<PAGE>
[WARBURG PINCUS FUNDS LOGO][CREDIT SUISSE ASSET MANAGEMENT LOGO]
INTERNATIONAL GROWTH FUND
EUROPEAN EQUITY FUND
U.S. CORE EQUITY FUND
FOCUS FUND
LONG-SHORT MARKET NEUTRAL FUND
U.S. CORE FIXED INCOME FUND
HIGH YIELD FUND
MUNICIPAL BOND FUND
STRATEGIC GLOBAL FIXED INCOME FUND
JANUARY 1, 2000 PROSPECTUS
PROVIDENT DISTRIBUTORS, INC., DISTRIBUTOR
As with all mutual funds, the Securities and Exchange Commission
has not approved these funds, nor has it passed upon the adequacy or
accuracy of this PROSPECTUS. It is a criminal offense to state otherwise.
INSTITUTIONAL SHARES
<PAGE>
CONTENTS
<TABLE>
<S> <C>
KEY POINTS.................................................. 4
PERFORMANCE SUMMARY......................................... 10
Year-by-Year Total Returns ............................... 10
Average Annual Total Returns.............................. 11
INVESTOR EXPENSES........................................... 13
THE FUNDS IN DETAIL......................................... 17
The Management Firms...................................... 17
Multi-Class Structure..................................... 17
Fund Information Key...................................... 18
INTERNATIONAL GROWTH FUND................................... 20
EUROPEAN EQUITY FUND........................................ 22
U.S. CORE EQUITY FUND....................................... 24
FOCUS FUND.................................................. 26
LONG-SHORT MARKET NEUTRAL FUND.............................. 28
U.S. CORE FIXED INCOME FUND................................. 30
HIGH YIELD FUND............................................. 32
MUNICIPAL BOND FUND......................................... 36
STRATEGIC GLOBAL FIXED INCOME FUND.......................... 38
MORE ABOUT RISK............................................. 40
Introduction.............................................. 40
Types of Investment Risk.................................. 40
CERTAIN INVESTMENT PRACTICES ............................... 42
MEET THE MANAGERS........................................... 46
ABOUT YOUR ACCOUNT.......................................... 53
Share Valuation........................................... 53
Buying and Selling Shares................................. 53
Buying Fund Shares........................................ 53
Selling Fund Shares....................................... 54
Exchanging Fund Shares.................................... 54
Other Policies............................................ 55
Account Statements........................................ 55
Distributions............................................. 55
Taxes .................................................... 56
OTHER INFORMATION........................................... 57
About the Distributor..................................... 57
FOR MORE INFORMATION........................................ back cover
CREDIT SUISSE ASSET MANAGEMENT INSTITUTIONAL FUNDS IS THE
NAME UNDER WHICH THE INSTITUTIONAL CLASS OF SHARES OF
CERTAIN WARBURG PINCUS FUNDS ARE OFFERED.
</TABLE>
3
<PAGE>
KEY POINTS
GOAL AND PRINCIPAL STRATEGIES
<TABLE>
<CAPTION>
FUND/RISK FACTORS GOAL STRATEGIES
<S> <C> <C>
INTERNATIONAL GROWTH FUND Long-term appreciation of capital / / Invests in foreign equity securities
Risk factors: / / Emphasizes developed countries, but
FOREIGN SECURITIES may also invest in emerging markets
MARKET RISK / / Combines top-down regional analysis with
NON-DIVERSIFIED STATUS bottom-up company research
/ / Seeks countries, sectors and companies with
solid growth prospects and attractive market
valuations
EUROPEAN EQUITY FUND Capital appreciation / / Invests in European equity securities
Risk factors: / / Targets Western European countries
FOREIGN SECURITIES / / Uses both growth and value criteria (seeks
MARKET RISK "growth at a resonable price")
REGION FOCUS / / Portfolio managers look at factors such as
earnings growth, stock price, relative
valuation and merger-and-acquisition trends
</TABLE>
- --- INVESTOR PROFILE
- ---------------------------
THESE FUNDS ARE DESIGNED FOR INVESTORS WHO:
- are investing for long-term goals
- are willing to assume the risk of losing money in exchange for attractive
potential long-term returns
- are looking for capital appreciation
- want to diversify their portfolios internationally
THEY MAY NOT BE APPROPRIATE IF YOU:
- are investing for a shorter time horizon
- are uncomfortable with an investment that has a higher degree of
volatility
- want to limit your exposure to foreign securities
- are looking for income
You should base your selection of a fund on your own goals, risk preferences and
time horizon.
4
<PAGE>
GOAL AND PRINCIPAL STRATEGIES
<TABLE>
<CAPTION>
FUND/RISK FACTORS GOAL STRATEGIES
<S> <C> <C>
U.S. CORE EQUITY FUND Long-term appreciation of capital / / Invests primarily in U.S. equity securities
Risk factors: / / Focuses on large companies
MARKET RISK / / Stock-selection process uses quantitative
NON-DIVERSIFIED STATUS techniques to seek to identify companies with
improving momentum and reasonable relative
valuations
FOCUS FUND Long-term appreciation of capital / / Invests in securities of 40-60 U.S.
Risk factors: companies
MARKET RISK / / Focuses on companies and industry sectors
NON-DIVERSIFIED STATUS with favorable economic profit trends
/ / Uses both traditional value-based analyses
(such as price/book ratio), as well as the
economic profit of a company
</TABLE>
- --- INVESTOR PROFILE
- ---------------------------
THESE FUNDS ARE DESIGNED FOR INVESTORS WHO:
- are investing for long-term goals
- are willing to assume the risk of losing money in exchange for attractive
potential long-term returns
- are looking for capital appreciation
- want to diversify their portfolios into common stocks
THEY MAY NOT BE APPROPRIATE IF YOU:
- are investing for a shorter time horizon
- are uncomfortable with an investment that will fluctuate in value
- are looking for income
You should base your selection of a fund on your own goals, risk preferences and
time horizon.
5
<PAGE>
GOAL AND PRINCIPAL STRATEGIES
<TABLE>
<CAPTION>
FUND/RISK FACTORS GOAL STRATEGIES
<S> <C> <C>
LONG-SHORT MARKET NEUTRAL FUND Long-term capital appreciation / / Seeks a total return greater than the return
Risk factors: while minimizing exposure to of the Salomon Smith Barney 1-Month Treasury
MARKET RISK general equity market risk Bill Index-TM-
NON-DIVERSIFIED STATUS / / Takes long positions in stocks that the
SHORT POSITIONS manager has identified as attractive
/ / Takes short positions in stocks that the
manager has identified as unattractive
/ / Seeks minimal net exposure to the general
U.S. equity market and low to neutral exposure
to any particular industry or specific
capitalization range
</TABLE>
- --- INVESTOR PROFILE
- ---------------------------
THIS FUND IS DESIGNED FOR INVESTORS WHO:
- are investing for long-term goals
- are willing to assume the risk of losing money in exchange for attractive
potential long-term returns
- are investing for total return or capital appreciation
IT MAY NOT BE APPROPRIATE IF YOU:
- are investing for a shorter time horizon
- are uncomfortable with an investment that will fluctuate in value
- are looking primarily for income
You should base your selection of a fund on your own goals, risk preferences and
time horizon.
6
<PAGE>
GOAL AND PRINCIPAL STRATEGIES
<TABLE>
<CAPTION>
FUND/RISK FACTORS GOAL STRATEGIES
<S> <C> <C>
U.S. CORE FIXED High total return / / Invests primarily in fixed-income securities
INCOME FUND of U.S. issuers
Risk factors: / / Typically maintains a weighted-average
CREDIT RISK portfolio maturity of between five and
INTEREST-RATE RISK 15 years
MARKET RISK / / Focuses on high-grade securities (average
NON-DIVERSIFIED STATUS credit rating AA)
HIGH YIELD FUND High total return / / Invests primarily in high-yield, higher-risk
Risk factors: fixed-income securities (junk bonds)
CREDIT RISK / / Typically maintains a weighted-average
INTEREST-RATE RISK portfolio maturity of between five and
MARKET RISK 15 years
NON-DIVERSIFIED STATUS / / Emphasizes top-down analysis of industry
sectors and themes
/ / Seeks to allocate risk by investing among a
variety of industry sectors
MUNICIPAL BOND FUND High total return / / Invests primarily in municipal securities
Risk factors: / / Typically maintains a weighted-average
CREDIT RISK portfolio maturity of between 10 and 15 years
INTEREST-RATE RISK / / Focuses on high-grade securities (average
MARKET RISK credit rating AA)
NON-DIVERSIFIED STATUS
STRATEGIC GLOBAL FIXED INCOME FUND High total return / / Invests in U.S. and foreign fixed-income
Risk factors: securities denominated in various currencies
CREDIT RISK / / Seeks to maintain an average credit rating
FOREIGN SECURITIES of BBB or higher
INTEREST-RATE RISK / / Seeks to invest in countries exhibiting an
MARKET RISK attractive combination of fixed-income returns
NON-DIVERSIFIED STATUS and currency exchange rates
/ / Focuses on high-grade securities (average
credit rating AA)
</TABLE>
- --- INVESTOR PROFILE
- ---------------------------
THESE FUNDS ARE DESIGNED FOR INVESTORS WHO:
- are seeking investment income
- want to diversify their portfolios with fixed-income funds
- are willing to accept risk and volatility
THEY MAY NOT BE APPROPRIATE IF YOU:
- are investing for maximum return over a long time horizon
- require stability of your principal
You should base your selection of a fund on your own goals, risk preferences and
time horizon.
BECAUSE THE HIGH YIELD FUND AND THE STRATEGIC GLOBAL FIXED INCOME FUND INVOLVE A
HIGHER LEVEL OF RISK, YOU SHOULD CONSIDER THEM ONLY FOR THE AGGRESSIVE PORTION
OF YOUR PORTFOLIO. THE HIGH YIELD FUND AND THE STRATEGIC GLOBAL FIXED INCOME
FUND MAY NOT BE APPROPRIATE FOR EVERYONE.
7
<PAGE>
- --- A WORD ABOUT RISK
- -----------------------------
All investments involve some level of risk. Simply defined, risk is the
possibility that you will lose money or not make money.
Principal risk factors for the funds are discussed below. Before you invest,
please make sure you understand the risks that apply to the funds. As with any
mutual fund, you could lose money over any period of time.
Investments in the funds are not bank deposits and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
CREDIT RISK
U.S. CORE FIXED INCOME, HIGH YIELD, MUNICIPAL BOND AND STRATEGIC GLOBAL FIXED
INCOME FUNDS
The issuer of a security or the counterparty to a contract may default or
otherwise become unable to honor a financial obligation.
FOREIGN SECURITIES
INTERNATIONAL GROWTH, EUROPEAN EQUITY AND STRATEGIC GLOBAL FIXED INCOME FUNDS
A fund that invests outside the U.S. carries additional risks that include:
- CURRENCY RISK Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. Adverse changes in
exchange rates may erode or reverse any gains produced by foreign-currency
denominated investments and may widen any losses. A fund may, but is not
required to, seek to reduce currency risk by hedging part or all of its
exposure to various foreign currencies.
- INFORMATION RISK Key information about an issuer, security or market may
be inaccurate or unavailable.
- POLITICAL RISK Foreign governments may expropriate assets, impose capital
or currency controls, impose punitive taxes, or nationalize a company or
industry. Any of these actions could have a severe effect on security
prices and impair a fund's ability to bring its capital or income back to
the U.S. Other political risks include economic policy changes, social and
political instability, military action and war.
INTEREST-RATE RISK
U.S. CORE FIXED INCOME, HIGH YIELD, MUNICIPAL BOND AND STRATEGIC GLOBAL FIXED
INCOME FUNDS
Changes in interest rates may cause a decline in the market value of an
investment. With bonds and other fixed-income securities, a rise in interest
rates typically causes a fall in values, while a fall in interest rates
typically causes a rise in values.
MARKET RISK
ALL FUNDS
The market value of a security may move up and down, sometimes rapidly and
unpredictably. These fluctuations, which are often referred to as "volatility,"
may cause a security to be worth less than it was worth at an earlier time.
Market risk may affect a single issuer, industry, sector of the economy, or the
market as a whole. Market risk is common to most investments -- including stocks
and bonds, and the mutual funds that invest in them.
Bonds and other fixed-income securities generally involve less market risk
than stocks. The risk of bonds can vary significantly depending upon factors
such as issuer and maturity. The bonds of some companies may be riskier than the
stocks of others.
8
<PAGE>
NON-DIVERSIFIED STATUS
ALL FUNDS EXCEPT EUROPEAN EQUITY FUND
The funds are considered non-diversified investment companies under the
Investment Company Act of 1940 and are permitted to invest a greater proportion
of their assets in the securities of a smaller number of issuers. As a result,
the funds may be subject to greater volatility with respect to their respective
portfolio securities than a fund that is more broadly diversified.
SHORT POSITIONS
LONG-SHORT MARKET NEUTRAL FUND
The fund takes short positions by selling borrowed securities that it does
not currently own, with the intention of repurchasing them later for a profit on
the expectation that the market price will drop.
Because they expose the fund to risks associated with securities it does not
own, short positions involve speculative exposure risk. As a result, if the fund
takes short positions in stocks that increase in value, then it will be likely
to underperform similar stock mutual funds that do not take short positions. In
addition, short positions typically involve increased liquidity risk and
transaction costs.
REGION FOCUS
EUROPEAN EQUITY FUND
Focusing on a single region involves increased currency, political,
regulatory and other risks. Market swings in the targeted region (Western
Europe) will be likely to have a greater effect on fund performance than they
would in a more geographically diversified equity fund.
9
<PAGE>
PERFORMANCE SUMMARY
The bar chart below and the table on the next page provide an indication of the
risks of investing in certain of these funds. The European Equity, Focus and
Long-Short Market Neutral Funds have not been included in either the bar chart
or the table because they have not had at least one full calendar year of
performance. The bar chart shows you how fund performance has varied from year
to year for up to 10 years. The table compares each fund's performance over time
to that of a broadly based securities market index. As with all mutual funds,
past performance is not a prediction of the future.
YEAR-BY-YEAR TOTAL RETURNS(*)
<TABLE>
<CAPTION>
YEAR ENDED 12/31: 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
INTERNATIONAL GROWTH FUND
Best quarter: 17.41% (Q1 98)
Worst quarter: -14.46% (Q3 98)
Inception date: 9/30/92
Total return for the period 1/1/99 - 9/30/99: 5.65%
(not annualized)
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1993 39.95%
1994 -8.37%
1995 4.34%
1996 11.76%
1997 15.17%
1998 20.67%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
U.S. CORE EQUITY FUND
Best quarter: 18.04% (Q2 97)
Worst quarter: -9.73% (Q3 98)
Inception date: 8/31/94
Total return for the period 1/1/99 - 9/30/99: 4.03%
(not annualized)
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1995 35.63%
1996 21.89%
1997 30.23%
1998 24.72%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
U.S. CORE FIXED INCOME FUND
Best quarter: 6.28% (Q2 95)
Worst quarter: -1.80% (Q2 94)
Inception date: 3/31/94
Total return for the period 1/1/99 - 9/30/99: .33%
(not annualized)
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1995 18.25%
1996 5.42%
1997 9.66%
1998 7.38%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
HIGH YIELD FUND
Best quarter: 9.43% (Q2 95)
Worst quarter: -7.02% (Q1 94)
Inception date: 2/26/93
Total return for the period 1/1/99 - 9/30/99: 1.50%
(not annualized)
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1994 -7.96%
1995 16.20%
1996 12.73%
1997 14.85%
1998 -1.28%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
MUNICIPAL BOND FUND
Best quarter: 6.66% (Q1 95)
Worst quarter: -2.61% (Q1 96)
Inception date: 6/17/94
Total return for the period 1/1/99 - 9/30/99: -1.90%
(not annualized)
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1995 15.28%
1996 2.16%
1997 9.61%
1998 5.71%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
STRATEGIC GLOBAL FIXED INCOME FUND
Best quarter: 5.62% (Q2 95)
Worst quarter: -3.18% (Q1 97)
Inception date: 6/27/94
Total return for the period 1/1/99 - 9/30/99: -4.36%
(not annualized)
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1995 17.35%
1996 8.36%
1997 2.00%
1998 10.32%
</TABLE>
* The total returns shown include the total returns of each fund's
predecessor, the Institutional Shares of the corresponding investment
portfolio of The RBB Fund, Inc.
10
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS(1)
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS LIFE OF INCEPTION
PERIOD ENDED 12/31/98: 1998 1996-1998 1994-1998 FUND DATE
<S> <C> <C> <C> <C> <C>
INTERNATIONAL GROWTH FUND 20.67% 15.81% 8.23% 12.30% 9/30/92
MSCI EUROPE, AUSTRALASIA AND
FAR EAST INDEX(2) 20.33% 9.30% 9.50% 11.84%
U.S. CORE EQUITY FUND 24.72% 25.57% N/A 24.67% 8/31/94
STANDARD & POOR'S 500
INDEX(3) 28.75% 28.26% N/A 27.11%
U.S. CORE FIXED INCOME FUND 7.38% 7.48% N/A 8.03% 3/31/94
LEHMAN BROTHERS AGGREGATE
BOND INDEX(4) 8.67% 7.28% N/A 8.33%
HIGH YIELD FUND -1.28% 8.50% 6.45% 9.15% 2/26/93
CS FIRST BOSTON DOMESTIC +
HIGH YIELD INDEX(5) .58% 8.38% 8.16% 9.29%
MUNICIPAL BOND FUND 5.71% 5.78% N/A 6.64% 6/17/94
LEHMAN BROTHERS MUNICIPAL
BOND INDEX(6) 6.48% 6.68% N/A 7.61%
STRATEGIC GLOBAL FIXED
INCOME FUND 10.32% 6.84% N/A 8.29% 6/27/94
JP MORGAN GLOBAL GOVERNMENT
BOND INDEX UNHEDGED(7) 15.31% 6.87% N/A 9.12%
</TABLE>
(1) The total returns shown include the total returns of each fund's
predecessor, the Institutional Shares of the corresponding investment
portfolio of The RBB Fund, Inc.
(2) The Morgan Stanley Capital International Europe, Australasia and Far East
Index is an unmanaged index (with no defined investment objective) of
international equities that includes reinvestments of dividends, and is the
exclusive property of Morgan Stanley Capital International & Co.,
Incorporated.
(3) The S&P 500 Index is an unmanaged index (with no defined investment
objective) of common stocks, includes reinvestment of dividends, and is a
registered trademark of McGraw-Hill Co., Inc.
(4) The Lehman Brothers Aggregate Bond Index is composed of the Lehman
Brothers Government/Corporate Bond Index and the Lehman Brothers
Mortgage-Backed Securities Index. The Aggregate Bond Index includes U.S.
Treasury and agency issues, corporate bond issues and mortgage-backed
securities rated investment-grade or higher by Moody's Investors Service,
Standard & Poor's Corporation or Fitch Investors' Service.
(5) The Credit Suisse First Boston Domestic + High Yield Index is an unmanaged
index (with no defined investment objective) of domestic high yield bonds
and is compiled by Credit Suisse First Boston, an affiliate of the funds'
adviser.
(6) The Lehman Brothers Municipal Bond Index is an unmanaged index (with no
defined investment objective) of municipal bonds and is calculated by Lehman
Brothers Inc.
(7) The JP Morgan Global Government Bond Index Unhedged (including U.S. $) is
a market-capitalization index consisting of the government bond markets of
the following countries: Australia, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, the Netherlands, Spain, Sweden, the U.K. and the U.S.
All issues have a remaining maturity of at least one year and the index is
rebalanced monthly.
11
<PAGE>
UNDERSTANDING PERFORMANCE
/ / TOTAL RETURN tells you how much an investment in a fund has changed in
value over a given time period. It assumes that all dividends and
capital gains (if any) were reinvested in additional shares. The change
in value can be stated either as a CUMULATIVE RETURN or as an AVERAGE
ANNUAL RATE OF RETURN.
/ / A CUMULATIVE TOTAL RETURN is the actual return of an investment for a
specified period. The YEAR-BY-YEAR TOTAL RETURNS in the bar chart are
examples of one-year cumulative total returns.
/ / An AVERAGE ANNUAL TOTAL RETURN applies to periods longer than one year.
It smoothes out the variations in year-by-year performance to tell you
what CONSTANT annual return would have produced the investment's actual
cumulative return. This gives you an idea of an investment's annual
contribution to your portfolio, ASSUMING you held it for the entire
period.
/ / Because of compounding, the average annual total returns in the table
cannot be computed by averaging the returns in the bar chart.
------------------------------------------------------------------------------
12
<PAGE>
INVESTOR EXPENSES
FEES AND FUND EXPENSES
This table describes the fees and expenses you may bear as a shareholder. Annual
fund operating expense figures are for the fiscal period ending August 31, 1999.
<TABLE>
<CAPTION>
EUROPEAN
INTERNATIONAL EQUITY
GROWTH FUND FUND
<S> <C> <C>
SHAREHOLDER FEES
(PAID DIRECTLY FROM YOUR INVESTMENT)
Sales charge "load" on purchases NONE NONE
Deferred sales charge "load" NONE NONE
Sales charge "load" on reinvested distributions NONE NONE
Redemption fees NONE NONE
Exchange fees NONE NONE
ANNUAL FUND OPERATING EXPENSES
(DEDUCTED FROM FUND ASSETS)
Management fee .80% 1.00%
Distribution and service (12b-1) fee NONE NONE
Other expenses .42% 1.29%
TOTAL ANNUAL FUND OPERATING EXPENSES* 1.22% 2.29%
</TABLE>
* Fee waivers and expense reimbursements or credits reduced expenses for the
funds during 1999 but may be discontinued at any time. Actual fees and
expenses for the fiscal year ended August 31, 1999 are shown below:
<TABLE>
<CAPTION>
EUROPEAN
INTERNATIONAL EQUITY
EXPENSES AFTER WAIVERS AND REIMBURSEMENTS GROWTH FUND FUND
<S> <C> <C>
Management fee .80% .00%
Distribution and service (12b-1) fee NONE NONE
Other expenses .41% 1.16%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.21% 1.16%
</TABLE>
EXAMPLE
This example may help you compare the cost of investing in these funds with the
cost of investing in other mutual funds. Because it uses hypothetical
conditions, your actual costs may be higher or lower.
Assume you invest $10,000, each fund returns 5% annually, expense ratios remain
as listed in the first table above (before fee waivers and expense
reimbursements and credits), and you close your account at the end of each of
the time periods shown. Based on these assumptions, your cost would be:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS 10 YEARS
<S> <C> <C> <C> <C>
INTERNATIONAL GROWTH FUND $ 124 $ 387 $ 670 $1,477
EUROPEAN EQUITY FUND $ 232 $ 715 $1,225 $2,626
</TABLE>
13
<PAGE>
FEES AND FUND EXPENSES
This table describes the fees and expenses you may bear as a shareholder. Annual
fund operating expense figures are for the fiscal year ended August 31, 1999.
<TABLE>
<CAPTION>
U.S. CORE
EQUITY FOCUS
FUND FUND
<S> <C> <C>
SHAREHOLDER FEES
(PAID DIRECTLY FROM YOUR INVESTMENT)
Sales charge "load" on purchases NONE NONE
Deferred sales charge "load" NONE NONE
Sales charge "load" on reinvested distributions NONE NONE
Redemption fees NONE NONE
Exchange fees NONE NONE
ANNUAL FUND OPERATING EXPENSES
(DEDUCTED FROM FUND ASSETS)
Management fee .75% .75%
Distribution and service (12b-1) fee NONE NONE
Other expenses .47% .67%
TOTAL ANNUAL FUND OPERATING EXPENSES* 1.22% 1.42%
</TABLE>
* Fee waivers and expense reimbursements or credits reduced expenses for the
funds during 1999 but may be discontinued at any time. Actual fees and
expenses for the fiscal year ended August 31, 1999 are shown below:
<TABLE>
<CAPTION>
U.S. CORE
EQUITY FOCUS
EXPENSES AFTER WAIVERS AND REIMBURSEMENTS FUND FUND
<S> <C> <C>
Management fee .53% .33%
Distribution and service (12b-1) fee NONE NONE
Other expenses .46% .66%
TOTAL ANNUAL FUND OPERATING EXPENSES .99% .99%
</TABLE>
EXAMPLE
This example may help you compare the cost of investing in these funds with the
cost of investing in other mutual funds. Because it uses hypothetical
conditions, your actual costs may be higher or lower.
Assume you invest $10,000, each fund returns 5% annually, expense ratios remain
as listed in the first table above (before fee waivers and expense
reimbursements or credits), and you close your account at the end of each of the
time periods shown. Based on these assumptions, your cost would be:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS 10 YEARS
<S> <C> <C> <C> <C>
U.S. CORE EQUITY FUND $ 124 $ 387 $ 670 $1,477
FOCUS FUND $ 145 $ 449 $ 776 $1,702
</TABLE>
14
<PAGE>
FEES AND FUND EXPENSES
This table describes the fees and expenses you may bear as a shareholder. Annual
fund operating expense figures are for the fiscal year ended August 31, 1999.
<TABLE>
<CAPTION>
LONG-SHORT
MARKET
NEUTRAL
FUND
<S> <C>
SHAREHOLDER FEES
(PAID DIRECTLY FROM YOUR INVESTMENT)
Sales charge "load" on purchases NONE
Deferred sales charge "load" NONE
Sales charge "load" on reinvested distributions NONE
Redemption fees NONE
Exchange fees NONE
ANNUAL FUND OPERATING EXPENSES
(DEDUCTED FROM FUND ASSETS)
Management fee 1.50%(1)
Distribution and service (12b-1) fee NONE
Other expenses(2) 2.43%
TOTAL ANNUAL FUND OPERATING EXPENSES(3) 3.93%
</TABLE>
(1) The basic management fee is 1.50%. The management fee of the fund may be
increased or decreased pursuant to the application of an adjustment formula
based upon the fund's investment performance as compared to the Salomon
Smith Barney 1-Month U.S. Treasury Bill Index-TM-. The management fee, as
adjusted, may range from 1.00% to 2.00%.
(2) "Other expenses" and "Total annual fund operating expenses" include
dividend and interest expenses incured in connection with short sales, which
are included in and reduce the investment return of the fund.
(3) Fee waivers and expense reimbursements or credits reduced expenses for the
fund during 1999 but may be discontinued at any time. Actual fees and
expenses for the fiscal year ended August 31, 1999 are shown below:
<TABLE>
<CAPTION>
LONG-SHORT
MARKET
NEUTRAL
EXPENSES AFTER WAIVERS AND REIMBURSEMENTS FUND
<S> <C>
Management fee 1.00%
Distribution and service (12b-1) fee NONE
Other expenses 2.33%
TOTAL ANNUAL FUND OPERATING EXPENSES 3.33%
</TABLE>
EXAMPLE
This example may help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. Because it uses hypothetical
conditions, your actual costs may be higher or lower.
Assume you invest $10,000, the fund returns 5% annually, expense ratios remain
as listed in the first table above (before fee waivers and expense
reimbursements or credits), and you close your account at the end of each of the
time periods shown. Based on these assumptions, your cost would be:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS 10 YEARS
<S> <C> <C> <C> <C>
LONG-SHORT MARKET
NEUTRAL FUND $ 395 $1,198 $2,018 $4,147
</TABLE>
15
<PAGE>
FEES AND FUND EXPENSES
This table describes the fees and expenses you may bear as a shareholder. Annual
fund operating expense figures are for the fiscal year ended August 31, 1999.
<TABLE>
<CAPTION>
STRATEGIC
U.S. CORE GLOBAL
FIXED MUNICIPAL FIXED
INCOME HIGH YIELD BOND INCOME
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
SHAREHOLDER FEES
(PAID DIRECTLY FROM YOUR INVESTMENT)
Sales charge "load" on purchases NONE NONE NONE NONE
Deferred sales charge "load" NONE NONE NONE NONE
Sales charge "load" on reinvested
distributions NONE NONE NONE NONE
Redemption fees NONE NONE NONE NONE
Exchange fees NONE NONE NONE NONE
ANNUAL FUND OPERATING EXPENSES
(DEDUCTED FROM FUND ASSETS)
Management fee .37% .70% .70% .50%
Distribution and service (12b-1) fee NONE NONE NONE NONE
Other expenses .25% .34% .73% .77%
TOTAL ANNUAL FUND OPERATING EXPENSES* .62% 1.04% 1.43% 1.27%
</TABLE>
* Fee waivers and expense reimbursements or credits reduced expenses for the
funds during 1999 but may be discontinued at any time. Actual fees and
expenses for the fiscal year ended August 31, 1999 are shown below:
<TABLE>
<CAPTION>
STRATEGIC
U.S. CORE GLOBAL
FIXED MUNICIPAL FIXED
EXPENSES AFTER WAIVERS AND INCOME HIGH YIELD BOND INCOME
REIMBURSEMENTS FUND FUND FUND FUND
<S> <C> <C> <C> <C>
Management fee .21% .39% .28% .00%
Distribution and service (12b-1) fee NONE NONE NONE NONE
Other expenses .23% .30% .71% .74%
TOTAL ANNUAL FUND OPERATING EXPENSES .44% .69% .99% .74%
</TABLE>
EXAMPLE
This example may help you compare the cost of investing in these funds with the
cost of investing in other mutual funds. Because it uses hypothetical
conditions, your actual costs may be higher or lower.
Assume you invest $10,000, each fund returns 5% annually, expense ratios remain
as listed in the first table above (before fee waivers and expense
reimbursements or credits), and you close your account at the end of each of the
time periods shown. Based on these assumptions, your cost would be:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS 10 YEARS
<S> <C> <C> <C> <C>
U.S. CORE FIXED INCOME FUND $ 63 $ 199 $ 346 $ 774
HIGH YIELD FUND $ 106 $ 331 $ 574 $1,271
MUNICIPAL BOND FUND $ 146 $ 452 $ 782 $1,713
STRATEGIC GLOBAL FIXED
INCOME FUND $ 129 $ 403 $ 697 $1,534
</TABLE>
16
<PAGE>
THE FUNDS IN DETAIL
- --- THE MANAGEMENT FIRMS
- ----------------------------------
CREDIT SUISSE ASSET MANAGEMENT, LLC
One Citicorp Center
153 East 53rd Street
New York, NY 10022
- - Investment adviser for the funds
- - Responsible for managing each fund's assets according to its goal and strategy
and supervising the activities of the sub-investment adviser for the European
Equity and Strategic Global Fixed Income Funds
- - A member of Credit Suisse Asset Management (CSAM), the institutional asset
management and mutual fund arm of Credit Suisse Group, one of the world's
leading banks
- - CSAM companies manage more than $58 billion in the U.S. and $186 billion
globally
- - CSAM has offices in 14 countries, including SEC-registered offices in New York
and London; other offices (such as those in Budapest, Frankfurt, Milan,
Moscow, Paris, Prague, Sydney, Tokyo, Warsaw and Zurich) are not registered
with the U.S. Securities and Exchange Commission
CREDIT SUISSE ASSET MANAGEMENT LIMITED
Beaufort House
15 St. Botolph Street
London, EC 3A 7JJ
- - Sub-investment adviser for the European Equity and Strategic Global Fixed
Income Funds
- - A member of CSAM
- --- MULTI-CLASS STRUCTURE
- ----------------------------------
This PROSPECTUS describes the Institutional Class shares of the funds. The
Common Class shares of the funds, if offered, are described in separate
prospectuses.
17
<PAGE>
- --- FUND INFORMATION KEY
- ---------------------------------
Concise fund-by-fund descriptions begin on the following pages. Each
description provides the following information:
GOAL AND STRATEGIES
The fund's particular investment goal and the strategies it intends to use
in pursuing that goal. Percentages of fund assets are based on total assets
unless indicated otherwise.
PORTFOLIO INVESTMENTS
The primary types of securities in which the fund invests. Secondary
investments are described in "More About Risk."
RISK FACTORS
The major risk factors associated with the fund. Additional risk factors are
included in "More About Risk."
PORTFOLIO MANAGEMENT
The individuals designated by the investment adviser or sub-adviser to
handle the fund's day-to-day management.
INVESTOR EXPENSES
Actual expenses for the 1999 fiscal period. Future expenses may be higher or
lower.
- MANAGEMENT FEE The fee paid to the investment adviser and sub-adviser for
providing investment advice to the fund. Expressed as a percentage of
average net assets after waivers.
- OTHER EXPENSES Fees paid by the fund for items such as administration,
transfer agency, custody, auditing, legal, registration fees and
miscellaneous expenses. Expressed as a percentage of average net assets
after waivers, credits and reimbursements.
