedging" may adversely affect 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 the securities index and movements in
the price of securities index futures, a correct forecast of general market
trends by each Fund's Adviser still may not result in a successful hedging
transaction.
Each Fund will engage in hedging transactions only when deemed
advisable by its Adviser, and successful use by a Fund of hedging transactions
will be subject to its Adviser's ability to predict trends in currency, interest
rate or securities markets, as the case may be, and to predict correctly
movements in the directions of the hedge and the hedged position and the
correlation between them, which predictions could prove to be inaccurate. This
requires different skills and techniques than predicting changes in the price of
individual securities, and there can be no assurance that the use of these
strategies will be successful. Even a well-conceived hedge may be unsuccessful
to some degree because of unexpected market behavior or trends. Losses incurred
in hedging transactions and the costs of these transactions will affect a Fund's
performance.
Asset Coverage for Forward Contracts, Options, Futures and Options
on Futures. Each Fund will comply with guidelines established by the U.S.
Securities and Exchange Commission (the "SEC") and other applicable regulatory
bodies with respect to coverage of forward currency contracts; options written
by a Fund on currencies, securities, if applicable, and indexes; and currency,
interest rate and index futures contracts and options on these futures
contracts. These guidelines may, in certain instances, require segregation by a
Fund of cash or liquid securities.
For example, a call option written by a Fund on securities may
require a 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
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<PAGE> 26
may require a 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 a 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 a Fund. If a
Fund holds a futures or forward contract, a Fund could purchase a put option on
the same futures or forward contract with a strike price as high or higher than
the price of the contract held. A Fund may enter into fully or partially
offsetting transactions so that its net position, coupled with any segregated
assets (equal to any remaining obligation), equals its net obligation. Asset
coverage may be achieved by other means when consistent with applicable
regulatory policies.
Additional Information on Other Investment Practices
Foreign Investments.
Investors should recognize that investing in foreign companies,
whether in emerging or more developed countries, involves certain risks,
including those discussed below, which are in addition to those associated with
investing in U.S. issuers. These risks include currency exchange rates and
exchange control regulations, less publicly available information, different
accounting and reporting standards, less liquid markets, more volatile markets,
higher brokerage commissions and other fees, possibility of nationalization or
expropriation, confiscatory taxation, political instability, and less protection
provided by the judicial system.
Foreign Currency Exchange. Since the Funds will invest in securities
denominated in currencies other than the U.S. dollar, and since the Funds may
temporarily hold funds in bank deposits or other money market investments
denominated in foreign currencies, the Funds may be affected favorably or
unfavorably by exchange control regulations or changes in the exchange rate
between such currencies and the dollar. A change in the value of a foreign
currency relative to the U.S. dollar will result in a corresponding change in
the dollar value of the Funds' 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 the Funds. Unless otherwise contracted, the rate of exchange
between the U.S. dollar and other currencies is determined by the forces of
supply and demand in the foreign exchange markets. Changes in the exchange rate
may result over time from the interaction of many factors directly or indirectly
affecting economic and political conditions in the United States and a
particular foreign country, including economic and political developments in
other countries. Of particular importance are rates of inflation, interest rate
levels, the balance of payments and the extent of government
14
<PAGE> 27
surpluses or deficits in the United States and the particular foreign country,
all of which are in turn sensitive to the monetary, fiscal and trade policies
pursued by the governments of the United States and foreign countries important
to international trade and finance. Governmental intervention may also play a
significant role. National governments rarely voluntarily allow their currencies
to float freely in response to economic forces. Sovereign governments use a
variety of techniques, such as intervention by a country's central bank or
imposition of regulatory controls or taxes, to affect the exchange rates of
their currencies. The Funds may use hedging techniques with the objective of
protecting against loss through the fluctuation of the value of foreign
currencies against the U.S. dollar, particularly the forward market in foreign
exchange, currency options and currency futures. See "Currency Transactions" and
"Futures Activities" above.
Euro Conversion. The Adviser believes that the planned introduction
of a single European currency, the euro, on January 1, 1999 for participating
European nations in the Economic and Monetary Union may create new economic
opportunities for investors, such as (i) lower interest rates; (ii)mergers and
acquisitions; (iii) corporate restructurings; (iv) share buybacks; (v) more
efficient distribution and product packaging; and (vi) greater competition. The
introduction of the euro, however, also presents unique risks and uncertainties
for investors in those countries, including (i) whether the payment and
operational systems of banks and other financial institutions will be ready by
the scheduled launch date; (ii) the creation of suitable clearing and settlement
payment schemes for the euro; (iii) the legal treatment of outstanding financial
contracts after January 1, 1999 that refer to existing currencies rather than
the euro; (iv) 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 (v) 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 and 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
before or after the introduction of the euro and could adversely affect the
value of European securities and currencies held by the Funds.
Information. The majority of the securities held by the Funds will
not be registered with, nor will the issuers thereof be subject to reporting
requirements of the SEC. Accordingly, there may be less publicly available
information about the securities and about the foreign company or government
issuing them than is available about a domestic company or government entity.
Foreign companies are generally not subject to uniform financial reporting
standards, practices and requirements comparable to those applicable to U.S.
companies.
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Political Instability. With respect to some foreign countries, there
is the possibility of expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Funds, political or social instability,
or domestic developments which could affect U.S.
investments in those and neighboring countries.
Emerging Markets. Investing in securities of issuers located in
"emerging markets" (less developed countries located outside of the U.S.)
involves not only the risks described above with respect to investing in foreign
securities, but also other risks, including exposure to economic structures that
are generally less diverse and mature than, and to political systems that can be
expected to have less stability than, those of developed countries. For example,
many investments in emerging markets experienced significant declines in value
due to political and currency volatility in emerging markets countries during
the latter part of 1997 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 for securities of issuers located in emerging markets
and the possibility of a low or nonexistent volume of trading in those
securities may also result in a lack of liquidity and in price volatility of
those securities.
Delays. 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. Due to the increased
exposure of the Funds to market and foreign exchange fluctuations brought about
by such delays, and due to the corresponding negative impact on the Funds'
liquidity, the Funds will take reasonable steps to mitigate investing in
countries which are known to experience settlement delays which may expose the
Funds to unreasonable risk of loss.
Increased Expenses. The operating expenses of the Funds can be
expected to be higher than that of an investment company investing exclusively
in U.S. securities, since the expenses of the Funds, such as custodial costs,
valuation costs and communication costs, as well as the rate of the investment
advisory fees, though similar to such expenses of some other international
funds, are higher than those costs incurred by other investment companies not
investing in foreign securities.
Foreign Debt Securities. Each Fund may invest in debt securities
(other than money market obligations) and preferred stocks that are not
convertible into common stock for the purpose of seeking capital appreciation.
Each Fund's holdings of debt securities will be considered investment grade at
the time of purchase, except that each Fund may purchase a certain amount of
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below investment grade securities (see "Below Investment Grade Securities"). A
security will be deemed to be investment grade if it is rated within the four
highest grades by Moody's Investors Service, Inc. ("Moody's") or Standard &
Poor's Ratings Service ("S&P") or, if unrated, is determined to be of comparable
quality by a Fund's Adviser. 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.
General. Individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency, and
balance of payments positions. The Funds may invest in securities of foreign
governments (or agencies or instrumentalities thereof), and many, if not all, of
the foregoing considerations apply to such investments as well.
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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 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 the Adviser 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
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<PAGE> 31
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 its Adviser, such
securities have the potential for future income or capital appreciation.
Privatizations. Each Fund may invest in privatizations (i.e.
foreign government programs of selling interests in government-owned or
controlled enterprises). The ability of U.S. entities, such as the Funds, to
participate in privatizations may be limited by local law, or the terms for
participation may be less advantageous than for local investors. There can
be no assurance that privatization programs will be available or successful.
Central and Eastern European Countries. Both Funds will be exposed
to the risks of investing in Central and Eastern Europe although to a different
extent. The risks normally associated with investing in foreign securities are
increased in Central and Eastern European countries due to the infancy of
political and economic structures. As noted in the Prospectus, the Funds may
invest in Russia, a country facing serious economic and political issues and
whose stock markets have experienced extreme volatility and illiquidity in
recent months. Many of these countries lack the political and economic stability
characteristic of more developed countries, and political or social developments
may adversely affect the value of a Fund's investment in a material way. The
small size and inexperience of the securities markets and the limited volume of
trading in such securities may make a Fund's investments illiquid and more
volatile than investments in more developed countries. There may be little
financial or accounting information available with respect to companies located
in certain Central and Eastern European countries and it may be difficult to
assess the value of an investment in such companies. These securities markets
are substantially smaller, less liquid and significantly more volatile than U.S.
or Western European markets. As a result, obtaining prices on portfolio
securities from independent sources may be more difficult. These factors may
make it more difficult
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<PAGE> 32
for a Fund to calculate an accurate net asset value on a daily basis and to
respond to significant shareholder redemptions.
The value of a Fund's assets may be materially adversely affected by
political, economic, and social factors, changes in the law or regulations of
Central and Eastern European countries and the status of political and economic
foreign relations of Central and Eastern European countries. Communist factions
continue to play a role in the political structure of some of these countries
and there is also speculation that organized crime exerts significant influence
on certain countries in this region. Developments in the region may also affect
the value of a Fund's assets. Actions of Central and Eastern European
governments could significantly adversely affect private sector companies and
the Funds, market conditions, and prices and yields of securities in each Fund's
portfolio. Despite privatization programs that have been implemented, the
governments of Central and Eastern European countries have exercised and
continue to exercise significant influence over many aspects of the local
economies, and the number of public sector enterprises in Central and Eastern
Europe is substantial. New governments and new economic policies may also have
an unpredictable adverse impact on Central and Eastern European economies and,
consequently, on a Fund's investments.
