-------------------- PART OF CREDIT | ASSET
WARBURG PINCUS FUNDS SUISSE | MANAGEMENT
--------------------
PROSPECTUS
Common Class
January 1, 2001
WARBURG PINCUS
GLOBAL HEALTH SCIENCES FUND
WARBURG PINCUS
GLOBAL TELECOMMUNICATIONS FUND
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.
Warburg Pincus Funds are advised by Credit Suisse Asset Management, LLC.
<PAGE>
CONTENTS
KEY POINTS ................................................................ 4
Goals and Principal Strategies ........................................ 4
Investor Profile ...................................................... 4
A Word About Risk ..................................................... 5
PERFORMANCE SUMMARY ....................................................... 8
Year-by-Year Total Returns ............................................ 8
Average Annual Total Returns .......................................... 9
INVESTOR EXPENSES ......................................................... 10
Fees and Fund Expenses ................................................ 10
Example ............................................................... 11
THE FUNDS IN DETAIL ....................................................... 12
The Management Firms .................................................. 12
Multi-Class Structure ................................................. 12
Fund Information Key .................................................. 13
GLOBAL HEALTH SCIENCES FUND ............................................... 14
GLOBAL TELECOMMUNICATIONS FUND ............................................ 16
MORE ABOUT RISK ........................................................... 18
Introduction .......................................................... 18
Types of Investment Risk .............................................. 18
Certain Investment Practices .......................................... 20
MEET THE MANAGERS ......................................................... 24
ABOUT YOUR ACCOUNT ........................................................ 26
Share Valuation ....................................................... 26
Buying and Selling Shares ............................................. 26
Account Statements .................................................... 27
Distributions ......................................................... 27
Taxes ................................................................. 27
OTHER INFORMATION ......................................................... 29
About the Distributor ................................................. 29
FOR MORE INFORMATION .................................................back cover
3
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KEY POINTS
GOALS AND PRINCIPAL STRATEGIES
<TABLE>
<CAPTION>
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FUND/RISK FACTORS GOAL STRATEGIES
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<S> <C> <C>
GLOBAL HEALTH Capital appreciation o Invests mainly in equity securities of
SCIENCES FUND U.S. and foreign companies
Risk factors: o Emphasizes the health services,
Foreign securities pharmaceuticals, biotechnology and
Legal risk medical-devices industries
Market risk o Can invest in companies of any size
Non-diversified status o Focuses on individual stock-picking,
Regulatory risk assisted by a top-down approach to four
Sector concentration categories of health sciences companies
-- buyers, providers, suppliers and
innovators
-----------------------------------------------------------------------------------------------------
GLOBAL Long-term appreciation o Invests in equity securities of U.S. and
TELECOMMUNICATIONS of capital foreign telecommunications companies
FUND o May invest in companies of all sizes
Risk factors:
Foreign securities
Market risk
Non-diversified status
Regulatory risk
Sector concentration
-----------------------------------------------------------------------------------------------------
</TABLE>
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INVESTOR PROFILE
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These funds are designed for investors who:
o are investing for long-term goals
o are willing to assume the risk of losing money in exchange for attractive
potential long-term returns
o are looking for capital appreciation
o want to diversify their portfolios internationally
They may NOT be appropriate if you:
o are investing for a shorter time horizon
o are uncomfortable with an investment that has a higher degree of
volatility
o want to limit your exposure to foreign securities
o are looking for income
You should base your selection of a fund on your own goals, risk
preferences and time horizon.
4
<PAGE>
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A WORD ABOUT RISK
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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 your fund. 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.
FOREIGN SECURITIES
Both funds
A fund that invests in foreign securities carries additional risks that
include:
o 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. The
fund may, but is not required to, seek to reduce currency risk by hedging
part or all of its exposure to various foreign currencies.
o Information risk Key information about an issuer, security or market may
be inaccurate or unavailable.
o 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.
LEGAL RISK
Global Health Sciences Fund
Lawsuits or other legal proceedings against the issuer of a security may
adversely affect the issuer, the market value of the security, or a fund's
performance.
MARKET RISK
Both 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.
NON-DIVERSIFIED STATUS
Both funds
A fund is considered a non-diversified investment company under the
Investment Company Act of 1940 and is permitted to invest a greater proportion
of its assets in the securities of a smaller number of issuers. As a result, the
fund may be subject
5
<PAGE>
to greater volatility with respect to its portfolio securities than a fund that
is more broadly diversified.
REGULATORY RISK
Both funds
Governments, agencies or other regulatory bodies may adopt or change laws
or regulations that could adversely affect the issuer or market value of a fund
security, or the fund's performance.