FINANCIAL HIGHLIGHTS
A table showing each fund's audited financial performance for up to five
years.
- TOTAL RETURN How much you would have earned on an investment in the fund,
assuming you had reinvested all dividend and capital-gain distributions.
- PORTFOLIO TURNOVER An indication of trading frequency. The funds may sell
securities without regard to the length of time they have been held. A
high turnover rate may increase a fund's transaction costs and negatively
affect its performance. Portfolio turnover may also result in capital-gain
distributions that could raise your income-tax liability.
The ANNUAL REPORT includes the auditor's report, along with each fund's
financial statements. It is available free upon request.
18
<PAGE>
This page intentionally left blank
19
<PAGE>
INTERNATIONAL GROWTH FUND
- --- GOAL AND STRATEGIES
- -------------------------------
The International Growth Fund seeks long-term appreciation of capital. To
pursue this goal, it invests in equity securities of companies located or
conducting a majority of their business outside the U.S.
Although it is not an index fund and does not seek to replicate the
performance of any index, this fund expects to focus primarily, but not
exclusively, on countries represented in the Morgan Stanley Capital
International Europe Australasia and Far East (MSCI-EAFE) Index. Although the
fund may invest in emerging markets, it does not expect to invest more than 30%
of assets in securities of emerging-markets issuers.
Under normal market conditions, the fund will invest at least 80% of assets
in equity securities of issuers from at least three foreign countries. The fund
may invest in companies of all sizes.
In managing the fund's investments, the portfolio managers:
- combine top-down regional analysis with bottom-up company research
- look for countries, sectors and companies with solid growth prospects and
attractive market valuations
- focus research efforts on early identification of new investment
opportunities while seeking to manage risk
- --- PORTFOLIO INVESTMENTS
- ----------------------------------
Equity holdings may include:
- common and preferred stocks
- securities convertible into common or preferred stock
- rights and warrants
- depositary receipts
To a limited extent, the fund may also engage in other investment practices.
- --- RISK FACTORS
- ---------------------
This fund's principal risk factors are:
- foreign securities
- market risk
- non-diversified risk
The value of your investment will fluctuate in response to stock-market
movements. Because the fund invests internationally, it carries additional
risks, including currency, information and political risks. These risks are
defined in "More About Risk."
Although the portfolio managers typically have diversified the fund's
investments, the fund's non-diversified status allows the fund to invest a
greater share of its assets in the securities of fewer companies. Non-
diversification might cause the fund to be more volatile than a diversified
fund.
To the extent that the fund invests in emerging markets or focuses on a
single country or region, it takes on additional risks that could hurt its
performance. Investing in emerging markets involves access, operational and
other risks not generally encountered in developed countries. "More About Risk"
details these and certain other investment practices the fund may use. Please
read that section carefully before you invest.
20
<PAGE>
- --- PORTFOLIO MANAGEMENT
- -----------------------------------
Steven D. Bleiberg, Richard Watt, Emily Alejos, Robert B. Hrabchak and Alan
Zlatar manage the fund's investment portfolio. You can find out more about them
in "Meet the Managers."
- --- INVESTOR EXPENSES
- ----------------------------
<TABLE>
<S> <C>
Management fee .80%
All other expenses .41%
----
Total expenses 1.21%
</TABLE>
- --- FINANCIAL HIGHLIGHTS
- --------------------------------
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP, whose report on the fund's financial statements is
included in the ANNUAL REPORT.
<TABLE>
<CAPTION>
8/99 8/98 8/97 8/96 8/95
PERIOD ENDED: ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of year............. $ 22.70 $ 22.22 $ 19.41 $ 18.24 $ 20.73
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income (loss)............... 0.14 0.15 0.18 0.19 0.06
Net gain (loss) on investments and foreign
currency transactions (both realized and
unrealized).............................. 2.90 3.26 2.89 1.05 (1.75)
-------- -------- -------- -------- --------
Total from investment operations........... 3.04 3.41 3.07 1.24 (1.69)
-------- -------- -------- -------- --------
Less distributions:
Dividends from net investment income....... (0.28) -- (0.26) (0.07) --
Distributions from capital gains........... (1.99) (2.93) -- -- (0.80)
-------- -------- -------- -------- --------
Total distributions........................ (2.27) (2.93) (0.26) (0.07) (0.80)
-------- -------- -------- -------- --------
Net asset value, end of year................... $ 23.47 $ 22.70 $ 22.22 $ 19.41 $ 18.24
======== ======== ======== ======== ========
Total return................................... 13.88% 16.74% 15.93% 6.81%(1) (8.06%)(1)
Ratios/supplemental data:
Net assets, end of year (000s omitted)....... $675,118 $623,482 $568,510 $682,271 $773,255
Ratio of expenses to average net assets...... 1.21%(2) 1.14%(2) 1.16%(2) 1.19%(2) 1.25%(2)
Ratio of net investment income (loss) to
average net assets......................... 0.60% 0.72% 0.71% 0.84% 0.35%
Fund turnover rate........................... 182% 141% 126% 86% 78%
</TABLE>
(1) Redemption fees not reflected in total return.
(2) Without the voluntary waiver of advisory fees and administration fees, the
ratios of expenses to average net assets for the Institutional Class would
have been 1.22%, 1.23%, 1.25%, 1.22% and 1.26% for the years ended August
31, 1999, 1998, 1997, 1996 and 1995, respectively.
21
<PAGE>
EUROPEAN EQUITY FUND
- --- GOAL AND STRATEGIES
- -------------------------------
The European Equity Fund seeks capital appreciation. To pursue this goal,
the fund invests primarily in equity securities of Western European companies.
The fund considers Western Europe to include the European Union, Norway and
Switzerland. The European Union currently consists of: Austria, Belgium,
Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, Spain, Sweden and the United Kingdom.
Under normal market conditions, the fund invests at least 65% of assets in
equity securities of companies located in or conducting a majority of their
business in Western Europe or companies whose securities trade primarily in
Western European markets. To enhance return potential, the fund may also pursue
opportunities in other European countries.
The fund intends to diversify its investments across different countries.
However, at times the fund may invest a significant part of its assets in a
single country. The fund may invest in companies of any size, although most of
the fund's investments will be in medium to larger capitalization companies.
In choosing stocks, the portfolio managers consider a number of factors
including:
- stock price relative to the company's rate of earnings growth
- valuation relative to other European companies and market averages
- merger-and-acquisition trends on companies' business strategies
- --- PORTFOLIO INVESTMENTS
- ----------------------------------
This fund currently intends to invest at least 80% of assets in equity
securities of Western European companies. These equity securities include:
- common and preferred stocks
- securities convertible into common stocks
- securities such as rights and warrants, whose values are based on common
stocks
To a limited extent, the fund may engage in other investment practices.
- --- RISK FACTORS
- ---------------------
This fund's principal risk factors are:
- market risk
- foreign securities
- region focus
The value of your investment will fluctuate in response to Western European
stock markets. Because the fund invests internationally, it carries additional
risks, including currency, information and political risks. These risks are
defined in "More About Risk."
Targeting a single region could hurt the fund's performance or may cause the
fund to be more volatile than a more geographically diversified equity fund.
Fund performance is closely tied to economic and political conditions within
Europe.
"More About Risk" details certain other investment practices the fund may
use. Please read that section carefully before you invest.
22
<PAGE>
- --- PORTFOLIO MANAGEMENT
- -----------------------------------
Harold W. Ehrlich, J.H. Cullum Clark and Nancy Nierman manage the fund's
investment portfolio. You can find out more about them in "Meet the Managers."
- --- INVESTOR EXPENSES
- ----------------------------
<TABLE>
<S> <C>
Management fee 0.00%
All other expenses 1.16%
----
Total expenses 1.16%
</TABLE>
- --- FINANCIAL HIGHLIGHTS
- --------------------------------
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP, whose report on the fund's financial statements is
included in the ANNUAL REPORT.
<TABLE>
<CAPTION>
8/99(1)
PERIOD ENDED: ---------------
<S> <C>
PER-SHARE DATA
Net asset value, beginning of period........................ $10.00
------
Income from investment operations:
Net investment income (loss)............................ 0.09
Net gain (loss) on investments and foreign currency
transactions (both realized and unrealized)............ (0.29)
------
Total from investment operations........................ (0.20)
------
Less distributions:
Dividends from net investment income.................... --
Distributions from capital gains........................ --
------
Total distributions..................................... --
------
Net asset value, end of period.............................. $ 9.80
======
Total return................................................ (2.00%)(2)
Ratios/supplemental data:
Net assets, end of period (000s omitted).................. $98
Ratio of expenses to average net assets................... 1.16%(3,4)
Ratio of net income (loss) to average net assets.......... 1.67%(4)
Fund turnover rate........................................ 1.61%(2)
</TABLE>
(1) For the period January 29, 1999 (commencement of operations) through
August 31, 1999.
(2) Not annualized.
(3) Without the voluntary waiver of advisory fees and administration fees, the
ratios of expenses to average net assets for the Institutional Class would
have been 2.29% annualized for the period ended August 31, 1999.
(4) Annualized.
23
<PAGE>
U.S. CORE EQUITY FUND
- --- GOAL AND STRATEGIES
- -------------------------------
The U.S. Core Equity Fund seeks long-term appreciation of capital. To pursue
this goal, it invests in equity securities of large U.S. companies.
In choosing stocks, the fund's portfolio managers use quantitative
techniques to seek to identify companies with improving momentum and reasonable
relative valuations. They emphasize the following five factors:
- earnings
- valuation
- stability/consistency
- relative price strength/sentiment
- financial strength
The managers seek to maintain characteristics that roughly mirror the S&P
500 Index with respect to:
- market capitalization
- industry/sector weightings
- style exposure
- --- PORTFOLIO INVESTMENTS
- ----------------------------------
Under normal market conditions, this fund invests at least 65% of assets in
U.S. equity securities. Equity holdings may consist of:
- common stocks
- preferred stocks
- securities convertible into common stocks
- securities such as rights and warrants, whose values are based on common
stocks
The fund may invest up to 35% of its assets in dollar-denominated American
Depositary Receipts (ADRs) and similar securities of foreign issuers. To a
limited extent, the fund may also engage in other investment practices.
- --- RISK FACTORS
- ---------------------
This fund's principal risk factors are:
- market risk
- non-diversified risk
The value of your investment will fluctuate in response to stock market
movements.
Although the portfolio managers typically have diversified the fund's
investments, the fund's non-diversified status allows the fund to invest a
greater share of its assets in the securities of fewer companies.
Non-diversification might cause the fund to be more volatile than a diversified
fund.
"More About Risk" details certain other investment practices the fund may
use. Please read that section carefully before you invest.
24
<PAGE>
- --- PORTFOLIO MANAGEMENT
- -----------------------------------
William W. Priest, Jr., Eric N. Remole, Marc Bothwell and Michael Welhoelter
manage the fund's investment portfolio. You can find out more about them in
"Meet the Managers."
- --- INVESTOR EXPENSES
- ----------------------------
<TABLE>
<S> <C>
Management fee .53%
All other expenses .46%
----
Total expenses .99%
</TABLE>
- --- FINANCIAL HIGHLIGHTS
- --------------------------------
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP, whose report on the fund's financial statements is
included in the ANNUAL REPORT.
<TABLE>
<CAPTION>
8/99 8/98 8/97 8/96 8/95
PERIOD ENDED: ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of
period............................. $ 21.73 $ 24.40 $ 19.05 $ 17.86 $ 15.00
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income (loss)..... 0.07 0.01 0.14 0.20 0.22
Net gain (loss) on investments
(both realized and
unrealized).................... 7.56 0.88 6.82 2.81 2.72
-------- -------- -------- -------- --------
Total from investment
operations..................... 7.63 0.89 6.96 3.01 2.94
-------- -------- -------- -------- --------
Less distributions:
Dividends from net investment
income......................... (0.04) (0.13) (0.20) (0.21) (0.08)
Distributions from realized
capital gains.................. (9.74) (3.43) (1.41) (1.61) --
-------- -------- -------- -------- --------
Total distributions.............. (9.78) (3.56) (1.61) (1.82) (0.08)
-------- -------- -------- -------- --------
Net asset value, end of period....... $ 19.58 $ 21.73 $ 24.40 $ 19.05 $ 17.86
======== ======== ======== ======== ========
Total return......................... 38.07% 3.18% 38.32% 17.59% 19.75%
Ratios/supplemental data:
Net assets, end of period (000s
omitted)......................... $70,081 $63,514 $86,182 $59,015 $31,644
Ratio of expenses to average net
assets........................... 0.99%* 1.00%* 1.00%* 1.00%* 1.00%*
Ratio of net investment income
(loss) to average net assets..... 0.32% 0.23% 0.67% 1.25% 1.59%
Fund turnover rate................. 110% 164% 93% 127% 123%
</TABLE>
* Without the voluntary waiver of advisory fees and administration fees, the
ratios of expenses to average net assets for the Institutional Class would
have been 1.22%, 1.18%, 1.18% and 1.34% for the years ended August 31, 1999,
1998, 1997 and 1996, respectively, and 1.51% annualized for the period ended
August 31, 1995.
25
<PAGE>
FOCUS FUND
- --- GOAL AND STRATEGIES
- -------------------------------
The Focus Fund seeks long-term appreciation of capital. To pursue this goal,
the fund invests in securities of approximately 40-60 U.S. companies. The "top
ten" (largest company holdings) in the fund's portfolio may account for 40% or
more of the fund's assets. In addition, the fund's portfolio managers search for
industry sectors with favorable economic profit trends and may focus the
portfolio in these sectors.
In choosing stocks, the fund's portfolio managers use both traditional
value-based analyses (such as
price/book ratio), as well as the economic profit of a company measured by its
cash flow relative to its capital assets. The managers look for companies that:
- earn rates of return exceeding their risk-adjusted costs of capital, as
opposed to earning more than they have spent (accounting profits)
- create shareholder value by gaining the most from their investment
spending, or use their cost of capital as a competitive advantage
- have current market valuations that do not fully recognize future
economically profitable growth
The managers believe this approach allows them to identify companies with
low disappointment risk, as well as those with potential restructuring
opportunities. The portfolio managers construct the fund's portfolio by
weighting selected securities based on results of a proprietary analysis and
risk-scoring system.
- --- PORTFOLIO INVESTMENTS
- ----------------------------------
Under normal market conditions, this fund invests at least 65% of assets in
U.S. equity securities. Equity holdings may consist of:
- common stocks
- preferred stocks
- securities convertible into common stocks
- securities such as rights and warrants, whose values are based on common
stocks
The fund may invest without limit in foreign securities, including
dollar-denominated ADRs of foreign issuers. To a limited extent, the fund may
also engage in other investment practices.
- --- RISK FACTORS
- ---------------------
This fund's principal risk factors are:
- market risk
- non-diversified risk
The value of your investment will vary with changes in interest rates and
other factors.
Compared to a diversified mutual fund, a non-diversified fund may invest a
greater portion of its assets in the securities of fewer issuers. Because this
fund is non-diversified, its share price and yield might fluctuate more than
they would for a diversified fund.
"More About Risk" details certain other investment practices the fund may
use. Please read that section carefully before you invest.
- --- PORTFOLIO MANAGEMENT
- -----------------------------------
James A. Abate and D. Susan Everly manage the fund's investment portfolio.
You can find out more about them in "Meet the Managers."
26
<PAGE>
- --- INVESTOR EXPENSES
- ----------------------------
<TABLE>
<S> <C>
Management fee .33%
All other expenses .66%
----
Total expenses .99%
</TABLE>
- --- FINANCIAL HIGHLIGHTS
- --------------------------------
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP, whose report on the fund's financial statements is
included in the ANNUAL REPORT.
<TABLE>
<CAPTION>
8/99 8/98(1)
PERIOD ENDED: ----------- -----------
<S> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period........................ $ 13.17 $ 15.00
------- -------
Income from investment operations:
Net investment income (loss)............................ 0.08 0.01
Net gain (loss) on investments (both realized and
unrealized)........................................... 6.92 (1.84)
------- -------
Total from investment operations........................ 7.00 (1.83)
------- -------
Less distributions:
Dividends from net investment income.................... (0.02) --
Distributions from capital gains........................ -- --
------- -------
Total distributions..................................... (0.02) --
------- -------
Net asset value, end of period.............................. $ 20.15 $ 13.17
======= =======
Total return................................................ 53.21% (12.20%)(2)
Ratios/supplemental data:
Net assets, end of period (000s omitted).................. $35,394 $22,659
Ratio of expenses to average net assets................... 0.99%(3) 1.00%(3,4)
Ratio of net investment income (loss) to average net
assets.................................................. 0.47% 0.92%(4)
Fund turnover rate........................................ 209% 52%(2)
</TABLE>
(1) For the period August 3, 1998 (commencement of operations) through August
31, 1998.
(2) Not annualized.
(3) Without the voluntary waiver of advisory fees and administration fees, the
ratios of expenses to average net assets for the Institutional Class would
have been 1.42% for the year ended August 31, 1999 and 1.30% annualized for
the period ended August 31, 1998.
(4) Annualized.
27
<PAGE>
LONG-SHORT MARKET NEUTRAL FUND
- --- GOAL AND STRATEGIES
- -------------------------------
The Long-Short Market Neutral Fund seeks long-term capital appreciation
while minimizing exposure to general equity market risk. This fund seeks a total
return greater than the return of the Salomon Smith Barney 1-Month Treasury Bill
Index-TM-.
To pursue its goal, the fund takes long positions in stocks that the
portfolio manager has identified as attractive and short positions in stocks
that the manager has identified as unattractive. In doing so, the fund attempts
to minimize directional market risks associated with investing in the equity
market by neutralizing the effects of general stock market movements on its
performance.
In choosing long and short positions for the fund, the portfolio managers
use quantitative techniques to analyze the tradeoff between the attractiveness
of each position and its impact on the risk of the overall portfolio. The
managers seek to construct a portfolio that has:
- minimal net exposure to the general U.S. equity market
- low to neutral exposure to any particular industry or specific
capitalization range (e.g., large cap, mid cap and small cap)
- --- PORTFOLIO INVESTMENTS
- ----------------------------------
Under normal market conditions, this fund takes long and short positions in
equity securities that are principally traded in U.S. markets. These securities
may include:
- common stocks of U.S. issuers
- American depositary receipts of foreign issuers
To a limited extent, the fund may also engage in other investment practices.
- --- RISK FACTORS
- ---------------------
This fund's principal risk factors are:
- market risk
- non-diversified risk
- short positions
The value of your investment will fluctuate in response to stock market
movements.
Although all mutual funds are subject to the risk that the fund's portfolio
managers will not make good investments, the fund's strategy of taking both long
and short positions increases this risk because long positions could decline in
value at the same time short positions increase. As with other mutual funds,
taking long positions in stocks that decline in value would hurt the fund's
performance. Additionally, however, if the fund were to take short positions in
stocks that increase in value, then it would be likely to underperform similar
stock mutual funds that do not take short positions. Short sales also involve
expenses that will decrease the fund's return.
An investment in the fund involves greater volatility and significantly more
risks than investing in one-month U.S. Treasury bills. Unlike Treasury bills:
- an investment in the fund is not guaranteed by the U.S. government
- the fund does not provide a fixed rate of return
- you can lose money by investing in the fund
28
<PAGE>
Although the portfolio managers typically have diversified the fund's
investments, the fund's non-diversified status allows the fund to invest a
greater share of its assets in the securities of fewer companies.
Non-diversification might cause the fund to be more volatile than a diversified
fund.
"More About Risk" details certain other investment practices the fund may
use. Please read that section carefully before you invest.
- --- PORTFOLIO MANAGEMENT
- -----------------------------------
William W. Priest, Jr., Eric N. Remole, Marc Bothwell and Michael Welhoelter
manage the fund's investment portfolio. You can find out more about them in
"Meet the Managers."
- --- INVESTOR EXPENSES
- ----------------------------
<TABLE>
<S> <C>
Management fee 1.00%*
All other expenses 2.33%
----
Total expenses 3.33%
</TABLE>
* The basic management fee is 1.50%. The management fee of the fund may be
increased or decreased pursuant to the application of an adjustment formula
based upon the fund's investment performance as compared to the Salomon
Smith Barney 1-Month U.S. Treasury Bill Index-TM-. The management fee, as
adjusted, may range from 1.00% to 2.00%.
- --- FINANCIAL HIGHLIGHTS
- --------------------------------
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP, whose report on the fund's financial statements is
included in the ANNUAL REPORT.
<TABLE>
<CAPTION>
8/99 8/98(1)
PERIOD ENDED: --------- ----------------
<S> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period........................ $ 15.27 $15.00
------- ------
Income from investment operations:
Net investment income (loss)............................ 0.39(2) 0.05
Net gain (loss) on investments and securities sold short
(both realized and unrealized)........................ (1.25) 0.22
------- ------
Total from investment operations........................ (0.86) 0.27
------- ------
Less distributions:
Dividends from net investment income.................... (0.07) --
Distributions from capital gains........................ (0.13) --
------- ------
Total distributions..................................... (0.20) --
------- ------
Net asset value, end of period.............................. $ 14.21 $15.27
======= ======
Total return................................................ (5.68%) 1.80%(3)
Ratios/supplemental data:
Net assets, end of period (000s omitted).................. $5,901 $6,302
Ratio of expenses to average net assets (including
dividend expenses)...................................... 3.33%(4) 4.32%(4,5)
Ratio of expenses to average net assets (excluding
dividend expenses)...................................... 2.00%(4) 2.00%(4,5)
Ratio of net investment income (loss) to average net
assets.................................................. 2.65% 1.96%(5)
Fund turnover rate........................................ 705% 130%(3)
</TABLE>
(1) For the period August 3, 1998 (commencement of operations) through August
31, 1998.
(2) Per share information is calculated using the average share outstanding
method.
(3) Not annualized.
(4) Without the voluntary waiver of advisory fees and administration fees, the
ratios of expenses to average net assets for the Institutional Class would
have been 2.56% (excluding dividend expense) and 3.93% (including dividend
expense) for the year ended August 31, 1999 and 5.12% (excluding dividend
expense) and 7.44% (including dividend expense) annualized for the period
ended August 31, 1998.
(5) Annualized.
29
<PAGE>
U.S. CORE FIXED INCOME FUND
- --- GOAL AND STRATEGIES
- -------------------------------
The U.S. Core Fixed Income Fund seeks high total return. To pursue this
goal, it invests primarily in fixed-income securities of U.S. issuers.
The fund seeks to maintain a weighted-average credit rating comparable to
the AA rating of Standard & Poor's Ratings Services. The fund's weighted-average
maturity will typically be between five and 15 years.
- --- PORTFOLIO INVESTMENTS
- ----------------------------------
Under normal market conditions, this fund invests at least 65% of assets in
U.S. fixed-income securities such as:
- corporate bonds, debentures and notes
- government and agency securities
- mortgage-backed securities
The fund may invest:
- up to 35% of assets in debt securities of foreign issuers
- up to 20% of assets in securities denominated in foreign currency
- up to 10% of assets in non-investment-grade debt securities (junk bonds)
of issuers located in emerging markets
- up to 10% of assets in bonds convertible into equity securities
- up to 10% of assets in preferred stocks
To a limited extent, the fund may also engage in other investment practices.
- --- RISK FACTORS
- ---------------------
This fund's principal risk factors are:
- credit risk
- interest-rate risk
- market risk
- non-diversified risk
You should expect fluctuations in share price, yield and total return,
particularly with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of fixed-income securities. There is also
the risk that an issuer of a debt security will fail to make timely payments of
principal or interest to the fund.
Although the portfolio managers typically have diversified the fund's
investments, the fund's non-diversified status allows the fund to invest a
greater share of its assets in the securities of fewer companies.
Non-diversification might cause the fund to be more volatile than a diversified
fund.
To the extent that it invests in certain securities, the fund may be
affected by additional risks:
- mortgage-backed securities: extension and prepayment risks
- junk bonds: above-average credit, information, market and other risks
- foreign securities: currency, information and political risks
- equity securities (including convertible bonds and preferred stocks):
information, market and other risks
30
<PAGE>
These risks are defined in "More About Risk." That section also details
certain other investment practices the fund may use. Please read "More About
Risk" carefully before you invest.
- --- PORTFOLIO MANAGEMENT
- -----------------------------------
Gregg M. Diliberto, Mark K. Silverstein, Jo Ann Corkran and Jose A.
Rodriguez manage the fund's investment portfolio. You can find out more about
them in "Meet the Managers."
- --- INVESTOR EXPENSES
- ----------------------------
<TABLE>
<S> <C>
Management fee .21%
All other expenses .23%
----
Total expenses .44%
</TABLE>
- --- FINANCIAL HIGHLIGHTS
- --------------------------------
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP, whose report on the fund's financial statements is
included in the ANNUAL REPORT.
<TABLE>
<CAPTION>
8/99 8/98 8/97 8/96 8/95
PERIOD ENDED: --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of year...... $ 15.72 $ 15.65 $ 15.06 $ 15.42 $ 14.77
-------- -------- -------- -------- -------
Income from investment operations:
Net investment income (loss)........ 0.93 0.84 0.92 0.95 0.88
Net gain (loss) on investments,
futures and foreign currency
transactions (both realized and
unrealized)....................... (0.56) 0.33 0.76 (0.16) 0.61
-------- -------- -------- -------- -------
Total from investment operations.... 0.37 1.17 1.68 0.79 1.49
-------- -------- -------- -------- -------
Less distributions:
Dividends from net investment
income............................ (0.91) (0.87) (0.97) (0.93) (0.84)
Distributions from capital gains.... (0.17) (0.23) (0.12) (0.22) --
-------- -------- -------- -------- -------
Total distributions................. (1.08) (1.10) (1.09) (1.15) (0.84)
-------- -------- -------- -------- -------
Net asset value, end of year............ $ 15.01 $ 15.72 $ 15.65 $ 15.06 $ 15.42
======== ======== ======== ======== =======
Total return............................ 2.37% 7.77% 11.53% 5.23% 10.60%
Ratios/supplemental data:
Net assets, end of year (000s
omitted)............................ $350,844 $393,533 $177,219 $118,596 $99,250
Ratio of expenses to average net
assets.............................. 0.44%* 0.47%* 0.50%* 0.50%* 0.50%*
Ratio of net investment income (loss)
to average net assets............... 5.90% 5.87% 6.31% 6.43% 6.47%
Fund turnover rate.................... 569% 372% 372% 201% 304%
</TABLE>
* Without the voluntary waiver of advisory fees and administration fees, the
ratios of expenses to average net assets for the Institutional Class would
have been .62%, .74%, .78%, .78% and .84% for the years ended August 31,
1999, 1998, 1997, 1996 and 1995, respectively.
31
<PAGE>
HIGH YIELD FUND
- --- GOAL AND STRATEGIES
- -------------------------------
The High Yield Fund seeks high total return. To pursue this goal, it invests
primarily in fixed-income securities rated below investment grade by primary
ratings services such as Standard & Poor's Ratings Services and Moody's
Investors Service. These high-yield, higher-risk securities are commonly known
as "junk bonds."
In choosing investments for the fund, the portfolio managers:
- emphasize top-down analysis of industry sectors and themes to determine
which sectors may benefit from current and future changes in the economy
- seek to allocate risk by investing among a variety of industry sectors
- look at the financial condition of the issuers (including debt/equity
ratios), as well as features of the securities themselves
- --- PORTFOLIO INVESTMENTS
- ----------------------------------
Under normal market conditions, this fund invests at least 65% of assets in
high-yield, higher-risk fixed-income securities issued by U.S. and foreign
corporations, governments and agencies.
The fund may invest:
- without limit in junk bonds, including their unrated equivalents
- up to 35% of assets in equity and equity-related securities, including
preferred stocks, securities convertible into equity securities, warrants,
rights and options
To a limited extent, the fund may also engage in other investment practices.
- --- RISK FACTORS
- ---------------------
This fund's principal risk factors are:
- credit risk
- interest-rate risk
- market risk
- non-diversified risk
The value of your investment will vary with changes in interest rates and
other factors. Typically, a rise in interest rates causes a decline in the
market value of fixed-income securities. You should expect greater fluctuations
in share price, yield and total return compared with less aggressive bond funds.
These fluctuations, whether positive or negative, may be sharp and
unanticipated. Like equity markets, junk-bond markets may react strongly to
adverse news about an issuer or the economy, or to the expectation of adverse
news.
Junk bonds generally provide higher yields than higher-rated debt securities
of similar maturity, but are subject to greater credit, liquidity and valuation
risks. These risks are defined in "More About Risk."
Junk bonds are considered speculative with respect to the issuer's
continuing ability to meet principal and interest payments. In the event of a
payment problem by an issuer of junk bonds, more senior debt (such as bank loans
and investment-grade bonds) will likely be paid a greater portion of payments
owed to it. Because investing in junk bonds involves greater investment risk,
achieving the fund's investment objective will depend more on the portfolio
managers' analysis than would be the case if the fund were investing in
higher-quality bonds.
Although the portfolio managers typically have diversified the fund's
investments, the fund's non-diversified status allows it to invest a greater
share of its assets in the securities of fewer companies. Non-diversification
might cause the fund to be more volatile than a diversified fund.
32
<PAGE>
To the extent that the fund invests in foreign securities and securities of
start-up and other small companies, it takes on further risks that could hurt
its performance. "More About Risk" details these and certain other investment
practices the fund may use. Please read that section carefully before you
invest.
- --- PORTFOLIO MANAGEMENT
- -----------------------------------
Richard Lindquist, Marianne Rossi, Misia Dudley, John Tobin and Mary Ann
Thomas manage the fund's investment portfolio. You can find out more about them
in "Meet the Managers."
- --- INVESTOR EXPENSES
- ----------------------------
<TABLE>
<S> <C>
Management fee .39%
All other expenses .30%
----
Total expenses .69%
</TABLE>
ANALYSIS OF CREDIT QUALITY
During the fiscal period ended August 31, 1999, the percentage of fund
securities holdings by rating category based upon a weighted monthly average
was:
<TABLE>
<CAPTION>
BONDS-S&P RATING:
<S> <C>
AAA......................................................... .00%
AA.......................................................... .00%
A........................................................... .00%
BBB......................................................... 2.57%
BB.......................................................... 10.81%
B........................................................... 59.17%
CCC......................................................... .00%
CC.......................................................... .00%
C........................................................... .00%
Below C or unrated.......................................... 22.32%
Cash/Governments/Agencies................................... 5.13%
------
TOTAL....................................................... 100.00%
</TABLE>
33
<PAGE>
- --- FINANCIAL HIGHLIGHTS
- --------------------------------
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP, whose report on the fund's financial statements is
included in the ANNUAL REPORT.
<TABLE>
<CAPTION>
8/99 8/98 8/97 8/96 8/95
PERIOD ENDED --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of year...... $ 16.60 $ 17.08 $ 16.09 $ 15.72 $ 15.94
------- ------- ------- ------- --------
Income from investment operations:
Net investment income (loss)........ 1.42 1.43 1.37 1.47 1.42
Net gain (loss) on investments (both
realized and unrealized).......... (1.33) (0.49) 0.96 0.40 (0.30)
------- ------- ------- ------- --------
Total from investment operations.... 0.09 0.94 2.33 1.87 1.12
------- ------- ------- ------- --------
Less distributions:
Dividends from net investment
income............................ (1.37) (1.42) (1.34) (1.50) (1.34)
Distributions from realized capital
gains............................. -- -- -- -- --
------- ------- ------- ------- --------
Total distributions................. (1.37) (1.42) (1.34) (1.50) (1.34)
------- ------- ------- ------- --------
Net asset value, end of year............ $ 15.32 $ 16.60 $ 17.08 $ 16.09 $ 15.72
======= ======= ======= ======= ========
Total return............................ 0.67% 5.48% 15.17% 12.42% 7.79%(1)
Ratios/supplemental data:
Net assets, end of year (000s
omitted)............................ $95,129 $94,044 $92,630 $75,849 $153,621
Ratio of expenses to average net
assets.............................. 0.69%(2) 0.70%(2) 0.70%(2) 0.88%(2) 1.00%(2)
Ratio of net investment income (loss)
to average net assets............... 9.10% 8.12% 8.44% 8.92% 9.37%
Fund turnover rate.................... 40% 60% 84% 143% 70%
</TABLE>
(1) Redemption fees not reflected in total return.
(2) Without the voluntary waiver of advisory fees and administration fees, the
ratios of expenses to average net assets for the Institutional Class would
have been 1.04%, 1.14%, 1.13%, 1.11% and 1.08% for the years ended
August 31, 1999, 1998, 1997, 1996 and 1995, respectively.