Many of the countries in Central and Eastern Europe experienced
extremely high rates of inflation, particularly in the early 1990s when central
planning was first being replaced by the capitalist free market system. As a
result, the exchange rates of such countries experienced significant
depreciation relative to the U.S. dollar. The possibility of significant loss
arising from foreign currency depreciation or devaluation must be considered as
a serious risk. Although Central and Eastern European governments are currently
implementing reforms directed at political and economic liberalization, there is
no assurance that these reforms will continue or, if continued, will be
successful.
The economies of Central and Eastern European countries are heavily
dependent on the manufacturing sector, and adverse developments affecting this
sector in a particular country could adversely affect the economy as a whole.
Labor unrest resulting from economic instability in the region could adversely
affect the profitability and success of businesses in this and other sectors. In
addition, these economies generally are heavily dependent upon international
trade and have been and may continue to be adversely affected by trade barriers
and other protectionist measures, exchange controls and relative currency
values. These economies may also be adversely affected by economic or political
developments in or controversies with neighboring countries and major trading
partners. The economies of certain Central and Eastern European countries are
heavily dependent on oil and gas imported from Russia via pipelines through the
Ukraine and the Slovak Republic. Political or economic turmoil in any one of
these nations could result in an energy crisis that could affect the economic
stability of certain
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<PAGE> 33
Central and Eastern European countries, and consequently adversely affect the
Funds. Political or economic turmoil in nearby regions could also lead to an
influx of refugees to one or more Central or Eastern European countries with
adverse economic and political effects on such countries.
Investments in Central and Eastern European countries may include
the securities of both large and small companies. Small companies may offer
greater opportunities for capital appreciation than larger companies, but these
investments may involve certain special risks. Small companies may have limited
product lines, markets, or financial resources and may be dependent on a limited
management group. Securities issued by small companies may trade less frequently
and in smaller volume than more widely held securities issued by large
companies. Also, the values of securities issued by small companies may
fluctuate more sharply than those issued by larger companies, and a Fund may
experience some difficulty in establishing or closing out positions in small
company securities at prevailing prices.
Central and Eastern European countries may be subject to a greater
amount of social, political and economic instability resulting from
extra-constitutional changes or attempted changes in government, popular unrest
and hostile relations with neighboring countries or territories. Investments in
Central and Eastern Europe could also be adversely affected by developments in
other emerging markets, such as Asia or Latin America.
Some Central and Eastern European countries, especially Russia, have
substantial external debt. Although, some countries have entered into debt
restructuring agreements with foreign creditors and some are negotiating the
rescheduling of their debt, there can be no assurance that such negotiations
will succeed. In many cases, it may be necessary to adopt economic policies to
facilitate debt service requirements (such as taking steps to control inflation)
and these measures may lead to periods of lower economic growth. Central and
Eastern European countries have been characterized by declining real gross
domestic product, high inflation, rising unemployment and declining personal
income (in real terms). Countries in this region lack a developed
infrastructure, telecommunications generally are poor and banks and financial
systems are not well developed. There is also a limited supply of domestic
savings in the region and businesses can experience difficulty in obtaining
working capital.
Many Central and Eastern European currencies are not fully
convertible. Some currencies have depreciated in value substantially against the
U.S. dollar and could depreciate further in the future. Since the net asset
value of each Fund will be calculated and reported in U.S. dollars, depreciation
in these currencies could adversely impact a Fund's performance.
Changes in local exchange control regulations, tax laws,
withholding taxes and economic or monetary policies may also affect the value of
an investment in the Funds, and may give
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rise to a capital gains tax liability on a Fund's investment gains. The tax laws
and regulations are not well drafted and are difficult to comply with, and a
company may incur substantial penalties despite using all reasonable efforts to
ensure compliance. The tax laws and regulations may be given retroactive effect
which could result in additional taxes that are not taken into account when
calculating a Fund's net asset value. The system of taxation in certain Central
and Eastern European countries may deter investment and hinder financial
stability by concentrating on the taxation of industry with relatively little
emphasis on individual taxation. Finally, accounting standards do not generally
correspond to generally accepted accounting principles or accepted international
accounting standards, and a Fund may have access to less financial information
on investments than would normally be the case in more sophisticated markets.
Many Central and Eastern European businesses do not have established
histories of operating within a market-oriented economy. These businesses
generally lack experience operating in the free market environment, modern
technology and a sufficient capital base with which to develop and expand
operations. Many of these countries are in need of restructuring their
industries to, among other things, close out-dated facilities and increase
investment in technology and management.
The securities in which a Fund may invest may not be listed or
traded on any securities market for the foreseeable future and, in some cases,
may not be registered for resale under the securities laws of any country. There
may be significant disparities between the prices paid for securities in private
transactions and the prices at which the same securities trade on an exchange or
in an OTC market. These factors may limit a Fund's ability to obtain accurate
market quotations for purposes of valuing its portfolio securities and
calculating its net asset value. Although, many Central and Eastern European
countries are developing stock exchanges and formulating rules and regulations,
it is unlikely that these stock exchanges will, in the foreseeable future, offer
the liquidity available in western securities markets. Accordingly, there may be
no readily available market for the timely liquidation of investments made by a
Fund, particularly in periods when the relevant market is declining.
The lack of environmental controls in Central and Eastern Europe has
led to widespread pollution and the legislative framework for environmental
liability and the extent of any exposure of businesses to the costs of pollution
clean-up have not been fully established. The extent of responsibility, if any,
for pollution-related liabilities of any business may not be determinable at the
time a Fund is considering an investment. Environmental liability could have a
significant adverse effect on the performance of companies in which a Fund
invests.
Legislative change in Central and Eastern Europe has been rapid, but
it is difficult to anticipate the impact of
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<PAGE> 35
legislative reforms on the companies in which a Fund will invest. Although there
appears to be political support for legislative change to a market economy, it
is not certain that legislation when enacted will advance this objective or that
this support will continue. It will be more difficult for a Fund to obtain
effective redress or enforcement of its rights in certain Central and Eastern
European countries than in western jurisdictions. Also, the judicial and civil
procedure system in this region has not been modernized to a material extent and
many courts lack experience in commercial dispute resolution. Further, many of
the procedural remedies for enforcement and the protection of legal rights
typically found in western jurisdictions are not available in Central and
Eastern Europe.
Employment and labor legislation can be pro-employee, particularly
in matters such as termination of employment, maternity benefits, overtime
restrictions and trade union participation. Laws regulating ownership, control
and corporate governance of companies as well as protection of minority
shareholders have been adopted recently and have virtually never been tested in
the courts. The judicial systems have very limited experience with the
adjudication of securities claims and corporate disputes. Consequently, it may
be more difficult for a Fund to obtain a judgment in a court outside the U.S. to
the extent that there is a default with respect to a security of a Central or
Eastern European issuer or a Fund has any other claim against such an issuer.
Disclosure and reporting requirements are minimal and anti-fraud and
insider trading legislation is generally rudimentary. Due to the newness of
Central and Eastern European securities markets, there is a low level of
monitoring and regulation of the markets and the activities of investors in such
markets, and there has been no or very limited enforcement to date of existing
regulations. The concept of fiduciary duties on the part of management or
directors to their companies as a whole is undeveloped. The regulatory
requirements for participants in the securities markets in the region as well as
the structure of relevant regulatory authorities are subject to constant change.
This may result in challenges to the validity of any license, permission,
consent or registration which is required in the particular country and which
were originally obtained in compliance with the laws.
Foreign investment in the securities of Central and Eastern European
companies is restricted and controlled to varying degrees. These restrictions or
controls may limit or preclude foreign investment in certain cases, may require
government approval prior to foreign investment, or may give preferential
treatment to nationals over foreign investors. Issuers in certain Central and
Eastern Europe countries are allowed by law to restrict the rights of foreign
investors to participate in the subscription of securities. This may result in
the disenfranchisement of foreign investors in respect of their rights to
participate in bonus issues, rights and issues or other corporate actions. This
may result in dilution of holdings
23
<PAGE> 36
and loss of voting power. A high proportion of the shares of many Central and
Eastern European companies are held by a limited number of investment funds and
other institutional investors, which may limit the number of shares available
for investment by the Funds. In addition, minority shareholders in companies,
such as the Funds, have limited rights against actions taken by controlling
parties, and those actions may adversely affect the value of a Fund's holdings.
A limited number of issuers represents a disproportionately large percentage of
market capitalization and trading value.
The prices at which a Fund may acquire investments may be affected
by the market's anticipation of a Fund's investing. In addition, trading on
material non-public information and securities transactions by brokers in
anticipation of transactions by a Fund in particular securities may impact such
prices. These and other factors may also affect the rate at which a Fund can
initially invest its assets.
Shareholders should be aware that settlement and safe custody of
securities in Central and Eastern Europe involves certain risks and
considerations which do not normally apply in more developed countries.
Verification and perfection of legal ownership in securities also differs and
are less effective than in Western Europe. In certain countries, securities are
issued only in bearer form. In other countries, no certificates are issued and
legal ownership of shares is perfected through registration either in the share
register of the company or at a central depository, in either case by a third
party over whom a Fund may not have control. In certain countries, the market
practice is settlement against production of evidence of title in the form of
extracts from the shareholders' register. Such extracts do not in themselves
constitute securities or constitute definitive evidence of title or ownership
rights. As such, these extracts do not guarantee that title to the securities
has in fact passed. In addition, fraudulent or incorrect registration may result
in title being removed from the securities register of an issuer. Access to
securities registers may also be limited and therefore registers may be
difficult to check.