SECTOR CONCENTRATION
Both funds
A fund that invests more than 25% of its net assets in a group of related
industries (market sector) is subject to increased risk.
o Fund performance will largely depend upon the sector's performance, which
may differ in direction and degree from that of the overall stock market.
o Financial, economic, business, political and other developments affecting
the sector will have a greater effect on the fund.
6
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7
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PERFORMANCE SUMMARY
The bar chart below and the table on the next page provide an indication of the
risks of investing in the funds. The bar chart shows you how fund performance
has varied from year to year for up to 10 years. The table compares the 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
[The following table was depicted as a bar graph in the printed material.]
--------------------------------------------------------------------------------
YEAR ENDED 12/31: 1997 1998 1999
--------------------------------------------------------------------------------
GLOBAL HEALTH SCIENCES FUND
Best quarter: 17.78% (Q2 97)
Worst quarter: -6.36% (Q3 98)
Inception Date: 12/31/96 27.35% 33.19% 6.39%
Total return for the period 1/1/00 - 9/30/00: 49.50%
--------------------------------------------------------------------------------
GLOBAL
TELECOMMUNICATIONS FUND*
Best quarter: 68.82% (Q4 98)
Worst quarter: -12.27% (Q3 98)
Inception Date: 12/4/96 32.32% 67.42% 156.16%
Total return for the period 1/1/00 - 9/30/00: -14.37%
(not annualized)
--------------------------------------------------------------------------------
* The total returns shown include the total returns of the Global
Telecommunications Fund's predecessor, the Advisor Shares of the Global
Telecommunications portfolio of The RBB Fund, Inc.
8
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
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ONE YEAR THREE YEARS LIFE OF INCEPTION
PERIOD ENDED 12/31/99: 1999 1997-1999 FUND DATE
--------------------------------------------------------------------------------
GLOBAL HEALTH SCIENCES FUND 6.39% 21.75% 21.73% 12/31/96
--------------------------------------------------------------------------------
S&P 500 INDEX(1) 21.02% 27.54% 27.54%
--------------------------------------------------------------------------------
LIPPER HEALTH/BIOTECHNOLOGY
FUNDS INDEX(2) 10.35% 18.78% 13.93%
--------------------------------------------------------------------------------
GLOBAL TELECOMMUNICATIONS FUND(3) 156.16% 78.37% 75.74% 12/4/96
--------------------------------------------------------------------------------
MSCI TELECOMMUNICATIONS INDEX(4) 44.66% 40.49% 31.70%
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(1) 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.
(2) The Lipper Health/Biotechnology Funds Index is an equal-weighted
performance index, adjusted for capital-gain distributions and income
dividends, of the largest qualifying funds in this investment objective,
and is compiled by Lipper Inc.
(3) The total returns shown include the total returns of the Global
Telecommunications Fund's predecessor, the Advisor Shares of the Global
Telecommunications portfolio of The RBB Fund, Inc.
(4) The Morgan Stanley Capital International Telecommunications Index is an
unmanaged index (with no defined investment objective) of
telecommunications equities that include reinvestment of dividends and is
compiled by Morgan Stanley & Co., Incorporated.
UNDERSTANDING PERFORMANCE
o 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.
o 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.
o 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.
o Because of compounding, the average annual total returns in the table
cannot be computed by averaging the returns in the bar chart.
9
<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 year or period ended August
31, 2000.