34
<PAGE>
This page intentionally left blank
35
<PAGE>
MUNICIPAL BOND FUND
- --- GOAL AND STRATEGIES
- -------------------------------
The Municipal Bond Fund seeks high total return. To pursue this goal, it
invests in municipal securities -- debt obligations issued by state and local
governments within the U.S.
The fund seeks to maintain a weighted-average credit rating comparable to
the AA rating of Standard & Poor's Ratings Services. The fund's weighted average
maturity will typically be between 10 and 15 years.
Holdings may include both general-obligation and revenue securities. General
obligation securities are secured by the issuing government's full faith and
credit, as well as its taxing power. Revenue securities are payable only from
specific revenue sources related to the project being financed.
- --- PORTFOLIO INVESTMENTS
- ----------------------------------
Under normal market conditions, this fund invests at least 80% of assets in
municipal securities.
The fund may invest:
- up to 40% of assets in municipal securities issued to finance private
activities
- without limit in securities rated below investment grade (junk bonds),
including their unrated equivalents
To a limited extent, the fund may also engage in other investment practices.
- --- RISK FACTORS
- ---------------------
This fund's principal risk factors are:
- credit risk
- interest-rate risk
- market risk
- non-diversified status
You should expect fluctuations in share price, yield and total return,
particularly with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of fixed-income securities. There is also
the risk that an issuer of a debt security will fail to make timely payments of
principal or interest to the fund.
Compared to a diversified mutual fund, a non-diversified fund may invest a
greater portion of its assets in the securities of fewer issuers. Because the
fund is non-diversified, its share price and yield might fluctuate more than
they would for a diversified fund.
A portion of the fund's assets may generate income that could be taxable to
you. "More About Risk" details certain other investment practices the fund may
use. Please read that section carefully before you invest.
- --- PORTFOLIO MANAGEMENT
- -----------------------------------
Gregg M. Diliberto, Mark K. Silverstein, Jo Ann Corkran and Jose A.
Rodriguez manage the fund's investment portfolio. You can find out more about
them in "Meet the Managers."
- --- INVESTOR EXPENSES
- ----------------------------
<TABLE>
<S> <C>
Management fee .28%
All other expenses .71%
----
Total expenses .99%
</TABLE>
36
<PAGE>
- --- FINANCIAL HIGHLIGHTS
- --------------------------------
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP, whose report on the fund's financial statements is
included in the ANNUAL REPORT.
<TABLE>
<CAPTION>
8/99 8/98 8/97 8/96 8/95
PERIOD ENDED: --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of year...... $ 15.12 $ 14.84 $ 14.65 $ 15.46 $ 15.06
------- ------- ------- ------- -------
Income from investment operations:
Net investment income (loss)........ 0.67 0.70 0.72 0.73 0.71
Net gain (loss) on investments (both
realized and unrealized).......... (0.60) 0.40 0.65 (0.37) 0.50
------- ------- ------- ------- -------
Total from investment operations.... 0.07 1.10 1.37 0.36 1.21
------- ------- ------- ------- -------
Less distributions:
Dividends from net investment
income............................ (0.68) (0.71) (0.72) (0.74) (0.76)
Distributions from capital gains.... (0.21) (0.11) (0.46) (0.43) (0.05)
------- ------- ------- ------- -------
Total distributions................. (0.89) (0.82) (1.18) (1.17) (0.81)
------- ------- ------- ------- -------
Net asset value, end of year............ $ 14.30 $ 15.12 $ 14.84 $ 14.65 $ 15.46
======= ======= ======= ======= =======
Total return............................ 0.36% 7.62% 9.74% 2.27% 8.42%
Ratios/supplemental data
Net assets, end of year (000s
omitted)............................ $22,423 $22,229 $19,810 $19,581 $48,978
Ratio of expenses to average net
assets.............................. 0.99%* 1.00%* 1.00%* 1.00%* 1.00%*
Ratio of net investment income (loss)
to average net assets............... 4.49% 4.72% 4.88% 4.62% 4.76%
Fund turnover rate.................... 26% 57% 43% 34% 25%
</TABLE>
* Without the voluntary waiver of advisory fees and administration fees, the
ratios of expenses to average net assets for the Institutional Class would
have been 1.43%, 1.39%, 1.37%, 1.42% and 1.19% for the years ended
August 31, 1999, 1998, 1997, 1996 and 1995, respectively.
37
<PAGE>
STRATEGIC GLOBAL FIXED INCOME FUND
- --- GOAL AND STRATEGIES
- -------------------------------
The Strategic Global Fixed Income Fund seeks high total return. To pursue
this goal, it invests in fixed-income securities of U.S. and foreign issuers
denominated in various currencies.
This fund may invest in any country or region, including emerging markets.
The portfolio managers generally seek to invest in countries exhibiting an
attractive combination of fixed-income returns and currency exchange rates. If
the currency trend is unfavorable, the managers may seek to reduce the currency
risk through hedging. In addition, the portfolio managers may also engage in
currency transactions to seek to generate income.
The fund seeks to maintain a weighted-average credit rating comparable to at
least the BBB rating of Standard & Poor's Ratings Services.
- --- PORTFOLIO INVESTMENTS
- ----------------------------------
Under normal market conditions, this fund invests at least 65% of assets in
fixed-income securities of corporate, government and agency issuers located in
at least three countries, including the U.S.
Fixed-income holdings may include:
- corporate bonds, debentures and notes
- U.S. and foreign government and agency securities
- securities of supranational organizations
- preferred stocks
- securities convertible into equity securities
- mortgage-backed and asset-backed securities
The fund may:
- concentrate its investments in a single country or region
- invest without limit in fixed-income securities rated below
investment-grade (junk bonds)
To a limited extent, the fund may also engage in other investment practices.
- --- RISK FACTORS
- ---------------------
This fund's principal risk factors are:
- credit risk
- foreign securities
- interest-rate risk
- market risk
- non-diversified status
You should expect fluctuations in share price, yield and total return,
particularly with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of fixed-income securities. There is also
the risk that an issuer of a debt security will fail to make timely payments of
either principal or interest to the fund.
International investing, particularly in emerging markets, carries
additional risks, including currency, information and political risks. These
risks are defined in "More About Risk."
38
<PAGE>
Although the portfolio managers typically have diversified the fund's
investments, the fund's non-diversified status allows the fund to invest a
greater share of its assets in the securities of fewer companies.
Non-diversification might cause the fund to be more volatile than a diversified
fund.
To the extent that the fund invests in junk bonds and securities of start-up
and other small companies, it takes on further risks that could hurt its
performance. "More About Risk" details these and certain other investment
practices the fund may use. Please read that section carefully before you
invest.
- --- PORTFOLIO MANAGEMENT
- -----------------------------------
Gregg M. Diliberto, Mark K. Silverstein, Jo Ann Corkran, Jose A. Rodriguez
and Dilip K. Rasgotra manage the fund's investment portfolio. You can find out
more about them in "Meet the Managers."
- --- INVESTOR EXPENSES
- ----------------------------
<TABLE>
<S> <C>
Management fee .00%
All other expenses .74%
----
Total expenses .74%
</TABLE>
- --- FINANCIAL HIGHLIGHTS
- --------------------------------
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP, whose report on the fund's financial statements is
included in the ANNUAL REPORT.
<TABLE>
<CAPTION>
8/99 8/98 8/97 8/96 8/95
PERIOD ENDED: --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of year...... $ 15.10 $ 15.41 $ 15.75 $ 15.67 $ 15.00
------- ------- ------- ------- -------
Income from investment operations:
Net investment income (loss)........ 0.79 0.87 0.85 0.87 1.06
Net gain (loss) on investments,
futures and foreign currency
transactions (both realized and
unrealized)....................... (0.35) (0.25) (0.16) 0.58 0.49
------- ------- ------- ------- -------
Total from investment operations.... 0.44 0.62 0.69 1.45 1.55
------- ------- ------- ------- -------
Less distributions:
Dividends from net investment
income............................ (0.29) (0.45) (0.71) (1.22) (0.88)
Distributions from realized capital
gains............................. (0.28) (0.48) (0.32) (0.15) --
------- ------- ------- ------- -------
Total distributions................. (0.57) (0.93) (1.03) (1.37) (0.88)
------- ------- ------- ------- -------
Net asset value, end of year............ $ 14.97 $ 15.10 $ 15.41 $ 15.75 $ 15.67
======= ======= ======= ======= =======
Total return............................ 2.78% 4.19% 4.48% 9.65% 10.72%
Ratios/supplemental data
Net assets, end of year (000s
omitted)............................ $27,342 $28,483 $44,285 $38,348 $19,565
Ratio of expenses to average net
assets.............................. 0.74%* 0.75%* 0.75%* 0.75%* 0.75%*
Ratio of net investment income (loss)
to average net assets............... 4.96% 5.30% 5.31% 7.37% 7.26%
Fund turnover rate.................... 305% 283% 98% 87% 91%
</TABLE>
* Without the voluntary waiver of advisory fees and administration fees, the
ratios of expenses to average net assets for the Institutional Class would
have been 1.27%, 1.17%, 0.98%, 1.07% and 1.29% for the years ended
August 31, 1999, 1998, 1997, 1996 and 1995, respectively.
39
<PAGE>
MORE ABOUT RISK
- --- INTRODUCTION
- ----------------------
A fund's goal and principal strategies largely determine its risk profile.
You will find a concise description of each fund's risk profile in "Key Points."
The fund-by-fund discussions contain more detailed information. This section
discusses other risks that may affect the funds.
The funds may use certain investment practices that have higher risks
associated with them. However, each fund has limitations and policies designed
to reduce many of the risks. The "Certain Investment Practices" table describes
these practices and the limitations on their use.
- --- TYPES OF INVESTMENT RISK
- -------------------------------------
The following risks are referred to throughout this PROSPECTUS.
ACCESS RISK Some countries may restrict a fund's access to investments or
offer terms that are less advantageous than those for local investors. This
could limit the attractive investment opportunities available to the fund.
CORRELATION RISK The risk that changes in the value of a hedging instrument
will not match those of the investment being hedged.
CREDIT RISK The issuer of a security or the counterparty to a contract may
default or otherwise become unable to honor a financial obligation.
CURRENCY RISK Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. Adverse changes in
exchange rates may erode or reverse any gains produced by foreign-currency
denominated investments and may widen any losses.
EXPOSURE RISK The risk associated with investments (such as derivatives) or
practices (such as short selling) that increase the amount of money a fund could
gain or lose on an investment.
- HEDGED Exposure risk could multiply losses generated by a derivative or
practice used for hedging purposes. Such losses should be substantially
offset by gains on the hedged investment. However, while hedging can
reduce or eliminate losses, it can also reduce or eliminate gains.
- SPECULATIVE To the extent that a derivative or practice is not used as a
hedge, a fund is directly exposed to its risks. Gains or losses from
speculative positions in a derivative may be much greater than the
derivative's original cost. For example, potential losses from writing
uncovered call options and from speculative short sales are unlimited.
EXTENSION RISK An unexpected rise in interest rates may extend the life of
a mortgage-backed security beyond the expected prepayment time, typically
reducing the security's value.
INFORMATION RISK Key information about an issuer, security or market may be
inaccurate or unavailable.
INTEREST-RATE RISK Changes in interest rates may cause a decline in the
market value of an investment. With bonds and other fixed-income securities, a
rise in interest rates typically causes a fall in values, while a fall in
interest rates typically causes a rise in values.
LIQUIDITY RISK Certain fund securities may be difficult or impossible to
sell at the time and the price that the fund would like. A fund may have to
lower the price, sell other securities instead or forego an investment
opportunity. Any of these could have a negative effect on fund management or
performance.
MARKET RISK The market value of a security may move up and down, sometimes
rapidly and unpredictably. These fluctuations, which are often referred to as
"volatility," may cause a security to be worth less than it was worth at an
earlier time. Market risk may affect a single issuer, industry, sector of the
economy, or the market as a whole. Market risk is common to most investments --
including stocks and bonds, and the mutual funds that invest in them.
40
<PAGE>
Bonds and other fixed-income securities generally involve less market risk
than stocks. However, the risk of bonds can vary significantly depending upon
factors such as issuer and maturity. The bonds of some companies may be riskier
than the stocks of others.
OPERATIONAL RISK Some countries have less-developed securities markets (and
related transaction, registration and custody practices) that could subject a
fund to losses from fraud, negligence, delay or other actions.
POLITICAL RISK Foreign governments may expropriate assets, impose capital
or currency controls, impose punitive taxes, or nationalize a company or
industry. Any of these actions could have a severe effect on security prices and
impair a fund's ability to bring its capital or income back to the U.S. Other
political risks include economic policy changes, social and political
instability, military action and war.
PREPAYMENT RISK Securities with high stated interest rates may be prepaid
prior to maturity. During periods of falling interest rates, a fund would
generally have to reinvest the proceeds at lower rates.
REGULATORY RISK Governments, agencies or other regulatory bodies may adopt
or change laws or regulations that could adversely affect the issuer, the market
value of the security, or a fund's performance.
VALUATION RISK The lack of an active trading market may make it difficult
to obtain an accurate price for a fund security.
YEAR 2000 PROCESSING RISK The inability of a computer system to distinguish
the year 2000 from the year 1900 (the "Year 2000 Issue") could cause
difficulties for system users after December 31, 1999. Although this date has
passed, the impact of the failure by companies or foreign markets in which the
funds invest to address the Year 2000 Issue effectively could continue to be
felt into 2000 and may negatively impact a fund's performance.
41
<PAGE>
CERTAIN INVESTMENT PRACTICES
For each of the following practices, this table shows the applicable
investment limitation. Risks are indicated for each practice.
KEY TO TABLE:
/x/ Permitted without limitation; does not indicate actual use
/20%/ ITALIC TYPE (E.G., 20%) represents an investment limitation as a
percentage of NET fund assets; does not indicate actual use
20% Roman type (e.g., 20%) represents an investment limitation as a
percentage of TOTAL fund assets; does not indicate actual use
/ / Permitted, but not expected to be used to a significant extent
- -- Not permitted
<TABLE>
<CAPTION>
INTERNATIONAL
GROWTH FUND
INVESTMENT PRACTICE LIMIT
- ---------------------------------------------------------------------------------------------------
<S> <C>
BORROWING The borrowing of money from banks to meet redemptions or for other
temporary or emergency purposes. SPECULATIVE EXPOSURE RISK. 33 1/3%
COUNTRY/REGION FOCUS Investing a significant portion of fund assets in a
single country or region. Market swings in the targeted country or region will
be likely to have a greater effect on fund performance than they would in a
more geographically diversified equity fund. CURRENCY, MARKET, POLITICAL RISKS. /x/
CURRENCY HEDGING Instruments, such as options, futures, forwards or swaps,
intended to manage fund exposure to currency risk. Options, futures or
forwards involve the right or obligation to buy or sell a given amount of
foreign currency at a specified price and future date. Swaps involve the right
or obligation to receive or make payments based on two different currency
rates.(1) CORRELATION, CREDIT, CURRENCY, HEDGED EXPOSURE, LIQUIDITY, POLITICAL,
VALUATION RISKS. /x/
EMERGING MARKETS Countries generally considered to be relatively less
developed or industrialized. Emerging markets often face economic problems
that could subject the fund to increased volatility or substantial declines in
value. Deficiencies in regulatory oversight, market infrastructure,
shareholder protections and company laws could expose the fund to risks beyond
those generally encountered in developed countries. ACCESS, CURRENCY, INFORMATION,
LIQUIDITY, MARKET, OPERATIONAL, POLITICAL, VALUATION RISKS. 30%
EQUITY AND EQUITY-RELATED SECURITIES Common stocks and other securities
representing or related to ownership in a company. May also include warrants,
rights, options, preferred stocks and convertible debt securities. These
investments may go down in value due to stock market movements or negative
company or industry events. LIQUIDITY, MARKET, VALUATION RISKS. /x/
FOREIGN SECURITIES Securities of foreign issuers. May include depositary
receipts. CURRENCY, INFORMATION, LIQUIDITY, MARKET, POLITICAL, VALUATION RISKS. /x/
FUTURES AND OPTIONS ON FUTURES Exchange-traded contracts that enable the fund to
hedge against or speculate on future changes in currency values, interest
rates or stock indexes. Futures obligate the fund (or give it the right, in the
case of options) to receive or make payment at a specific future time based
on those future changes.(1) CORRELATION, CURRENCY, HEDGED EXPOSURE, INTEREST-RATE,
MARKET, SPECULATIVE EXPOSURE RISKS.(2) / /
INVESTMENT-GRADE DEBT SECURITIES Debt securities rated within the four highest
grades (AAA/Aaa through BBB/Baa) by Standard & Poor's or Moody's rating
service, and unrated securities of comparable quality. CREDIT, INTEREST-
RATE, MARKET RISKS. / /
MORTGAGE-BACKED AND ASSET-BACKED (3) SECURITIES Debt securities backed by
pools of mortgages, including passthrough certificates and other
senior classes of collateralized mortgage obligations (CMOs), or other
receivables. CREDIT, EXTENSION, INTEREST-RATE, LIQUIDITY, PREPAYMENT RISKS. / /
MUNICIPAL SECURITIES Debt obligations issued by or on behalf of states,
territories and possessions of the U.S. and the District of Columbia and their
political subdivisions, agencies and instrumentalities. Municipal securities
may be affected by uncertainties regarding their tax status, legislative
changes or rights of municipal-securities holders. CREDIT, INTEREST-RATE, MARKET,
REGULATORY RISKS. / /
NON-INVESTMENT-GRADE DEBT SECURITIES Debt securities and convertible
securities rated below the fourth-highest grade (BBB/Baa) by Standard & Poor's or
Moody's rating service, and unrated securities of comparable quality.
Commonly referred to as junk bonds. CREDIT, INFORMATION, INTEREST-RATE,
LIQUIDITY, MARKET, VALUATION RISKS. / /
OPTIONS Instruments that provide a right to buy (call) or sell (put) a particular
security, currency or index of securities at a fixed price within a certain time
period. The fund may purchase or sell (write) both put and call options for
hedging or speculative purposes.(1) CORRELATION, CREDIT, HEDGED EXPOSURE,
LIQUIDITY, MARKET, SPECULATIVE EXPOSURE RISKS. / /
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
STRATE-
LONG- U.S. GIC
EURO- U.S. SHORT- CORE MUNICI- GLOBAL
PEAN CORE MARKET FIXED HIGH PAL FIXED
EQUITY EQUITY FOCUS NEUTRAL INCOME YIELD BOND INCOME
FUND FUND FUND FUND FUND FUND FUND FUND
INVESTMENT PRACTICE LIMIT
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BORROWING The borrowing of money from
banks to meet redemptions or for other
temporary or emergency purposes.
SPECULATIVE EXPOSURE RISK. 30% 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
COUNTRY/REGION FOCUS Investing a
significant portion of fund assets in a
single country or region. Market swings
in the targeted country or region will
be likely to have a greater effect on
fund performance than they would in a
more geographically diversified equity
fund. CURRENCY, MARKET, POLITICAL RISKS. /x/ /x/ /x/ /x/ /x/ / / -- /x/
CURRENCY HEDGING Instruments, such as
options, futures, forwards or swaps,
intended to manage fund exposure to
currency risk. Options, futures or
forwards involve the right or obligation
to buy or sell a given amount of foreign
currency at a specified price and future
date. Swaps involve the right or
obligation to receive or make payments
based on two different currency rates.(1)
CORRELATION, CREDIT, CURRENCY, HEDGED
EXPOSURE, LIQUIDITY, POLITICAL,
VALUATION RISKS. /x/ / / / / / / /x/ / / -- /x/
EMERGING MARKETS Countries generally
considered to be relatively less
developed or industrialized. Emerging
markets often face economic problems
that could subject the fund to increased
volatility or substantial declines in
value. Deficiencies in regulatory
oversight, market infra-structure,
shareholder protections and company laws
could expose the fund to risks beyond
those generally encountered in developed
countries. ACCESS, CURRENCY, INFORMATION,
LIQUIDITY, MARKET, OPERATIONAL,
POLITICAL, VALUATION RISKS. 20% / / / / / / / / / / -- /x/
EQUITY AND EQUITY-RELATED SECURITIES
Common stocks and other securities
representing or related to ownership in
a company. May also include warrants,
rights, options, preferred stocks and
convertible debt securities. These
investments may go down in value due
to stock market movements or negative
company or industry events. LIQUIDITY,
MARKET, VALUATION RISKS. /x/ /x/ /x/ /x/ / / / / / / / /
FOREIGN SECURITIES Securities of foreign
issuers. May include depositary receipts.
CURRENCY, INFORMATION, LIQUIDITY, MARKET,
POLITICAL, VALUATION RISKS. /x/ / / 35% / / 35% / / -- /x/
FUTURES AND OPTIONS ON FUTURES Exchange-
traded contracts that enable the fund to
hedge against or speculate on future
changes in currency values, interest
rates or stock indexes. Futures obligate
the fund (or give it the right, in the
case of options) to receive or make
payment at a specific future time based
on those future changes.(1) CORRELATION,
CURRENCY, HEDGED EXPOSURE, INTEREST-RATE,
MARKET, SPECULATIVE EXPOSURE RISKS.(2) / / / / / / / / / / / / -- / /
INVESTMENT-GRADE DEBT SECURITIES Debt
securities rated within the four highest
grades (AAA/Aaa through BBB/Baa) by
Standard & Poor's or Moody's rating
service, and unrated securities of
comparable quality. CREDIT, INTEREST-
RATE, MARKET RISKS. / / / / / / / / / / / / / / / /
MORTGAGE-BACKED AND ASSET-BACKED (3)
SECURITIES Debt securities backed by
pools of mortgages, including
passthrough certificates and other
senior classes of collateralized
mortgage obligations (CMOs), or other
receivables. CREDIT, EXTENSION, INTEREST-
RATE, LIQUIDITY, PREPAYMENT RISKS. -- / / / / -- /x/ / / -- /x/
MUNICIPAL SECURITIES Debt obligations
issued by or on behalf of states,
territories and possessions of the U.S.
and the District of Columbia and their
political subdivisions, agencies and
instrumentalities. Municipal securities
may be affected by uncertainties
regarding their tax status, legislative
changes or rights of municipal-securities
holders. CREDIT, INTEREST-RATE, MARKET,
REGULATORY RISKS. -- / / / / -- / / / / /x/ / /
NON-INVESTMENT-GRADE DEBT SECURITIES
Debt securities and convertible
securities rated below the fourth-highest
grade (BBB/Baa) by Standard & Poor's or
Moody's rating service, and unrated
securities of comparable quality.
Commonly referred to as junk bonds.
CREDIT, INFORMATION, INTEREST-RATE,
LIQUIDITY, MARKET, VALUATION RISKS. /20%/ / / / / -- / / /x/ -- / /
OPTIONS Instruments that provide a right
to buy (call) or sell (put) a particular
security, currency or index of securities
at a fixed price within a certain time
period. The fund may purchase or sell
(write) both put and call options for
hedging or speculative purposes.(1)
CORRELATION, CREDIT, HEDGED EXPOSURE,
LIQUIDITY, MARKET, SPECULATIVE EXPOSURE
RISKS. / / / / / / / / / / / / -- / /
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
INTER-
NATIONAL
GROWTH
FUND
INVESTMENT PRACTICE LIMIT
- ------------------------------------------------------------------------------------------------
<S> <C>
PRIVATIZATION PROGRAMS Foreign governments may sell all or part of their
interests in enterprises they own or control. ACCESS, CURRENCY, INFORMATION,
LIQUIDITY, OPERATIONAL, POLITICAL, VALUATION RISKS. /x/
RESTRICTED AND OTHER ILLIQUID SECURITIES Securities with restrictions on trading,
or those not actively traded. May include private placements. LIQUIDITY, MARKET,
VALUATION RISKS. /15%/
SECURITIES LENDING Lending portfolio securities to financial institutions;
the fund receives cash, U.S. government securities or bank letters of credit as
collateral. CREDIT, LIQUIDITY, MARKET, OPERATIONAL RISKS. 33 1/3%
SHORT POSITIONS Selling borrowed securities with the intention of
repurchasing them for a profit on the expectation that the market price will
drop. If a fund were to take short positions in stocks that increase in
value, then it would be likely to underperform similar mutual funds
that do not take short positions. LIQUIDITY, MARKET, SPECULATIVE EXPOSURE
RISKS. / /
SHORT SALES "AGAINST THE BOX" A short sale when the fund owns enough shares
of the security involved to cover the borrowed securities, if necessary.
LIQUIDITY, MARKET, SPECULATIVE EXPOSURE RISKS. / /
SHORT-TERM TRADING Selling a security shortly after purchase. A fund engaging
in short-term trading will have higher turnover and transaction expenses.
Increased short-term capital gains distributions could raise shareholders'
income tax liability. / /
START-UP AND OTHER SMALL COMPANIES Companies with small relative market
capitalizations, including those with continuous operations of less than
three years. INFORMATION, LIQUIDITY, MARKET, VALUATION RISKS. /5%/
STRUCTURED INSTRUMENTS Swaps, structured securities and other
instruments that allow the fund to gain access to the performance of a benchmark
asset (such as an index or selected stocks) where the fund's direct invest-
ment is restricted. CREDIT, CURRENCY, INFORMATION,
INTEREST-RATE, LIQUIDITY, MARKET, POLITICAL, SPECULATIVE EXPOSURE,
VALUATION RISKS. / /
TEMPORARY DEFENSIVE TACTICS Placing some or all of the fund's assets in
investments such as money-market obligations and investment-grade debt
securities for defensive purposes. Although intended to avoid losses in
adverse market, economic, political or other conditions, defensive tactics
might be inconsistent with the fund's principal investment strategies and
might prevent the fund from achieving its goal. / /
WARRANTS Options issued by a company granting the holder the right to buy
certain securities, generally common stock, at a specified price and usually
for a limited time. LIQUIDITY, MARKET, SPECULATIVE EXPOSURE RISKS. / /
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS The purchase or sale of
securities for delivery at a future date; market value may change before
delivery. LIQUIDITY, MARKET, SPECULATIVE EXPOSURE RISKS. /25%/
ZERO-COUPON BONDS Debt securities that pay no cash income to holders
for either an intial period or until maturity and are issued at a discount
from maturity value. At maturity, return comes from the difference between
purchase price and maturity value. INTEREST-RATE, MARKET RISKS. / /
</TABLE>
(1) The fund is not obligated to pursue any hedging strategy. In addition,
hedging practices may not be available, may be too costly to be used
effectively or may be unable to be used for other reasons.
(2) The Fund is limited to 5% of net assets for initial margin and premium
amounts on futures positions considered to be speculative by the
Commodity Futures Trading Commission.
(3) Although there is no stated investment limitation with respect to
mortgage-backed securities, each fund will limit its investments in
asset-backed securities to 25% of total assets.
44
<PAGE>
<TABLE>
<CAPTION>
STRATE-
LONG- U.S. GIC
EURO- U.S. SHORT- CORE MUNICI- GLOBAL
PEAN CORE MARKET FIXED HIGH PAL FIXED
EQUITY EQUITY FOCUS NEUTRAL INCOME YIELD BOND INCOME
FUND FUND FUND FUND FUND FUND FUND FUND
INVESTMENT PRACTICE LIMIT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRIVATIZATION PROGRAMS Foreign govern-
ments may sell all or part of their
interests in enterprises they own or
control. ACCESS, CURRENCY, INFORMATION,
LIQUIDITY, OPERATIONAL, POLITICAL,
VALUATION RISKS. /x/ / / / / / / / / / / -- / /
RESTRICTED AND OTHER ILLIQUID SECURITIES
Securities with restrictions on trading,
or those not actively traded. May include
private placements. LIQUIDITY, MARKET,
VALUATION RISKS. /15%/ /15%/ /15%/ /15%/ /15%/ /15%/ /15%/ /15%/
SECURITIES LENDING Lending portfolio
securities to financial institutions;
the fund receives cash, U.S. government
securities or bank letters of credit as
collateral. CREDIT, LIQUIDITY, MARKET,
OPERATIONAL RISKS. 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
SHORT POSITIONS Selling borrowed
securities with the intention of
repurchasing them for a profit on the
expectation that the market price will
drop. If a fund were to take short
positions in stocks that increase in
value, then it would be likely to
underperform similar mutual funds
that do not take short positions.
LIQUIDITY, MARKET, SPECULATIVE EXPOSURE
RISKS. / / / / / / /x/ / / / / -- / /
SHORT SALES "AGAINST THE BOX" A short
sale when the fund owns enough shares
of the security involved to cover the
borrowed securities, if necessary.
LIQUIDITY, MARKET, SPECULATIVE EXPOSURE
RISKS. / / / / / / / / / / / / -- / /
SHORT-TERM TRADING Selling a security
shortly after purchase. A fund engaging
in short-term trading will have higher
turnover and transaction expenses.
Increased short-term capital gains
distributions could raise shareholders'
income tax liability. /x/ / / / / / / / / / / / / / /
START-UP AND OTHER SMALL COMPANIES
Companies with small relative market
capitalizations, including those with
continuous operations of less than
three years. INFORMATION, LIQUIDITY,
MARKET, VALUATION RISKS. /5%/ /5%/ /5%/ /5%/ /5%/ /5%/ /5%/ /5%/
STRUCTURED INSTRUMENTS Swaps,
structured securities and other
instruments that allow the fund to gain
access to the performance of a benchmark
asset (such as an index or selected
stocks) where the fund's direct invest-
ment is restricted. CREDIT, CURRENCY,
INFORMATION,
INTEREST-RATE, LIQUIDITY, MARKET,
POLITICAL, SPECULATIVE EXPOSURE,
VALUATION RISKS. / / / / / / / / / / / / -- / /
TEMPORARY DEFENSIVE TACTICS Placing
some or all of the fund's assets in
investments such as money-market
obligations and investment-grade debt
securities for defensive purposes.
Although intended to avoid losses in
adverse market, economic, political or
other conditions, defensive tactics
might be inconsistent with the fund's
principal investment strategies and
might prevent the fund from achieving
its goal. / / / / / / / / / / / / / / / /
WARRANTS Options issued by a company
granting the holder the right to buy
certain securities, generally common
stock, at a specified price and usually
for a limited time. LIQUIDITY, MARKET,
SPECULATIVE EXPOSURE RISKS. /15%/ / / / / / / / / / / / / / /
WHEN-ISSUED SECURITIES AND FORWARD
COMMITMENTS The purchase or sale of
securities for delivery at a future
date; market value may change before
delivery. LIQUIDITY, MARKET, SPECULATIVE
EXPOSURE RISKS. 20% /25%/ /25%/ / / /25%/ /25%/ /25%/ /25%/
ZERO-COUPON BONDS Debt securities
that pay no cash income to holders
for either an intial period or until
maturity and are issued at a discount
from maturity value. At maturity, return
comes from the difference between
purchase price and maturity value.
INTEREST-RATE, MARKET RISKS. / / / / / / / / / / / / -- / /
</TABLE>
45
<PAGE>
MEET THE MANAGERS
The day-to-day portfolio management of the International Growth Fund is the
responsibility of the Credit Suisse Asset Management International Equity
Management Team. The team consists of the following individuals:
[PHOTO]
STEVEN D. BLEIBERG
MANAGING DIRECTOR
/ / Team member since 1991
/ / With Credit Suisse Asset Management since 1991
[PHOTO]
RICHARD WATT
MANAGING DIRECTOR
/ / Team member since 1995
/ / With Credit Suisse Asset Management since 1995
/ / Director and head of emerging markets investments and research at Gartmore
Investment Limited in London, 1992 to 1995
[PHOTO]
EMILY ALEJOS
DIRECTOR
/ / Team member since 1997
/ / With Credit Suisse Asset Management since 1997
/ / Vice president and emerging markets portfolio manager with Bankers Trust,
1993 to 1997
[PHOTO]
ROBERT B. HRABCHAK
DIRECTOR
/ / Team member since 1997
/ / With Credit Suisse Asset Management since 1997
/ / Senior portfolio manager at Merrill Lynch Asset Management, 1995 to 1997
/ / Associate at Salomon Brothers, 1993 to 1995
[PHOTO]
ALAN ZLATAR
VICE PRESIDENT
/ / Team member since 1997
/ / With Credit Suisse Asset Management since 1997
/ / European equity analyst at Credit Suisse Group in Zurich, 1994 to 1997
46
<PAGE>
The following individuals are primarily responsible for the day-to-day
portfolio management of the European Equity Fund:
[PHOTO]
HAROLD W. EHRLICH, CFA, CIC
MANAGING DIRECTOR
/ / Co-Portfolio Manager, European Equity Fund since 1999
/ / Joined Credit Suisse Asset Management in 1999 as a result of CSAM's
acquisition of Warburg Pincus Asset Management
/ / With Warburg Pincus Asset Management since 1995
/ / Senior vice president, portfolio manager and analyst at Templeton
Investment Counsel Inc., 1987 to 1995
[PHOTO]
NANCY NIERMAN
DIRECTOR
/ / Co-Portfolio Manager, European Equity Fund since 1999
/ / Joined Credit Suisse Asset Management in 1999 as a result of CSAM's
acquisition of Warburg Pincus Asset Management
/ / With Warburg Pincus Asset Management since 1996
/ / Vice president at Fiduciary Trust Company International, 1992 to 1996
[PHOTO]
J.H. CULLUM CLARK
DIRECTOR
/ / Co-Portfolio Manager, European Equity Fund since 1999
/ / Joined Credit Suisse Asset Management in 1999 as a result of CSAM's
acquisition of Warburg Pincus Asset Management
/ / With Warburg Pincus Asset Management since 1996
/ / Analyst and portfolio manager at Brown Brothers Harriman, 1993 to 1996
47
<PAGE>
The day-to-day portfolio management of the U.S. Core Equity Fund is the
responsibility of the Credit Suisse Asset Management Equity Management Team. The
team consists of the following individuals:
[PHOTO]
WILLIAM W. PRIEST, JR.