Fixed Income Securities. The value of the securities held by a Fund,
and thus the net asset value of the shares of a Fund, generally will vary
inversely in relation to changes in prevailing interest rates. Thus, if interest
rates have increased from the time a debt or other fixed income security was
purchased, such security, if sold, might be sold at a price less than its cost.
Conversely, if interest rates have declined from the time such a security was
purchased, such security, if sold, might be sold at a price greater than its
cost. Also, the value of such securities may be affected by changes in real or
perceived creditworthiness of the issuers. Thus, if creditworthiness is
enhanced, the price may rise. Conversely, if creditworthiness declines, the
price may decline. A Fund is not restricted to any maximum or minimum time to
maturity in purchasing portfolio securities, and the average maturity of a
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<PAGE> 37
Fund's assets will vary based on its Adviser's assessment of economic and market
conditions.
Below Investment Grade Securities. The European Equity Fund may
invest up to 20% of its net assets and the Central & Eastern Europe Fund may
invest up to 35% of its net assets in below investment grade securities
(securities that are rated below the fourth highest grade at the time of
purchase by Moody's or S&P, or, if unrated, deemed by the Adviser to be of
comparable quality). 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 a sale of such securities by a Fund, although its Adviser will
consider such event in its determination of whether a Fund should continue to
hold the securities. The widespread expansion of government, consumer and
corporate debt within the economy has made the corporate sector, especially
cyclically sensitive industries, more vulnerable to economic downturns or
increased interest rates. Because lower-rated securities involve issuers with
weaker credit fundamentals (such as debt-to-equity ratios, interest charge
coverage, earnings history and the like), an economic downturn, or increases in
interest rates, could severely disrupt the market for lower-rated securities and
adversely affect the value of outstanding securities and the ability of the
issuers to repay principal and interest.
The market values of below investment grade securities and unrated
securities of comparable quality tend to react less to fluctuations in interest
rate levels than do those of investment grade securities and the market values
of certain of these securities also tend to be more sensitive to individual
corporate developments and changes in economic conditions than below investment
grade securities. In addition, these securities generally present a higher
degree of credit risk. Issuers of these securities are often highly leveraged
and may not have more traditional methods of financing available to them so that
their ability to service their obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. The risk of loss due
to default by such issuers is significantly greater because below investment
grade securities generally are unsecured and frequently are subordinated to
prior payment of senior indebtedness. If the issuer of a security owned by a
Fund defaulted, a Fund could incur additional expenses in seeking recovery with
no guarantee of recovery. Also, a 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. Lower-rated securities also present risks based on payment
expectations. For example, lower-rated securities may contain redemption or call
provisions. If an issuer exercises these provisions in a declining interest rate
market, a Fund would have to replace the security with a lower yielding
security, resulting in a decreased return for investors.
The Funds may have difficulty disposing of certain of these
securities because there may be a thin trading market.
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<PAGE> 38
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 investment grade securities. The lack of a liquid
secondary market, as well as adverse publicity and investor perception with
respect to these securities, may have an adverse impact on market price and a
Fund's ability to dispose of particular issues when necessary to meet liquidity
needs or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. The lack of a liquid secondary market for
certain securities also may make it more difficult for the Funds to obtain
accurate market quotations for purposes of valuing the Funds and calculating net
asset value.
The market value of securities rated below investment grade is more
volatile than that of investment grade securities. Factors adversely impacting
the market value of these securities will adversely impact a Fund's net asset
value. The Funds will rely on the judgment, analysis and experience of their
Advisers in evaluating the creditworthiness of an issuer. In this evaluation, an
Adviser will consider, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. Normally, below
investment grade securities and comparable unrated securities are not intended
for short-term investment. The Funds may incur additional expenses to the extent
it is required to seek recovery upon a default in the payment of principal or
interest on its portfolio holdings of such securities. At times, adverse
publicity regarding lower-rated securities has depressed the prices for such
securities to some extent.
Securities of Other Investment Companies. The Funds may invest in
securities of other investment companies to the extent permitted under the
Investment Company Act of 1940, as amended (the "1940 Act"). Presently, under
the 1940 Act, each 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 each Fund's total assets and
(iii) when added to all other investment company securities held by each Fund,
do not exceed 10% of the value of a Fund's total assets.
Lending of Portfolio Securities. The Funds may lend portfolio
securities to brokers, dealers and other financial organizations that meet
capital and other credit requirements or other criteria established by each
Fund's Board of Directors (the "Board"). These loans, if and when made, may not
exceed 50% of the value of the Fund's total assets immediately before such
loans. No Fund will lend portfolio securities to affiliates of CSAM or CSAM Ltd.
unless it has applied for and received specific authority to do so from the SEC.
Loans of portfolio securities will be collateralized by cash, letters of credit
or U.S.
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government securities, which are maintained at all times in an amount equal to
at least 102% of the current market value of loaned U.S. securities and at least
105% of the current market value of loaned non-U.S. 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 Funds. From time to time, the Funds 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 Funds and that is acting as a "finder."
By lending its securities, each Fund can increase its income by
continuing to receive interest and any dividends on the loaned securities as
well as by either investing the collateral received for securities loaned in
short-term instruments or obtaining yield in the form of interest paid by the
borrower when U.S. government securities are used as collateral. Each Fund will
adhere to the following conditions whenever its portfolio securities are loaned:
(i) each Fund must receive cash collateral or equivalent securities of the type
discussed in the preceding paragraph from the borrower; (ii) the borrower must
increase such collateral whenever the market value of the securities rises above
the level of such collateral; (iii) each Fund must be able to terminate the loan
at any time; (iv) each 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) each 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.
When-Issued Securities, Delayed-Delivery Transactions and Forward
Commitments. Each Fund may utilize up to 20% of its total assets to purchase
securities on a "when-issued" basis, for delayed delivery (i.e., payment or
delivery occur beyond the normal settlement date at a stated price and yield) or
on a forward commitment basis. Each Fund does not intend to engage in these
transactions for speculative purposes, but only in furtherance of its investment
objectives. These transactions occur when securities are purchased or sold by a
Fund with payment and delivery taking place in the future to secure what is
considered an advantageous yield and price to a Fund at the time of entering
into the transaction. The payment obligation and the interest rate that will be
received on when-issued securities are fixed at the time the buyer enters into
the commitment. Due to fluctuations in the value of securities purchased or sold
on a when-issued, delayed-delivery basis or forward commitment basis, the prices
obtained on such securities may be higher or lower than the prices available in
the market on the dates when the investments are actually delivered to the
buyers.
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When a Fund agrees to purchase when-issued, delayed-delivery
securities or securities on a forward commitment basis, its custodian will set
aside cash or liquid securities equal to the amount of the commitment in a
segregated account. Normally, the custodian will set aside portfolio securities
to satisfy a purchase commitment, and in such a case 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 a Fund's
commitment. The assets contained in the segregated account will be
marked-to-market daily. 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, delayed-delivery or forward commitment 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.
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 "Brady Plan"). 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.
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 payments on these Brady Bonds generally are collateralized by
cash or securities in an 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").
Repurchase Agreements. Each Fund may agree to purchase securities
from a bank or recognized securities dealer and simultaneously commit to resell
the securities to the bank or dealer at an agreed-upon date and price reflecting
a market rate of interest unrelated to the coupon rate or maturity of the
purchased securities ("repurchase agreements"). Such Fund would maintain custody
of the underlying securities prior to their repurchase; thus, the obligation of
the bank or dealer to pay the
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repurchase price on the date agreed to would be, in effect, secured by such
securities. If the value of such securities were less than the repurchase price,
plus interest, the other party to the agreement would be required to provide
additional collateral so that at all times the collateral is at least 102% of
the repurchase price plus accrued interest. Default by or bankruptcy of a seller
would expose a Fund to possible loss because of adverse market action, expenses
and/or delays in connection with the disposition of the underlying obligations.
The financial institutions with which a Fund may enter into repurchase
agreements will be banks and non-bank dealers of U.S. Government securities that
are listed on the Federal Reserve Bank of New York's list of reporting dealers,
if such banks and non-bank dealers are deemed creditworthy by a Fund's Adviser.
A Fund's Adviser will continue to monitor the creditworthiness of the seller
under a repurchase agreement, and will require the seller to maintain during the
term of the agreement the value of the securities subject to the agreement to
equal at least 102% of the repurchase price (including accrued interest). In
addition, a Fund's Adviser will require that the value of this collateral, after
transaction costs (including loss of interest) reasonably expected to be
incurred on a default, be equal to 102% or greater than the repurchase price
(including accrued premium) provided in the repurchase agreement or the daily
amortization of the difference between the purchase price and the repurchase
price specified in the repurchase agreement. A Fund's Adviser will
mark-to-market daily the value of the securities. There are no percentage limits
on a Fund's ability to enter into repurchase agreements. Repurchase agreements
are considered to be loans by the Fund under the 1940 Act.
Loan Participations and Assignments. Each Fund 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 the Funds' investments in Loans are expected to be in the form of
participations in Loans ("Participations") and assignments of portions of Loans
from third parties ("Assignments"). Participations typically will result in a
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, participating Funds 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. The Funds will acquire Participations only if
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the Lender interpositioned between the Funds and the borrower is determined by
the Adviser to be creditworthy. Each Fund currently anticipates that it will not
invest more than 5% of its net assets in Loan Participations and Assignments.