--------------------------------------------------------------------------------
GLOBAL
GLOBAL TELE-
HEALTH COMMUNI-
SCIENCES CATIONS
FUND FUND
--------------------------------------------------------------------------------
Shareholder fees
(paid directly from your investment)
--------------------------------------------------------------------------------
Sales charge "load" on purchases NONE NONE
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Deferred sales charge "load" NONE NONE
--------------------------------------------------------------------------------
Sales charge "load" on reinvested distributions NONE NONE
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Redemption fees NONE NONE
--------------------------------------------------------------------------------
Exchange fees NONE NONE
--------------------------------------------------------------------------------
Annual fund operating expenses
(deducted from fund assets)
--------------------------------------------------------------------------------
Management fee 1.00% 1.00%
--------------------------------------------------------------------------------
Distribution and service (12b-1) fee .25% .25%
--------------------------------------------------------------------------------
Other expenses .64% .52%
--------------------------------------------------------------------------------
Total annual fund operating expenses* 1.89% 1.77%
--------------------------------------------------------------------------------
* Fee waivers and expense reimbursements or credits reduced expenses for the
funds during 2000 but may be discontinued at any time. Actual fees and expenses
for the fiscal year or period ended August 31, 2000 are shown below:
GLOBAL
GLOBAL TELE-
EXPENSES AFTER HEALTH COMMUNI-
WAIVERS AND SCIENCES CATIONS
REIMBURSEMENTS FUND FUND
Management fee .77% .94%
Distribution and service (12b-1) fee .25% .25%
Other expenses .57% .45%
---- ----
Total annual fund operating expenses 1.59% 1.64%
10
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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 on the opposite page (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:
--------------------------------------------------------------------------------
ONE YEAR THREE YEARS FIVE YEARS 10 YEARS
--------------------------------------------------------------------------------
GLOBAL HEALTH SCIENCES FUND $192 $594 $1,021 $2,212
--------------------------------------------------------------------------------
GLOBAL TELECOMMUNICATIONS FUND $180 $557 $ 959 $2,084
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11
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THE FUNDS IN DETAIL
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THE MANAGEMENT FIRMS
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CREDIT SUISSE ASSET
MANAGEMENT, LLC
466 Lexington Avenue
New York, NY 10017
o Investment adviser for the funds
o Responsible for managing each fund's assets according to its goal and
strategies and supervising the activities of the sub-investment adviser
for the funds
o A member of Credit Suisse Asset Management, the institutional asset
management and mutual fund arm of Credit Suisse Group (Credit Suisse), one
of the world's leading banks
o Credit Suisse Asset Management companies manage approximately $104 billion
in the U.S. and $296 billion globally
o Credit Suisse Asset Management has offices in 14 countries, including
SEC-registered offices in New York and London; other offices (such as
those in Budapest, Frankfurt, Milan, Moscow, Paris, Prague, Sydney, Tokyo,
Warsaw and Zurich) are not registered with the U.S. Securities and
Exchange Commission
For easier reading, Credit Suisse Asset Management, LLC will be referred
to as "CSAM" throughout this Prospectus.
CREDIT SUISSE ASSET MANAGEMENT
LIMITED
Beaufort House
15 St. Botolph Street
London, EC3A 7JJ
o Sub-investment adviser for the funds
o Responsible for assisting CSAM in the management of a fund's international
assets according to its goal and strategies
o Also a member of Credit Suisse Asset Management
For easier reading, Credit Suisse Asset Management Limited will be
referred to as "CSAM U.K." throughout this Prospectus.
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MULTI-CLASS STRUCTURE
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This Prospectus offers Common Class shares of the funds. Common Class
shares are no-load.
12
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FUND INFORMATION KEY
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Concise fund-by-fund descriptions begin on the next page. The 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 to handle the fund's
day-to-day management.
INVESTOR EXPENSES
Actual fund expenses for the 2000 fiscal year. Future expenses may be
higher or lower.
o Management fee The fee paid to the investment adviser for providing
investment advice to the fund and compensating the sub-investment adviser.
Expressed as a percentage of average net assets after waivers.
o Distribution and service (12b-1) fees Fees paid by the fund to the
distributors for making shares of the fund available to you. Expressed as
a percentage of average net assets.
o Other Expenses Fees paid by the fund for items such as administration,
transfer agency, custody, auditing, legal and registration fees and
miscellaneous expenses. Expressed as a percentage of average net assets
after waivers, credits and reimbursements.
FINANCIAL HIGHLIGHTS
A table showing the fund's audited financial performance for up to five
years.
o Total Return How much you would have earned on an investment in the fund,
assuming you had reinvested all dividend and capital-gain distributions.
o 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 the 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 the fund's
financial statements. It is available free upon request.
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GLOBAL HEALTH SCIENCES FUND
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GOAL AND STRATEGIES
--------------------------------------------------------------------------------
The Global Health Sciences Fund seeks capital appreciation. To pursue this
goal, it invests in equity and debt securities of U.S. and foreign
health-sciences companies.
The health sciences consist of health care, medicine and the life
sciences. Health-sciences companies are principally engaged in research and
development, production, or distribution of health-sciences products or
services. The fund may invest in companies of any size.
Under normal market conditions, the fund will invest at least:
o 65% of assets in equity and debt securities of health-sciences companies,
including small and medium-size companies
o 25% of assets in the health-services, pharmaceuticals and medical-devices
industries combined
The fund will invest in at least three countries, which may include the
U.S.
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PORTFOLIO INVESTMENTS
--------------------------------------------------------------------------------
This fund intends to invest at least 80% of assets in equity securities of
health-sciences companies. Equity holdings may consist of:
o common and preferred stocks
o rights and warrants
o securities convertible into or exchangeable for common stocks
This fund may invest up to 20% of assets in debt securities, including
those rated below investment grade (junk bonds), and may invest without limit in
foreign securities.
To a limited extent, the fund may also engage in other investment
practices.