CEO, MANAGING DIRECTOR
/ / Team member since 1972
/ / With Credit Suisse Asset Management for more than 25 years
[PHOTO]
ERIC N. REMOLE
MANAGING DIRECTOR
/ / Team member since 1997
/ / With Credit Suisse Asset Management since 1997
/ / Managing director and portfolio manager of Chancellor LGT Asset Management,
Inc., 1983 to 1997
[PHOTO]
MARC E. BOTHWELL
VICE PRESIDENT
/ / Team member since 1997
/ / With Credit Suisse Asset Management since 1997
/ / Vice president and portfolio manager at Chancellor LGT Asset Management,
Inc., 1994 to 1997
[PHOTO]
MICHAEL A. WELHOELTER
VICE PRESIDENT
/ / Team member since 1993
/ / With Credit Suisse Asset Management since 1997
/ / Vice president and portfolio manager at Chancellor LGT Asset Management,
Inc., 1986 to 1997
48
<PAGE>
The day-to-day portfolio management of the Focus Fund is the responsibility
of the Credit Suisse Asset Management Value Equity Management Team. The team
consists of the following individuals:
[PHOTO]
JAMES A. ABATE
MANAGING DIRECTOR
/ / Team member since 1995
/ / With Credit Suisse Asset Management since 1995
/ / Managing director at VERT Independent Capital Research, 1993 to 1995
[PHOTO]
D. SUSAN EVERLY
DIRECTOR
/ / Team member since 1998
/ / With Credit Suisse Asset Management since 1998
/ / Securities analyst at Goldman Sachs, 1996 to 1998
/ / Financial analyst at First Boston, 1991 to 1994
49
<PAGE>
The day-to-day portfolio management of the Long-Short Market Neutral Fund is
the responsibility of the Credit Suisse Asset Management Structured Equity Team.
The team consists of the following individuals:
[PHOTO]
WILLIAM W. PRIEST, JR.
CEO, MANAGING DIRECTOR
/ / Team member since 1972
/ / With Credit Suisse Asset Management for more than 25 years
[PHOTO]
ERIC N. REMOLE
MANAGING DIRECTOR
/ / Team member since 1997
/ / With Credit Suisse Asset Management since 1997
/ / Managing director and portfolio manager of Chancellor LGT Asset Management,
Inc., 1983 to 1997
[PHOTO]
MARC E. BOTHWELL
VICE PRESIDENT
/ / Team member since 1997
/ / With Credit Suisse Asset Management since 1997
/ / Vice president and portfolio manager at Chancellor LGT Asset Management,
Inc., 1994 to 1997
[PHOTO]
MICHAEL A. WELHOELTER
VICE PRESIDENT
/ / Team member since 1997
/ / With Credit Suisse Asset Management since 1997
/ / Vice president and portfolio manager at Chancellor LGT Asset Management,
Inc., 1986 to 1997
50
<PAGE>
The day-to-day portfolio management of the High Yield Fund is the
responsibility of the Credit Suisse Asset Management High Yield Management Team.
The team consists of the following individuals:
[PHOTO]
RICHARD LINDQUIST
MANAGING DIRECTOR
/ / Team member since 1989
/ / Joined Credit Suisse Asset Management in 1995 as a result of CSAM's
acquisition of CS First Boston Investment Corp.
/ / With First Boston since 1989
[PHOTO]
MISIA DUDLEY
DIRECTOR
/ / Team member since 1989
/ / Joined Credit Suisse Asset Management in 1995 as a result of CSAM's
acquisition of CS First Boston Investment Corp.
/ / With First Boston since 1989
[PHOTO]
MARIANNE ROSSI
MANAGING DIRECTOR
/ / Team member since 1991
/ / Joined Credit Suisse Asset Management in 1995 as a result of CSAM's
acquisition of CS First Boston Investment Corp.
/ / With First Boston since 1991
[PHOTO]
MARY ANN THOMAS
DIRECTOR
/ / Team member since 1997
/ / With Credit Suisse Asset Management since 1997
/ / Vice president and high yield bond analyst at Prudential Insurance Company
of America, 1994 to 1997
[PHOTO]
JOHN TOBIN
DIRECTOR
/ / Team member since 1990
/ / Joined Credit Suisse Asset Management in 1995 as a result of CSAM's
acquisition of CS First Boston Investment Corp.
/ / With First Boston since 1990
51
<PAGE>
The Credit Suisse Asset Management Fixed Income Management Team is
responsible for the day-to-day portfolio management of the Municipal Bond Fund
and the U.S. Core Fixed Income Fund and supervising the activities of Credit
Suisse Asset Management Limited, the sub-investment adviser for the Strategic
Global Fixed Income Fund. The team consists of the following individuals:
[PHOTO]
JO ANN CORKRAN
MANAGING DIRECTOR
/ / Team member since 1997
/ / With Credit Suisse Asset Management since 1997
/ / Director of mortgage- and asset-backed research at Morgan Stanley, 1994 to
1997
[PHOTO]
GREGG M. DILIBERTO
MANAGING DIRECTOR
/ / Team member since 1984
/ / With Credit Suisse Asset Management since 1984
[PHOTO]
MARK K. SILVERSTEIN
MANAGING DIRECTOR
/ / Team member since 1991
/ / With Credit Suisse Asset Management since 1991
[PHOTO]
JOSE A. RODRIGUEZ
DIRECTOR
/ / Team member since 1999
/ / With Credit Suisse Asset Management since 1999
/ / Managing director and senior portfolio manager at Prudential Investments,
1988 to 1999
SUB-INVESTMENT ADVISER
PORTFOLIO MANAGER
STRATEGIC GLOBAL FIXED INCOME FUND
DILIP K. RASGOTRA manages the Strategic Global Fixed Income Fund's
investments. Mr. Rasgotra is a Managing Director of Credit Suisse Asset
Management Limited, the fund's sub-investment adviser. Mr. Rasgotra has
been with Credit Suisse Asset Management Limited since 1983.
----------------------------------
52
<PAGE>
ABOUT YOUR ACCOUNT
- --- SHARE VALUATION
- --------------------------
The price of your shares is also referred to as their net asset value (NAV).
The NAV is determined at the close of regular trading on the New York Stock
Exchange (NYSE) (usually 4 p.m. Eastern Time) each day the NYSE is open for
business. It is calculated by dividing the total assets of the Institutional
Class, less its liabilities, by the number of Institutional Class shares
outstanding.
The funds value their securities based on market quotations when they
calculate their NAV. If market quotations are not readily available, securities
and other assets are valued by another method that the Board believes accurately
reflects fair value. Debt obligations that will mature in 60 days or less are
valued on the basis of amortized cost, unless the Board determines that using
this method would not reflect an investment's value.
Some fund securities may be listed on foreign exchanges that are open on
days (such as U.S. holidays) when a fund does not compute its price. This could
cause the value of the fund's portfolio investments to be affected by trading on
days when you cannot buy or sell shares.
- --- BUYING AND SELLING SHARES
- ---------------------------------------
The funds are open on those days when the NYSE is open, typically Monday
through Friday. If we receive your request in proper form by the close of the
NYSE (usually 4 p.m. Eastern Time), your transaction will be priced at that
day's NAV. If we receive it after that time, it will be priced at the next
business day's NAV.
The funds have authorized financial-services firms, such as banks, brokers
and financial advisors (and other intermediaries that the firms may designate)
to accept orders. When an authorized firm or its designee has received your
order, it is considered received by a fund and will be priced at the
next-computed NAV.
- --- BUYING FUND SHARES
- ------------------------------
INVEST BY WIRE
Institutional Class shares are generally available only to investors who
have entered into an investment management agreement with the adviser. Investors
should complete an account application and forward it to CSAM Institutional
Shares. After calling a fund to place an order, you may wire funds to:
State Street Bank and Trust Company
ABA# 0110 000 28
Attn: Mutual Funds/Custody Department
CSAM Institutional Shares
DDA# 9905-227-6
F/F/C: [ACCOUNT NUMBER AND REGISTRATION]
You can also purchase shares by mailing a check or Federal Reserve draft to:
CSAM Institutional Shares
P.O. Box 8500
Boston, Massachusetts 02266-8500
or overnight to:
Boston Financial
Attn: CSAM Institutional Shares
66 Brooks Drive
Braintree, Massachusetts 02184
Please use either a personal, company or bank check payable in U.S. dollars.
Unfortunately, we cannot accept checks that are not pre-printed or checks that
are payable to you or another party. These types of checks may be returned to
you and your purchase order may not be processed. Limited exceptions include IRA
Rollover and government checks. Federal Reserve drafts are available at national
banks and at state Federal Reserve member banks. Please indicate the fund's name
on any check or Federal Reserve draft. The application contains further
instructions.
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INVEST BY PURCHASES IN KIND
With the adviser's permission, investors may acquire Institutional
Class shares in exchange for fund portfolio securities. The portfolio securities
must meet the following requirements:
- - Match the investment objectives and policies of the fund to be purchased
- - Be considered by the fund's adviser or sub-adviser to be an appropriate fund
investment
- - Be easily valued, liquid and not subject to restrictions on transfer
You may have to pay administrative or custody costs if you make purchases in
kind and the execution of your purchase order may be delayed.
MINIMUM INVESTMENTS
Minimum investments for Institutional Class shares are the following,
including investment by purchases in-kind and by exchange (described below):
<TABLE>
<S> <C>
Initial investment $3,000,000
Subsequent investment $ 100,000
</TABLE>
Clients of the adviser, along with the adviser's affiliates, client officers
and certain other related persons, may purchase shares without entering into an
investment management agreement with the adviser subject to a minimum initial
investment of $100,000 and a minimum subsequent investment of $1,000. The
minimum investments for Institutional Shares of certain funds may be waived or
modified by the fund's Board of Directors for former holders of the fund's
Common Shares who have exchanged such shares for Institutional Shares at the
request of the Board.
You must maintain an account balance in the fund of at least $500. 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 30 days, the fund may close your account and
mail you the proceeds.
- --- SELLING FUND SHARES
- -------------------------------
SELL FUND SHARES IN WRITING
You can sell (redeem) your shares on any day the funds are open by writing
to CSAM Institutional Shares. The request must be signed by all record owners
(exactly as registered) or by an authorized person such as an investment adviser
or other agent. Additional documents may be required for redemption by a
corporation, partnership, trust, fiduciary, executor or administrator or in
certain other cases.
REDEMPTION PROCEEDS
After selling fund shares you will receive the proceeds by either wire or
check, mailed within seven days of the redemption. For shares purchased by
check, 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.
- --- EXCHANGING FUND SHARES
- ------------------------------------
You may exchange Institutional Class shares for Institutional Class shares
in any other CSAM Fund by writing to CSAM Institutional Shares. If you are
purchasing shares in a new fund by exchange, the new fund account will be
registered exactly as the fund from which you are exchanging. If you want to
change account information or privileges you must specify this in the redemption
request and have all signatures guaranteed. You can obtain a signature guarantee
from most banks or securities dealers, but not from a notary public.
54
<PAGE>
- --- OTHER POLICIES
- ------------------------
TRANSACTION DETAILS
Your purchase order will be canceled and you may be liable for losses or
fees incurred by a fund if:
- your investment check or Federal Reserve draft does not clear
- you place a telephone order by 4 p.m. Eastern Time and we do not receive
your wire that day
If you wire money without first calling the fund 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
Each 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 60 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 redemptions 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 when trading on the NYSE is
restricted, or any other time that the SEC permits)
- stop offering its shares for a period of time (such as when management
believes that a substantial increase in assets could adversely affect it)
ACCOUNT CHANGES
You should update your account records whenever you change your address. You
can call 800-222-8977 to change your account information or privileges.
- --- ACCOUNT STATEMENTS
- -------------------------------
In general, you will receive account statements as follows:
- after every transaction that affects your account balance (except for
distribution reinvestments and automatic transactions)
- after any changes of name or address of the registered owner(s)
- otherwise, every quarter
You will receive annual and semiannual financial reports.
- --- DISTRIBUTIONS
- ----------------------
As a fund investor, you will receive distributions.
55
<PAGE>
Each fund earns dividends from stocks and interest from bond, money-market
and other investments. These are passed along as dividend distributions. A fund
realizes capital gains whenever it sells securities for a higher price than it
paid for them. These are passed along as capital-gain distributions.
The U.S. Core Fixed Income, High Yield and Strategic Global Fixed Income
Funds declare and pay dividend distributions quarterly. The Municipal Bond Fund
declares and pays dividend distributions monthly. The other funds typically
distribute dividends annually, usually in December. Each of the funds typically
distribute capital gains annually in December.
Most investors have their distributions reinvested in additional shares of
the same fund. Distributions will be reinvested unless you choose on your
account application to have a check for your distributions mailed to you or sent
by electronic transfer.
- --- TAXES
- ------------
As with any investment, you should consider how your investment in a fund
will be taxed. If your account is not a tax-advantaged account, you should be
especially aware of the following potential tax implications. Please consult
your tax professional concerning your own tax situation.
TAXES ON DISTRIBUTIONS
As long as a fund continues to meet the requirements for being a
tax-qualified regulated investment company, the fund pays no federal income tax
on the earnings it distributes to shareholders.
Distributions you receive from a fund, whether reinvested or taken in cash,
are generally considered taxable. Distributions from a fund's long-term capital
gains are taxed as long-term capital gains, regardless of how long you have held
fund shares. Distributions from other sources are generally taxed as ordinary
income. The funds will mostly make capital-gain distributions, which could be
short-term or long-term.
If you buy shares shortly before or on the "record date" -- the date that
establishes you as the person to receive the upcoming distribution -- you may
receive a portion of the money you just invested in the form of a taxable
distribution.
The Form 1099 that is mailed to you every January details your distributions
and their federal tax category, including the portion taxable as long-term
capital gains.
Any gain or loss from a fund's short positions will be short-term gain or
loss, regardless of the length of time the short positions remain open. Thus,
net gain from short positions will potentially increase the amount of the fund's
ordinary income dividends, while net losses would potentially reduce the amount
of the fund's long-term gain distributions.
MUNICIPAL BOND FUND -- SPECIAL TAX MATTERS
The Municipal Bond Fund intends to pay federally tax-exempt distributions
derived from qualifying municipal securities.
Some income from the fund that is exempt from federal tax may be subject to
state and local income taxes. In addition, the fund may invest a portion of its
assets in securities that generate income that is not exempt from federal or
state income tax. The interest earned by the fund from its investments in
private entities is a tax-preference item for purposes of the federal
alternative-minimum tax.
TAXES ON TRANSACTIONS
Any time you sell or exchange shares, it is considered a taxable event for
you. Depending on the purchase price and the sale price of the shares you sell
or exchange, you may have a gain or loss on the transaction. You are responsible
for any tax liabilities generated by your transactions.
56
<PAGE>
OTHER INFORMATION
- --- ABOUT THE DISTRIBUTOR
- ----------------------------------
Provident Distributors, Inc., located at Four Falls Corporate Center, West
Conshohocken, PA 19428-2961, is the funds' distributor and is responsible for
making the funds available to you.
57
<PAGE>
FOR MORE INFORMATION
More information about these funds is available free upon request, including
the following:
- --- ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS
- ---------------------------------------------------------------
Includes financial statements, portfolio investments and detailed
performance information.
The ANNUAL REPORT also contains a letter from the funds' managers discussing
market conditions and investment strategies that significantly affected fund
performance during their past fiscal year.
- --- OTHER INFORMATION
- ------------------------------
A current STATEMENT OF ADDITIONAL INFORMATION (SAI) which provides more
details about the funds is on file with the Securities and Exchange Commission
(SEC) and is incorporated by reference.
You may visit the SEC's Internet website (www.sec.gov) to view the SAI,
material incorporated by reference and other information. You can also obtain
copies by visiting the SEC's Public Reference Room in Washington, DC (phone
800-SEC-0330) or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009 or electronically at
[email protected].
Please contact CSAM Institutional Shares to obtain, without charge, the SAI
and ANNUAL and SEMIANNUAL REPORTS and to make shareholder inquiries:
<TABLE>
<S> <C>
BY TELEPHONE:
800-222-8977
BY MAIL:
CSAM Institutional Shares
P.O. Box 8500
Boston, MA 02266-8500
BY OVERNIGHT OR COURIER SERVICE:
Boston Financial
Attn: CSAM Institutional Shares
66 Brooks Drive
Braintree, MA 02171
SEC FILE NUMBER:
CSAM Institutional Shares/Warburg Pincus
International Growth Fund 811-08933
European Equity Fund 811-08903
U.S. Core Equity Fund 811-08919
Focus Fund 811-08921
Long-Short Market Neutral Fund 811-08925
U.S. Core Fixed Income Fund 811-08917
High Yield Fund 811-08927
Municipal Bond Fund 811-08923
Strategic Global Fixed Income Fund 811-08931
</TABLE>
<TABLE>
<C> <S>
[LOGO]
P.O. BOX 8500, BOSTON, MA 02266-8500
800-222-8977
</TABLE>
The distributor of Warburg Pincus Funds is Provident Distributors, Inc.,
which is not affiliated with Credit Suisse Asset Management, LLC. CSISB-1-0100
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
January 1, 2000
Institutional Shares of the
WARBURG PINCUS INTERNATIONAL GROWTH FUND
WARBURG PINCUS U.S. CORE EQUITY FUND
WARBURG PINCUS U.S. CORE FIXED INCOME FUND
WARBURG PINCUS STRATEGIC GLOBAL FIXED INCOME FUND
WARBURG PINCUS HIGH YIELD FUND
WARBURG PINCUS MUNICIPAL BOND FUND
WARBURG PINCUS FOCUS FUND
WARBURG PINCUS LONG-SHORT MARKET NEUTRAL FUND
P.O. Box 8500, Boston, Massachusetts 02266-8500
For information, call 800-222-8977
This combined STATEMENT OF ADDITIONAL INFORMATION provides information
about Warburg Pincus International Growth Fund ("International Growth Fund"),
Warburg Pincus U.S. Core Equity Fund ("U.S. Equity Fund"), Warburg Pincus U.S.
Core Fixed Income Fund ("U.S. Fixed Income Fund"), Warburg Pincus Strategic
Global Fixed Income Fund ("Global Income Fund"), Warburg Pincus High Yield Fund
("High Yield Fund"), Warburg Pincus Municipal Bond Fund ("Municipal Bond Fund"),
Warburg Pincus Focus Fund ("Focus Fund") and Warburg Pincus Long-Short Market
Neutral Fund ("Long-Short Neutral Fund") (each a "Fund" and collectively, the
"Funds") that supplements information contained in the combined PROSPECTUS for
the Institutional Shares of the Funds, dated January 1, 2000, as amended or
supplemented from time to time, and is incorporated by reference in its entirety
into that PROSPECTUS.
Each Fund's audited ANNUAL REPORT dated August 31, 1999, which either
accompanies this STATEMENT OF ADDITIONAL INFORMATION or has previously been
provided to the investor to whom this STATEMENT OF ADDITIONAL INFORMATION is
being sent, is incorporated herein by reference.
This STATEMENT OF ADDITIONAL INFORMATION is not itself a prospectus
and no investment in shares of the Funds should be made solely upon the
information contained herein. Copies of the PROSPECTUS, ANNUAL REPORT and
information regarding each Fund's current performance may be obtained by writing
or telephoning:
CSAM Institutional Shares
P.O. Box 8500
Boston, Massachusetts 02266-8500
800-222-8977
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES.................................................1
Common Investment Objectives and Policies -- All Funds.............................1
Non-Diversified Status........................................................1
Temporary Investments.........................................................1
Repurchase Agreements.........................................................2
Reverse Repurchase Agreements and Dollar Rolls................................2
Illiquid Securities...........................................................3
RULE 144A SECURITIES......................................................4
Emerging Growth and Smaller Capitalization Companies;
Unseasoned Issuers........................................................4
Lending of Portfolio Securities...............................................5
Borrowing.....................................................................6
Securities of Other Investment Companies......................................6
Options Generally.............................................................6
SECURITIES OPTIONS........................................................6
SECURITIES INDEX OPTIONS..................................................9
Common Investment Objectives and Policies -- International
Growth, U.S. Equity, U.S. Fixed Income, Global Income,
High Yield, Municipal Bond and Focus Funds....................................9
When-Issued Securities, Delayed Delivery Transactions And
Forward Commitments.......................................................9
Stand-By Commitment Agreements...............................................10
Common Investment Objectives and Policies -- International
Growth, U.S. Equity, U.S. Fixed Income, Global Income,
High Yield, Focus and Long-Short Neutral Funds...............................11
U.S. Government Securities...................................................11
Foreign Investments..........................................................12
FOREIGN DEBT SECURITIES..................................................12
FOREIGN CURRENCY EXCHANGE................................................13
INFORMATION..............................................................13
POLITICAL INSTABILITY....................................................14
FOREIGN MARKETS..........................................................14
INCREASED EXPENSES.......................................................14
DOLLAR-DENOMINATED DEBT SECURITIES OF FOREIGN ISSUERS....................14
DEPOSITARY RECEIPTS......................................................14
BRADY BONDS..............................................................14
EMERGING MARKETS.........................................................15
SOVEREIGN DEBT...........................................................15
Convertible Securities.......................................................16
Debt Securities..............................................................17
BELOW INVESTMENT GRADE SECURITIES........................................17
i
<PAGE>
MORTGAGE-BACKED SECURITIES...............................................19
ASSET-BACKED SECURITIES..................................................20
LOAN PARTICIPATIONS AND ASSIGNMENTS......................................21
STRUCTURED NOTES, BONDS OR DEBENTURES....................................21
COLLATERALIZED MORTGAGE OBLIGATIONS......................................22
ZERO COUPON SECURITIES...................................................22
Futures Activities...........................................................23
FUTURES CONTRACTS........................................................23
OPTIONS ON FUTURES CONTRACTS.............................................24
Currency Exchange Transactions...............................................25
FORWARD CURRENCY CONTRACTS...............................................25
CURRENCY OPTIONS.........................................................26
CURRENCY HEDGING.........................................................26
Hedging Generally............................................................27
Short Sales "Against the Box.................................................28
Section 4(2) Paper...........................................................29
Supplemental Investment Objectives and Policies -- International
Growth, U.S. Equity and Focus Funds..........................................29
Rights Offerings and Purchase Warrants.......................................29
Supplemental Investment Objectives and Policies -- Municipal
Bond Fund....................................................................29
Supplemental Investment Objectives And Policies -- Long-Short
Neutral Fund.................................................................30
Short Sales..................................................................30
INVESTMENT RESTRICTIONS...........................................................31
PORTFOLIO VALUATION...............................................................33
PORTFOLIO TRANSACTIONS............................................................34
PORTFOLIO TURNOVER................................................................37
MANAGEMENT OF THE FUNDS...........................................................37
Officers and Board of Directors..............................................37
Directors' Total Compensation for Fiscal Year Ended August
31, 1999.................................................................41
Investment Adviser and Co-Administrators.....................................42
Custodian and Transfer Agent.................................................47
Organization of the Funds....................................................48
Distribution and Shareholder Servicing.......................................49
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION....................................49
Automatic Cash Withdrawal Plan...............................................49
EXCHANGE PRIVILEGE................................................................49
ADDITIONAL INFORMATION CONCERNING TAXES...........................................50
The Funds and Their Investments..............................................50
Special Tax Considerations...................................................54
STRADDLES................................................................54
OPTIONS AND SECTION 1256 CONTRACTS.......................................55
ii
<PAGE>
FOREIGN CURRENCY TRANSACTIONS............................................55
PASSIVE FOREIGN INVESTMENT COMPANIES.....................................56
ASSET DIVERSIFICATION REQUIREMENT........................................56
FOREIGN TAXES............................................................57
FUND TAXES ON SWAPS......................................................57
DIVIDENDS AND DISTRIBUTIONS..............................................57
SALES OF SHARES..........................................................58
BACKUP WITHHOLDING.......................................................59
NOTICES..................................................................59
OTHER TAXATION...........................................................59
DETERMINATION OF PERFORMANCE......................................................59
Total Return.................................................................59
Yield........................................................................62
INDEPENDENT ACCOUNTANTS AND COUNSEL...............................................63
MISCELLANEOUS.....................................................................63
FINANCIAL STATEMENTS..............................................................68
APPENDIX A ---- DESCRIPTION OF RATINGS.............................................A-1
</TABLE>
iii
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the descriptions 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 International Growth Fund, Focus Fund
(formerly, the Warburg Pincus Select Economic Value Equity Fund) and U.S. Equity
Fund is to provide long-term appreciation of capital.
The investment objective of the High Yield, Municipal Bond, Global
Income and U.S. Fixed Income Funds is to provide high total return.
The investment objective of the Long-Short Neutral Fund is to seek
long-term capital appreciation while minimizing exposure to general equity
market risk.
Unless otherwise indicated, all of the Funds are permitted, but not
obligated, to engage in the following investment strategies, subject to any
percentage limitations set forth below. The Funds do not represent that these
techniques are available now or will be available at any time in the future.
COMMON INVESTMENT OBJECTIVES AND POLICIES -- ALL FUNDS
NON-DIVERSIFIED STATUS. Each Fund is classified as non-diversified
within the meaning of the Investment Company Act of 1940, as amended (the "1940
Act"), which means that each Fund is not limited by such Act in the proportion
of its assets that it may invest in securities of a single issuer. As a
non-diversified fund, each Fund may invest a greater proportion of its assets in
the obligations of a smaller number of issuers and, as a result, may be subject
to greater risk with respect to portfolio securities. The investments of these
Funds will be limited, however, in order to qualify as a "regulated investment
company" for purposes of the Internal Revenue Code of 1986, as amended (the
"Code"). See "Additional Information Concerning Taxes." To qualify, a Fund will
comply with certain requirements, including limiting its investments so that at
the close of each quarter of the taxable year (i) not more than 25% of the
market value of its total assets will be invested in the securities of a single
issuer, and (ii) with respect to 50% of the market value of its total assets,
not more than 5% of the market value of its total assets will be invested in the
securities of a single issuer and the Fund will not own more than 10% of the
outstanding voting securities of a single issuer.
TEMPORARY INVESTMENTS. To the extent permitted by its investment
objectives and policies, each of the Funds may hold cash or cash equivalents
pending investment or to meet redemption requests. In addition, for defensive
purposes due to abnormal market conditions or economic situations as determined
by the Credit Suisse Asset Management, LLC, each Fund's adviser ("CSAM"), or, if
applicable, Credit Suisse Asset Management Ltd. ("CSAM Ltd."), the Fund's
sub-investment adviser, as the case may be (each, an "Adviser"), each Fund may
reduce its holdings in other securities and invest up to 100% of its assets in
1
<PAGE>
cash or certain short-term (less than twelve months to maturity) and medium-term
(not greater than five years to maturity) interest-bearing instruments or
deposits of the United States and foreign issuers. The short-term and
medium-term debt securities in which a 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.
REPURCHASE AGREEMENTS. The Funds may invest in repurchase agreement
transactions with member banks of the Federal Reserve System and certain
non-bank dealers. Repurchase agreements are contracts under which the buyer of a
security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under the terms of a typical repurchase agreement, a
Fund would acquire any underlying security for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the underlying
securities will at all times be at least equal to the total amount of the
purchase obligation, including interest. The Fund bears a risk of loss in the
event that the other party to a repurchase agreement defaults on its obligations
or becomes bankrupt and the Fund is delayed or prevented from exercising its
right to dispose of the collateral securities, including the risk of a possible
decline in the value of the underlying securities during the period in which the
Fund seeks to assert this right. The Adviser monitors the creditworthiness of
those bank and non-bank dealers with which each Fund enters into repurchase
agreements to evaluate this risk. A repurchase agreement is considered to be a
loan under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. Each Fund may enter
into reverse repurchase agreements with member banks of the Federal Reserve
System with respect to portfolio securities for temporary purposes (such as to
obtain cash to meet redemption requests when the liquidation of portfolio
securities is deemed disadvantageous or inconvenient by the Adviser) and "dollar
rolls." The Funds do not presently intend to invest more than 5% of net assets
in reverse repurchase agreements or dollar rolls during the coming year.
Reverse repurchase agreements involve the sale of securities held by a
Fund pursuant to such Fund's agreement to repurchase them at a mutually agreed
upon date, price and rate of interest. At the time a Fund enters into a reverse
repurchase agreement, it will establish and maintain a segregated account with
an approved custodian containing cash or liquid securities having a value not
less than the repurchase price (including accrued interest). The segregated
assets will be marked-to-market daily and additional assets will be segregated
on any day in which the assets fall below the repurchase price (plus accrued
interest). The
2
<PAGE>
segregated assets will be marked-to-market daily and additional assets will be
segregated on any day in which the assets fall below the repurchase price (plus
accrued interest). A Fund's liquidity and ability to manage its assets might be
affected when it sets aside cash or portfolio securities to cover such
commitments. Reverse repurchase agreements involve the risk that the market
value of the securities retained in lieu of sale may decline below the price of
the securities a Fund has sold but is obligated to repurchase. In the event the
buyer of securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, such buyer or its trustee or receiver may receive an
extension of time to determine whether to enforce a Fund's obligation to
repurchase the securities, and a Fund's use of the proceeds of the reverse
repurchase agreement may effectively be restricted pending such decision.
Each Fund also may enter into "dollar rolls," in which it sells fixed
income securities for delivery in the current month and simultaneously contracts
to repurchase substantially similar (same type, coupon and maturity) securities
on a specified future date. During the roll period, a Fund would forgo principal
and interest paid on such securities. A Fund would be compensated by the
difference between the current sales price and the forward price for the future
purchase, as well as by the interest earned on the cash proceeds of the initial
sale. At the time a Fund enters into a dollar roll transaction, it will
segregate with an approved custodian, cash or liquid securities having a value
not less than the repurchase price (including accrued interest) and will
subsequently monitor the segregated assets to ensure that its value is
maintained. Reverse repurchase agreements and dollar rolls that are accounted
for as financings are considered to be borrowings under the 1940 Act.
ILLIQUID SECURITIES. Each Fund is authorized to, but does not
presently intend to, invest up to 15% of its net assets in 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.
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. Companies whose securities are not publicly traded may not be
subject to the disclosure and other investor protection requirements applicable
to companies whose securities are publicly traded. Limitations on resale may
have an adverse effect on the marketability of portfolio securities and a mutual
fund might be unable to dispose of restricted or other illiquid securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemptions within seven days without borrowing. A mutual fund might
also have to register
3
<PAGE>
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 Securities and Exchange Commission ("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. The 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 the Funds' limit on the purchase of illiquid securities
unless the Fund's Board of Directors (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 of the marketplace trades (E.G., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of the transfer).
Investing in Rule 144A securities could have the effect of increasing
the level of illiquidity in the Funds to the extent that qualified institutional
buyers are unavailable or uninterested in purchasing such securities from the
Funds. The Boards may adopt guidelines and delegate to the Adviser the daily
function of determining and monitoring the liquidity of Rule 144A Securities,
although each Board will retain ultimate responsibility for liquidity
determinations.
EMERGING GROWTH AND SMALLER CAPITALIZATION COMPANIES; UNSEASONED
ISSUERS. Each Fund will not invest in securities of unseasoned issuers,
including equity securities of unseasoned issuers which are not readily
marketable, if the aggregate investment in such securities would exceed 5% of
such Fund's net assets. The term "unseasoned" refers to issuers which, together
with their predecessors, have been in operation for less than three years.