Convertible Securities. A convertible security is a bond, debenture,
note, preferred stock or other security that may be converted into or exchanged
for a prescribed amount of common stock of the same or a different issuer within
a particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Before conversion, convertible securities have
characteristics similar to nonconvertible debt securities in that they
ordinarily provide a stable stream of income with generally higher yields than
those of common stocks of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure but are usually
subordinated to comparable nonconvertible securities. While no securities
investment is completely without risk, investments in convertible securities
generally entail less risk than the corporation's common stock, although the
extent to which such risk is reduced depends in large measure upon the degree to
which the convertible security sells above its value as a fixed-income security.
Convertible securities have unique investment characteristics in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (2) are less subject to fluctuation in
value than the underlying stock since they have fixed-income characteristics and
(3) provide the potential for capital appreciation if the market price of the
underlying common stock increases. Most convertible securities currently are
issued by U.S. companies, although a substantial Eurodollar convertible
securities market has developed, and the markets for convertible securities
denominated in local currencies are increasing.
The value of a convertible security is a function of its "investment
value" (determined by its yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and its "conversion value" (the security's worth, at market value, if
converted into the underlying common stock). The investment value of a
convertible security is influenced by changes in interest rates, with investment
value declining as interest rates increase and increasing as interest rates
decline. The credit standing of the issuer and other factors also may have an
effect on the convertible security's investment value. The conversion value of a
convertible security is determined by the market price of the underlying common
stock. If the conversion value is low relative to the investment value, the
price of the convertible security is governed principally by its investment
value. Generally the conversion value decreases as the convertible security
approaches maturity. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly
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influenced by its conversion value. A convertible security generally will sell
at a premium over its conversion value by the extent to which investors place
value on the right to acquire the underlying common stock while holding a
fixed-income security.
A convertible security might be subject to redemption at the option
of the issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Fund is called for redemption,
the Fund will be required to permit the issuer to redeem the security, convert
it into the underlying common stock or sell it to a third party. The Funds will
invest in convertible securities without regard to their credit rating.
Structured Notes. The Funds may invest in structured notes. The
distinguishing feature of a structured note is that the amount of interest
and/or principal payable on the notes is based on the performance of a benchmark
asset or market other than fixed-income securities or interest rates. Examples
of a benchmark include stock prices, currency exchange rates and physical
commodity prices. Investing in a structured note allows a Fund to gain exposure
to the benchmark asset or market, such as investments in certain emerging
markets that restrict investment by foreigners. The structured note fixes the
maximum loss that a Fund may experience in the event that the market does not
perform as expected. The performance tie can be a straight relationship or
leveraged, although the Adviser generally will not use leverage in its
structured note strategies. Depending on the terms of the note, a Fund may
forego all or part of the interest and principal that would be payable on a
comparable conventional note; a Fund's loss cannot exceed this foregone interest
and/or principal. An investment in a structured note involves risks similar to
those associated with a direct investment in the benchmark asset. Structured
notes will be treated as illiquid securities for investment limitation purposes.
Short Sales. 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 immediately deliver the securities sold and is said to have
a short position in those securities until delivery occurs. If a Fund engages in
a short sale, the collateral for the short position will be maintained by the
Funds' custodian or qualified sub-custodian. While the short sale is open, a
Fund will maintain in a segregated account an amount of securities equal in kind
and amount to the securities sold short or securities convertible into or
exchangeable for such equivalent securities.
These securities constitute a Fund's long position.
While a short sale is made by selling a security a Fund does not
own, a short sale is "against the box" to the extent that a Fund
contemporaneously owns or has the right to obtain, at no added cost, securities
identical to those sold short. A Fund may make a short sale as a hedge when it
believes that the price of a security may decline, causing a decline in the
value of a security owned by a Fund (or a security convertible or
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exchangeable for such security). In such case, any future losses in a 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 each Fund owns. There will be
certain additional transactions costs associated with short sales against the
box, but the Funds 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 a 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 the Funds may effect short
sales.
Emerging Growth and Smaller Capitalization Companies; Unseasoned
Issuers. Investments in securities of small- and medium-sized, emerging growth
companies and companies with continuous operations of less than three years
("unseasoned issuers") involve risks that are not applicable to investing in
securities of established, larger-capitalization issuers, including reduced and
less reliable information about issuers and markets, less stringent financial
disclosure requirements, illiquidity of securities and markets, higher brokerage
commissions and fees and greater market risk in general. In addition, securities
of these companies may involve greater risks since these securities may have
limited marketability and, thus, may be more volatile. Because such companies
normally have fewer shares outstanding than larger, more established companies,
it may be more difficult for the Fund to buy or sell significant amounts of such
shares without an unfavorable impact on prevailing prices. 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. 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.
Depositary Receipts. The assets of each Fund may be invested in the
securities of foreign issuers in the form of American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and International Depositary
Receipts ("IDRs"). These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs are
receipts typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued
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by a foreign corporation. EDRs, which are sometimes referred to as Continental
Depositary Receipts, are receipts issued in Europe, and IDRs, which are
sometimes referred to as Global Depositary Receipts, are issued outside the
United States. EDRs and IDRs are typically issued by non-U.S. banks and trust
companies and evidence ownership of either foreign or domestic securities.
Generally, ADRs in registered form are designed for use in U.S. securities
markets and EDRs and IDRs in bearer form are designed for use in European and
non-U.S. securities markets, respectively.
Temporary Investments. The short-term and medium-term debt
securities in which each Fund may invest for temporary defensive purposes
consist of: (a) obligations of the United States or foreign governments, their
respective agencies or instrumentalities; (b) bank deposits and bank obligations
(including certificates of deposit, time deposits and bankers' acceptances) of
U.S. or foreign banks denominated in any currency; (c) floating rate securities
and other instruments denominated in any currency issued by international
development agencies; (d) finance company and corporate commercial paper and
other short-term corporate debt obligations of U.S. and foreign corporations;
and (e) repurchase agreements with banks and broker-dealers with respect to such
securities.
Rights Offerings and Purchase Warrants. Each Fund may invest up to
15% of its net assets in rights and warrants to purchase newly created equity
securities consisting of common and preferred stock. The equity security
underlying a right or warrant is outstanding at the time the right or warrant is
issued or is issued together with the right or warrant.
Investing in rights and 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. The value of a right or 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.
Rights and 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. No Fund may invest more
than 15% of its net assets in non-publicly traded and illiquid securities,
including securities that are illiquid by virtue of the absence of a readily
available market, repurchase agreements which have a maturity of longer than
seven days, certain Rule 144A Securities (as defined below), and time deposits
maturing in more 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.
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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. Limitations on resale may have an adverse effect on the
marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days without borrowing. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
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. Each
Fund's Adviser anticipates that the market for certain restricted securities
such as institutional commercial paper will expand further as a result of this
regulation and use of automated systems for the trading, clearance and
settlement of unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of Securities Dealers,
Inc.
An investment in Rule 144A Securities will be considered illiquid
and therefore subject to a Fund's limit on the purchase of illiquid securities
unless the Board or its delegates determines that the Rule 144A Securities are
liquid. In reaching liquidity decisions, the Board or 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
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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).
Borrowing. Each 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. Investments (including
roll-overs) will not be made when borrowings exceed 5% of a Fund's net assets.
Although the principal of such borrowings will be fixed, a Fund's assets may
change in value during the time the borrowing is outstanding. Each Fund expects
that some of its borrowings may be made on a secured basis. In such situations,
either the custodian will segregate the pledged assets for the benefit of the
lender or arrangements will be made with a suitable subcustodian, which may
include the lender.
Stand-By Commitments. Each Fund may acquire "stand-by commitments"
with respect to securities held in its portfolio. 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. The Funds intend to enter into stand-by commitments only with brokers,
dealers and banks that, in the opinion of their Advisers, present minimal credit
risks. In evaluating the creditworthiness of the issuer of a stand-by
commitment, each Fund's Adviser will periodically review relevant financial
information concerning the issuer's assets, liabilities and contingent claims. A
Fund will acquire stand-by commitments only in order to facilitate portfolio
liquidity and does not intend to exercise its rights under stand-by commitments
for trading purposes.
The amount payable to 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
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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.
A Fund would acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The acquisition of a stand-by commitment would not affect the
valuation or assumed maturity of the underlying securities. Stand-by commitments
acquired by a 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.
OTHER INVESTMENT LIMITATIONS
The investment limitations numbered 1 through 9 may not be changed
without the affirmative vote of the holders of a majority of each Fund's
outstanding shares. Such majority is defined as the lesser of (i) 67% or more of
the shares present at the meeting, if the holders of more than 50% of the
outstanding shares of a Fund are present or represented by proxy, or (ii) more
than 50% of the outstanding shares. Investment limitations 10 through 13 may be
changed by a vote of the Board at any time.
Each Fund may not:
1. Borrow money except that the Fund may borrow from banks for
temporary or emergency purposes provided that any such 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, options on futures contracts,
and forward commitment 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.
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4. Make loans, except that the Fund may purchase or hold
fixed-income securities, including structured securities, lend portfolio
securities (in an amount up to 50% of its total assets immediately before the
making of such loans) 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 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
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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 limitations
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 a Fund's assets will
not constitute a violation of such restriction.
PORTFOLIO VALUATION
The Prospectus discusses the time at which the net asset value of
each Fund is determined for purposes of sales and redemptions. The following is
a description of the procedures used by each Fund in valuing its assets.