--------------------------------------------------------------------------------
RISK FACTORS
--------------------------------------------------------------------------------
This fund's principal risk factors are:
o foreign securities
o market risk
o non-diversified status
o legal and regulatory risks
o sector concentration
The value of your investment generally will fluctuate in response to
stock-market movements. Fund performance will largely depend upon a limited
number of industries, which may perform differently from (or be more volatile
than) the overall stock market.
Because this fund focuses on a single sector (health sciences), you should
expect it to be more volatile than a broadly diversified global equity fund.
Additionally, health sciences companies are often subject to regulatory risks
that could hurt the fund's performance. Non-diversification might cause the fund
to be more volatile than a diversified mutual fund.
To the extent that the fund invests in smaller companies and foreign
securities, it takes on further risks that could hurt its performance. Start-up
and other small companies may have less-experienced management, limited product
lines, unproven track records or inadequate capital reserves. Their securities
may carry increased market, information and liquidity risks. Risks associated
with foreign securities include currency, information and political risks. These
risks are defined in "More About Risk." That section also details other
investment practices the fund
14
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may use. Please read "More About Risk" carefully
before you invest.
--------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
--------------------------------------------------------------------------------
Susan L. Black and Peter T. Wen manage the fund's investment portfolio.
You can find out more about the fund's managers in "Meet the Managers."
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INVESTOR EXPENSES
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Management fee .77%
Distribution and service
(12b-1) fee .25%
All other expenses .57%
----
Total expenses 1.59%
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>
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PERIOD ENDED: 8/00** 10/99 10/98 10/97*
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per-share data
----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 14.92 $ 14.41 $ 12.22 $ 10.00
----------------------------------------------------------------------------------------------------------------------
Investment activities:
Net investment loss (0.08) (0.13) (0.06) (0.02)
Net gains on investments and foreign
currency transactions (both realized and unrealized) 9.11 0.64 2.97 2.24
----------------------------------------------------------------------------------------------------------------------
Total from investment activities 9.03 0.51 2.91 2.22
----------------------------------------------------------------------------------------------------------------------
Less Dividends and Distributions:
Dividends from net investment income -- -- (0.04) --
Distributions from net realized capital gains -- -- (0.68) --
----------------------------------------------------------------------------------------------------------------------
Total dividends and distributions -- -- (0.72) --
----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 23.95 $ 14.92 $ 14.41 $ 12.22
----------------------------------------------------------------------------------------------------------------------
Total return 60.52%(1) 3.54% 25.25% 22.20%(1)
----------------------------------------------------------------------------------------------------------------------
Ratios/supplemental data
----------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) $90,801 $47,574 $64,336 $18,246
Ratio of expenses to average net assets(3,4) 1.61%(2) 1.59% 1.59% 1.59%(2)
Ratio of net investment income/
(loss) to average net assets (0.94)%(2) 0.62% (0.58)% (0.24)%(2)
Portfolio turnover rate 106%(1) 146% 63% 160%(1)
----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Not Annualized.
(2) Annualized.
(3) Without the voluntary waiver of advisory fees and administration fees, the
ratios of expenses to average net assets for the Common Class would have
been 1.89% annualized for the period November 1, 1999 to August 31, 2000,
1.88% and 1.97% for the years ended October 31, 1999 and 1998,
respectively, and 3.42% annualized for the period December 31, 1996 to
October 31, 1997.
(4) Interest earned on uninvested cash balances is used to offset positions of
the transfer agent expense. These arrangements resulted in a reduction to
the Common Shares net expense ratio by .02% annualized for the period
November 1, 1999 to August 31, 2000. These arrangements had no effect on
the fund's expense ratio for the previous periods. The Common Shares
operating expense ratio after reflecting these arrangements was 1.59%
annualized for the period November 1, 1999 to August 31, 2000.
* For the period December 31, 1996 (inception date) to October 31, 1997.
** Effective May 1, 2000, Global Health Sciences changed its fiscal and tax
year ends from October 31st to August 31st.
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GLOBAL TELECOMMUNICATIONS FUND
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GOAL AND STRATEGIES
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The Global Telecommunications Fund seeks long-term appreciation of
capital. To pursue this goal, it invests in equity securities of U.S. and
foreign telecommunications companies.
Telecommunications includes:
o communications equipment and service
o electronic components and equipment
o broadcast media
o computer equipment, mobile telecommunications, and cellular radio and
paging
o electronic mail
o local and wide area networking, and linkage of work and data processing
systems
o publishing and information systems
o video and telex
o internet and other emerging technologies combining telephone, television
and/or computer systems
Under normal market conditions, the fund will invest at least 65% of assets
in equity securities of telecommunications companies from at least three
countries, which may include the U.S. The fund may invest in companies of all
sizes.