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Such investments involve considerations that are not applicable to
investing in securities of established, larger-capitalization issuers, including
reduced and less reliable information about issuers and markets, less stringent
financial disclosure requirements, illiquidity of securities and markets, higher
brokerage commissions and fees and greater market risk in general. In addition,
securities of these companies may involve greater risks since these securities
may have limited marketability and, thus, may be more volatile.
Although investing in securities of unseasoned issuers offers
potential for above-average returns if the companies are successful, the risk
exists that the companies will not succeed and the prices of the companies'
shares could significantly decline in value. Therefore, an investment in a Fund
may involve a greater degree of risk than an investment in other mutual funds
that seek growth of capital or capital appreciation by investing in
better-known, larger companies.
LENDING OF PORTFOLIO SECURITIES. Each Fund may lend portfolio
securities to brokers, dealers and other financial organizations that meet
capital and other credit requirements or other criteria established by the
Board. These loans, if and when made, may not exceed 33-1/3% of the Funds' total
assets (including the loan collateral). The Funds will not lend portfolio
securities to the Adviser or its affiliates unless it has applied for and
received specific authority to do so from the SEC. Loans of portfolio
securities will be collateralized by cash or liquid securities, which are
maintained at all times in an amount equal to at least 102% (105% in the case
of foreign securities) of the current market value of the loaned securities.
Any gain or loss in the market price of the securities loaned that might
occur during the term of the loan would be for the account of the 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) the Fund must receive at least 102% (105% in the case of foreign
securities) cash collateral or equivalent securities of the type discussed in
the preceding paragraph from the borrower; (ii) the borrower must increase
such collateral whenever the market value of the securities rises above the
level of such collateral; (iii) the Fund must be able to terminate the loan
at any time; (iv) the Fund must receive reasonable interest on the loan, as
well as any dividends, interest or other distributions on the loaned
securities and any increase in market value; (v) the Fund may pay only
reasonable custodian fees in connection with the loan; and (vi) voting rights
on the loaned securities may pass to the borrower, provided, however, that if
a material event adversely affecting the investment occurs, the Board must
terminate the loan and regain the right to vote the securities. Loan
agreements involve certain risks in the event of default or insolvency of the
other party including possible delays or restrictions upon a Fund's ability
to recover the loaned securities or dispose of the collateral for the loan.
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BORROWING. Each Fund may borrow up to 33-1/3% 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. Additional investments
(including roll-overs) will not be made when borrowings exceed 5% of a Fund's
total assets. Although the principal of such borrowings will be fixed, a Fund's
assets may change in value during the time the borrowing is outstanding. Each
Fund expects that some of its borrowings may be made on a secured basis. In such
situations, either the custodian will segregate the pledged assets for the
benefit of the lender or arrangements will be made with a suitable subcustodian,
which may include the lender.
SECURITIES OF OTHER INVESTMENT COMPANIES. Each Fund may invest in
securities issued by other investment companies to the extent permitted by the
1940 Act. As a shareholder of another investment company, each Fund would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in addition
to the advisory and other expenses that a Fund bears directly in connection with
its own operations.
OPTIONS GENERALLY. The Funds, except the Municipal Bond Fund, may
purchase and write (sell) securities, securities indices and currencies for both
hedging purposes and to increase total return.
SECURITIES OPTIONS. Each Fund may write covered put and call options
on stock and debt securities and each Fund may purchase such options that are
traded on foreign and U.S. exchanges, as well as OTC options. A Fund realizes
fees (referred to as "premiums") for granting the rights evidenced by the
options it has written. A put option embodies the right of its purchaser to
compel the writer of the option to purchase from the option holder an underlying
security at a specified price for a specified time period or at a specified
time. In contrast, a call option embodies the right of its purchaser to compel
the writer of the option to sell to the option holder an underlying security at
a specified price for a specified time period or at a specified time.
The potential loss associated with purchasing an option is limited to
the premium paid, and the premium would partially offset any gains achieved from
its use. However, for an option writer the exposure to adverse price movements
in the underlying security or index is potentially unlimited during the exercise
period. Writing securities options may result in substantial losses to a Fund,
force the sale or purchase of portfolio securities at inopportune times or at
less advantageous prices, limit the amount of appreciation the Fund could
realize on its investments or require the Fund to hold securities its would
otherwise sell.
The principal reason for writing covered options on a security is to
attempt to realize, through the receipt of premiums, a greater return than would
be realized on the securities alone. In return for a premium, a Fund, as the
writer of a covered call option, forfeits the right to any appreciation in the
value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). A
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Fund that writes call options retains the risk of an increase in the price of
the underlying security. The size of the premiums that the Funds may receive may
be adversely affected as new or existing institutions, including other
investment companies, engage in or increase their option-writing activities.
If security prices rise, a put writer would generally expect to
profit, although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that the
writer will also profit, because it should be able to close out the option at a
lower price. If security prices decline, the put writer would expect to suffer a
loss. This loss may be less than the loss from purchasing the underlying
instrument directly to the extent that the premium received offsets the effects
of the decline.
In the case of options written by a Fund that are deemed covered by
virtue of the Fund's holding convertible or exchangeable preferred stock or debt
securities, the time required to convert or exchange and obtain physical
delivery of the underlying common stock with respect to which the Fund has
written options may exceed the time within which the Fund must make delivery in
accordance with an exercise notice. In these instances, a Fund may purchase or
temporarily borrow the underlying securities for purposes of physical delivery.
By so doing, the Fund will not bear any market risk, since the Fund will have
the absolute right to receive from the issuer of the underlying security an
equal number of shares to replace the borrowed securities, but the Fund may
incur additional transaction costs or interest expenses in connection with any
such purchase or borrowing.
Additional risks exist with respect to certain of the securities for
which a Fund may write covered call options. For example, if the Fund writes
covered call options on mortgage-backed securities, the mortgage-backed
securities that it holds as cover may, because of scheduled amortization or
unscheduled prepayments, cease to be sufficient cover. If this occurs, the Fund
will compensate for the decline in the value of the cover by purchasing an
appropriate additional amount of mortgage-backed securities.
Options written by a Fund will normally have expiration dates between
one and nine months from the date written. The exercise price of the options may
be below, equal to or above the market values of the underlying securities at
the times the options are written. In the case of call options, these exercise
prices are referred to as "in-the-money," "at-the- money" and
"out-of-the-money," respectively. Each Fund that can write put and call options
on securities may write (i) in-the-money call options when the 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 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-
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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 Clearing Corporation and of the securities
exchange on which the option is written.
Prior to their expirations, put and call options may be sold in
closing sale or purchase transactions (sales or purchases by a Fund prior to the
exercise of options that it has purchased or written, respectively, of options
of the same series) in which a Fund may realize a profit or loss from the sale.
An option position may be closed out only where there exists a secondary market
for an option of the same series on a recognized securities exchange or in the
OTC market. When a Fund has purchased an option and engages in a closing sale
transaction, whether the Fund realizes a profit or loss will depend upon whether
the amount received in the closing sale transaction is more or less than the
premium the Fund initially paid for the original option plus the related
transaction costs. Similarly, in cases where a Fund has 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 (the Fund would not be deemed to
own an option as a result of the transaction). So long as the obligation of a
Fund as the writer of an option continues, the Fund may be assigned an exercise
notice by the broker-dealer through which the option was sold, requiring the
Fund to deliver the underlying security against payment of the exercise price.
This obligation terminates when the option expires or the Fund effects a closing
purchase transaction. A Fund cannot effect a closing purchase transaction with
respect to an option once it has been assigned an exercise notice.
There is no assurance that sufficient trading interest will exist to
create a liquid secondary market on a securities exchange for any particular
option or at any particular time, and for some options, no such secondary market
may exist. A liquid secondary market in an option may cease to exist for a
variety of reasons. In the past, for example, higher than anticipated trading
activity or order flow or other unforeseen events have at times rendered certain
of the facilities of the Options Clearing Corporation (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
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participating in OTC transactions would fail to meet their obligations to the
Fund. The Funds, however, intend to purchase OTC options only from dealers whose
debt securities, as determined by the 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.
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 the Adviser and certain of its affiliates may be considered to
be such a group. A securities exchange may order the liquidation of positions
found to be in violation of these limits and it may impose certain other
sanctions. These limits may restrict the number of options the Funds will be
able to purchase on a particular security.
SECURITIES INDEX OPTIONS. A securities index measures the movement of
a certain group of securities by assigning relative values to the securities
included in the index, fluctuating with changes in the market values of the
securities included in the index. Some securities index options are based on a
broad market index, such as the NYSE Composite Index, or a narrower market index
such as the Standard & Poor's 100. Indexes may also be based on a particular
industry or market segment.
Options on securities indexes are similar to options on securities
except that (i) the expiration cycles of securities index options are monthly,
while those of securities options are currently quarterly, and (ii) the delivery
requirements are different. Instead of giving the right to take or make delivery
of securities at a specified price, an option on a securities index gives the
holder the right to receive a cash "exercise settlement amount" equal to (a) the
amount, if any, by which the fixed exercise price of the option exceeds (in the
case of a put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (b) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the securities index upon which the option is based being greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
index and the exercise price of the option times a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Securities index options may be offset by entering into
closing transactions as described above for securities options.
COMMON INVESTMENT OBJECTIVES AND POLICIES -- INTERNATIONAL GROWTH, U.S. EQUITY,
U.S. FIXED INCOME, GLOBAL INCOME, HIGH YIELD, MUNICIPAL BOND AND FOCUS FUNDS
WHEN-ISSUED SECURITIES, DELAYED DELIVERY TRANSACTIONS AND FORWARD
COMMITMENTS. Each Fund may purchase securities on a when-issued basis or on a
forward commitment basis, and it may purchase or sell securities for delayed
delivery (I.E., payment or
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delivery occur beyond the normal settlement date at a stated price and yield).
Each Fund currently anticipates that when-issued securities will not exceed 25%
of its net assets. Each Fund does not intend to engage in when-issued purchases
and forward commitments for speculative purposes but only in furtherance of its
investment objectives.
In these transactions, payment for and delivery of the securities
occur beyond the regular settlement dates, normally within 30-45 days after the
transaction. The Funds will not enter into a when-issued or delayed-delivery
transaction for the purpose of leverage, but may sell the right to acquire a
when-issued security prior to its acquisition or dispose of its right to deliver
or receive securities in a delayed-delivery transaction before the settlement
date if the Adviser deems it advantageous to do so. The payment obligation and
the interest rate that will be received on when-issued and delayed-delivery
transactions are fixed at the time the buyer enters into the commitment. Due to
fluctuations in the value of securities purchased or sold on a when-issued or
delayed-delivery basis, the prices 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. Each Fund will establish a segregated
account with its custodian consisting of cash or liquid securities in an amount
equal to its when-issued and delayed-delivery purchase commitments and will
segregate the securities underlying commitments to sell securities for delayed
delivery.
When a Fund agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash or liquid securities that are
acceptable as collateral to the appropriate regulatory authority equal to the
amount of the commitment in a segregated account. Normally, the custodian will
set aside portfolio securities to satisfy a purchase commitment, and in such a
case a Fund may be required subsequently to place additional assets in the
segregated account in order to ensure that the value of the account remains
equal to the amount of the Fund's commitment. It may be expected that a Fund's
net assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash. When
a Fund engages in when-issued or delayed-delivery transactions, it relies on the
other party to consummate the trade. Failure of the seller to do so may result
in the Funds' incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
STAND-BY COMMITMENT AGREEMENTS. Each Fund may from time to time enter
into stand-by commitment agreements. The Funds do not presently intend to invest
more than 5% of net assets in stand-by commitment agreements during the coming
year.
Such agreements commit a Fund, for a stated period of time, to
purchase a stated amount of a fixed income securities which may be issued and
sold to the Fund at the option of the issuer. The price and coupon of the
security is fixed at the time of the commitment. At the time of entering into
the agreement, a Fund is paid a commitment fee, regardless of whether or not the
security is ultimately issued. A Fund will enter into such agreements only for
the purpose of investing in the security underlying the commitment at a yield
and price that is considered advantageous to a Fund. Each Fund will not enter
into a stand-by commitment with a remaining term in excess of 45 days and it
will limit its
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investment in such commitments so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale, will not exceed 10% of its
assets taken at the time of acquisition of such commitment or security.
Each Fund will at all times maintain a segregated account with its
custodian consisting of cash or liquid securities denominated in U.S. dollars or
non-U.S. currencies in an aggregate amount equal to the purchase price of the
securities underlying the commitment. The assets contained in the segregated
account will be marked-to-market daily and additional assets will be placed in
such account on any day in which assets fall below the amount of the purchase
price. A Fund's liquidity and ability to manage its assets might be affected
when it sets aside cash or portfolio securities to cover such commitments.
There can be no assurance that the securities subject to a stand-by
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Because the issuance
of the security underlying the commitment is at the option of the issuer, a Fund
may bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.
The purchase of a security subject to a stand-by commitment agreement
and the related commitment fee will be recorded on the date on which the
security can reasonably be expected to be issued, and the value of the security
will be adjusted by the amount of the commitment fee. In the event the security
is not issued, the commitment fee will be recorded as income on the expiration
date of the stand-by commitment.
COMMON INVESTMENT OBJECTIVES AND POLICIES -- INTERNATIONAL GROWTH, U.S. EQUITY,
U.S. FIXED INCOME, GLOBAL INCOME, HIGH YIELD, FOCUS AND LONG-SHORT NEUTRAL FUNDS
U.S. GOVERNMENT SECURITIES. The obligations issued or guaranteed by
the U.S. government in which a Fund may invest include direct obligations of the
U.S. Treasury and obligations issued by U.S. government agencies and
instrumentalities. Included among direct obligations of the United States are
Treasury Bills, Treasury Notes and Treasury Bonds, which differ in terms of
their interest rates, maturities and dates of issuance. Treasury Bills have
maturities of less than one year, Treasury Notes have maturities of one to 10
years and Treasury Bonds generally have maturities of greater than 10 years at
the date of issuance. Included among the obligations issued by agencies and
instrumentalities of the United States are instruments that are supported by the
full faith and credit of the United States (such as certificates issued by the
Government National Mortgage Association ("GNMA")); instruments that are
supported by the right of the issuer to borrow from the U.S. Treasury (such as
securities of Federal Home Loan Banks); and instruments that are supported by
the credit of the instrumentality (such as Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") bonds).
Other U.S. government securities the Funds may invest in include
securities issued or guaranteed by the Federal Housing Administration, Farmers
Home Loan
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Administration, Export-Import Bank of the United States, Small Business
Administration, General Services Administration, Central Bank for Cooperatives,
Federal Farm Credit Banks, Federal Intermediate Credit Banks, Federal Land
Banks, Maritime Administration, Tennessee Valley Authority, District of Columbia
Armory Board and Student Loan Marketing Association. Because the U.S. government
is not obligated by law to provide support to an instrumentality it sponsors, a
Fund will invest in obligations issued by such an instrumentality only if the
Adviser determines that the credit risk with respect to the instrumentality does
not make its securities unsuitable for investment by the Fund.
FOREIGN INVESTMENTS. Investors should recognize that investing in
foreign companies involves certain risks, including those discussed below, which
are in addition to those associated with investing in U.S. issuers. Individual
foreign economies may differ favorably or unfavorably from the U.S. economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments positions. In
addition, foreign investments by the Funds are subject to the risk that natural
disasters (such as an earthquake) will weaken a country's economy and cause
investments in that country to lose money. Natural disaster risks are, of
course, not limited to foreign investments and may apply to a Fund's domestic
investments as well. 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.
For the purposes of this investment policy, foreign investments
include investments in companies located or conducting a majority of their
business outside of the U.S., companies which have issued securities traded
principally outside of the U.S., or non-U.S. governments, governmental entities
or political subdivisions.
FOREIGN DEBT SECURITIES. The returns on foreign debt securities
reflect interest rates and other market conditions prevailing in those countries
and the effect of gains and losses in the denominated currencies against the
U.S. dollar, which have had a substantial impact on investment in foreign
fixed-income securities. The relative performance of various countries'
fixed-income markets historically has reflected wide variations relating to the
unique characteristics of each country's economy. Year-to-year fluctuations in
certain markets have been significant, and negative returns have been
experienced in various markets from time to time.
The foreign government securities in which the Funds may invest
generally consist of obligations issued or backed by national, state or
provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt obligations
of supranational entities, which include international organizations designated,
or backed by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples include the International Bank for Reconstruction and Development (the
"World Bank"), the European Coal and Steel Community, the Asian Development Bank
and the InterAmerican Development Bank.
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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 euro,
the new single currency for eleven Economic and Monetary Union member states.
The euro represents specified amounts of the currencies of certain member states
of the Economic and Monetary Union and was introduced on January 1, 1999.
National currencies of the eleven member states participating in the euro will
become subdivisions of the euro, but will continue to circulate as legal tender
until January 1, 2002, when they will be withdrawn permanently.
FOREIGN CURRENCY EXCHANGE. Since the Funds may invest in securities
denominated in currencies of non-U.S. countries, the Funds may be affected
favorably or unfavorably by exchange control regulations or changes in the
exchange rate between such currencies and the dollar. A change in the value of a
foreign currency relative to the U.S. dollar will result in a corresponding
change in the dollar value of the Fund assets denominated in that foreign
currency. Changes in foreign currency exchange rates may also affect the value
of dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by a Fund. Unless otherwise contracted, the rate of exchange
between the U.S. dollar and other currencies is determined by the forces of
supply and demand in the foreign exchange markets. Changes in the exchange rate
may result over time from the interaction of many factors directly or indirectly
affecting economic and political conditions in the United States and a
particular foreign country, including economic and political developments in
other countries. Governmental intervention may also play a significant role.
National governments rarely voluntarily allow their currencies to float freely
in response to economic forces. Sovereign governments use a variety of
techniques, such as intervention by a country's central bank or imposition of
regulatory controls or taxes, to affect the exchange rates of their currencies.
The Funds may use hedging techniques with the objective of protecting against
loss through the fluctuation of the value of the yen against the U.S. dollar,
particularly the forward market in foreign exchange, currency options and
currency futures.
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 subject to financial reporting standards,
practices and requirements that are either not uniform or less rigorous than
those applicable to U.S. companies.
POLITICAL INSTABILITY. With respect to some foreign countries, there
is the possibility of expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Funds, political or social instability,
or domestic developments which could affect U.S. investments in those and
neighboring countries.
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FOREIGN MARKETS. Securities of some foreign companies are less liquid
and their prices are more volatile than securities of comparable U.S. companies.
Certain foreign countries are known to experience long delays between the trade
and settlement dates of securities purchased or sold which may result in
increased exposure to market and foreign exchange fluctuations and increased
illiquidity.
INCREASED EXPENSES. The operating expenses of 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 cost of converting
foreign currency into U.S. dollars, the payment of fixed brokerage commissions
on foreign exchanges, custodial costs, valuation costs and communication costs,
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. In addition,
foreign securities may be subject to foreign government taxes that would reduce
the net yield on such securities.
DOLLAR-DENOMINATED DEBT SECURITIES OF FOREIGN ISSUERS. The returns on
foreign debt securities reflect interest rates and other market conditions
prevailing in those countries. The relative performance of various countries'
fixed income markets historically has reflected wide variations relating to the
unique characteristics of each country's economy. Year-to-year fluctuations in
certain markets have been significant, and negative returns have been
experienced in various markets from time to time.
DEPOSITARY RECEIPTS. The assets of each Fund may be invested in the
securities of foreign issuers in the form of American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and International Depositary
Receipts ("IDRs"). These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs are
receipts typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. EDRs, which
are sometimes referred to as Continental Depositary Receipts ("CDRs"), are
receipts issued in Europe, and IDRs, which are sometimes referred to as Global
Depositary Receipts ("GDRs"), are issued outside the United States. EDRs (CDRs)
and IDRs (GDRs) are typically issued by non-U.S. banks and trust companies and
evidence ownership of either foreign or domestic securities. Generally, ADRs in
registered form are designed for use in U.S. securities markets and EDRs (CDRs)
and IDRs (GDRs) in bearer form are designed for use in European and non-U.S.
securities markets, respectively.
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. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (primarily the U.S. dollar)
and are currently actively traded in the OTC secondary market for debt
instruments. Brady Bonds have been issued only recently and therefore do not
have a long payment history. In light of the history of commercial bank loan
defaults by Latin American public and private entities, investments in Brady
Bonds may be viewed as speculative.
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EMERGING MARKETS. Each Fund may invest in securities of issuers
located in "emerging markets" (less developed countries located outside of the
U.S.). Investing in emerging markets involves not only the risks described above
with respect to investing in foreign securities, but also other risks, including
exposure to economic structures that are generally less diverse and mature than,
and to political systems that can be expected to have less stability than, those
of developed countries. For example, many investments in emerging markets
experienced significant declines in value due to political and currency
volatility in emerging markets countries during the latter part of 1997 and the
first half of 1998. Other characteristics of emerging markets that may affect
investment include certain national policies that may restrict investment by
foreigners in issuers or industries deemed sensitive to relevant national
interests and the absence of developed structures governing private and foreign
investments and private property. The typically small size of the markets of
securities of issuers located in emerging markets and the possibility of a low
or nonexistent volume of trading in those securities may also result in a lack
of liquidity and in price volatility of those securities.
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
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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 Investors Service,
Inc. ("Moody's") and Standard & Poor's Ratings Services ("S&P"). Such securities
are regarded as predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations and involve major risk exposure to adverse conditions. Some of such
sovereign debt, which may not be paying interest currently or may be in payment
default, may be comparable to securities rated "D" by S&P or "C" by Moody's. A
Fund may have difficulty disposing of certain sovereign debt obligations because
there may be a limited trading market for such securities. Because there is no
liquid secondary market for many of these securities, the Funds anticipate that
such securities could be sold only to a limited number of dealers or
institutional investors. The lack of a liquid secondary market may have an
adverse impact on the market price of such securities and a Fund's ability to
dispose of particular issues when necessary to meet a Fund's liquidity needs or
in response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer. The lack of a liquid secondary market for
certain securities also may make it more difficult for a Fund to obtain accurate
market quotations for purposes of valuing a Fund's portfolio and calculating its
net asset value. When and if available, fixed income securities may be purchased
by a Fund at a discount from face value. However, the Funds do not intend to
hold such securities to maturity for the purpose of achieving potential capital
gains, unless current yields on these securities remain attractive. From time to
time, a Fund may purchase securities not paying interest at the time acquired
if, in the opinion of the "Adviser," such securities have the potential for
future income or capital appreciation.
CONVERTIBLE SECURITIES. Convertible securities in which a fund may
invest, including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an investor
to benefit from increases in the market price of the underlying common stock.
Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. The value of convertible securities fluctuates in relation to
changes in interest rates like bonds and, in addition, fluctuates in relation to
the underlying common stock. Subsequent to purchase by a Fund, convertible
securities may cease to be rated or a rating may be reduced below the minimum
required for purchase by the Fund. Neither event will require sale of such
securities, although the "Adviser" will consider such event in its determination
of whether a Fund should continue to hold the securities.
DEBT SECURITIES. Each Fund may invest in investment grade debt
securities (other than money market obligations) for the purpose of seeking
capital appreciation. Any percentage limitation on a Fund's ability to invest in
debt securities will not be applicable during periods when the Fund pursues a
temporary defensive strategy as discussed below.
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Each Fund may invest to a limited extent in zero coupon securities and
government zero coupon securities. See "Additional Information Concerning Taxes"
for a discussion of the tax consequences to shareholders of a Fund that invests
in zero coupon securities.
The interest income to be derived may be considered as one factor in
selecting debt securities for investment by the "Adviser." Because the market
value of debt obligations can be expected to vary inversely to changes in
prevailing interest rates, investing in debt obligations may provide an
opportunity for capital appreciation when interest rates are expected to
decline. The success of such a strategy is dependent upon the "Adviser's ability
to forecast accurately changes in interest rates. The market value of debt
obligations may also be expected to vary depending upon, among other factors,
the ability of the issuer to repay principal and interest, any change in
investment rating and general economic conditions.
A security will be deemed to be investment grade if it is rated within
the four highest grades by Moody's or S&P or, if unrated, is determined to be of
comparable quality by the "Adviser." Securities rated in the fourth highest
grade may have speculative characteristics and changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade bonds.
Subsequent to its purchase by a Fund, an issue of securities may cease to be
rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither event will require sale of such securities, although the
Adviser will consider such event in its determination of whether the Fund should
continue to hold the securities.
BELOW INVESTMENT GRADE SECURITIES. The Funds, except for the
Long-Short Neutral Fund, may invest in below investment grade securities. The
High Yield Fund has established no rating criteria for the debt securities in
which they may invest.
Below investment grade debt securities may be rated as low as C by
Moody's or D by S&P, or be deemed by the Adviser to be of equivalent quality.
Securities that are rated C by Moody's are the lowest rated class and can be
regarded as having extremely poor prospects of ever attaining any real
investment standing. A security rated D by S&P is in default or is expected to
default upon maturity or payment date. Investors should be aware that ratings
are relative and subjective and are not absolute standards of quality.
Below investment grade securities (commonly referred to as "junk
bonds"), (i) will likely have some quality and protective characteristics that,
in the judgment of the rating organizations, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (ii) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. The market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
investment grade securities. In addition, these securities generally present a
higher degree of credit risk. The risk of loss due to default is significantly
greater because these securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness.
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While the market values of medium- and lower-rated securities and
unrated securities of comparable quality tend to react less to fluctuations in
interest rate levels than do those of higher-rated securities, the market values
of certain of these securities also tend to be more sensitive to individual
corporate developments and changes in economic conditions than higher-quality
securities. In addition, medium- and lower-rated securities and comparable
unrated securities generally present a higher degree of credit risk. Issuers of
medium- and lower-rated securities and unrated securities are often highly
leveraged and may not have more traditional methods of financing available to
them so that their ability to service their obligations during an economic
downturn or during sustained periods of rising interest rates may be impaired.
The risk of loss due to default by such issuers is significantly greater because
medium- and lower-rated securities and unrated securities generally are
unsecured and frequently are subordinated to the prior payment of senior
indebtedness.
An economic recession could disrupt severely the market for such
securities and may adversely affect the value of such securities and the ability
of the issuers of such securities to repay principal and pay interest thereon. A
Fund may have difficulty disposing of certain of these securities because there
may be a thin trading market. Because there is no established retail secondary
market for many of these securities, the Funds anticipate that these securities
could be sold only to a limited number of dealers or institutional investors. To
the extent a secondary trading market for these securities does exist, it
generally is not as liquid as the secondary market for higher-rated securities.
The lack of a liquid secondary market, as well as adverse publicity and investor
perception with respect to these securities, may have an adverse impact on
market price and a Fund's ability to dispose of particular issues when necessary
to meet the Fund's liquidity needs or in response to a specific economic event
such as a deterioration in the creditworthiness of the issuer. The lack of a
liquid secondary market for certain securities also may make it more difficult
for a Fund to obtain accurate market quotations for purposes of valuing the Fund
and calculating its net asset value.
The market value of securities in medium- and lower-rated categories
is also more volatile than that of higher quality securities. Factors adversely
impacting the market value of these securities will adversely impact a Fund's
net asset value. A Fund will rely on the judgment, analysis and experience of
the Adviser in evaluating the creditworthiness of an issuer. In this evaluation,
in addition to relying on ratings assigned by Moody's or S&P, the Adviser will
take into consideration, among other things, the issuer's financial resources,
its sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. Interest rate trends
and specific developments which may affect individual issuers will also be
analyzed. Subsequent to its purchase by a Fund, an issue of securities may cease
to be rated or its rating may be reduced. Neither event will require sale of
such securities, although the Adviser will consider such event in its
determination of whether a Fund should continue to hold the securities.
Normally, medium- and lower-rated and comparable unrated securities are not
intended for short-term investment. A Fund may incur additional expenses to the
extent it is required to seek recovery upon a default in the payment of
principal or interest on its portfolio holdings of such securities. At times,
adverse publicity regarding lower-rated securities has depressed the prices for
such securities to some extent.
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MORTGAGE-BACKED SECURITIES. The Funds, except for the Long-Short
Neutral Fund, may invest in mortgage-backed securities. Mortgage-backed
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities include those issued by GNMA, FNMA and FHLMC. Non-government
issued mortgage-backed securities may offer higher yields than those issued by
government entities, but may be subject to greater price fluctuations.
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property. The
mortgages backing these securities include, among other mortgage instruments,
conventional 30-year fixed-rate mortgages, 15-year fixed-rate mortgages,
graduated payment mortgages and adjustable rate mortgages. Although there may be
government or private guarantees on the payment of interest and principal of
these securities, the guarantees do not extend to the securities' yield or
value, which are likely to vary inversely with fluctuations in interest rates,
nor do the guarantees extend to the yield or value of the Fund's shares. These
securities generally are "pass-through" instruments, through which the holders
receive a share of all interest and principal payments from the mortgages
underlying the securities, net of certain fees. Some mortgage-backed securities,
such as collateralized mortgage obligations ("CMOs"), make payments of both
principal and interest at a variety of intervals; others make semiannual
interest payments at a predetermined rate and repay principal at maturity (like
a typical bond).
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. The occurrence of mortgage prepayments is affected by various
factors, including the level of interest rates, general economic conditions, the
location, scheduled maturity and age of the mortgage and other social and
demographic conditions. Because prepayment rates of individual pools vary
widely, it is not possible to predict accurately the average life of a
particular pool. At present, pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of falling interest rates, the rate of
prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising rates the
rate of prepayment tends to decrease, thereby lengthening the actual average
life of the pool. However, these effects may not be present, or may differ in
degree, if the mortgage loans in the pools have adjustable interest rates or
other special payment terms, such as a prepayment charge. Actual prepayment
experience may cause the yield of mortgage-backed securities to differ from the
assumed average life yield. Reinvestment of prepayments may occur at higher or
lower interest rates than the original investment, thus affecting the Funds'
yield. In addition, mortgage-backed securities issued by certain non-government
entities and collateralized mortgage obligations may be less marketable than
other securities.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificate holders and
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to any guarantor, such as GNMA, and due to any yield retained by the issuer.
Actual yield to the holder may vary from the coupon rate, even if adjustable, if
the mortgage-backed securities are purchased or traded in the secondary market
at a premium or discount. In addition, there is normally some delay between the
time the issuer receives mortgage payments from the servicer and the time the
issuer makes the payments on the mortgage-backed securities, and this delay
reduces the effective yield to the holder of such securities.
ASSET-BACKED SECURITIES. The Funds, except for the Long-Short Neutral
Fund, may invest in asset-backed securities. Asset-backed securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities include
those issued by the Student Loan Marketing Association. Asset-backed securities
represent participations in, or are secured by and payable from, assets such as
motor vehicle installment sales, installment loan contracts, leases of various
types of real and personal property and receivables from revolving credit
(credit card) agreements. Such assets are securitized through the use of trusts
and special purpose corporations. Payments or distributions of principal and
interest may be guaranteed up to certain amounts and for a certain time period
by a letter of credit or a pool insurance policy issued by a financial
institution unaffiliated with the trust or corporation. In certain
circumstances, asset-backed securities may be considered illiquid securities
subject to the percentage limitations described herein. Asset-backed securities
are considered an industry for industry concentration purposes, and a Fund will
therefore not purchase any asset-backed securities which would cause 25% or more
of a Fund's net assets at the time of purchase to be invested in asset-backed
securities.
Asset-backed securities present certain risks that are not presented
by other securities in which the Funds may invest. Automobile receivables
generally are secured by automobiles. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations. If
the servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the holders of
the asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in the underlying automobiles. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities. Credit card receivables are
generally unsecured, and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. In addition, there is no assurance that the security interest in
the collateral can be realized. The remaining maturity of any asset-backed
security a Fund invests in will be 397 days or less. A Fund may purchase
asset-backed securities that are unrated.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Each Fund may invest in fixed and
floating rate loans ("Loans") arranged through private negotiations between a
foreign government (a "Borrower") and one or more financial institutions
("Lenders"). The majority of each Fund's investments in Loans are expected to be
in the form of participations in Loans ("Participations") and assignments of
portions of Loans from third parties ("Assignments").
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Each Fund currently anticipates that it will not invest more than 5% of its net
assets in Loan Participations and Assignments.