Securities listed on a U.S. securities exchange (including
securities traded through the Nasdaq National Market System) or foreign
securities exchange or traded in an OTC market will be valued at the most recent
sale as of the time the valuation is made or, in the absence of sales, at the
mean between the bid and lowest asked quotations. If there are no such
quotations, the value of the highest securities will be taken to be the most
recent bid quotation on the exchange or market. Options contracts will be valued
similarly. Futures contracts will be valued at the most recent settlement price
at the time of valuation. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the primary
market for such security. Short-term obligations with maturities of 60 days or
less are valued at amortized cost, which constitutes fair value as determined by
the Fund's 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. Notwithstanding the foregoing, in determining the market
value of portfolio investments, the Funds may employ outside organizations (a
"Pricing Service") which may use a matrix, formula or other objective method
that takes into consideration market indexes, matrices, yield curves and other
specific adjustments. The procedures of Pricing Services are reviewed
periodically by the officers of the Funds under the general supervision and
responsibility of the Board, which may replace a Pricing Service at any time.
Securities, options and futures contracts for which market quotations are not
available and certain other assets of the 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
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that such security's value determined by the methodology set forth above does
not reflect its fair value.
Trading in securities in certain foreign countries is completed at
various times prior to the close of business on each business day in New York
(i.e., a day on which The New York Stock Exchange, Inc. (the "NYSE") is open for
trading). In addition, securities trading in a particular country or countries
may not take place on all business days in New York. Furthermore, trading takes
place in various foreign markets on days which are not business days in New York
and days on which a Fund's net asset value is not calculated. As a result,
calculation of a Fund's net asset value does not take place contemporaneously
with the determination of the prices of the majority of a Fund's securities. All
assets and liabilities initially expressed in foreign currency values will be
converted into U.S. dollar values at the prevailing exchange rate as quoted by a
Pricing Service. If such quotations are not available, the rate of exchange will
be determined in good faith pursuant to consistently applied procedures
established by the Board.
PORTFOLIO TRANSACTIONS
Each Fund's Adviser is responsible for establishing, reviewing and,
where necessary, modifying each Fund's investment program to achieve its
investment objective. Purchases and sales of newly issued portfolio securities
are usually principal transactions without brokerage commissions effected
directly with the issuer or with an underwriter acting as principal. Other
purchases and sales may be effected on a securities exchange or OTC market,
depending on where it appears that the best price or execution will be obtained.
The purchase price paid by the Funds to underwriters of newly issued securities
usually includes a concession paid by the issuer to the underwriter, and
purchases of securities from dealers, acting as either principals or agents in
the after market, are normally executed at a price between the bid and asked
price, which includes a dealer's mark-up or mark-down. Transactions on U.S.
stock exchanges and some foreign stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers. On most
foreign exchanges, commissions are generally fixed. There is generally no stated
commission in the case of securities traded in domestic or foreign OTC markets,
but the price of securities traded in OTC markets includes an undisclosed
commission or mark-up. U.S. Government securities are generally purchased from
underwriters or dealers, although certain newly issued U.S. Government
securities may be purchased directly from the U.S. Treasury or from the issuing
agency or instrumentality.
Each Fund's Adviser will select specific portfolio investments and
effect transactions for each Fund and in doing so, seeks to obtain the overall
best execution of portfolio transactions. In evaluating prices and executions,
the Adviser will consider the factors it deems relevant, which may include the
breadth of the market in the security, the price of the
39
<PAGE> 52
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.
The Adviser 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, as
amended) to the Funds and/or other accounts over which the Adviser exercises
investment discretion. The Adviser 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 the Adviser determines in good faith that such amount of
commission was reasonable in relation to the value of such brokerage and
research services provided by such broker or dealer viewed in terms of either
that particular transaction or of the overall responsibilities of the Adviser.
Research and other services received may be useful to the Adviser in serving
each Fund and their other clients and, conversely, research or other services
obtained by the placement of business of other clients may be useful to the
Adviser 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 the Adviser in carrying out
its responsibilities. Research received from brokers or dealers is supplemental
to the Adviser's own research program. The fees paid to the Adviser under its
advisory agreement with a Fund are not reduced by reason of its receiving any
brokerage and research services.
Investment decisions for the Funds concerning specific portfolio
securities are made independently from those for other clients advised by the
Adviser. Such other investment clients may invest in the same securities as the
Funds. 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 the
Adviser believes to be equitable to each client, including a Fund. In some
instances, this investment procedure may adversely affect the price paid or
received by a Fund or the size of the position obtained or sold for a Fund. To
the extent permitted by law, the Adviser may aggregate the
40
<PAGE> 53
securities to be sold or purchased for a Fund with those to be sold or purchased
for such other investment clients in order to obtain best execution.
In no instance will portfolio securities be purchased from or sold
to CSAM, CSAM Ltd., Credit Suisse Asset Management Securities, Inc. ("CSAMSI"),
Credit Suisse First Boston ("CS First Boston"), or any affiliated person of such
companies. In addition, the Funds will not give preference to any institutions
with whom a Fund enters into distribution or shareholder servicing agreements
concerning the provision of administrative and other support services.
Transactions for each Fund may be effected on foreign securities
exchanges. In transactions for securities not actively traded on a foreign
securities exchange, the Funds will deal directly with the dealers who make a
market in the securities involved, except in those circumstances where better
prices and execution are available elsewhere. Such dealers usually are acting as
principal for their own account. On occasion, securities may be purchased
directly from the issuer. Such portfolio securities are generally traded on a
net basis and do not normally involve brokerage commissions. Securities firms
may receive brokerage commissions on certain portfolio transactions, including
options, futures and options on futures transactions and the purchase and sale
of underlying securities upon exercise of options.
The Funds may participate, if and when practicable, in bidding for
the purchase of securities for each Fund's portfolio directly from an issuer in
order to take advantage of the lower purchase price available to members of such
a group. A Fund will engage in this practice, however, only when its Adviser, in
its sole discretion, believes such practice to be otherwise in a 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 Funds deem it
desirable to sell or purchase securities. Each Fund's portfolio turnover rate is
calculated by dividing the lesser of purchases or sales of its portfolio
securities for the year by the monthly average value of the portfolio
securities. Securities with remaining maturities of one year or less at the date
of acquisition are excluded from the calculation.
Certain practices that may be employed by the Funds 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, the Funds will be engaged essentially in trading
activities based on short-term
41
<PAGE> 54
considerations affecting the value of an issuer's stock instead of long-term
investments based on fundamental valuation of securities. Because of this
policy, portfolio securities may be sold without regard to the length of time
for which they have been held. Consequently, the annual portfolio turnover rate
of the Funds may be higher than mutual funds having a similar objective that do
not utilize these strategies. Each Fund expects its turnover rate for its first
year of operation to total approximately 100%.
MANAGEMENT OF THE FUNDS
Officers and Board of Directors
The business and affairs of each Fund is managed by its 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.
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.
Richard H. Francis (67) Director
40 Grosvenor Road Currently retired; Executive Vice
Short Hills, New Jersey 07078 President and Chief Financial Officer of
Pan Am Corporation and Pan American World
Airways, Inc. from 1988 to 1991; Director
of The Infinity Mutual Funds, BISYS Group
Incorporated; Director/Trustee of other
Warburg Pincus Funds and other
CSAM-advised investment companies.
Jack W. Fritz (72) Director
2425 North Fish Creek Road Private investor; Consultant and
P.O. Box 483 Director of Fritz Broadcasting, Inc. and
Wilson, Wyoming 83014 Fritz Communications (developers and
operators of radio stations); Director
of Advo, Inc. (direct mail
advertising); Director/Trustee of other
Warburg Pincus Funds.
42
<PAGE> 55
Jeffrey E. Garten (52) Director
Box 208200 Dean of Yale School of Management and
New Haven, Connecticut 06520-8200 William S. Beinecke 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. (68) Director
29 The Trillium Currently retired; President and Chief
Pittsburgh, Pennsylvania 15238 Operating Officer of National
InterGroup, Inc. from April 1989 to March
1991; Chairman of Permian Oil Co. from
April 1989 to March 1991; Director of
Education Management Corp., Tyco
International Ltd.; Trustee, BT Insurance
Funds Trust; Director/Trustee of other
Warburg Pincus Funds and other
CSAM-advised investment companies.
William W. Priest* (57) Chairman of the Board
153 East 53rd Street Chairman- Management Committee, Chief
New York, New York 10022 Executive Officer and Managing Director
of CSAM (U.S.) since 1990; Director of
TIG Holdings, Inc.; Director/Trustee of
other Warburg Pincus Funds and other
CSAM-advised investment companies.
- ----------
* Indicates a Director who is an "interested person" of the Fund as defined
in the 1940 Act.
43
<PAGE> 56
Steven N. Rappaport (50) Director
c/o Loanet, Inc. President of Loanet, Inc. since 1997;
153 East 53rd Street, Executive Vice President of Loanet, Inc.
Suite 5500 from 1994 to 1997; Director, President,
New York, New York 10022 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.
Arnold M. Reichman* (51) Vice Chairman of the Board
466 Lexington Avenue Managing Director and Chief Operating
New York, New York 10017-3147 Officer of CSAM; Associated with CSAM
since CSAM acquired the Funds'
predecessor adviser in July 1999; with
the predecessor adviser since 1984;
Officer of CSAMSI; Director of The RBB
Fund, Inc.; Director/ Trustee of other
Warburg Pincus Funds.
Alexander B. Trowbridge (69) Director
1317 F Street, N.W., Currently retired; President of
5th Floor Trowbridge Partners, Inc. (business
Washington, DC 20004 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.
44
<PAGE> 57
Eugene L. Podsiadlo (42) President
466 Lexington Avenue Managing Director 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 1991; Vice
President of Citibank, N.A. from 1987 to
1991; Officer of CSAMSI and of other
Warburg Pincus Funds.