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PORTFOLIO INVESTMENTS
--------------------------------------------------------------------------------
Equity holdings may include:
o common and preferred stocks
o convertible securities
o warrants
To a limited extent, the fund may also engage in other investment practices.
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RISK FACTORS
--------------------------------------------------------------------------------
This fund's principal risk factors are:
o foreign securities
o market risk
o non-diversified status
o regulatory risk
o sector concentration
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."
Because this fund focuses on a single sector (telecommunications), you
should expect it to be more volatile than a broadly diversified global equity
fund. Additionally, telecommunications companies are often subject to regulatory
risks that could hurt the fund's performance.
Non-diversification might cause the fund to be more volatile than a
diversified mutual fund. To the extent that the fund invests in emerging markets
and start-up and other small companies, it takes on additional 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.
16
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PORTFOLIO MANAGEMENT
--------------------------------------------------------------------------------
Scott T. Lewis and Vincent J. McBride manage the fund's investment
portfolio. You can find out more about them in "Meet the Managers."
--------------------------------------------------------------------------------
INVESTOR EXPENSES
--------------------------------------------------------------------------------
Management fee .94%
Distribution and service
(12b-1) fee .25%
All other expenses .45%
----
Total expenses 1.64%
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>
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PERIOD ENDED: 8/00 8/99 8/98 8/97(1)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per-share data
-----------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 41.22 $ 20.54 $17.30 $15.00
-----------------------------------------------------------------------------------------------------
Investment activities:
Net investment income/(loss) (0.44) (0.04) (0.01) 0.02
Net gains or losses on investments
(both realized and unrealized) 29.56 23.56 4.29 2.28
-----------------------------------------------------------------------------------------------------
Total from investment activities 29.12 23.52 4.28 2.30
-----------------------------------------------------------------------------------------------------
Distributions:
From net investment income -- -- -- --
From realized capital gains (1.23) (2.84) (1.04) --
-----------------------------------------------------------------------------------------------------
Total distributions (1.23) (2.84) (1.04)
-----------------------------------------------------------------------------------------------------
Net asset value, end of period $ 69.11 $ 41.22 $20.54 $17.30
-----------------------------------------------------------------------------------------------------
Total return 70.99% 120.73% 25.38% 15.33%(2)
-----------------------------------------------------------------------------------------------------
Ratios and supplemental data
-----------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) $471,455 $65,165 $ 718 $ 569
Ratio of expenses to average net assets(3) 1.66%(4) 1.65% 1.65% 1.65%(5)
Ratio of net income to average net assets (0.89)% (0.35)% (0.03)% 0.16%(5)
Portfolio turnover rate 143% 203% 169% 43%(2)
-----------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period December 4, 1996 (commencement of operations) through
August 31, 1997.
(2) Not annualized.
(3) Without the voluntary waiver of advisory fees and administration fees, the
ratios of expenses to average net assets for the Common Class would have
been 1.77%, 2.52% and 6.86% for the years ended August 31, 2000, 1999 and
1998, respectively, and 8.38% annualized for the period ended August 31,
1997.
(4) Interest earned on uninvested cash balances is used to offset portions of
the transfer agent expense. These arrangements resulted in a reduction to
the net expense ratio by .02% for the year ended August 31, 2000. The
operating expense ratio after reflecting these arrangements was 1.64% for
the year ended August 31, 2000.
(5) Annualized.
17
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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 a 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.
o 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.
o Speculative To the extent that a derivative or practice is not used
as a hedge, the 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.
Information risk Key information about an issuer, security or market may
be inaccurate or unavailable.
18
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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.
Legal risk Lawsuits or other legal proceedings against the issuer of a
security may adversely affect the issuer, the market value of the security, or a
fund's performance.
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.
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.
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.
19
<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%I/ Italic type (e.g., 20%) represents an investment limitation as a
percentage of net fund assets; does not indicate actual use
20%R 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
--------------------------------------------------------------------------------
GLOBAL
GLOBAL TELE-
HEALTH COMMUNI-
SCIENCES CATIONS
FUND FUND
--------------------------------------------------------------------------------
INVESTMENT PRACTICE LIMIT
--------------------------------------------------------------------------------
Borrowing The borrowing of money from banks to
meet redemptions or for other temporary or
emergency purposes. Speculative exposure risk. 30%R 33 1/3%R
--------------------------------------------------------------------------------
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|
--------------------------------------------------------------------------------
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.(2) |_| |_|
--------------------------------------------------------------------------------
Emerging markets Countries generally considered to
be relatively less developed or industrialized.