Participations typically will result in the Fund having a contractual
relationship only with the Lender, not with the Borrower. The Fund will have the
right to receive payments of principal, interest and any fees to which it is
entitled only from the Lender selling the Participation and only upon receipt by
the Lender of the payments from the Borrower. In connection with purchasing
Participations, the Fund generally will have no right to enforce compliance by
the Borrower with the terms of the loan agreement relating to the Loan, nor any
rights of set-off against the Borrower, and the Fund may not directly benefit
from any collateral supporting the Loan in which it has purchased the
Participation. As a result, the Fund will assume the credit risk of both the
Borrower and the Lender that is selling the Participation. In the event of the
insolvency of the Lender selling a Participation, the Fund may be treated as a
general creditor of the Lender and may not benefit from any set-off between the
Lender and the Borrower. The Fund will acquire Participations only if the Lender
interpositioned between the Fund and the Borrower is determined by the Adviser
to be creditworthy.
STRUCTURED NOTES, BONDS OR DEBENTURES. Typically, the value of the
principal and/or interest on these instruments is determined by reference to
changes in the value of specific currencies, interest rates, commodities,
indexes or other financial indicators (the "Reference") or the relevant change
in two or more References. The interest rate or the principal amount payable
upon maturity or redemption may be increased or decreased depending upon changes
in the applicable Reference. The terms of the structured securities may provide
that in certain circumstances no principal is due at maturity and, therefore,
may result in the loss of a Fund's entire investment. The value of structured
securities may move in the same or the opposite direction as the value of the
Reference, so that appreciation of the Reference may produce an increase or
decrease in the interest rate or value of the security at maturity. In addition,
the change in interest rate or the value of the security at maturity may be a
multiple of the change in the value of the Reference so that the security may be
more or less volatile than the Reference, depending on the multiple.
Consequently, structured securities may entail a greater degree of market risk
and volatility than other types of debt obligations.
COLLATERALIZED MORTGAGE OBLIGATIONS. The Funds may also purchase
collateralized mortgage obligations CMOs issued by a U.S. Government
instrumentality which are backed by a portfolio of mortgages or mortgage-backed
securities. The issuer's obligations to make interest and principal payments is
secured by the underlying portfolio of mortgages or mortgage-backed securities.
Generally, CMOs are partitioned into several classes with a ranked priority by
which the classes of obligations are redeemed. These securities may be
considered mortgage derivatives. The Funds may only invest in CMOs issued by
FHLMC, FNMA or other agencies of the U.S. Government or instrumentalities
established or sponsored by the U.S. Government.
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CMOs provide an investor with a specified interest in the cash flow of
a pool of underlying mortgages or other mortgage-related securities. Issuers of
CMOs frequently elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. Coupons can be fixed or variable. If variable, they can move with or in
the reverse direction of interest rates. The coupon changes could be a multiple
of the actual rate change and there may be limitations on what the coupon can
be. Cash flows of pools can also be divided into a principal only class and an
interest only class. In this case the principal only class will only receive
principal cash flows from the pool. All interest cash flows go to the interest
only class. The relative payment rights of the various CMO classes may be
structured in many ways, either sequentially or by other rules of priority.
Generally, payments of principal are applied to the CMO classes in the order of
their respective stated maturities, so that no principal payments will be made
on a CMO class until all other classes having an earlier stated maturity date
are paid in full. Sometimes, however, CMO classes are "parallel pay" (I.E.
payments of principal are made to two or more classes concurrently). CMOs may
exhibit more or less price volatility and interest rate risk than other types of
mortgaged-related obligations.
The CMO structure returns principal to investors sequentially, rather
than according to the pro rata method of a pass-through. In the traditional CMO
structure, all classes (called tranches) receive interest at a stated rate, but
only one class at a time receives principal. All principal payments received on
the underlying mortgages or securities are first paid to the "fastest pay"
tranche. After this tranche is retired, the next tranche in the sequence becomes
the exclusive recipient of principal payments. This sequential process continues
until the last tranche is retired. In the event of sufficient early repayments
on the underlying mortgages, the "fastest-pay" tranche generally will be retired
prior to its maturity. Thus the early retirement of a particular tranche of a
CMO held by a Fund would have the same effect as the prepayment of mortgages
underlying a mortgage-backed pass-through security as described above.
ZERO COUPON SECURITIES. Each Fund may invest in "zero coupon" U.S.
Treasury, foreign government and U.S. and foreign corporate debt securities,
which are bills, notes and bonds that have been stripped of their unmatured
interest coupons and receipts or certificates representing interests in such
stripped debt obligations and coupons. Each Fund currently anticipates that zero
coupon securities will not exceed 5% of its net assets.
A zero coupon security pays no interest to its holder prior to
maturity. Accordingly, such securities usually trade at a deep discount from
their face or par value and will be subject to greater fluctuations of market
value in response to changing interest rates than debt obligations of comparable
maturities that make current distributions of interest. The Funds anticipate
that they will not normally hold zero coupon securities to maturity. Federal tax
law requires that a holder of a zero coupon security accrue a portion of the
discount at which the security was purchased as income each year, even though
the holder receives no interest payment on the security during the year.
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FUTURES ACTIVITIES. Each Fund may enter into futures contracts (and
related options) on securities, securities indices, foreign currencies and
interest rates, and purchase and write (sell) related options traded on
exchanges designated by the Commodity Futures Trading Commission (the "CFTC") or
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
multiplier times the change in the index. An option on a futures contract gives
the purchaser the right, in return for the premium paid, to assume a position in
a futures contract.
These transactions may be entered into for "bona fide hedging"
purposes as defined in CFTC regulations and other permissible purposes including
hedging against changes in the value of portfolio securities due to anticipated
changes in currency values, interest rates and/or market conditions as well as
for the purpose of increasing total return, which may involve speculation.
Aggregate initial margin and premiums (discussed below) required to establish
positions other than those considered to be "bona fide hedging" by the CFTC will
not exceed 5% of the Fund's net asset value after taking into account unrealized
profits and unrealized losses on any such contracts it has entered into Each
Fund reserves the right to engage in transactions involving futures contracts
and options on futures contracts to the extent allowed by CFTC regulations in
effect from time to time and in accordance with the Fund's policies. There is no
overall limit on the percentage of Fund assets that may be at risk with respect
to futures activities.
FUTURES CONTRACTS. A foreign currency futures contract provides for
the future sale by one party and the purchase by the other party of a certain
amount of a specified non-U.S. currency at a specified price, date, time and
place. An interest rate futures contract provides for the future sale by one
party and the purchase by the other party of a certain amount of a specific
interest rate sensitive financial instrument (debt security) at a specified
price, date, time and place. Securities indexes are capitalization weighted
indexes which reflect the market value of the securities represented in the
indexes. A securities index futures contract is an agreement to be settled by
delivery of an amount of cash equal to a specified multiplier times the
difference between the value of the index at the close of the last trading day
on the contract and the price at which the agreement is made.
No consideration is paid or received by a Fund upon entering into a
futures contract. Instead, the Fund is required to deposit in a segregated
account with its custodian an amount of cash or liquid securities acceptable to
the broker, equal to approximately 1% to 10% of the contract amount (this amount
is subject to change by the exchange on which the contract is traded, and
brokers may charge a higher amount). This amount is known as "initial margin"
and is in the nature of a performance bond or good faith deposit on the contract
which is returned to the Fund upon termination of the futures contract, assuming
all contractual obligations have been satisfied. The broker will have access to
amounts in the margin account if the Fund fails to meet its contractual
obligations. Subsequent payments, known as "variation margin," to and from the
broker, will be made daily as the currency, financial instrument or securities
index underlying the futures contract fluctuates, making the
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long and short positions in the futures contract more or less valuable, a
process known as "marking-to-market." A Fund will also incur brokerage costs in
connection with entering into futures transactions.
At any time prior to the expiration of a futures contract, a Fund may
elect to close the position by taking an opposite position, which will operate
to terminate the Fund's existing position in the contract. Positions in futures
contracts and options on futures contracts (described below) may be closed out
only on the exchange on which they were entered into (or through a linked
exchange). No secondary market for such contracts exists. Although each Fund may
enter into futures contracts only if there is an active market for such
contracts, there is no assurance that an active market will exist at any
particular time. Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the day. It is possible that futures contract prices could move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions at an advantageous
price and subjecting the Fund to substantial losses. In such event, and in the
event of adverse price movements, the Fund would be required to make daily cash
payments of variation margin. In such situations, if a Fund had insufficient
cash, it might have to sell securities to meet daily variation margin
requirements at a time when it would be disadvantageous to do so. In addition,
if the transaction is entered into for hedging purposes, in such circumstances
the Fund may realize a loss on a futures contract or option that is not offset
by an increase in the value of the hedged position. Losses incurred in futures
transactions and the costs of these transactions will affect a Fund's
performance.
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
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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 each
Fund.
CURRENCY EXCHANGE TRANSACTIONS. The value in U.S. dollars of the
assets of the Funds that are invested in foreign securities may be affected
favorably or unfavorably by a variety of factors not applicable to investment in
U.S. securities, and the Funds may incur costs in connection with conversion
between various currencies. Currency exchange transactions may be from any
non-U.S. currency into U.S. dollars or into other appropriate currencies. Each
Fund will conduct its currency exchange transactions (i) on a spot (I.E., cash)
basis at the rate prevailing in the currency exchange market, (ii) through
entering into futures contracts or options on such contracts (as described
above), (iii) through entering into forward contracts to purchase or sell
currency or (iv) by purchasing exchange-traded currency options. The funds may
engage in currency exchange transactions for both hedging payable and to reverse
total return, which may involve speculation.
FORWARD CURRENCY CONTRACTS. Each Fund may use forward currency
contracts to protect against uncertainty in the level of future exchange rates
and to enhance total return. The Funds will not invest more than 50% of their
respective total assets in such contracts for the purpose of enhancing total
return. There is no limit on the amount of assets that the Funds may invest in
such transactions for hedging purposes.
The Funds may also enter into forward currency contracts with respect
to specific transactions. For example, when a Fund anticipates the receipt in a
foreign currency of interest payments on a security that it holds, a Fund may
desire to "lock-in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such payment, as the case may be, by entering into a forward
contract for the purchase or sale, for a fixed amount of U.S. dollars, of the
amount of foreign currency involved in the underlying transaction. A Fund will
thereby be able to protect itself against a possible loss resulting from an
adverse change in the relationship between the currency exchange rates during
the period between the date on which the security is purchased or sold, or on
which the payment is declared, and the date on which such payments are made or
received.
A forward currency contract involves an obligation to purchase or sell
a specific currency at a future date, which may be any fixed number of days from
the date of the contract as agreed upon by the parties, at a price set at the
time of the contract. These contracts are entered into in the interbank market
conducted directly between currency traders (usually large commercial banks and
brokers) and their customers. Forward currency contracts are similar to currency
futures contracts, except that futures contracts are traded on commodities
exchanges and are standardized as to contract size and delivery date.
At or before the maturity of a forward contract, the Funds may either
sell a portfolio security and make delivery of the currency, or retain the
security and fully or partially offset its contractual obligation to deliver the
currency by negotiating with its trading partner to enter into an offsetting
transaction. If a Fund retains the portfolio security and engages in an
offsetting transaction, the Fund, at the time of execution of the offsetting
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transaction, will incur a gain or a loss to the extent that movement has
occurred in forward contract prices.
CURRENCY OPTIONS. The Funds may purchase exchange-traded put and call
options on foreign currencies. Put options convey the right to sell the
underlying currency at a price which is anticipated to be higher than the spot
price of the currency at the time the option is exercised. Call options convey
the right to buy the underlying currency at a price which is expected to be
lower than the spot price of the currency at the time the option is exercised.
CURRENCY HEDGING. Each Fund's currency hedging will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward currency with respect to
specific receivables or payables of a Fund generally accruing in connection with
the purchase or sale of its portfolio securities. Position hedging is the sale
of forward currency with respect to portfolio security positions. No Fund may
position hedge to an extent greater than the aggregate market value (at the time
of entering into the hedge) of the hedged securities.
A decline in the U.S. dollar value of a foreign currency in which a
Fund's securities are denominated will reduce the U.S. dollar value of the
securities, even if their value in the foreign currency remains constant. The
use of currency hedges does not eliminate fluctuations in the underlying prices
of the securities, but it does establish a rate of exchange that can be achieved
in the future. For example, in order to protect against diminutions in the U.S.
dollar value of non-dollar denominated securities it holds, a Fund may purchase
foreign currency put options. If the value of the foreign currency does decline,
the Fund will have the right to sell the currency for a fixed amount in dollars
and will thereby offset, in whole or in part, the adverse effect on the U.S.
dollar value of its securities that otherwise would have resulted. Conversely,
if a rise in the U.S. dollar value of a currency in which securities to be
acquired are denominated is projected, thereby potentially increasing the cost
of the securities, the Fund may purchase call options on the particular
currency. The purchase of these options could offset, at least partially, the
effects of the adverse movements in exchange rates. The benefit to a Fund
derived from purchases of currency options, like the benefit derived from other
types of options, will be reduced by premiums and other transaction costs.
Because transactions in currency exchange are generally conducted on a principal
basis, no fees or commissions are generally involved. Currency hedging involves
some of the same risks and considerations as other transactions with similar
instruments. Although currency hedges limit the risk of loss due to a decline in
the value of a hedged currency, at the same time, they also limit any potential
gain that might result should the value of the currency increase. If a
devaluation is generally anticipated, a Fund may not be able to contract to sell
a currency at a price above the devaluation level it anticipates.
While the values of currency futures and options on futures, forward
currency contracts and currency options may be expected to correlate with
exchange rates, they will not reflect other factors that may affect the value of
a Fund's investments and a currency hedge may not be entirely successful in
mitigating changes in the value of the Fund's investments
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denominated in that currency. A currency hedge, for example, should protect a
non-dollar denominated bond against a decline in the non-dollar currency, but
will not protect the Fund against a price decline if the issuer's
creditworthiness deteriorates.
HEDGING GENERALLY. In addition to entering into options, futures and
currency exchange transactions for other purposes, including generating current
income to offset expenses or increase return, each Fund may enter into these
transactions as hedges to reduce investment risk, generally by making an
investment expected to move in the opposite direction of a portfolio position. A
hedge is designed to offset a loss in a portfolio position with a gain in the
hedged position; at the same time, however, a properly correlated hedge will
result in a gain in the portfolio position being offset by a loss in the hedged
position. As a result, the use of options, futures, contracts and currency
exchange transactions for hedging purposes could limit any potential gain from
an increase in the value of the position hedged. In addition, the movement in
the portfolio position hedged may not be of the same magnitude as movement in
the hedge. With respect to futures contracts, since the value of portfolio
securities will far exceed the value of the futures contracts sold by a Fund, an
increase in the value of the futures contracts could only mitigate, but not
totally offset, the decline in the value of the Fund's assets.
In hedging transactions based on an index, whether a Fund will realize
a gain or loss depends upon movements in the level of securities prices in the
stock market generally or, in the case of certain indexes, in an industry or
market segment, rather than movements in the price of a particular security. The
risk of imperfect correlation increases as the composition of a Fund's portfolio
varies from the composition of the index. In an effort to compensate for
imperfect correlation of relative movements in the hedged position and the
hedge, 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 the Fund's net investment results if market movements are
not as anticipated when the hedge is established. Securities index futures
transactions may be subject to additional correlation risks. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions which
would distort the normal relationship between the securities index and futures
markets. Secondly, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market. Therefore, increased participation by speculators in the
futures market also may cause temporary price distortions. Because of the
possibility of price distortions in the futures market and the imperfect
correlation between movements in the securities index and movements in the price
of securities index futures, a correct forecast of general market trends by the
Adviser still may not result in a successful hedging transaction.
Each Fund will engage in hedging transactions only when deemed
advisable by the Adviser, and successful use by the Fund of hedging transactions
will be subject to the 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
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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.
SHORT SALES "AGAINST THE BOX." In a short sale, a Fund sells a
borrowed security and has a corresponding obligation to the lender to return the
identical security. The seller does not immediately deliver the securities sold
and is said to have a short position in those securities until delivery occurs.
While a short sale is made by selling a security the Fund does not own, a short
sale is "against the box" to the extent that the Fund contemporaneously owns or
has the right to obtain, at no added cost, securities identical to those sold
short. It may be entered into by the Fund, for example, to lock in a sales price
for a security the Fund does not wish to sell immediately. If the Fund engages
in a short sale, the collateral for the short position will be maintained by the
Fund's custodian or qualified sub-custodian. While the short sale is open, the
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 the
Fund's long position.
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 the Fund (or a security convertible or 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 a Fund owns. There will be certain additional
transactions costs associated with short sales against the box, but a Fund will
endeavor to offset these costs with the income from the investment of the cash
proceeds of short sales.
If a Fund effects a short sale of securities at a time when it has an
unrealized gain on the securities, it may be required to recognize that gain as
if it had actually sold the securities (as a "constructive sale") on the date it
effects the short sale. However, such constructive sale treatment may not apply
if 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 a Fund may effect short sales.
The Funds do not presently intend to invest more than 5% of net assets
in short sales against the box.
SECTION 4(2) PAPER. "Section 4(2) paper" is commercial paper which is
issued in reliance on the "private placement" exemption from registration which
is afforded by Section 4(2) of the Securities Act of 1933. Section 4(2) paper is
restricted as to disposition
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under the federal securities laws and is generally sold to institutional
investors such as the Funds which agree that they are purchasing the paper for
investment and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) paper normally is
resold to other institutional investors through or with the assistance of
investment dealers who make a market in the Section 4(2) paper, thereby
providing liquidity. See "Illiquid Securities" above. See Appendix "A" for a
list of commercial paper ratings.
SUPPLEMENTAL INVESTMENT OBJECTIVES AND POLICIES -- INTERNATIONAL GROWTH, U.S.
EQUITY AND FOCUS FUNDS
RIGHTS OFFERINGS AND PURCHASE WARRANTS. Rights offerings and purchase
warrants are privileges issued by a corporation which enable the owner to
subscribe to and purchase a specified number of shares of the corporation at a
specified price during a specified period of time. Subscription rights normally
have a short lifespan to expiration. The purchase of rights or warrants involves
the risk that a Fund could lose the purchase value of a right or warrant if the
right to subscribe to additional shares is not executed prior to the rights and
warrants expiration. Also, the purchase of rights and/or warrants involves the
risk that the effective price paid for the right and/or warrant added to the
subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in the
level of the underlying security.
SUPPLEMENTAL INVESTMENT OBJECTIVES AND POLICIES -- MUNICIPAL BOND FUND
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance, and opinions relating
to the validity of and the tax-exempt status of payments received by the Fund
from tax-exempt derivative securities are rendered by counsel to the respective
sponsors of such securities. The Fund and the Adviser will rely on such opinions
and will not review independently the underlying proceedings relating to the
issuance of Municipal Obligations, the creation of any tax-exempt derivative
securities, or the basis for such opinions.
Certain Municipal Obligations are classified as private activity
bonds. Interest on private activity bonds is tax-exempt only if the bonds fall
within certain defined categories of qualified private activity bonds and meet
the requirements specified in those respective categories. In addition, interest
on certain private activity bonds ("Alternative Minimum Tax Securities") is a
specific preference item under the federal alternative minimum tax. Investors
should also be aware of the possibility of state and local alternative minimum
or minimum income tax liability on interest from Alternative Minimum Tax
Securities.
Although the Municipal Bond Fund may invest 25% or more of its net
assets in Municipal Obligations the interest on which is paid solely from
revenues of similar projects, and may invest up to 40% of its total assets in
private activity bonds when added together with any taxable investments held by
the Municipal Bond Fund, it will not do so unless in the opinion of the Adviser
the investment is warranted. To the extent the Municipal Bond Fund's assets are
invested in Municipal Obligations payable from the revenues of similar projects
or
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are invested in private activity bonds, the Municipal Bond Fund will be subject
to the peculiar risks presented by the laws and economic conditions relating to
such projects and bonds to a greater extent than it would be if its assets were
not so invested.
SUPPLEMENTAL INVESTMENT OBJECTIVES AND POLICIES -- LONG-SHORT NEUTRAL FUND
SHORT SALES. The Long-Short Neutral Fund will seek to realize
additional gains through short sales. Short sales are transactions in which the
Fund sells a security it does not own, in anticipation of a decline in the value
of that security relative to the long positions held by the Fund. To complete
such a transaction, the Fund must borrow the security from a broker or other
institution to make delivery to the buyer. The Fund then is obligated to replace
the security borrowed by purchasing it at the market price at or prior to the
time of replacement. The price at such time may be more or less than the price
at which the security was sold by the Fund. Until the security is replaced, the
Fund is required to repay the lender any dividends or interest that accrue
during the period of the loan. To borrow the security, the Fund also may be
required to pay a premium, which would increase the cost of the security sold.
The net proceeds of the short sale will be retained by the broker (or by the
Fund's custodian in a special custody account), to the extent necessary to meet
margin requirements, until the short position is closed out. The Fund also will
incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price
of the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund will realize a gain if
the security declines in price between those dates. The amount of any gain will
be decreased, and the amount of any loss increased, by the amount of the
premium, dividends, interest or expenses the Fund may be required to pay in
connection with a short sale. An increase in the value of a security sold short
by the Fund over the price at which it was sold short will result in a loss to
the Fund, and there can be no assurance that the Fund will be able to close out
the position at any particular time or at an acceptable price. Although the
Fund's gain is limited to the amount at which it sold a security short, its
potential loss is limited only by the maximum attainable price of the security
less the price at which the security was sold. Until the Fund replaces a
borrowed security, it will maintain in a segregated account at all times cash,
U.S. Government Securities, or other liquid securities in an amount which, when
added to any amount deposited with a broker as collateral will at least equal
the current market value of the security sold short. Depending on arrangements
made with brokers, the Fund may not receive any payments (including interest) on
collateral deposited with them. The Fund will not make a short sale if, after
giving effect to such sale, the market value of all securities sold short
exceeds 100% of the value of the Fund's net assets.
INVESTMENT RESTRICTIONS
The following investment limitations of each Fund may not be changed
without the affirmative vote of the holders of a majority of a Fund's
outstanding shares ("Fundamental
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Restrictions"). Such majority is defined as the lesser of (i) 67% or more of the
shares present at the meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy, or (ii) more
than 50% of the outstanding shares.
If a percentage restriction (other than the percentage limitation set
forth in No. 1 of each of the Funds) is adhered to at the time of an investment,
a later increase or decrease in the percentage of assets resulting from a change
in the values of portfolio securities or in the amount of the Funds' assets will
not constitute a violation of such restriction.
Each Fund may not:
1. Borrow money, except from banks, and only if after such borrowing
there is asset coverage of at least 300% for all borrowings of the Fund; or
mortgage, pledge or hypothecate any of its assets except in connection with any
such borrowing and in amounts not in excess of the lesser of the dollar amounts
borrowed or 33 1/3% of the value of the Fund's total assets at the time of such
borrowing; provided, however, with respect to the Long-Short Neutral Fund only,
that: (a) short sales and related borrowings of securities are not subject to
this restriction; and, (b) for the purposes of this restriction, collateral
arrangements with respect to options, short sales, stock index, interest rate,
currency or other futures, options on futures contracts, collateral arrangements
with respect to initial and variation margin and collateral arrangements with
respect to swaps and other derivatives are not deemed to be a pledge or other
encumbrance of assets).
2. Issue any senior securities, except as permitted under the 1940
Act;
3. Act as an underwriter of securities within the meaning of the
Securities Act, except insofar as it might be deemed to be an underwriter upon
disposition of certain portfolio securities acquired within the limitation on
purchases of restricted securities;
4. Purchase or sell real estate (including real estate limited
partnership interests), provided that a Fund may invest in securities secured by
real estate or interests therein or issued by companies that invest in real
estate or interests therein;
5. Purchase or sell commodities or commodity contracts, except that
a Fund may deal in forward foreign exchange transactions between currencies of
the different countries in which it may invest and purchase and sell stock index
and currency options, stock index futures, financial futures and currency
futures contracts and related options on such futures;
6. Make loans, except through loans of portfolio instruments and
repurchase agreements, provided that for purposes of this restriction the
acquisition of bonds, debentures or other debt instruments or interests therein
and investment in government obligations, Loan Participations and Assignments,
short-term commercial paper, certificates of deposit and bankers' acceptances
shall not be deemed to be the making of a loan; and
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7. 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 one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
(i) instruments issued or guaranteed by the United States, any state, territory
or possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions, and (ii)
repurchase agreements secured by the instruments described in clause (i); (b)
wholly-owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents; and (c) utilities will be divided according to their
services, for example, gas, gas transmission, electric and gas, electric and
telephone will each be considered a separate industry.
For purposes of Investment Limitation No. 1, collateral arrangements
with respect to, if applicable, the writing of options, futures contracts,
options on futures contracts, forward currency contracts and collateral
arrangements with respect to initial and variation margin are not deemed to be a
pledge of assets and neither such arrangements nor the purchase or sale of
futures or related options are deemed to be the issuance of a senior security
for purposes of Investment Limitation No. 2.
In addition to the fundamental investment limitations specified above,
a Fund may not:
1. Make investments for the purpose of exercising control or
management, but investments by a Fund in wholly-owned investment entities
created under the laws of certain countries will not be deemed the making
of investments for the purpose of exercising control or management;
2. Purchase securities on margin, except for short-term credits
necessary for clearance of portfolio transactions, and except that a Fund
may make margin deposits in connection with its use of options, futures
contracts, options on futures contracts and forward contracts;
3. Purchase or sell interests in mineral leases, oil, gas or other
mineral exploration or development programs, except that a Fund may invest
in securities issued by companies that engage in oil, gas or other mineral
exploration or development activities; and
4. (LONG-SHORT NEUTRAL FUND ONLY) Acquire any securities of
registered open-end investment companies or registered unit investment
trusts in reliance on Section 12(d)(1)(F) or (G) of the 1940 Act.
The policies set forth above are not fundamental and thus may be
changed by the Funds' Board of Directors without a vote of the shareholders.
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Securities held by a Fund generally may not be purchased from, sold or
loaned to the Adviser or its affiliates or any of their directors, officers or
employees, acting as principal, unless pursuant to a rule or exemptive order
under the 1940 Act.
PORTFOLIO VALUATION
The following is a description of the procedures used by the Funds in
valuing their assets.
Securities listed on a U.S. securities exchange (including securities
traded through the Nasdaq National Market System) or foreign securities exchange
or traded in an OTC market will be valued at the most recent sale as of the time
the valuation is made or, in the absence of sales, at the mean between the
highest bid and lowest asked quotations. If there are no such quotations, the
value of the securities will be taken to be the most recent bid quotation on the
exchange or market. Options contracts will be valued similarly. Futures
contracts will be valued at the most recent settlement price at the time of
valuation. A security 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
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 (each a
"Pricing Service") which may use a matrix, formula or other objective method
that takes into consideration market indexes, matrices, yield curves and other
specific adjustments. The procedures of Pricing Services are reviewed
periodically by the officers of each Fund under the general supervision and
responsibility of the Boards, which may replace a Pricing Service at any time.
Securities, options, futures contracts and other assets for which market
quotations are not available will be valued at their fair value as determined in
good faith pursuant to consistently applied procedures established by the
Boards. In addition, the Boards or their delegates may value a security at fair
value if it determines that such security's value determined by the methodology
set forth above does not reflect its fair value.
Trading in certain foreign countries is completed at various times
prior to the close of business on each business day in New York (I.E., a day on
which The New York Stock Exchange, Inc. (the "NYSE") is open for trading). In
addition, securities trading in a particular country or countries may not take
place on all business days in New York. Furthermore, trading takes place in
various foreign markets on days which are not business days in New York and days
on which the Funds' net asset value is not calculated. As a result, calculation
of the Funds' net asset value does not take place contemporaneously with the
determination of the prices of the majority of the Funds' securities. All assets
and liabilities initially expressed in foreign currency values will be converted
into U.S. dollar values at the
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prevailing exchange rate as quoted by a Pricing Service as of noon (Eastern
time). If such quotations are not available, the rate of exchange will be
determined in good faith pursuant to consistently applied procedures established
by the Boards. Although the Long-Short Neutral Fund does not invest directly in
foreign securities, it invests in American Depositary Receipts, the value of
which depends on the underlying foreign security.
PORTFOLIO TRANSACTIONS
The 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 over-the-counter, depending on where it
appears that the best price or execution will be obtained. The purchase price
paid by a Fund to underwriters of newly issued securities usually includes a
concession paid by the issuer to the underwriter, and purchases of securities
from dealers, acting as either principals or agents in the after market, are
normally executed at a price between the bid and asked price, which includes a
dealer's mark-up or mark-down. Transactions on U.S. stock exchanges and some
foreign stock exchanges involve the payment of negotiated brokerage commissions.
On exchanges on which commissions are negotiated, the cost of transactions may
vary among different brokers. On most foreign exchanges, commissions are
generally fixed. There is generally no stated commission in the case of
securities traded in domestic or foreign OTC markets, but the price of
securities traded in OTC markets includes an undisclosed commission or mark-up.
U.S. government securities are generally purchased from underwriters or dealers,
although certain newly issued U.S. government securities may be purchased
directly from the U.S. Treasury or from the issuing agency or instrumentality.
No brokerage commissions are typically paid on purchases and sales of U.S.
Government Securities.
In selecting broker-dealers, the Adviser does business exclusively
with those broker-dealers that, in the Adviser's judgment, can be expected to
provide the best service. The service has two main aspects: the execution of buy
and sell orders and the provision of research. In negotiating commissions with
broker-dealers, the Adviser will pay no more for execution and research services
that it considers either, or both together, to be worth. The worth of execution
service depends on the ability of the broker-dealer to minimize costs of
securities purchased and to maximize prices obtained for securities sold. The
worth of research depends on its usefulness in optimizing portfolio composition
and its changes over time. Commissions for the combination of execution and
research services that meet the Adviser's standards may be higher than for
execution services alone or for services that fall below the Adviser's
standards. The Adviser believes that these arrangements may benefit all clients
and not necessarily only the accounts in which the particular investment
transactions occur that are so executed. Further, the Adviser will only receive
brokerage or research service in connection with securities transactions that
are consistent with the "safe harbor" provisions of Section 28(e) of the
Securities Exchange Act of 1934 when paying such higher commissions.
34
<PAGE>
All orders for transactions in securities or options on behalf of a
Fund are placed by the Adviser with broker-dealers that it selects, including
Credit Suisse Asset Management Securities, Inc. ("CSAMSI") and affiliates of
Credit Suisse Group ("Credit Suisse"). A Fund may utilize CSAMSI or affiliates
of Credit Suisse in connection with a purchase or sale of securities when the
Adviser believes that the charge for the transaction does not exceed usual and
customary levels and when doing so is consistent with guidelines adopted by the
Board.
Investment decisions for the 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 the Funds. In some
instances, this investment procedure may adversely affect the price paid or
received by the Funds or the size of the position obtained or sold for the
Funds. To the extent permitted by law, the Adviser may aggregate the securities
to be sold or purchased for each Fund with those to be sold or purchased for
such other investment clients in order to obtain best execution.
Transactions for each of the Funds 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.
Each Fund may participate, if and when practicable, in bidding for the
purchase of securities for the Fund's portfolio directly from an issuer in order
to take advantage of the lower purchase price available to members of such a
group. A Fund will engage in this practice, however, only when the Adviser, in
its sole discretion, believe such practice to be otherwise in the Fund's
interest.
For the past three fiscal years ended August 31, the Funds have paid
brokerage commissions as follows:
AUGUST 31, 1999
<TABLE>
<CAPTION>
Fund Brokerage Commission
- ---- --------------------
<S> <C>
International Growth $5,207,753
35
<PAGE>
Fund Brokerage Commission
- ---- --------------------
U.S. Equity $ 84,295
U.S. Fixed Income $ 62,630
Global Income $ 4,476
High Yield $ 16
Municipal Bond N/A
Focus $ 142,853
Long-Short Neutral $ 214,482
AUGUST 31, 1998
Fund Brokerage Commission
- ---- --------------------
International Equity $3,481,661
U.S. Core Equity $ 352,567
U.S. Core Fixed Income $ 12,023
Strategic Global Fixed Income $ 678
High Yield $ 250
Municipal Bond N/A
Focus $ 17,675
Long-Short Neutral $ 3,790
AUGUST 31, 1997
Fund Brokerage Commission
- ---- --------------------
International Equity $5,041,204
U.S. Core Equity $ 181,354
U.S. Core Fixed Income $ 0
Strategic Global Fixed Income $ 0
High Yield $ 0
Municipal Bond N/A
Focus N/A
Long-Short Neutral N/A
</TABLE>
In no instance will portfolio securities be purchased from or sold to
CSAM, CSAMSI or Credit Suisse First Boston ("CS First Boston") or any affiliated
person of such companies except as permitted by the SEC exemptive order or by
applicable law. In addition, the Funds will not give preference to any
institutions with whom the Funds enter into distribution or shareholder
servicing agreements concerning the provision of distribution services or
support services.