Hal Liebes, Esq. (35) Vice President and Secretary
153 East 53rd Street Director and General Counsel of CSAM;
New York, New York 10022 Associated with CSAM since 1995;
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 and
other Warburg Pincus Funds.
Michael A. Pignataro (39) Treasurer and Chief Financial Officer
153 East 53rd Street Vice President and Director of Fund
New York, New York 10022 Administration of CSAM; Associated with
CSAM since 1986; Officer of other Warburg
Pincus Funds.
Janna Manes, Esq. (31) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel of
New York, New York 10017-3147 CSAM; Associated with CSAM since CSAM
acquired the Funds' predecessor adviser
in July 1999; with the predecessor
adviser since 1996; Associated with the
law firm of Willkie Farr & Gallagher from
1993 to 1996; Officer of other Warburg
Pincus Funds.
Stuart J. Cohen, Esq. (30) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel of
New York, New York 10017-3147 CSAM; Associated with CSAM since CSAM
acquired the Funds' predecessor adviser
in July 1999; with the predecessor
adviser since 1997; Associated with the
law firm of Gordon Altman Butowsky
Weitzen Shalov & Wein from 1995 to 1997;
Officer of other Warburg Pincus Funds.
45
<PAGE> 58
Rocco A. DelGuercio (36) Assistant Treasurer
153 East 53rd Street Assistant Vice President and
New York, New York 10022 Administrative Officer of CSAM;
Associated with CSAM since June 1996;
Assistant Treasurer, Bankers Trust Corp.
-- Fund Administration from March 1994 to
June 1996; Mutual Fund Accounting
Supervisor, Dreyfus Corporation from
April 1987 to March 1994; Officer of
other Warburg Pincus Funds.
No employee of CSAM, CSAM Ltd., PFPC Inc. and Counsellors Funds
Service, Inc., the Funds' co-administrators ("PFPC" and "Counsellors Service,"
respectively), or any of their affiliates, receives any compensation from the
Funds for acting as an officer or director of a Fund. Each Director who is not a
director, trustee, officer or employee of CSAM, CSAM Ltd., PFPC, Counsellors
Service or any of their affiliates receives an annual fee of $500 and $250 for
each meeting of the Boards attended by him for his services as Director, and is
reimbursed for expenses incurred in connection with his attendance at Board
meetings. Each member of the Audit Committee receives an annual fee of $250, and
the chairman of the Audit Committee receives an annual fee of $325.
Directors' Estimated Compensation Through August 31, 1999:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
All Investment
Companies in
the Warburg
European Central & Eastern Pincus Fund
Name of Director Equity Fund Europe Fund Complex*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
William W. Priest** None None None
- --------------------------------------------------------------------------------
Arnold M. Reichman** None None None
- --------------------------------------------------------------------------------
Richard N. Cooper*** $1,750 $1,750 $73,250
- --------------------------------------------------------------------------------
Richard H. Francis**** 375 375 $16,500
- --------------------------------------------------------------------------------
Jack W. Fritz $1,750 $1,750 $73,250
- --------------------------------------------------------------------------------
Jeffrey E. Garten $1,750 $1,750 $73,250
- --------------------------------------------------------------------------------
James S. Pasman, Nr.**** 375 375 $16,500
- --------------------------------------------------------------------------------
Steven N. Rappaport**** 375 375 $16,500
- --------------------------------------------------------------------------------
Alexander B. Trowbridge $1,825 $1,825 $76,025
- --------------------------------------------------------------------------------
</TABLE>
- ----------
* Each Director serves as a Director or Trustee of 39 investment companies in
the Warburg Pincus family of funds.
46
<PAGE> 59
** Mr. Priest and Mr. Reichman receive compensation as affiliates of CSAM,
and, accordingly, receive no compensation from any Fund or any other
investment company advised by CSAM.
*** Mr. Cooper resigned as a Director of each Fund effective July 6, 1999.
**** Messrs. Francis, Pasman and Rappaport became Directors of the Funds
effective July 6, 1999.
Portfolio Managers
The Portfolio Manager of the European Equity Fund is William P.
Sterling and the Assistant Portfolio Manager is Emily F. Baker. Mr. Sterling
joined CSAM in 1995 and manages other Warburg Pincus funds. Prior to that,
Mr. Sterling was the head of International Economics at Merrill Lynch &
Company. Ms. Baker joined CSAM in 1996. She was a Vice President at
Mastrapasqua & Associates from 1994 to 1996 and a financial consultant for
Merrill Lynch private client group from 1993 to 1996.
The Portfolio Managers of the Central & Eastern Europe Fund are
Glenn Wellman and Isabel Knight. Mr. Wellman joined CSAM Ltd. in 1993. From
1987-1993, Mr. Wellman was a Managing Director and Chief Investment Officer
of Alliance Capital Limited. Ms. Knight joined CSAM Ltd. in 1997. From
1995-1997, she was a Senior Fund Manager for emerging Europe with Foreign &
Colonial Emerging Markets, and from 1992-1995, she was a Portfolio Manager
for Morgan Stanley Asset Management.
Control Persons and Principal Holders of Securities
CSAM Ltd. will hold all of the shares of each Fund on the date each
Fund's Registration Statement become effective.
Investment Advisers and Co-Administrators
CSAM, located at One Citicorp Center, 153 East 53rd Street, New
York, New York 10022, serves as investment adviser to each Fund pursuant to
separate written agreements (the "CSAM Advisory Agreements"). CSAM is a
diversified investment adviser, managing global equity, fixed-income and
derivative securities accounts for corporate pension and profit-sharing plans,
state pension funds, union funds, endowments and other charitable institutions.
CSAM currently manages approximately $35 billion in assets and is a registered
investment adviser under the Investment Advisers Act of 1940, as amended. As an
investment adviser, CSAM emphasizes a global investment strategy. CSAM currently
acts as investment adviser for eleven other investment companies registered
under the 1940 Act. They are: BEA Strategic Global Income Fund, Inc., BEA Income
Fund, Inc., The Brazilian Equity Fund, Inc., The Chile Fund, Inc., The Emerging
Markets Infrastructure Fund, Inc., The Emerging Markets Telecommunications Fund,
Inc., The First Israel Fund, Inc., The
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<PAGE> 60
Indonesia Fund, Inc., The Latin America Equity Fund, Inc., The Latin America
Investment Fund, Inc., and The Portugal Fund, Inc. In addition, CSAM acts as
sub-adviser to certain portfolios of thirteen other registered investment
companies or portfolios: American Odyssey Funds, Inc. (Global High Yield Bond
Fund), American United Life (Conservative Investor Portfolio, Moderate Investor
Portfolio and Aggressive Investor Portfolio), Frank Russell Investment Company
(Fixed Income III Fund and Multi-strategy Bond Fund), Panorama (LifeSpan
Balanced Account, LifeSpan Capital Appreciation Account and LifeSpan Diversified
Income Account), SEI Institutional Managed Trust (High Yield Bond Fund), AGA
Series Trust (Credit Suisse Growth and Income Fund), Touchstone International
Equity Fund and Touchstone Variable Annuity International Equity Fund.
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.
CSAM Ltd., located at Beaufort House, 15 St. Botolph Street,
GB-London EC3A 7JJ, serves as sub-investment adviser to each Fund pursuant to
separate written agreements (the "CSAM Ltd. Sub-Advisory Agreements"). CSAM
Ltd. is a wholly owned, indirectly held, subsidiary of Credit Suisse Group.
CSAM Ltd. is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, and currently manages $138 billion in assets. CSAM
Ltd. also has offices in Budapest, Moscow, Prague, Warsaw, Frankfurt, Milan,
Paris, Sydney, Tokyo and Zurich. These offices are not registered with the
U.S. Securities and Exchange Commission.
For the services provided by CSAM to the European Equity Fund, the
Fund pays a fee calculated at an annual rate of 1.00% of the Fund's average
daily net assets computed daily and payable quarterly (out of which CSAM pays
CSAM Ltd. for its sub-investment advisory services). For the services provided
by CSAM to the Central & Eastern Europe Fund, the Fund pays a fee calculated at
an annual rate of 1.25% of the Fund's average daily net assets computed daily
and payable quarterly (out of which CSAM pays CSAM Ltd. for its sub-investment
advisory services). CSAM and CSAM Ltd. may voluntarily waive a portion of their
fees from time to time and temporarily limit the expenses to be borne by a Fund.
Under the Advisory Agreements, neither CSAM nor CSAM Ltd. will be
liable for any error of judgment or mistake of law
48
<PAGE> 61
or for any loss suffered by a Fund in connection with the matters to which the
Advisory Agreements relate. The Advisory Agreements for the Funds were approved
on July 20, 1998 by vote of the Funds' Board of Directors, including a majority
of those directors who are not parties to the Advisory Agreements or interested
persons (as defined in the 1940 Act) of such parties. The Advisory Agreements
were also approved by each Fund's initial shareholder. The CSAM Advisory
Agreements are terminable by vote of the Funds' Board of Directors or by the
holders of a majority of the outstanding voting securities of the relevant Fund,
and at any time without penalty, on 60 days' written notice to CSAM. The CSAM
Advisory Agreements may also be terminated by CSAM on 90 days' written notice to
a fund. The CSAM Advisory Agreements terminate automatically in the event of an
assignment. The CSAM Ltd. Sub-Advisory Agreements are terminable by CSAM on 60
days' written notice to the Fund and CSAM Ltd., by vote of the Funds' Board of
Directors or by the holders of a majority of the outstanding voting securities
of the relevant Fund on 60 days' written notice to CSAM and CSAM Ltd., or by
CSAM Ltd. upon 60 days' written notice to a Fund and CSAM. The CSAM Ltd.