Emerging markets often face economic problems that
could subject a fund to increased volatility or
substantial declines in value. Deficiencies in
regulatory oversight, market infrastructure,
shareholder protections and company laws could
expose a fund to risks beyond those generally
encountered in developed countries. Access,
currency, information, liquidity, market,
operational, political, valuation risks. |_| |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|
--------------------------------------------------------------------------------
Foreign securities Securities of foreign issuers.
May include depositary receipts. Currency,
information, liquidity, market, political,
valuation risks. |X| |X|
--------------------------------------------------------------------------------
20
<PAGE>
--------------------------------------------------------------------------------
GLOBAL
GLOBAL TELE-
HEALTH COMMUNI-
SCIENCES CATIONS
FUND FUND
--------------------------------------------------------------------------------
INVESTMENT PRACTICE LIMIT
--------------------------------------------------------------------------------
Futures and options on futures Exchange-traded
contracts that enable a fund to hedge against or
speculate on future changes in currency values,
interest rates, securities 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) |_| |_|
--------------------------------------------------------------------------------
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. A 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. 25%R |_|
--------------------------------------------------------------------------------
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| |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%I/ /15%I/
--------------------------------------------------------------------------------
Sector concentration Investing more than 25% of a
fund's net assets in a group of related industries
(market sector). Performance will largely depend
upon the sector's performance, which may differ in
direction and degree from that of the overall
stock market. Financial, economic, business,
political and other developments affecting the
sector will have a greater effect on the fund. |X| |X|
--------------------------------------------------------------------------------
Securities lending Lending portfolio securities to
financial institutions; a fund receives cash, U.S.
government securities or bank letters of credit as
collateral. Credit, liquidity, market, operational
risks. 33 1/3%R 33 1/3%R
--------------------------------------------------------------------------------
21
<PAGE>
--------------------------------------------------------------------------------
GLOBAL
GLOBAL TELE-
HEALTH COMMUNI-
SCIENCES CATIONS
FUND FUND
--------------------------------------------------------------------------------
INVESTMENT PRACTICE LIMIT
--------------------------------------------------------------------------------
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. |X| /5%I/
--------------------------------------------------------------------------------
Structured instruments Swaps, structured
securities and other instruments that allow a fund
to gain access to the performance of a benchmark
asset (such as an index or selected stocks) that
may be more attractive or accessible than the
fund's direct investment. Credit, currency,
information, interest-rate, liquidity, market,
political, speculative exposure, valuation risks. |_| |_|
--------------------------------------------------------------------------------
Temporary defensive tactics Placing some or all of
a 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 a fund's
principal investment strategies and might prevent
a 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%I/ |_|
--------------------------------------------------------------------------------
(1) The funds are 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) Each 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.
22
<PAGE>
This page intentionally left blank
23
<PAGE>
MEET THE MANAGERS
The following individuals are responsible for the day-to-day portfolio
management of the Global Health Sciences Fund:
[PHOTO OMITTED]
Susan L. Black, CFA, CIC
Managing Director
o Co-Portfolio Manager, Global Health Sciences Fund since fund inception
o With CSAM since 1999 as a result of Credit Suisse's acquisition of Warburg
Pincus Asset Management, Inc. (Warburg Pincus)
o With Warburg Pincus since 1985
[PHOTO OMITTED]
Peter T. Wen
Vice President
o Co-Portfolio Manager, Global Health Sciences Fund since 1999
o With CSAM since 1999
o Investment analyst at Lynch & Mayer, Inc., 1994 to 1999
24
<PAGE>
The day-to-day portfolio management of the Global Telecommunications Fund
is the responsibility of the Credit Suisse Asset Management Global
Telecommunications Management Team. The team consists of the following
individuals:
[PHOTO OMITTED]
Scott T. Lewis
Managing Director
o Team member since 1999
o With CSAM since 1999 as a result of Credit Suisse's acquisition of Warburg
Pincus
o With Warburg Pincus since 1986
[PHOTO OMITTED]
Vincent J. McBride
Managing Director
o Team member since 2000
o With CSAM since 1999 as a result of Credit Suisse's acquisition of Warburg
Pincus
o With Warburg Pincus since 1994
o International equity analyst at Smith Barney Inc., 1993 to 1994
25
<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) (currently 4 p.m. Eastern Time) each day the NYSE is open
for business. It is calculated by dividing the Common Class's total assets, less
its liabilities, by the number of Common Class shares outstanding.
Each fund values its securities based on market quotations when it
calculates its NAV. If market quotations are not readily available, securities
and other assets are valued by another method that the Board of Directors
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 of
Directors 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 the funds do not compute their prices. This
could cause the value of a fund's portfolio investments to be affected by
trading on days when you cannot buy or sell shares.