36
<PAGE>
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 a Fund deems it
desirable to sell or purchase securities. The Funds' 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, a Fund will be engaged essentially in trading
activities based on short-term considerations affecting the value of an issuer's
stock instead of long-term investments based on fundamental valuation of
securities. Because of this policy, portfolio securities may be sold without
regard to the length of time for which they have been held.
It is not possible to predict the Funds' portfolio turnover rates.
High portfolio turnover rates (100% or more) may result in higher brokerage
commissions, dealer markups or underwriting commissions as well as other
transaction costs. In addition, gains realized from portfolio turnover may be
taxable to shareholders.
MANAGEMENT OF THE FUNDS
OFFICERS AND BOARD OF DIRECTORS. The business and affairs of each Fund
are managed by the Board of Directors in accordance with the laws of the State
of Maryland. Each Board elects officers who are responsible for the day-to-day
operations of a Fund and who execute policies authorized by the Board. Under
each Fund's charter, a Board may classify or reclassify any unissued shares of
the Funds into one or more additional classes by setting or changing in any one
or more respects their relative rights, voting powers, restrictions, limitations
as to dividends, qualifications and terms and conditions of redemption. A Board
may similarly classify or reclassify any class of its shares into one or more
series and, without shareholder approval, may increase the number of authorized
shares of the Funds.
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.
37
<PAGE>
<TABLE>
<S> <C>
Richard H. Francis (67) DIRECTOR
40 Grosvenor Road Currently retired; Executive Vice President and
Short Hills, New Jersey 07078 Chief Financial Officer of Pan Am Corporation
and Pan American World Airways, Inc. from 1988 to
1991; Director of The Infinity Mutual Funds, BISYS
Group Incorporated; Director/Trustee of other
Warburg Pincus Funds and other CSAM-advised
investment companies.
Jack W. Fritz (72) DIRECTOR
2425 North Fish Creek Road Private investor; Consultant and Director of
P.O. Box 483 Fritz Broadcasting, Inc. and Fritz
Wilson, Wyoming 83014 Communications (developers and operators of
radio stations); Director of Advo, Inc. (direct
mail advertising); Director/Trustee of other
Warburg Pincus Funds.
Jeffrey E. Garten (53) 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. (69) DIRECTOR
29 The Trillium Currently retired; President and Chief Operating
Pittsburgh, Pennsylvania 15238 Officer of National InterGroup, Inc. from April
1989 to March 1991; Chairman of Permian Oil Co.
from April 1989 to March 1991; Director of
Education Management Corp., Tyco International
Ltd.; Trustee, BT Insurance Funds Trust;
Director/Trustee of other Warburg Pincus Funds and
other CSAM-advised investment companies.
38
<PAGE>
William W. Priest* (58) 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.
Steven N. Rappaport (51) DIRECTOR
40 East 52nd Street President of Loanet, Inc. since 1997; Executive
New York, New York 10022 Vice President of Loanet, Inc. from 1994 to
1997; Director, President, North American
Operations, and former Executive Vice President
from 1992 to 1993 of Worldwide Operations of
Metallurg Inc.; Executive Vice President,
Telerate, Inc. from 1987 to 1992; Partner in the
law firm of Hartman & Craven until 1987;
Director/Trustee of other Warburg Pincus Funds and
other CSAM-advised investment companies.
Alexander B. Trowbridge (70) DIRECTOR
1317 F Street, N.W., Currently retired; President of Trowbridge
5th Floor Partners, Inc.(business consulting) from January
Washington, DC 20004 1990 to November 1996; Director or Trustee
of New England Mutual Life Insurance Co., ICOS
Corporation (biopharmaceuticals), IRI
International (energy services), The Rouse Company
(real estate development), Harris Corp.
(electronics and communications equipment), The
Gillette Co. (personal care products) and Sunoco,
Inc. (petroleum refining and marketing);
Director/Trustee of other Warburg Pincus Funds.
Eugene L. Podsiadlo (42) PRESIDENT
466 Lexington Avenue Managing Director of CSAM; Associated with
New York, New York 10017-3147 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.
- ----------------------
* Indicates a Director who is an "interested person" of the Fund as defined
in the 1940 Act.
39
<PAGE>
Hal Liebes, Esq. (35) VICE PRESIDENT AND SECRETARY
153 East 53rd Street Managing Director and General Counsel of
New York, New York 10022 CSAM; Associated with Lehman Brothers, Inc.
from 1996 to 1997; Associated with CSAM from 1995
to 1996; Associated with CS First Boston
Investment Management from 1994 to 1995;
Associated with Division of Enforcement, U.S.
Securities and Exchange Commission from 1991 to
1994; Officer of CSAMSI, other Warburg Pincus
Funds and other CSAM-advised investment companies.
Michael A. Pignataro (40) TREASURER AND CHIEF FINANCIAL OFFICER
153 East 53rd Street Vice President and Director of Fund
New York, New York 10022 Administration of CSAM; Associated with
CSAM since 1984; Officer of other Warburg Pincus
Funds and other CSAM-advised investment companies.
Stuart J. Cohen, Esq. (31) ASSISTANT SECRETARY
466 Lexington Avenue Vice President and Legal Counsel of CSAM;
New York, New York 10017-3147 Associated with CSAM since CSAM acquired
the Funds' predecessor adviser in July 1999; with
the predecessor adviser since 1997; Associated
with the law firm of Gordon Altman Butowsky
Weitzen Shalov & Wein from 1995 to 1997; Officer
of other Warburg Pincus Funds.
Rocco A. DelGuercio (36) ASSISTANT TREASURER
153 East 53rd Street Assistant Vice President and Administrative
New York, New York 10022 Officer of CSAM; Associated with CSAM since
June 1996; Assistant Treasurer, Bankers Trust
Corp. -- Fund Administration from March 1994 to
June 1996; Mutual Fund Accounting Supervisor,
Dreyfus Corporation from April 1987 to March 1994;
Officer of other Warburg Pincus Funds and other
CSAM-advised investment companies.
</TABLE>
No employee of CSAM, PFPC Inc. ("PFPC") and CSAMSI, the Funds'
co-administrators, 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, PFPC, CSAMSI or any of
their affiliates receives an annual fee of $750 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
40
<PAGE>
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' TOTAL COMPENSATION FOR FISCAL YEAR ENDED AUGUST 31, 1999
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
All
U.S. Investment
U.S. Fixed High Long-Short Companies
Name of International Equity Income Global Yield Municipal Focus Neutral in the CSAM
Director Growth Fund Fund Fund Income Fund Fund Bond Fund Fund Fund Fund Complex*
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
William W. Priest** None None None None None None None None None
- ----------------------------------------------------------------------------------------------------------------------------------
Arnold M. Reichman*** None None None None None None None None None
- ----------------------------------------------------------------------------------------------------------------------------------
Richard N. Cooper**** 1,125 1,125 1,125 1,125 1,125 1,125 1,125 1,125 $73,250
- ----------------------------------------------------------------------------------------------------------------------------------
Richard H. Francis***** 750 750 750 750 750 750 750 750 $16,500
- ----------------------------------------------------------------------------------------------------------------------------------
Jack W. Fritz 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 $73,250
- ----------------------------------------------------------------------------------------------------------------------------------
Jeffrey E. Garten 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 $73,250
- ----------------------------------------------------------------------------------------------------------------------------------
James S. Pasman, Jr.***** 750 750 750 750 750 750 750 750 $16,500
- ----------------------------------------------------------------------------------------------------------------------------------
Steven N. Rappaport***** 750 750 750 750 750 750 750 750 $16,500
- ----------------------------------------------------------------------------------------------------------------------------------
Alexander B. Trowbridge 2,075 2,075 2,075 2,075 2,075 2,075 2,075 2,075 $76,025
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Each Director serves as a Director or Trustee of 51 investment
companies and portfolios in the CSAM Fund Complex.
** Mr. Priest receives compensation as an affiliate of CSAM, and,
accordingly, receives no compensation from any Fund or any other
investment company advised by CSAM.
*** Mr. Reichman resigned as a Director of each Fund effective August 18,
1999.
**** 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.
As of September 30, 1999, Directors and officers as a group, owned of
record less than 1% of each Fund's outstanding Institutional Shares. No Director
or officer owned any of the Funds' outstanding Common Shares.
INVESTMENT ADVISER AND CO-ADMINISTRATORS. CSAM, located at 153 East
53rd Street, New York, New York 10022, serves as investment adviser to each Fund
pursuant to a written agreement (the "Advisory Agreement"). CSAM Ltd. serves as
sub-investment adviser to the Global Income Fund. CSAM is an indirect
wholly-owned U.S. subsidiary of Credit Suisse. Credit Suisse is a global
financial services company, providing a comprehensive range of banking and
insurance products. Active on every continent and in all major financial
centers, Credit Suisse comprises five business units -- Credit Suisse Asset
Management (asset management); Credit Suisse First Boston (investment banking);
Credit Suisse Private Banking (private banking); Credit Suisse (retail banking);
and Winterthur (insurance). 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's predecessor, BEA Associates, had rendered advisory services to
the predecessor to the Funds, each a series of The RBB Fund, Inc. (the "BEA
Funds"), pursuant
41
<PAGE>
to Investment Advisory Agreements (the "BEA Advisory Agreements"). CSAM Ltd. had
not provided sub-investment advisory services to the BEA Funds. CSAM, together
with its predecessor firms, has been engaged in the investment advisory business
for over 60 years.
CSAM has investment discretion for the Funds and will make all
decisions affecting assets in the Funds under the supervision of the Funds'
Board of Directors and in accordance with each Fund's stated policies. The
Adviser will select investments for the Funds and will place purchase and sale
orders on behalf of the Funds. For its services to the International Growth,
U.S. Equity, U.S. Fixed Income, Global Income, High Yield, Municipal Bond and
Focus Funds, CSAM will be paid (before any voluntary waivers or reimbursements)
a monthly fee computed at an annual rate of .80%, .75%, .375%, .50%, .70%, .70%
and, .75% of average daily net assets, respectively. CSAM pays CSAM Ltd. a
sub-investment advisory fee out of the fees CSAM receives from the Global Income
Fund.
The Long-Short Neutral Fund pays CSAM a basic management fee, computed
daily and payable monthly, at the annual rate of 1.50% of the average net assets
of the Fund. This basic management fee may be increased or decreased by applying
an adjustment formula (the "Performance Adjustment"). The Performance Adjustment
is calculated monthly by comparing the Fund's investment performance to a Target
(as defined below) during the most recent twelve-month period. The "Target" is
the investment record of the Salomon Smith Barney 1-Month U.S. Treasury Bill
Index-TM- plus 5 percentage points. The Performance Adjustment is added to or
subtracted from the basic fee.
The Performance Adjustment may increase or decrease the basic fee in
five steps. The first step would occur if the Fund's performance during the most
recent 12-month period differed from that of the Target by more than one but not
more than two percentage points. In this event, the Performance Adjustment would
be 0.10%, and the annual rate of the total management fee would be either 1.40%
or 1.60%. The second step would occur if the Fund's performance during the most
recent 12-month period differed from that of the Target by more than two but not
more than three percentage points. In this event, the Performance Adjustment
would be 0.20%, and the annual rate of the total management fee would be either
1.30% or 1.70%. The third step would occur if the Fund's performance during the
most recent 12-month period differed from that of the Target by more than three
but not more than four percentage points. In this event, the Performance
Adjustment would be 0.30%, and the annual rate of the total management fee would
be either 1.20% or 1.80%. The fourth step would occur if the Fund's performance
during the most recent 12-month period differed from that of the Target by more
than four but not more than five percentage points. In this event, the
Performance Adjustment would be 0.40%, and the annual rate of the total
management fee would be either 1.10% or 1.90%. The fifth step would occur if the
Fund's performance during the most recent 12-month period differed from that of
the Target by five percentage points or more. In this event, the Performance
Adjustment would be 0.50%, and the annual rate of the total management fee would
be either 1.00% or 2.00%. Thus:
42
<PAGE>
<TABLE>
<CAPTION>
PERFORMANCE
TOTAL MANAGEMENT BASIC RATE ADJUSTMENT FEE RATE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
No adjustment 1.50% N/A 1.50%
- ----------------------------------------------------------------------------------------------
First Step:
Performance exceeds
Target by more than 1
but not more than 2
percentage points 1.50 .10% 1.60
Performance lags Target
by more than 1 but not
more than 2 percent
points 1.50 (.10) 1.40
- ----------------------------------------------------------------------------------------------
Second Step:
Performance exceeds
Target by more than 2
but not more than 3
percentage points 1.50 .20 1.70
Performance lags Target
by more than 1 but not
more than 3 percent
points 1.50 (.20) 1.30
- ----------------------------------------------------------------------------------------------
Third Step:
Performance exceeds
Target by more than 3
but not more than 4
percentage points 1.50 .30 1.80
Performance lags Target
by more than 3 but not
more than 4 percent
points 1.50 (.30) 1.20
- ----------------------------------------------------------------------------------------------
Fourth Step:
Performance exceeds
Target by more than 4
but not more than 5
percentage points 1.50 .40 1.90
43
<PAGE>
<CAPTION>
PERFORMANCE
TOTAL MANAGEMENT BASIC RATE ADJUSTMENT FEE RATE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Performance lags Target
by more than 4 but not
more than 5 percent
points 1.50 (.40) 1.10
- ----------------------------------------------------------------------------------------------
Fifth Step:
Performance exceeds
Target by more than 5
percentage points 1.50 .50 2.00
Performance lags Target by
more than 5 percent
points 1.50 (.50) 1.00
- ----------------------------------------------------------------------------------------------
</TABLE>
CSAMSI and PFPC, an indirect, wholly owned subsidiary of PNC Bank
Corp., both serve as co-administrators to the Funds pursuant to separate written
agreements (the "CSAMSI Co-Administration Agreements" and the "PFPC
Co-Administration Agreements," respectively). CSAMSI became co-administrator to
each Fund on November 1, 1999. Prior to that, Counsellors Funds Service, Inc.
("Counsellors Service") served as co-administrator to the Funds. BEA Associates,
the predecessor of CSAM, and PFPC had served as co-administrators to the Advisor
Class of the BEA Funds. CSAMSI provides co-administration services to each Fund
without compensation. For the services provided by PFPC under the PFPC
Co-Administration Agreements, each Fund pays PFPC a fee calculated at an annual
rate of .125% of each Fund's average daily net assets, subject in each case to a
minimum annual fee and exclusive of out-of-pocket expenses. Each class of shares
of the Funds bears its proportionate share of fees payable to PFPC in the
proportion that its assets bear to the aggregate assets of the Funds at the time
of calculation.
For the past three fiscal years ended August 31, the Funds have paid
CSAM or BEA Associates advisory fees and CSAM or BEA Associates has waived fees
and/or reimbursed expenses of the Funds under the Advisory Agreements or BEA
Advisory Agreements as follows:
AUGUST 31, 1999
<TABLE>
<CAPTION>
Fees Paid
Fund (after waivers) Waivers Reimbursements
---- --------------- ------- --------------
<S> <C> <C> <C>
International Growth $5,508,687 $ 0 $ 0
U.S. Equity $ 369,195 $148,230 $ 0
U.S. Fixed Income $ 827,811 $608,214 $ 0
Global Income $ 0 $144,265 $ 3,649
44
<PAGE>
<CAPTION>
Fees Paid
Fund (after waivers) Waivers Reimbursements
---- --------------- ------- --------------
<S> <C> <C> <C>
High Yield $ 497,661 $405,408 $ 0
Municipal Bond $ 64,918 $ 95,749 $ 0
Focus $ 111,197 $139,116 $ 0
Long-Short Neutral $ 193,807 $ 97,341 $ 0
AUGUST 31, 1998
Fees Paid
Fund (after waivers) Waivers Reimbursements
---- --------------- ------- --------------
International Equity $4,943,773 $ 27,976 $ 0
U.S. Core Equity $ 703,273 $ 36,437 $ 0
U.S. Core Fixed Income $ 579,143 $288,699 $ 0
Strategic Global Fixed Income $ 81,321 $ 89,310 $ 0
High Yield $ 422,069 $271,277 $ 0
Municipal Bond $ 93,618 $ 51,669 $ 0
Focus $ 14,224 $ 643 $ 0
Long-Short Neutral $ 4,661 $ 2,758 $ 0
AUGUST 31, 1997
Fees Paid
Fund (after waivers) Waivers Reimbursements
---- --------------- ------- --------------
International Equity $5,300,316 $ 0 $ 0
U.S. Core Equity $ 537,237 $ 27,626 $ 0
U.S. Core Fixed Income $ 357,196 $177,539 $ 0
Strategic Global Fixed Income $ 180,945 $ 27,305 $ 0
High Yield $ 393,841 $233,336 $ 0
Municipal Bond $ 91,093 $ 44,791 $ 0
Focus N/A N/A N/A
Long-Short Neutral N/A N/A N/A
</TABLE>
From August 31, 1997 to August 31, 1999, the Funds paid BEA Associates
or Counsellors Service and PFPC administration fees and BEA Associates or
Counsellors Service and PFPC have waived fees and/or reimbursed expenses as
follows:
AUGUST 31, 1999
<TABLE>
<CAPTION>
PFPC Counsellors Service
---- -------------------
Fees Paid Fees Paid
(after Reimburse- (after Reimburse-
Fund Waivers) Waivers ments Fund Waivers) Waivers Ments
- ---- -------- ------- --------- ---- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
International Growth $860,732 $ 0 $0 International Growth $9,292 $ 0 $0
U.S. Equity $ 86,237 $ 0 $0 U.S. Equity $ 6 $ 25 $0
U.S. Fixed Income $286,470 $ 0 $0 U.S. Fixed Income $ 4 $ 18 $0
45
<PAGE>
<CAPTION>
PFPC Counsellors Service
---- -------------------
Fees Paid Fees Paid
(after Reimburse- (after Reimburse-
Fund Waivers) Waivers ments Fund Waivers) Waivers Ments
- -------- -------- ------- --------- ---- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Global Income $ 50,059 $ 0 $0 Global Income $ 1 $ 4 $0
High Yield $129,010 $32,252 $0 High Yield $2,733 $9,930 $0
Municipal Bond $ 37,500 $ 0 $0 Municipal Bond $ 9 $ 40 $0
Focus $ 41,719 $ 0 $0 Focus $ 2 $ 7 $0
Long-Short Neutral $ 12,643 $11,902 $0 Long-Short Neutral $1,036 $4,144 $0
AUGUST 31, 1998
<CAPTION>
PFPC BEA Associates
---- --------------
Fees Paid Fees Paid
(after Reimburse- (after Reimburse-
BEA Fund Waivers) Waivers ments BEA Fund Waivers) Waivers Ments
- -------- -------- ------- --------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
International Equity $769,622 $7,213 $0 International Equity $435,028 $497,175 $0
U.S. Core Equity $123,285 $ 0 $0 U.S. Core Equity $ 9,863 $138,079 $0
U.S. Core Fixed Income $235,924 $ 0 $0 U.S. Core Fixed Income $ 23,143 $323,994 $0
Strategic Global Fixed Income $42,937 $5,494 $0 Strategic Global Fixed Income $ 3,412 $ 47,777 $0
High Yield $99,050 $24,762 $0 High Yield $ 9,905 $138,669 $0
Municipal Bond $30,402 $ 0 $0 Municipal Bond $ 2,076 $ 29,057 $0
Focus $ 0 $2,478 $0 Focus $ 198 $ 2,775 $0
Long-Short Neutral $ 0 $ 618 $0 Long-Short Neutral $ 148 $ 594 $0
AUGUST 31, 1997
<CAPTION>
PFPC BEA Associates
---- --------------
Fees Paid Fees Paid
(after Reimburse- (after Reimburse-
BEA Fund Waivers) Waivers ments BEA Fund Waivers) Waivers Ments
- -------- -------- ------- --------- -------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
International Equity $785,014 $43,161 $0 International Equity $463,778 $530,031 $0
U.S. Core Equity $ 94,144 $ 0 $0 U.S. Core Equity $ 7,532 $105,441 $0
U.S. Core Fixed Income $159,177 $19,068 $0 U.S. Core Fixed Income $ 14,258 $199,636 $0
Strategic Global Fixed Income $ 41,650 $10,412 $0 Strategic Global Fixed Income $ 4,165 $ 58,310 $0
High Yield $ 89,597 $22,399 $0 High Yield $ 8,959 $125,436 $0
Municipal Bond $ 24,265 $ 0 $0 Municipal Bond $ 1,941 $ 27,177 $0
Focus N/A N/A N/A Focus N/A N/A N/A
Long-Short Neutral N/A N/A N/A Long-Short Neutral N/A N/A N/A
</TABLE>
Each class of a Fund bears all of its own expenses not specifically
assumed by the Adviser or another service provider to the Fund. General expenses
of the Funds not readily identifiable as belonging to a particular Fund are
allocated among all investment funds by or under the direction of the Funds'
Board of Directors in such manner as the Board determines fair and accurate.
Each class of the Funds pays its own administration fees, and may pay a
different share than the other classes of the Funds of other expenses (excluding
advisory and custodial fees) if those expenses are actually incurred in a
different amount by such class or if a class receives different services.
CUSTODIAN AND TRANSFER AGENT. Except for the Long-Short Neutral Fund,
Brown Brothers Harriman & Co. ("BBH") acts as the custodian for the Funds and
also acts as the custodian for the Funds' foreign securities pursuant to a
Custodian Agreement (the "BBH
46
<PAGE>
Custodian Agreement"). Custodial Trust Company ("CTC") acts as the custodian for
the Long-Short Neutral Fund pursuant to a Custodian Agreement (the "CTC
Custodian Agreement", together with the BBH Custodian Agreement, the "Custodian
Agreements"). Under the Custodian Agreements, BBH and CTC (a) maintain a
separate account or accounts in the name of each Fund, (b) hold and transfer
portfolio securities on account of each Fund, (c) accept receipts and make
disbursements of money on behalf of each Fund, (d) collect and receive all
income and other payments and distributions on account of each Fund's portfolio
securities, and (e) make periodic reports to the Funds' Board of Directors
concerning each Fund's operations. BBH and CTC are authorized to select one or
more banks or trust companies to serve as sub-custodian on behalf of the Funds,
provided that BBH and CTC remain responsible for the performance of all their
duties under the Custodian Agreements and hold the Funds harmless from the
negligent acts and omissions of any sub-custodian. For their services to the
Funds under the Custodian Agreements, BBH and CTC receive 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.
State Street Bank and Trust Company ("State Street") serves as the
shareholder servicing, transfer and dividend disbursing agent of the Funds
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 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 Boards concerning
the transfer agent's operations with respect to the Funds. State Street has
delegated to Boston Financial Data Services, Inc., an affiliate of State Street
("BFDS"), responsibility for most shareholder servicing functions. BFDS's
principal business address is 2 Heritage Drive, North Quincy, Massachusetts
02171
ORGANIZATION OF THE FUNDS . Each of the Funds is a non-diversified,
open-end management investment company. Each Fund was organized as a Maryland
corporation on July 31, 1998. On January 1, 2000, the Focus Fund changed its
name from "Warburg, Pincus Select Economic Value Equity Fund, Inc." to "Warburg,
Pincus Focus Fund, Inc."
Each Fund's charter authorizes its 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 shares are designated Advisor Shares. Under
each Fund's charter documents, the Board has the power to classify or reclassify
any unissued shares of the Fund into one or more additional classes by setting
or changing in any one or more respects their relative rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption. 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 Fund.
The High Yield, Municipal Bond, Focus and Long-Short Neutral Funds
currently offer two separate classes of shares: Common Shares and Institutional
Shares. The
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International Growth, U.S. Core Equity, U.S. Core Fixed Income and Global Income
Funds currently offer only Institutional Shares.
Shares of each class represent equal pro rata interests in the
respective Fund and accrue dividends and calculate net asset value and
performance quotations in the same manner. Because of the lower fees paid by
Institutional Shares, the total return on Institutional Shares can be expected
to be higher than the total return on Common Shares. Investors may obtain
information concerning the Common Shares and, if and when offered, the Advisor
Shares from their investment professional or by calling CSAMSI at 800-WARBURG.
Unless the context clearly suggests otherwise, references to a Fund in this
prospectus are to the Fund as a whole and not to any particular class of the
Fund's shares.
Investors in a Fund are entitled to one vote for each full share held
and fractional votes for fractional shares held. Shareholders of a Fund will
vote in the aggregate except where otherwise required by law and except that
each class will vote separately on certain matters pertaining to its
distribution and shareholder servicing arrangements. There will normally be no
meetings of investors for the purpose of electing members of the 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.
Each investor will receive a quarterly statement of his account, as
well as a statement of his account after any transaction that affects his share
balance or share registration (other than the reinvestment of dividends or
distributions or investment made through the Automatic Monthly Investment Plan).
Each Fund will also send to its investors a semiannual report and an audited
annual report, each of which includes a list of the investment securities held
by the Fund and a statement of the performance of the Fund. Periodic listings of
the investment securities held by the Fund, as well as certain statistical
characteristics of the Fund, may be obtained by calling Warburg Pincus Funds at
800-WARBURG or on the Warburg Pincus Funds web site at www.warburg.com.
DISTRIBUTION AND SHAREHOLDER SERVICING. Provident Distributors, Inc.
("PDI") serves as distributor of the Fund's shares. PDI offers the Fund's shares
on a continuous basis. No compensation is payable by the Fund to PDI for
distribution services; however, pursuant to a separate agreement with CSAM, PDI
is compensated for the services provided to the Fund. PDI's principal business
address is Four Falls Corporate Center, West Conshohocken, Pennsylvania
19428-2961.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of each Fund's shares is equal to the per share net
asset value of the relevant class of shares of the Fund.
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Under the 1940 Act, a Fund may suspend the right to redemption or
postpone the date of payment upon redemption for any period during which The New
York Stock Exchange, Inc. (the "NYSE") is closed (other than customary weekend
and holiday closings), or during which trading on said Exchange is restricted,
or during which (as determined by the SEC by rule or regulation) an emergency
exists as a result of which disposal or valuation of Fund 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 the transfer of its shares upon
the occurrence of any of the foregoing conditions.)
AUTOMATIC CASH WITHDRAWAL PLAN. An automatic cash withdrawal plan (the
"Plan") is available to shareholders who wish to receive specific amounts of
cash periodically. Withdrawals may be made under the Plan by redeeming as many
shares of the relevant Fund as may be necessary to cover the stipulated
withdrawal payment. To the extent that withdrawals exceed dividends,
distributions and appreciation of a shareholder's investment in a Fund, there
will be a reduction in the value of the shareholder's investment and continued
withdrawal payments may reduce the shareholder's investment and ultimately
exhaust it. Withdrawal payments should not be considered as income from
investment in a Fund.
EXCHANGE PRIVILEGE
An exchange privilege with certain other funds advised by CSAM is
available to investors in each Fund. An Institutional Shareholder may exchange
Institutional Shares of a Fund for Institutional Shares of another Fund or for
Institutional Shares of another Warburg Pincus Fund at their respective net
asset values.
If an exchange request is received by Warburg Pincus Funds or their
agent prior to the close of regular trading on the NYSE, the exchange will be
made at each Fund's net asset value determined at the end of that business day.
Exchanges will be effected without a sales charge but must satisfy the minimum
dollar amount necessary for new purchases. The Fund may refuse exchange
purchases at any time without prior notice.
The exchange privilege is available to shareholders residing in any
state in which the shares being acquired may legally be sold. When an investor
effects an exchange of shares, the exchange is treated for federal income tax
purposes as a redemption. Therefore, the investor may realize a taxable gain or
loss in connection with the exchange. Investors wishing to exchange shares of a
Fund for shares in another Warburg Pincus Fund should review the prospectus of
the other fund prior to making an exchange. For further information regarding
the exchange privilege or to obtain a current prospectus for another Warburg
Pincus Fund, an investor should contact Warburg Pincus Funds at 800-222-8977.
The Funds reserve the right to refuse exchange purchases by any person
or group if, in CSAM's judgment, a Fund would be unable to invest the money
effectively in accordance with its investment objective and policies, or would
otherwise potentially be adversely affected. Examples of when an exchange
purchase could be refused are when the Fund receives or anticipates receiving
large exchange orders at or about the same time and/or when a pattern of
exchanges within a short period of time (often associated with a "market
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timing" strategy) is discerned. The Funds reserve the right to terminate or
modify the exchange privilege at any time upon 30 days' notice to shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is a summary of the material United States federal
income tax considerations regarding the purchase, ownership and disposition of
shares in 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 continue to
qualify to be treated as a regulated investment company each taxable year under
the Code. To so qualify, a Fund must, among other things: (a) derive at least
90% of its gross income in each taxable year from dividends, interest, payments
with respect to securities loans, 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 (the "Asset Diversification Requirement") so
that, at the end of each quarter of the Fund's taxable year, (i) at least 50% of
the market value of the Fund's assets is represented by cash, securities of
other regulated investment companies, United States government securities and
other securities, with such other securities limited, in respect of any one
issuer, to an amount not greater than 5% of the Fund's assets and not greater
than 10% of the outstanding voting securities of such issuer and (ii) not more
than 25% of the value of its assets is invested in the securities (other than
United States government securities or securities of other regulated investment
companies) of any one issuer or any two or more issuers that the Fund controls
and are determined to be engaged in the same or similar trades or businesses or
related trades or businesses.
As a regulated investment company, a 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., 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)), and its net
tax-exempt interest income for the taxable year is distributed (the
"Distribution Requirement"), but will be subject to tax at regular corporate
rates on any taxable income or gains that it does not distribute. Any dividend
declared by a Fund in October, November or December of any calendar year and
payable to shareholders of record on a specified date in such a month shall be
deemed to have been received by each shareholder on December 31 of such calendar
year and to have been paid by the Fund not later than such December 31, provided
that such dividend is actually paid by the Fund during January of the following
calendar year.
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Each Fund intends to distribute annually to its shareholders
substantially all of its investment company taxable income. The Board of
Directors of the Fund will determine annually whether to distribute any net
realized long-term capital gains in excess of net realized short-term capital
losses (including any capital loss carryovers). Each Fund currently expects to
distribute any excess annually to its shareholders. However, if a Fund retains
for investment an amount equal to all or a portion of its net long-term capital
gains in excess of its net short-term capital losses and capital loss
carryovers, it will be subject to a corporate tax (currently at a rate of 35%)
on the amount retained. In that event, the Fund will designate such retained
amounts as undistributed capital gains in a notice to its shareholders who (a)
will be required to include in income for United Stares federal income tax
purposes, as long-term capital gains, their proportionate shares of the
undistributed amount, (b) will be entitled to credit their proportionate shares
of the 35% tax paid by the Fund on the undistributed amount against their United
States federal income tax liabilities, if any, and to claim refunds to the
extent their credits exceed their liabilities, if any, and (c) will be entitled
to increase their tax basis, for United States federal income tax purposes, in
their shares by an amount equal to 65% of the amount of undistributed capital
gains included in the shareholder's income. Organizations or persons not subject
to federal income tax on such capital gains will be entitled to a refund of
their pro rata share of such taxes paid by the Fund upon filing appropriate
returns or claims for refund with the Internal Revenue Service (the "IRS").
The Code imposes a 4% nondeductible excise tax on each Fund to the
extent the Fund does not distribute by the end of any calendar year at least 98%
of its net investment income for that year and 98% of the net amount of its
capital gains (both long-and short-term) for the one-year period ending, as a
general rule, on October 31 of that year. For this purpose, however, any income
or gain retained by the Fund that is subject to corporate income tax will be
considered to have been distributed by year-end. In addition, the minimum
amounts that must be distributed in any year to avoid the excise tax will be
increased or decreased to reflect any underdistribution or overdistribution, as
the case may be, from the previous year. Each Fund anticipates that it will pay
such dividends and will make such distributions as are necessary in order to
avoid the application of this tax.
If, in any taxable year, a Fund fails to qualify as a regulated
investment company under the Code or fails to meet the distribution requirement,
it would be taxed in the same manner as an ordinary corporation and
distributions to its shareholders would not be deductible by the Fund in
computing its taxable income. In addition, in the event of a failure to qualify,
the Fund's distributions, to the extent derived from the Fund's current or
accumulated earnings and profits would constitute dividends (eligible for the
corporate dividends-received deduction) which are taxable to shareholders as
ordinary income, even though those distributions might otherwise (at least in
part) have been treated in the shareholders' hands as long-term capital gains or
tax-exempt interest. 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, the Fund may be required to recognize any
net built-in gains (the excess of the aggregate gains, including items of
income, over aggregate losses that would have been
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realized if it had been liquidated) in order to qualify as a regulated
investment company in a subsequent year.