Sub-Advisory Agreements terminate automatically in the event of an assignment.
Counsellors Funds Service, Inc. ("Counsellors Service") and PFPC
serve as co-administrators to each Fund pursuant to separate written agreements.
Counsellors Service provides shareholder liaison services to each Fund including
responding to shareholder inquiries and providing information on shareholder
investments. Counsellors Service 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 of each Fund pay Counsellors Service a fee calculated at an annual
rate of .10% of the Common Shares' average daily net assets. Counsellors Service
provides co-administration services to the CSAM Institutional Funds without
compensation.
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.
Each class of Shares of a Fund bears its proportionate share of fees
payable to CSAM, CSAM Ltd. and PFPC in the proportion that its assets bear to
the aggregate assets of a Fund at the time of calculation. These fees are
calculated at an
49
<PAGE> 62
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.
Custodians and Transfer Agents
Brown Brothers Harriman & Co. ("BBH") acts as custodian for each
Fund and also acts as the custodian for each Fund's foreign securities pursuant
to a written Custodian Agreement (the "Custodian Agreement"). BBH will (i)
maintain a separate account or accounts in the name of each Fund, (ii) hold and
transfer portfolio securities on account of each Fund, (iii) accept receipts and
disbursements of money on behalf of each Fund, (iv) collect and receive all
income and other payments and distributions for the account of each Fund's
portfolio securities and (v) make periodic reports to the Board concerning each
Fund's custodial arrangements. BBH is authorized to select one or more foreign
banking institutions and foreign securities depositories to serve as
sub-custodian on behalf of the Funds, provided that BBH remains responsible for
the performance of all its duties under the Custodian Agreement and holds the
Funds harmless from the negligent acts and omissions of any sub-custodian. For
its services to the Funds under the Custodian Agreement, BBH receives a fee
which is calculated based upon each Fund's average daily gross assets, exclusive
of transaction charges and out-of-pocket expenses, which are also charged to the
Funds. BBH's principal business address is 40 Water Street, Boston,
Massachusetts 02109.
State Street Bank and Trust Company ("State Street") will serve as
each Fund's shareholder servicing, transfer and dividend disbursing agent
pursuant to a Transfer Agency and Service Agreement, under which State Street
(i) issues and redeems shares of the Funds, (ii) addresses and mails all
communications by the Funds to record owners of each Fund shares, including
reports to shareholders, dividend and distribution notices and proxy material
for 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 Funds. State Street has
delegated to Boston Financial Data Services, Inc., a 50% owned subsidiary
("BFDS"), responsibility for most shareholder servicing functions. State
Street's principal business address is 225 Franklin Street, Boston,
Massachusetts 02110. BFDS's principal business address is 2 Heritage Drive,
North Quincy, Massachusetts 02171.
Organization of the Funds
Each Fund's Charter authorizes the Board to issue three billion full
and fractional shares of capital stock, $.001 par value per share, of which one
billion shares are designated Common Shares, one billion shares are designated
Institutional Shares and one billion are designated Advisor Shares. The Funds
currently offer Common and Institutional Shares. Shareholders of each Fund in
the class, upon liquidation, will participate
50
<PAGE> 63
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 each Fund are entitled to one vote for each full share
held and fractional votes for fractional shares held. Shareholders of each 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 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.
Distribution and Shareholder Servicing
Distributor. CSAMSI serves as the Funds' distributor. CSAMSI's
principal business address is 466 Lexington Avenue, New York, New York
10017-3147.
Common Shares. Each Fund has entered into a Shareholder Servicing
and Distribution Plan (the "12b-1 Plan"), pursuant to Rule 12b-1 under the 1940
Act, pursuant to which each Fund will pay CSAMSI, in consideration for Services
(as defined below), a fee calculated at an annual rate of .25% of the average
daily net assets of the Common Shares of each Fund. Services performed by CSAMSI
include (i) the sale of the Common Shares, as set forth in the 12b-1 Plan
("Selling Services"), (ii) ongoing servicing and/or maintenance of the accounts
of Common Shareholders of a Fund, as set forth in the 12b-1 Plan ("Shareholder
Services"), and (iii) sub-transfer agency services, subaccounting services or
administrative services related to the sale of the Common Shares, as set forth
in the 12b-1 Plan ("Administrative Services" and collectively with Selling
Services and Administrative Services, "Services") including, without limitation,
(a) payments reflecting an allocation of overhead and other office expenses of
CSAMSI related to providing Services; (b) payments made to, and reimbursement of
expenses of, persons who provide support services in connection with the
distribution of the Common Shares including, but not limited to, office space
and equipment, telephone facilities, answering routine inquiries regarding a
Fund, and providing any other Shareholder Services; (c) payments made to
compensate selected dealers or other authorized persons for providing any
Services; (d) costs relating to the formulation and implementation of marketing
and promotional activities for the Common Shares, including, but not limited to,
direct mail promotions and television, radio, newspaper, magazine and other mass
media advertising, and related
51
<PAGE> 64
travel and entertainment expenses; (e) costs of printing and distributing
prospectuses, statements of additional information and reports of the Funds to
prospective shareholders of the Funds; and (f) costs involved in obtaining
whatever information, analyses and reports with respect to marketing and
promotional activities that the Funds may, from time to time, deem advisable.
Pursuant to the 12b-1 Plan, CSAMSI will provide each Fund's Board
with periodic reports of amounts expended under the 12b-1 Plan and the purpose
for which the expenditures were made.
Each Fund has authorized certain broker-dealers, financial
institutions, recordkeeping organizations and other industry professionals
(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. Each Fund may, in the future, enter into agreements
("Agreements") with institutional shareholders of record, broker-dealers,
financial institutions, depository institutions, retirement plans and financial
intermediaries ("Institutions") to provide certain distribution, shareholder
servicing, administrative and/or accounting services for their clients or
customers (or participants in the case of retirement plans) ("Customers") who
are beneficial owners of Advisor Shares. Agreements will be governed by a
distribution plan (the "Distribution Plan") pursuant to Rule 12b-1 under the
1940 Act. The Distribution Plan requires the Board, at least quarterly, to
receive and review written reports of amounts expended under the Distribution
Plan and the purpose for which such expenditures were made.
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An Institution with which a Fund has entered into an Agreement with
respect to its Advisor Shares may charge a Customer one or more of the following
types of fees, as agreed upon by the Institution and the Customer, with respect
to the cash management or other services provided by the Institution: (i)
account fees (a fixed amount per month or per year); (ii) transaction fees (a
fixed amount per transaction processed); (iii) compensation balance requirements
(a minimum dollar amount a Customer must maintain in order to obtain the
services offered); or (iv) account maintenance fees (a periodic charge based
upon the percentage of assets in the account or of the dividend paid on those
assets). Services provided by an Institution to Customers are in addition to,
and not duplicative of, the services to be provided under each Fund's
co-administration and distribution and shareholder servicing arrangements. A
Customer of an Institution should read the Prospectus and this Statement of
Additional Information in conjunction with the Agreement and other literature
describing the services and related fees that would be provided by the
Institution to its Customers prior to any purchase of Fund shares. Prospectuses
are available from a Fund's distributor upon request. No preference will be
shown in the selection of a Fund's portfolio investments for the instruments of
Institutions.
General. The Distribution Plan and the 12b-1 Plan will continue in
effect for so long as their continuance is specifically approved at least
annually by each Board, including a majority of the Directors who are not
interested persons of a Fund and who have no direct or indirect financial
interest in the operation of the Distribution Plans or the 12b-1 Plans, as the
case may be ("Independent Directors"). Any material amendment of the
Distribution Plan or 12b-1 Plan would require the approval of the Board in the
same manner. Neither the Distribution Plan nor the 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 Distribution Plan or 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 each Fund.
Institutional Shares. The Institutional Shares will be distributed
under the name "CSAM Institutional Shares." CSAMSI serves without compensation
as distributor of the Institutional Shares.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of each Fund's shares is equal to the per share
net asset value of the relevant class of shares of a Fund.
Under the 1940 Act, the Funds 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
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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 a Board determines that conditions exist which make payment of
redemption proceeds wholly in cash unwise or undesirable, a Fund may make
payment wholly or partly in securities or other investment instruments which may
not constitute securities as such term is defined in the applicable securities
laws. If a redemption is paid wholly or partly in securities or other property,
a shareholder would incur transaction costs in disposing of the redemption
proceeds. The Funds will comply with Rule 18f-1 promulgated under the 1940 Act
with respect to redemptions in kind.
As stated in the Prospectus, with respect to the Central & Eastern
Europe Fund only, a short-term trading fee of 1.0% of the amount of shares
redeemed will be deducted from the redemption amount if a shareholder sells
shares of the Central & Eastern Europe Fund after holding them less than six
months. This fee, which is currently being waived, is paid to the Central &
Eastern Europe Fund to offset costs associated with short-term shareholder
trading. It does not apply to shares acquired through reinvestment of
distributions. If a shareholder purchased shares of the Central & Eastern Europe
Fund on different days, any shares purchased through reinvestment of
distributions would be redeemed first, without charging the fees, followed by
the shares of the Central & Eastern Europe Fund held the longest.
Automatic Cash Withdrawal Plan. An automatic cash withdrawal plan
(the "Plan") is available to the holders of Common Shares of each Fund who wish
to receive specific amounts of cash periodically. Withdrawals may be made under
the Plan by redeeming as many Common 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 the Funds.
EXCHANGE PRIVILEGE
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
Institutional Shareholder may exchange Institutional Shares of a Fund for
Institutional Shares of another CSAM fund at their respective net asset values.