--------------------------------------------------------------------------------
BUYING AND SELLING SHARES
--------------------------------------------------------------------------------
The accompanying Shareholder Guide explains how to invest directly with
the funds. You will find information about purchases, redemptions, exchanges and
services.
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.
FINANCIAL-SERVICES FIRMS
You can also buy and sell fund shares through a variety of
financial-services firms such as banks, brokers and financial advisors. The
funds have authorized these firms (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 the fund and will be priced at
the next-computed NAV.
Financial-services firms may charge transaction fees or other fees that
you could avoid by investing directly with the fund. Please read their program
materials for any special provisions or additional service features that may
apply to your investment. Certain features of the fund, such as the minimum
initial or subsequent investment amounts, may be modified.
Some of the firms through which the funds are available include:
o Charles Schwab & Co., Inc. Mutual Fund OneSource(R) service
o Fidelity Brokerage Services, Inc. FundsNetwork(R) Funds
o TD Waterhouse Mutual Fund Network
26
<PAGE>
--------------------------------------------------------------------------------
ACCOUNT STATEMENTS
--------------------------------------------------------------------------------
In general, you will receive account statements as follows:
o after every transaction that affects your account balance (except for
distribution reinvestments and automatic transactions)
o after any changes of name or address of the registered owner(s)
o otherwise, every calendar quarter
You will receive annual and semiannual financial reports.
--------------------------------------------------------------------------------
DISTRIBUTIONS
--------------------------------------------------------------------------------
As a fund investor, you will receive distributions.
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 funds distribute dividends annually. 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.
Estimated year-end distribution information, including record and payment
dates, will be available at www.warburg.com or by calling 800-WARBURG
(800-927-2874). Investors are encouraged to consider the potential tax
consequences of distributions prior to buying or selling shares of the funds.
--------------------------------------------------------------------------------
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 the 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
27
<PAGE>
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.
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.
28
<PAGE>
OTHER INFORMATION
--------------------------------------------------------------------------------
ABOUT THE DISTRIBUTOR
--------------------------------------------------------------------------------
Credit Suisse Asset Management Securities, Inc. (CSAMSI), an affiliate of
CSAM, is responsible for:
o making the funds available to you
o account servicing and maintenance
o other administrative services related to sale of the Common Class
As part of their business strategies, the funds each have adopted a Rule
12b-1 shareholder-servicing and distribution plan to compensate CSAMSI for
providing certain shareholder and other services related to the sale of the
Common Class. Under the plan, CSAMSI receives fees at an annual rate of 0.25% of
average daily net assets of the fund's Common Class. Because the fees are paid
out of a fund's assets on an ongoing basis, over time they will increase the
cost of your investment and may cost you more than paying other types of sales
charges. CSAMSI, CSAM or their affiliates may make additional payments out of
their own resources to firms offering Common Class shares for providing
administration, subaccounting, transfer agency and/or other services. Under
certain circumstances, the funds may reimburse a portion of these payments.
29
<PAGE>
FOR MORE INFORMATION
More information about these funds is available free upon request,
including the following:
--------------------------------------------------------------------------------
SHAREHOLDER GUIDE
--------------------------------------------------------------------------------
Explains how to buy and sell shares. The Shareholder Guide is incorporated
by reference into (is legally part of) this Prospectus.
--------------------------------------------------------------------------------
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 its 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 Web site (www.sec.gov) to view the SAI,
material incorporated by reference and other information. You can also obtain
copies by visiting the SEC's Public Reference Room in Washington, DC (phone
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 Warburg Pincus Funds to obtain, without charge, the SAI,
Annual and Semiannual Reports and portfolio holdings and other information and
to make shareholder inquiries:
BY TELEPHONE:
800-WARBURG
(800-927-2874)
BY MAIL:
Warburg Pincus Funds
P.O. Box 9030
Boston, MA 02205-9030
BY OVERNIGHT OR COURIER SERVICE:
Boston Financial
Attn: Warburg Pincus Funds
66 Brooks Drive
Braintree, MA 02184
ON THE INTERNET:
www.warburg.com
SEC file numbers:
Warburg Pincus Global
Health Sciences Fund 811-07901
Warburg Pincus Global
Telecommunications Fund 811-08935
--------------------
WARBURG PINCUS FUNDS
--------------------
PART OF CREDIT | ASSET
SUISSE | MANAGEMENT
P.O. BOX 9030, BOSTON, MA 02205-9030
800-WARBURG (800-927-2874) o www.warburg.com
CREDIT SUISSE ASSET MANAGEMENT SECURITIES, INC., DISTRIBUTOR WPGHT-1-0101
<PAGE>
[LOGO] WARBURG PINCUS FUNDS, PART OF CREDIT SUISSE | ASSET MANAGEMENT
WARBURG PINCUS FUNDS
SHAREHOLDER
GUIDE
Common Class
January 1, 2001
This Shareholder Guide is incorporated into and legally part of each
Warburg Pincus (Common Class) prospectus.