A Fund's short sales against the box, if any, and transactions in
foreign currencies, forward contracts, options and futures contracts (including
options and futures contracts on foreign currencies) will be subject to special
provisions of the Code that, among other things, may affect the character of
gains and losses realized by the Fund (I.E., may affect whether gains or losses
are ordinary or capital), accelerate recognition of income to the Fund and defer
Fund losses. These rules could therefore affect the character, amount and timing
of distributions to shareholders. These provisions also (a) will require the
Fund to mark-to-market certain types of the positions in its portfolio (I.E.,
treat them as if they were closed out) and (b) may cause the Fund to recognize
income without receiving cash with which to pay dividends or make distributions
in amounts necessary to satisfy the distribution requirements for avoiding
income and excise taxes. Each Fund will monitor its transactions, will make the
appropriate tax elections and will make the appropriate entries in its books and
records when it engages in short sales or acquires any foreign currency, forward
contract, option, futures contract or hedged investment in order to mitigate the
effect of these rules and prevent disqualification of the Fund as a regulated
investment company.
A Fund's investments in zero coupon securities, if any, may create
special tax consequences. Zero coupon securities do not make interest payments,
although a portion of the difference between a zero coupon security's face value
and its purchase price is imputed as income to the Fund each year even though
the Fund receives no cash distribution until maturity. Under the U.S. federal
tax laws, the Fund will not be subject to tax on this income if it pays
dividends to its shareholders substantially equal to all the income received
from, or imputed with respect to, its investments during the year, including its
zero coupon securities. These dividends ordinarily will constitute taxable
income to the shareholders of the Fund.
"Constructive sale" provisions apply to activities by the Fund which
lock in gain on an "appreciated financial position." Generally, a "position" is
defined to include stock, a debt instrument, or partnership interest, or an
interest in any of the foregoing, including through a short sale, an option, or
a future or forward contract. The entry into a short sale, a swap contract or a
future or forward contract relating to an appreciated direct position in any
stock or debt instrument, or the acquisition of a stock or debt instrument at a
time when the Fund holds an offsetting (short) appreciated position in the stock
or debt instrument, is treated as a "constructive sale" that gives rise to the
immediate recognition of gain (but not loss). The application of these rules may
cause the Fund to recognize taxable income from these offsetting transactions in
excess of the cash generated by such activities.
The Municipal Bond Fund is designed to provide investors with current
tax-exempt interest income. Exempt interest dividends distributed to
shareholders by this Fund are not included in the shareholder's gross income for
regular federal income tax purpose. In order for the Municipal Bond Fund to pay
exempt interest dividends during any taxable year, at the close of each fiscal
quarter at least 50% of the value of the Fund must consist of exempt interest
obligations.
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In addition, the Municipal Bond Fund may not be an appropriate
investment for entities which are "substantial users" of facilities financed by
private activity bonds or "related persons" thereof. "Substantial user" is
defined under U.S. Treasury Regulations to include a nonexempt person who
regularly uses a part of such facilities in his trade or business and (a) whose
gross revenues are more than 5% of the total revenue derived by all users of
such facilities, (b) who occupies more than 5% of the entire usable area of such
facilities, or (c) for whom such facilities or a part thereof were specifically
constructed, reconstructed or acquired. "Related persons" include certain
related natural persons, affiliated corporations, a partnership and its partners
and an S corporation and its shareholder.
The alternative minimum tax is a special tax that applies to a limited
number of taxpayers who have certain adjustments or tax preference items.
Available returns on Alternative Minimum Tax Bonds acquired by a Fund may be
lower than those from other municipal obligations acquired by the Municipal Bond
Fund due to the possibility of federal, state and local alternative minimum or
minimum income tax liability on Alternative Minimum Tax Bonds.
Under the Code, interest on specified private activity bonds issued
after August 7, 1986, although otherwise exempt from federal income tax, is
treated as an item of tax preference for purposes of the alternative minimum tax
on individuals and corporations. If the Municipal Bond Fund invests in such
specified "private activity bonds," it will report a portion of the
"exempt-interest dividends" paid to its shareholders as interest on specified
private activity bonds, and hence as a tax preference item. In addition, exempt
interest dividends are included in adjusted current earnings. The amount of the
alternative minimum tax imposed by the Code is the excess, if any, of the
taxpayer's "tentative minimum tax" over the taxpayer's regular tax liability for
the taxable year. The "tentative minimum tax" is equal to (i) 26% of the first
$175,000, and 28% of any amount over $175,000 (for corporations, 20% of the
whole), of the taxpayer's alternative minimum taxable income (defined as regular
taxable income modified by certain adjustments and increased by the taxpayer's
"items of tax preference," including the adjustment for corporate current
earnings and the tax preference for tax-exempt interest on private activity
bonds described above) for the taxable year in excess of the exemption amount,
less (ii) the alternative minimum tax foreign tax credit for the taxable year.
The exemption amount is $40,000 for corporations, $45,000 for those filing joint
returns, lesser amounts for others, and is phased out over certain income
levels. Prospective investors should consult their own tax advisers with respect
to the possible application of the alternative minimum tax to their tax
situations.
In addition, the receipt of Municipal Bond Fund dividends and
distributions may affect a foreign corporate shareholder's federal "branch
profits" tax liability and a Subchapter S corporation shareholder's federal
"excess net passive income" tax liability. Shareholders should consult their own
tax advisers as to whether they are (i) substantial users with respect to a
facility or related to such users within the meaning of the Code or (ii) subject
to a federal alternative minimum tax, any applicable state alternative minimum
tax, the federal branch profits tax, or the federal excess net passive income
tax.
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Interest on indebtedness incurred by a shareholder to purchase or
carry shares of the Municipal Bond Fund is not deductible for income tax
purposes if (as expected) the Municipal Bond Fund distributes exempt interest
dividends during the shareholder's taxable year. Receipt of exempt interest
dividends may result in collateral federal income tax consequences to certain
other taxpayers, including financial institutions, property and casualty
insurance companies, individual recipients of Social Security or Railroad
Retirement benefits, and foreign corporations engaged in a trade or business in
the United States. Prospective investors should consult their own tax advisers
as to such consequences.
SPECIAL TAX CONSIDERATIONS. The following discussion relates to the
particular federal income tax consequences of the investment policies of the
Funds.
STRADDLES. The options transactions that the Funds enter into may
result in "straddles" for federal income tax purposes. The straddle rules of the
Code may affect the character of gains and losses realized by the Funds. In
addition, losses realized by the Funds on positions that are part of a straddle
may be deferred under the straddle rules, rather than being taken into account
in calculating the investment company taxable income and net capital gain of the
Funds for the taxable year in which such losses are realized. Losses realized
prior to October 31 of any year may be similarly deferred under the straddle
rules in determining the "required distribution" that the Funds must make in
order to avoid federal excise tax. Furthermore, in determining their investment
company taxable income and ordinary income, the Funds may be required to
capitalize, rather than deduct currently, any interest expense on indebtedness
incurred or continued to purchase or carry any positions that are part of a
straddle. The tax consequences to the Funds of holding straddle positions may be
further affected by various elections provided under the Code and Treasury
regulations, but at the present time the Funds are uncertain which (if any) of
these elections they will make.
OPTIONS AND SECTION 1256 CONTRACTS. The writer of a covered put or
call option generally does not recognize income upon receipt of the option
premium. If the option expires unexercised or is closed on an exchange, the
writer generally recognizes short-term capital gain. If the option is exercised,
the premium is included in the consideration received by the writer in
determining the capital gain or loss recognized in the resultant sale. However,
certain options transactions as well as futures transactions and transactions in
forward foreign currency contracts that are traded in the interbank market, will
be subject to special tax treatment as "Section 1256 contracts." Section 1256
contracts are treated as if they are sold for their fair market value on the
last business day of the taxable year (I.E., marked-to-market), regardless of
whether a taxpayer's obligations (or rights) under such contracts have
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end marking-to-market of Section 1256 contracts is combined (after
application of the straddle rules that are described above) with any other gain
or loss that was previously recognized upon the termination of Section 1256
contracts during that taxable year. The net amount of such gain or loss for the
entire taxable year is generally treated as 60% long-term capital gain or loss
and 40% short-term capital gain or loss, except in the case of marked-to-market
forward foreign currency contracts for which such gain or loss is treated as
ordinary income or loss. Such short-term capital gain (and, in
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the case of marked-to-market forward foreign currency contracts, such ordinary
income) would be included in determining the investment company taxable income
of the relevant Fund for purposes of the Distribution Requirement, even if it
were wholly attributable to the year-end marking-to-market of Section 1256
contracts that the relevant Fund continued to hold. Investors should also note
that Section 1256 contracts will be treated as having been sold on October 31 in
calculating the "required distribution" that a Fund must make to avoid federal
excise tax liability.
Each of the Funds may elect not to have the year-end mark-to-market
rule apply to Section 1256 contracts that are part of a "mixed straddle" with
other investments of such Fund that are not Section 1256 contracts (the "Mixed
Straddle Election").
FOREIGN CURRENCY TRANSACTIONS. In general, gains from "foreign
currencies" and from foreign currency options, foreign currency futures and
forward foreign exchange contracts relating to investments in stock, securities
or foreign currencies will be qualifying income for purposes of determining
whether the Fund qualifies as a RIC. It is currently unclear, however, who will
be treated as the issuer of a foreign currency instrument or how foreign
currency options, futures or forward foreign currency contracts will be valued
for purposes of the Asset Diversification Requirement.
Under Code Section 988 special rules are provided for certain
transactions in a foreign currency other than the taxpayer's functional currency
(I.E., unless certain special rules apply, currencies other than the U.S.
dollar). In general, foreign currency gains or losses from certain forward
contracts, from futures contracts that are not "regulated futures contracts",
and from unlisted options will be treated as ordinary income or loss. In certain
circumstances where the transaction is not undertaken as part of a straddle, a
Fund may elect capital gain or loss treatment for such transactions.
Alternatively, a Fund may elect ordinary income or loss treatment for
transactions in futures contracts and options on foreign currency that would
otherwise produce capital gain or loss. In general gains or losses from a
foreign currency transaction subject to Code Section 988 will increase or
decrease the amount of the Fund's investment company taxable income available to
be distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. Additionally, if losses
from a foreign currency transaction subject to Code Section 988 exceed other
investment company taxable income during a taxable year, a Fund will not be able
to make any ordinary dividend distributions, and any distributions made before
the losses were realized but in the same taxable year would be recharacterized
as a return of capital to shareholders, thereby reducing each shareholder's
basis in his Shares.
PASSIVE FOREIGN INVESTMENT COMPANIES. If a Fund acquires shares in
certain foreign investment entities, called "passive foreign investment
companies" ("PFIC"), such Fund may be subject to federal income tax and a
deferral interest charge on a portion of any "excess distribution" received with
respect to such shares or on a portion of any gain recognized upon a disposition
of such shares, notwithstanding the distribution of such income to the
shareholders of such Fund. Additional charges in the nature of interest may also
be imposed on a Fund in respect of such deferred taxes. However, in lieu of
sustaining the
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foregoing tax consequences, a Fund may elect to have its investment in any PFIC
taxed as an investment in a "qualified electing fund" ("QEF"). A Fund making a
QEF election would be required to include in its income each year a ratable
portion, whether or not distributed, of the ordinary earnings and net capital
gain of the QEF. Any such QEF inclusions would have to be taken into account by
a Fund for purposes of satisfying the Distribution Requirement and the excise
tax distribution requirement.
A Fund may elect (in lieu of paying deferred tax or making a QEF
election) to mark-to-market annually any PFIC shares that it owns and to include
any gains (but not losses) that it was deemed to realize as ordinary income. A
Fund generally will not be subject to deferred federal income tax on any gains
that it is deemed to realize as a consequence of making a mark-to-market
election, but such gains will be taken into account by the Fund for purposes of
satisfying the Distribution Requirement and the excise tax distribution
requirement.
ASSET DIVERSIFICATION REQUIREMENT. For purposes of the Asset
Diversification Requirement, the issuer of a call option on a security
(including an option written on an exchange) will be deemed to be the issuer of
the underlying security. The Internal Revenue Service has informally ruled,
however, that a call option that is written by a fund need not be counted for
purposes of the Asset Diversification Requirement where the fund holds the
underlying security. However, the Internal Revenue Service has also informally
ruled that a put option written by a fund must be treated as a separate asset
and its value measured by "the value of the underlying security" for purposes of
the Asset Diversification Requirement, regardless (apparently) of whether it is
"covered" under the rules of the exchange. The Internal Revenue Service has not
explained whether in valuing a written put option in this manner a fund should
use the current value of the underlying security (its prospective future
investment); the cash consideration that must be paid by the fund if the put
option is exercised (its liability); or some other measure that would take into
account the fund's unrealized profit or loss in writing the option. Under the
Code, a fund may not rely on informal rulings of the Internal Revenue Service
issued to other taxpayers. Consequently, a Fund may find it necessary to seek a
ruling from the Internal Revenue Service on this issue or to curtail its writing
of options in order to stay within the limits of the Asset Diversification
Requirement.
FOREIGN TAXES. Dividends and interest received by the Funds on
investments in foreign securities may be subject to withholding and other taxes
imposed by foreign countries. However, tax conventions between certain countries
and the United States may reduce or eliminate such taxes. If a Fund qualifies as
a regulated investment company, if certain asset and distribution requirements
are satisfied and if more than 50% of the Fund's total assets at the close of
its fiscal year consists of stock or securities of foreign corporations, the
Fund may elect for U.S. income tax purposes to treat foreign income taxes paid
by it as paid by its shareholders. 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
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taxes. Shortly after any year for which it makes such an election, each 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.
FUND TAXES ON SWAPS. As a result of entering into index swaps, the
funds may make or receive periodic net payments. They may also make or receive a
payment when a swap is terminated prior to maturity through an assignment of the
swap or other closing transaction. Periodic net payments will constitute
ordinary income or deductions, while termination of a swap will result in
capital gain or loss (which will be a long-term capital gain or loss if a fund
has been a party to the swap for more than one year).
DIVIDENDS AND DISTRIBUTIONS. Dividends of net investment income and
distributions of net realized short-term capital gains are taxable to a United
States shareholder as ordinary income, whether paid in cash or in shares.
Distributions of net-long-term capital gains, if any, that the Fund designates
as capital gains dividends are taxable as long-term capital gains, whether paid
in cash or in shares and regardless of how long a shareholder has held shares of
the Fund. Dividends and distributions paid by the 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 the Fund's current and accumulated
earnings and profits will, as to each shareholder, be treated as a tax-free
return of capital, to the extent of a shareholder's basis in his shares of the
Fund, and as a capital gain thereafter (if the shareholder holds his shares of
the Fund as capital assets).
Shareholders receiving dividends or distributions in the form of
additional shares should be treated for United States federal income tax
purposes as receiving a distribution in the amount equal to the amount of money
that the shareholders receiving cash dividends or distributions will receive,
and should have a cost basis in the shares received equal to such amount.
Investors considering buying shares just prior to a dividend or
capital gain distribution should be aware that, although the price of shares
just purchased at that time may reflect the amount of the forthcoming
distribution, such dividend or distribution may nevertheless be taxable to them.
If a Fund is the holder of record of any stock on the record date for
any dividends payable with respect to such stock, such dividends are included in
the Fund's gross income not as of the date received but as of the later of (a)
the date such stock became ex-dividend with respect to such dividends (i.e., the
date on which a buyer of the stock would not be entitled to receive the
declared, but unpaid, dividends) or (b) the date the Fund acquired such stock.
Accordingly, in order to satisfy its income distribution requirements, the Fund
57
<PAGE>
may be required to pay dividends based on anticipated earnings, and shareholders
may receive dividends in an earlier year than would otherwise be the case.
SALES OF SHARES. Upon the sale or exchange of his shares, a
shareholder will realize a taxable gain or loss equal to the difference between
the amount realized and his basis in his shares. Such gain or loss will be
treated as capital gain or loss, if the shares are capital assets in the
shareholder's hands, and will be long-term capital gain or loss if the shares
are held for more than one year and short-term capital gain or loss if the
shares are held for one year or less. Any loss realized on a sale or exchange
will be disallowed to the extent the shares disposed of are replaced, including
replacement through the reinvesting of dividends and capital gains distributions
in a Fund, within a 61-day period beginning 30 days before and ending 30 days
after the disposition of the shares. In such a case, the basis of the shares
acquired will be increased to reflect the disallowed loss. Any loss realized by
a shareholder on the sale of a Fund share held by the shareholder for six months
or less will be treated for United States federal income tax purposes as a
long-term capital loss to the extent of any distributions or deemed
distributions of long-term capital gains received by the shareholder with
respect to such share.
BACKUP WITHHOLDING. A Fund may be required to withhold, for United
States federal income tax purposes, 31% of the dividends, distributions and
redemption proceeds payable to shareholders who fail to provide the Fund with
their correct taxpayer identification number or to make required certifications,
or who have been notified by the IRS that they are subject to backup
withholding. Certain shareholders are exempt from backup withholding. Backup
withholding is not an additional tax and any amount withheld may be credited
against a shareholder's United States federal income tax liabilities.
NOTICES. Shareholders will be notified annually by the relevant Fund
as to the United States federal income tax status of the dividends,
distributions and deemed distributions attributable to undistributed capital
gains (discussed above in "The Funds and Their Investments") made by the Fund to
its shareholders. Furthermore, shareholders will also receive, if appropriate,
various written notices after the close of the Fund's taxable year regarding the
United States federal income tax status of certain dividends, distributions and
deemed distributions that were paid (or that are treated as having been paid) by
the Fund to its shareholders during the preceding taxable year.
OTHER TAXATION. Distributions also may be subject to additional state,
local and foreign taxes depending on each shareholder's particular situation.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN MATERIAL TAX CONSEQUENCES AFFECTING
THE FUNDS AND THEIR 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.
58
<PAGE>
DETERMINATION OF PERFORMANCE
TOTAL RETURN. From time to time, a Fund may quote the total return of
its Institutional Shares in advertisements or in reports and other
communications to shareholders. The net asset value of Institutional Shares is
listed in THE WALL STREET JOURNAL each business day under the heading "BEA
Institutional Funds." Current total return figures may be obtained by calling
CSAM Institutional Shares at 800-222-8977.
Each Fund that advertises its "average annual total return" computes
such return separately for each class of shares by determining the average
annual compounded rate of return during specified periods that equates the
initial amount invested to the ending redeemable value of such investment
according to the following formula:
n
P(1+T) = ERV
Where: T = average annual total return;
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the l, 5 or 10 year
(or other) periods at the end of the applicable period
(or a fractional portion thereof);
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed in years.
Each Fund that advertises its "aggregate total return" computes such
returns separately for each class of shares by determining the aggregate
compounded rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
[(ERV) ]
Aggregate Total Return = [ --- - 1]
[ P ]
The calculations are made assuming that (1) all dividends and capital
gain distributions are reinvested on the reinvestment dates at the price per
share existing on the reinvestment date, (2) all recurring fees charged to all
shareholder accounts are included, and (3) for any account fees that vary with
the size of the account, a mean (or median) account size in the Fund during the
periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.
59
<PAGE>
Although total return is calculated in a separate manner for each
class of shares, under certain circumstances, performance information for a
class may include performance information of another class with an earlier
inception date.
The average annual total returns for the Institutional Shares of the
following Funds for the year ended August 31, 1999 were as follows:
<TABLE>
<CAPTION>
Since
Inception
Fund 1 year 3 year (ann.) 5 year (ann.) (ann.)
- ---- ------ ------------- ------------- -----------------------
<S> <C> <C> <C> <C> <C>
International Growth 13.88% 15.51% 8.64% 11.76% (09/30/92)
U.S. Equity 38.07% 25.37% 22.64% 22.62% (08/31/94)
U.S. Fixed Income 2.37% 7.15% 7.44% 6.88% (03/31/94)
Global Income 2.78% 3.81% 6.31% 6.08% (06/27/94)
High Yield 0.67% 6.94% 8.18% 8.59% (02/26/93)
Municipal Bond 0.36% 5.83% 5.62% 5.47% (06/17/94)
Focus 53.21% N/A N/A 31.34% (07/31/98)
Long-Short Neutral (5.68)% N/A N/A (3.67)% (07/31/98)
</TABLE>
The aggregate total returns for the Institutional Shares of the
following Funds for the period ended August 31, 1999 since inception were as
follows:
<TABLE>
<CAPTION>
Fund Inception Date Aggregate Return
- ---- -------------- ----------------
<S> <C> <C>
International Growth 09/30/92 115.88%
U.S. Equity 08/31/94 117.48%
U.S. Fixed Income 03/31/94 43.43%
Global Income 06/27/94 35.82%
High Yield 02/26/93 71.10%
Municipal Bond 06/17/94 31.95%
Focus 07/31/98 34.52%
Long-Short Neutral 07/31/98 (3.99)%
</TABLE>
Performance information provided above reflects the performance of the
Institutional Shares of the corresponding BEA Funds to the extent applicable
(which are the predecessors of the Funds) for the periods noted.
Performance information provided above for each Fund also reflects the
performance of the Institutional Shares of the corresponding predecessor BEA
Fund since inception (as noted below). The BEA Funds' Institutional Shares
performance was favorably affected by expense waivers and/or reimbursements. The
performance information provided above has not been restated to adjust for the
BEA Funds' Institutional Shares expense waivers and/or reimbursements. Had these
expense adjustments been made, the performance information shown above would
have been lower.
60
<PAGE>
The Funds may also from time to time include in such advertising an
aggregate total return figure or a total return figure that is not calculated
according to the formula set forth above in order to compare more accurately a
Fund's performance with other measures of investment return. For example, in
comparing a Fund's total return with data published by Lipper Analytical
Services, Inc., CDA/Weisenberger Investment Technologies, Inc. or Weisenberger
Investment Company Service, or with the performance of the Standard & Poor's 500
Stock Index or the Dow Jones Industrial Average, as appropriate, a Fund may
calculate its aggregate and/or average annual total return for the specified
periods of time by assuming the investment of $10,000 in Fund shares and
assuming the reinvestment of each dividend or other distribution at net asset
value on the reinvestment date. The Funds do not, for these purposes, deduct
from the initial value invested any amount representing sales charges. The Funds
will, however, disclose the maximum sales charge and will also disclose that the
performance data do not reflect sales charges and that inclusion of sales
charges would reduce the performance quoted. Such alternative total return
information will be given no greater prominence in such advertising than the
information prescribed under SEC rules, and all advertisements containing
performance data will include a legend disclosing that such performance data
represent past performance and that the investment return and principal value of
an investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
YIELD. Certain Funds may advertise a 30-day (or one month) standard
yield as described in the Prospectus. Such yields are calculated separately for
each class of shares in each Fund in accordance with the method prescribed by
the SEC for mutual funds:
[ 6 ]
[(a - b ) ]
YIELD = 2[(----- +1) - 1]
[( cd ) ]
Where: a = dividends and interest earned by a Fund during the
period;
b = expenses accrued for the period (net of
reimbursements);
c = average daily number of shares outstanding during
the period, entitled to receive dividends; and
d = maximum offering price per share on the last day
of the period.
For the purpose of determining net investment income earned during the period
(variable "a" in the formula), dividend income on equity securities held by a
Fund is recognized by accruing 1/360 of the stated dividend rate of the security
each day that the security is in the Fund. Except as noted below, interest
earned on debt obligations held by a Fund is calculated by computing the yield
to maturity of each obligation based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each
61
<PAGE>
month, or, with respect to obligations purchased during the month, the purchase
price (plus actual accrued interest) and dividing the result by 360 and
multiplying the quotient by the market value of the obligation (including actual
accrued interest) in order to determine the interest income on the obligation
for each day of the subsequent month that the obligation is held by the Fund.
For purposes of this calculation, it is assumed that each month contains 30
days. The maturity of an obligation with a call provision is the next call date
on which the obligation reasonably may be expected to be called or, if none, the
maturity date. With respect to debt obligations purchased at a discount or
premium, the formula generally calls for amortization of the discount or
premium. The amortization schedule will be adjusted monthly to reflect changes
in the market value of such debt obligations. Expenses accrued for the period
(variable "b" in the formula) include all recurring fees charged by a Fund to
all shareholder accounts in proportion to the length of the base period and the
Fund's mean (or median) account size. Undeclared earned income will be
subtracted from the offering price per share (variable "d" in the formula).
With respect to receivables-backed obligations that are expected to be
subject to monthly payments of principal and interest ("pay-downs"), (i) gain or
loss attributable to actual monthly pay downs are accounted for as an increase
or decrease to interest income during the period, and (ii) each Fund may elect
either (a) to amortize the discount and premium on the remaining security, based
on the cost of the security, to the weighted average maturity date, if such
information is available, or to the remaining term of the security, if any, if
the weighted average date is not available or (b) not to amortize discount or
premium on the remaining security.
Based on the foregoing calculation, the Standard Yield for the
Institutional Shares of the following funds for the 30-day period ended August
31, 1999 were as follows:
<TABLE>
<CAPTION>
Fund 30-Day Yield
---- ------------
<S> <C>
U.S. Fixed Income 6.02%
Global Income 4.96%
High Yield 10.00%
Municipal Bond 4.66%
</TABLE>
INDEPENDENT ACCOUNTANTS AND COUNSEL
PricewaterhouseCoopers LLP ("PwC"), with principal offices at 2400
Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as independent
accountants for each Fund. The financial statements that are incorporated by
reference in this Statement of Additional Information have been audited by PwC,
and have been included herein in reliance upon the report of such firm of
independent accountants given upon their authority as experts in accounting and
auditing.
Willkie Farr & Gallagher serves as counsel for each Fund and provides
legal services from time to time for CSAM and CSAMSI.
62
<PAGE>
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.
As of October 29, 1999, the names, address and percentage of ownership
of each person that owns of record 5% or more of a class of each Fund's
outstanding shares were as follows:
<TABLE>
<CAPTION>
PERCENT
OWNED AS OF
FUND NAME AND ADDRESS OCTOBER 29, 1999
- ---- ---------------- ----------------
<S> <C> <C>
International Growth Fund-- Employees Ret Plan Marshfield 8.94%
Institutional 1000 N. Oak Ave
Marshfield, WI 54449
MAC & Co 7.33%
A/C # TYCF8754542
Mutual Funds Operations
P.O. Box 3198
Pittsburgh, PA 15210-3198
Indiana University Foundation 6.18%
Attn: Walter L. Koon, Jr.
PO Box 500
Bloomington, IN 47402
State Street Bank & Trust 5.27%
FBO Consumers Energy Company
DTD 3-1-97
P.O. Box 1992
Boston, MA 02105-1992
63
<PAGE>
<CAPTION>
PERCENT
OWNED AS OF
FUND NAME AND ADDRESS OCTOBER 29, 1999
- ---- ---------------- ----------------
<S> <C> <C>
U.S. Equity Fund-- First Union National Bank 40.33%
Institutional FBO Buckeye BEA Eqt
A/C 1541048836
1525 W WT Harris Blvd.
CMG NC 1151
Charlotte, NC 28262-8522
Washington Hebrew Congregation 12.80%
3935 Macomb St. NW
Washington, DC 20016
Pension Plan for the Employees of 11.36%
Krupp Werner & Pfleiderer Corp
663 E Crescent Ave
Ramsey, NJ 07446-1220
Fleet National Bank Trust 7.65%
Hospital ST Raphael
PO Box 92800
Rochester, NY 14692-8900
U.S. Fixed Income Fund-- The Northern Trust Company TTEE 15.18%
Institutional Uniroyal Holdings Bond Fund
c/o Uniroyal Holding Inc.
70 Great Hill Road
Naugatuck, CT 06770-2224
Patterson & Co. 6.76%
A/C 9888880836
1525 West WT Harris Blvd.
CMG 1151
Charlotte, NC 28862-8522
Huntington Hospital Pension Plan 6.74%
270 Park Ave
Huntington, NY 11743-2799
64
<PAGE>
<CAPTION>
PERCENT
OWNED AS OF
FUND NAME AND ADDRESS OCTOBER 29, 1999
- ---- ---------------- ----------------
<S> <C> <C>
Local 239 Pension Fund 5.68%
RJ Waldbauer Jr, A Evarieto, I Stockel
TTEES DTD 04/01/1960
2380 Hempstead Tpke
East Meadow, NY 11554-2030
Fidelity Investments Institutional 5.31%
Operations Co Inc (FIIOC) as
Agent for Credit Suisse First
Boston Employee's Savings PSP
100 Magellan Way #KWIC
Covington, KY 41015-1987
DCA Food Industries Inc. 5.23%
100 East Grand Ave
Beloit, WI 53511-6255
Focus Fund-- Institutional BEA Associates 51.37%
Pension Trust
153 East 53rd Street
New York, NY 10022
Chase Manhattan Bank 16.24%
DCA/MMP Hourly Pension Plan
Plan No 006
Kerry Ingredients
352 E Grand Ave
Beloit, WI 53511-6227
FTC & Co. 12.30%
Attn Datalynx # House Acct
P.O. Box 173736
Denver, CO 80217-3736
State Street Bank & Trust 6.06%
Cust for the IRA of
Joan B Erle MD
524 E 72nd St 46DE
New York, NY 10021-9807
65
<PAGE>
<CAPTION>
PERCENT
OWNED AS OF
FUND NAME AND ADDRESS OCTOBER 29, 1999
- ---- ---------------- ----------------
<S> <C> <C>
Global Income Fund-- Sunkist Master Trust 56.39%
Institutional 14130 Riverside Drive
Sherman Oaks, CA 91423-2392
Patterson & Co. 33.45%
PO Box 7829
Philadelphia, PA 19101-7829
State Street Bank & Trustee TTEE 6.52%
Fenway Holdings LLC Master Trust
PO Box 470
Boston, MA 02102-0470
High Yield Fund-- Advantus Capital Mgmt Inc 31.50%
Institutional 400 Robert Stn
Saint Paul, MN 55101-2015
Carl F. Besenbach 15.38%
TRST Michelin North America Inc.
Master Trust
PO Box 19001
Greenville, SC 29602-9001
Fidelity Investments Institutional 14.56%
Operations Co Inc as Agent for
Certain Employee Benefits Plan
100 Magellan Way # KWIC
Covington, KY 41015-1999
Municipal Bond Fund-- William A. Marquard 42.53%
Institutional 2199 Maysville Rd.
Carlisle, KY 40311-9716
Howard Isermann 16.37%
9 Tulane Dr.
Livingston, NJ 07039-6212
Howard T. Hallowell III 10.15%
P.O. Box 18298
Rochester, NY 14518-0298
66
<PAGE>
<CAPTION>
PERCENT
OWNED AS OF
FUND NAME AND ADDRESS OCTOBER 29, 1999
- ---- ---------------- ----------------
<S> <C> <C>
S. Finkelstein Family Fund 5.14%
1755 York Ave Apt 35 BC
New York, NY 10128-6827
Long-Short Neutral Fund-- Warburg Pincus Long-Short Equity Fund 26.38%
Institutional 400 Bellevue Pkwy
Wilmington, DE 19809-3706
BEA Associates 20.78%
153 E 53rd Street
New York, NY 10022-4611
Andrew M. Jarmel TTEE 13.83%
AAM Alpha Fund LP
Asset Allocation & Management Co
30 N LaSalle St FL 35
Chicago, IL 60602-2590
EALSA & Co. 9.83%
P.O. Box 1768
Grand Central Station
New York, NY 10163-1768
BEA Associates 6.45%
FAO Pension Trust
153 E 53rd Street
New York, NY 10022-4611
</TABLE>
FINANCIAL STATEMENTS
Each Fund's audited financial report dated August 31, 1999, which
either accompanies this Statement of Additional Information or has previously
been provided to the investor to whom this Statement of Additional Information
is being sent, is incorporated herein by reference with respect to all
information regarding the relevant Fund included therein. Each Fund will furnish
without charge a copy of the annual report upon request by calling Warburg
Pincus Funds at 800-222-8977.
67
<PAGE>
APPENDIX A
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 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
A-1
<PAGE>
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 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
A-2
<PAGE>
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 ranking; and the modifier 3 indicates that the bond ranks in the
lower end of its generic rating category.
Caa - Bonds that are rated Caa are of poor standing. These issues may
be in default or present elements of danger may exist with respect to principal
or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C comprise the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-3
<PAGE>
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with margins
of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality, carrying
specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack of
margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-4