The exchange privilege enables shareholders to acquire shares in a
fund with a different investment objective when they
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believe that a shift between funds is an appropriate investment decision.
Subject to the restrictions on exchange purchases contained in the Prospectus
and any other applicable restrictions, this privilege is available to
shareholders residing in any state in which the Common Shares, Institutional
Shares or Advisor Shares being acquired, as relevant, may legally be sold. Prior
to any exchange, the investor should obtain and review a copy of the current
prospectus of the relevant class of a Fund into which an exchange is being
considered. Shareholders may obtain a prospectus of the relevant class of a Fund
into which they are contemplating an exchange by calling 800-927-2874 (Common
Shares) or 800-401-22033 (Institutional Shares).
Subject to the restrictions described above, upon receipt of proper
instructions and all necessary supporting documents, shares submitted for
exchange are redeemed at the then-current net asset value of the relevant class
and the proceeds are invested on the same day, at a price as described above, in
shares of the relevant class of a Fund being acquired. The exchange privilege
may be modified or terminated 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 the Funds. Each prospective shareholder is urged to consult his own
tax adviser with respect to the specific federal, state, local and foreign tax
consequences of investing in the Funds. 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 qualify to be treated as a regulated investment
company each taxable year under the Code. To so qualify, a Fund must, among
other things: (a) derive at least 90% of its gross income in each taxable year
from dividends, interest, payments with respect to securities, loans and gains
from the sale or other disposition of stock or securities or foreign currencies,
or other income (including, but not limited to, gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies; and (b) diversify its holdings so that, at the
end of each quarter of a Fund's taxable year, (i) at least 50% of the market
value of a 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 a 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 United States
Government securities or securities of other regulated investment companies) of
any one issuer or any two or more issuers that a Fund controls and are
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determined to be engaged in the same or similar trades or businesses or related
trades or businesses. Each Fund expects that all of its foreign currency gains
will be directly related to its principal business of investing in stocks and
securities.
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 a Fund not later than
such December 31, provided that such dividend is actually paid by a 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. Each Board 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, each Fund will designate such retained amounts as undistributed capital
gains in a notice to its shareholders who (a) will be required to include in
income for United Stares federal income tax purposes, as long-term capital
gains, their proportionate shares of the undistributed amount, (b) will be
entitled to credit their proportionate shares of the 35% tax paid by a Fund on
the undistributed amount against their United States federal income tax
liabilities, if any, and to claim refunds to the extent their credits exceed
their liabilities, if any, and (c) will be entitled to increase their tax basis,
for United States federal income tax purposes, in their shares by an amount
equal to 65% of the amount of undistributed capital gains included in the
shareholder's income. Organizations or persons not subject to federal income tax
on such capital gains will be entitled to a refund of their pro rata share of
such taxes paid by a Fund upon filing appropriate returns or claims for refund
with the Internal Revenue Service (the "IRS"). Even if a Fund makes such an
election, it is
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possible that a Fund may incur an excise tax as a result of not having
distributed net capital gains.
The Code imposes a 4% nondeductible excise tax on each Fund to the
extent a Fund does not distribute by the end of any calendar year at least 98%
of its net investment income for that year and 98% of the net amount of its
capital gains (both long-and short-term) for the one-year period ending, as a
general rule, on October 31 of that year. For this purpose, however, any income
or gain retained by a Fund that is subject to corporate income tax will be
considered to have been distributed by year-end. In addition, the minimum
amounts that must be distributed in any year to avoid the excise tax will be
increased or decreased to reflect any underdistribution or overdistribution, as
the case may be, from the previous year. Each Fund anticipates that it will pay
such dividends and will make such distributions as are necessary in order to
avoid the application of this tax.
With regard to a 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 each Fund and
may limit a 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 a Fund in computing
its taxable income. In addition, in the event of a failure to qualify, each
Fund's distributions, to the extent derived from each 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 a Fund failed
to qualify as a regulated investment company for a period greater than one
taxable year, a Fund may be required to recognize any net built-in gains (the
excess of the aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Each Fund's short sales against the box, if any, and transactions in
foreign currencies, forward contracts, options and futures contracts (including
options and futures contracts on foreign currencies) will be subject to special
provisions of the Code that, among other things, may affect the character of
gains and losses realized by the Funds (i.e., may affect whether gains
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or losses are ordinary or capital), accelerate recognition of income to a Funds
and defer Fund losses. These rules could therefore affect the character, amount
and timing of distributions to shareholders. These provisions also (a) will
require each Fund to mark-to-market certain types of the positions in its
portfolio (i.e., treat them as if they were closed out) and (b) may cause each
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 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 a Fund as a regulated investment
company.
Passive Foreign Investment Companies.
If a Fund purchases shares in certain foreign investment entities,
called "passive foreign investment companies" (a "PFIC"), it may be subject to
United States federal income tax on a portion of any "excess distribution" or
gain from the disposition of such shares even if such income is distributed as a
taxable dividend by a Fund to its shareholders. Additional charges in the nature
of interest may be imposed on a 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, a Fund might be required to include in income each year
a portion of the ordinary earnings and net capital gains of the qualified
election fund, even if not distributed to a Fund, and such amounts would be
subject to the 90% and excise tax distribution requirements described above. In
order to make this election, each 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. If a Fund were able
to make the election described in this paragraph, a Fund would not be able to
treat any portion of the long-term capital gains included in income pursuant to
the election as eligible for the 20% maximum capital gains rate.
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, each 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 a Fund, unless revoked with the consent of the IRS.
By making the election, each 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. Each Fund may
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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.
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 a 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 a 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 a 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 a Fund acquired
such stock. Accordingly, in order to satisfy its income distribution
requirements, each 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
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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.
Each 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 withholding is not an
additional tax and any amount withheld may be credited against a shareholder's
United States federal income tax liabilities.
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Notices.
Shareholders will be notified annually by each Fund as to the United
States federal income tax status of the dividends, distributions and deemed
distributions attributable to undistributed capital gains (discussed above in
"The Funds and Their Investments") made by the Fund to its shareholders.
Furthermore, shareholders will also receive, if appropriate, various written
notices after the close of a Fund's taxable year regarding the United States
federal income tax status of certain dividends, distributions and deemed
distributions that were paid (or that are treated as having been paid) by the
Funds 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 THE FUNDS.
DETERMINATION OF PERFORMANCE
From time to time, each Fund may quote the total return of its
Common Shares, Institutional Shares and/or Advisor Shares in advertisements or
in reports and other communications to shareholders. 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.
Each Fund may advertise, from time to time, comparisons of the
performance of its Common Shares, Institutional Shares and/or Advisor Shares
with that of one or more other mutual funds with similar investment objectives.
Each 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
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may be. Investors should note that this performance may not be representative of
a Fund's total return in longer market cycles.
The performance of a class of a Fund's shares will vary from time to
time depending upon market conditions, the composition of a Fund's portfolio and
operating expenses allocable to it. As described above, total return is based on
historical earnings and is not intended to indicate future performance.
Consequently, any given performance quotation should not be considered as
representative of performance for any specified period in the future.
Performance information may be useful as a basis for comparison with other
investment alternatives. However, a Fund's performance will fluctuate, unlike
certain bank deposits or other investments which pay a fixed yield for a stated
period of time. Any fees charged by Institutions or other institutional
investors directly to their customers in connection with investments in Fund
shares are not reflected in a Fund's total return, and such fees, if charged,
will reduce the actual return received by customers on their investments.
In its 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; and (xii) 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 the independent
accountant for each Fund. The statements of assets and liabilities of each Fund,
as of October 14, 1998, that appear in this Statement of Additional Information
have been audited by PwC, whose report thereon appears elsewhere herein and has
been included herein in reliance upon the report of such firm of independent
accountants given upon their authority as experts in accounting and auditing.
Willkie Farr & Gallagher serves as counsel for each Fund and
provides legal services from time to time for CSAM, CSAMSI and Counsellors
Service.
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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 financial statement follows the Report of Independent
Accountants.
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APPENDIX
DESCRIPTION OF RATINGS
Commercial Paper Ratings
Commercial paper rated A-1 by Standard and Poor's Ratings Services
("S&P") indicates that the degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted with a plus sign designation. Capacity for timely payment on commercial
paper rated A-2 is satisfactory, but the relative degree of safety is not as
high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating assigned
by Moody's Investors Service, Inc. ("Moody's"). Issuers rated Prime-1 (or
related supporting institutions) are considered to have a superior capacity for
repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics of issuers rated Prime-1 but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
Corporate Bond Ratings
The following summarizes the ratings used by S&P for corporate
bonds:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB - This is the lowest investment grade. Debt rated BBB is
regarded as having an adequate capacity to pay interest and repay principal.
Although it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for bonds in this category than for
bonds in higher rated categories.
BB, B and CCC - Debt rated BB and B are regarded, on balance, as
predominately speculative with respect to capacity to
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pay interest and repay principal in accordance with the terms of the obligation.
BB represents a lower degree of speculation than B, and CCC the highest degree
of speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which could
lead to inadequate capacity to meet timely interest and principal payments. The
BB rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B - Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
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
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the filing of a bankruptcy petition if debt service payments are jeopardized.
The following summarizes the ratings used by Moody's for corporate
bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers (1, 2 and 3) with respect to the
bonds rated "Aa" through "B." The modifier 1 indicates that the bond being rated
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range
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ranking; and the modifier 3 indicates that the bond ranks in the lower end of
its generic rating category.
Caa - Bonds that are rated Caa are of poor standing. These issues
may be in default or present elements of danger may exist with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C comprise the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
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