Warburg Pincus Funds are advised by Credit Suisse Asset Management, LLC
<PAGE>
BUYING SHARES
o OPENING AN ACCOUNT
Your account application provides us with key information we need to set
up your account correctly. It also lets you authorize services that you may find
convenient in the future.
If you need an application, call our Shareholder Service Center to receive
one by mail or fax. Or you can download it from our Internet Web site:
www.warburg.com.
You can make your initial investment by check or wire. The "By Wire"
method in the table enables you to buy shares on a particular day at that day's
closing NAV.
o ADDING TO AN ACCOUNT
You can add to your account in a variety of ways, as shown in the table.
If you want to use ACH transfer, be sure to complete the "ACH on Demand" section
of the account application.
o INVESTMENT CHECKS
Please use either a personal or bank check payable in U.S. dollars to
Warburg Pincus Funds. Unfortunately, we cannot accept "starter" checks that do
not have your name preprinted on them. We also cannot accept checks payable to
you or to another party and endorsed to the order of Warburg Pincus Funds. These
types of checks may be returned to you and your purchase order may not be
processed. Limited exceptions include properly endorsed government checks.
--------------------------------------------------------------------------------
MINIMUM INITIAL
INVESTMENT
Cash Reserve Fund: $ 1,000
New York Tax Exempt Fund: $ 1,000
Balanced Fund: $ 1,000
Value Fund: $ 1,000
WorldPerks(R) Funds: $ 5,000
Long-Short Fund: $25,000
All other funds: $ 2,500
IRAs: $ 500*
Transfers/Gifts to Minors: $ 500*
--------------------------------------------------------------------------------
* $25,000 minimum for Long-Short Fund.
--------------------------------------------------------------------------------
WIRE INSTRUCTIONS
State Street Bank and Trust Company
ABA# 0110 000 28
Attn: Mutual Funds/Custody Dept.
[Warburg Pincus Fund Name]
DDA# 9904-649-2
F/F/C: [Account Number and Registration]
HOW TO REACH US
Shareholder Service Center
Toll free: 800-WARBURG
(800-927-2874)
Fax: 212-370-9833
Mail
Warburg Pincus Funds
P.O. Box 9030
Boston, MA 02205-9030
Overnight/Courier Service
Boston Financial
Attn: Warburg Pincus Funds
66 Brooks Drive
Braintree, MA 02184
Internet Web Site
www.warburg.com
--------------------------------------------------------------------------------
2
<PAGE>
--------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
--------------------------------------------------------------------------------
BY CHECK
--------------------------------------------------------------------------------
o Complete the New Account o Make your check payable to Warburg
Application. For IRAs use the Pincus Funds.
Universal IRA Application.
o Write the account number and the
o Make your check payable to Warburg fund name on your check.
Pincus Funds.
o Mail to Warburg Pincus Funds.
o Mail to Warburg Pincus Funds.
o Minimum amount is $100.
--------------------------------------------------------------------------------
BY EXCHANGE
--------------------------------------------------------------------------------
o Call our Shareholder Service Center o Call our Shareholder Service Center
to request an exchange. Be sure to to request an exchange.
read the current prospectus for the
new fund. Also please observe the o Minimum amount is $250.
minimum initial investment.
If you do not have telephone
If you do not have telephone privileges, mail or fax a signed
privileges, mail or fax a signed letter of instruction.
letter of instruction.
--------------------------------------------------------------------------------
BY WIRE
--------------------------------------------------------------------------------
o Complete and sign the New Account o Call our Shareholder Service Center
Application. by 4 p.m. ET to inform us of the
incoming wire. Please be sure to
o Call our Shareholder Service Center specify your name, the account
and fax the signed New Account number and the fund name on your
Application by 4 p.m. ET. wire advice.
o Shareholder Services will telephone o Wire the money for receipt that day.
you with your account number. Please
be sure to specify your name, the o Minimum amount is $500.
account number and the fund name on
your wire advice.
o Wire your initial investment for
receipt that day.
o Mail the original, signed
application to Warburg Pincus Funds.
This method is not available for
IRAs.
--------------------------------------------------------------------------------
BY AUTOMATED CLEARING HOUSE (ACH) TRANSFER
--------------------------------------------------------------------------------
o Cannot be used to open an account. o Call our Shareholder Service Center
to request an ACH transfer from your
bank.
o Your purchase will be effective at
the next NAV calculated after we
receive your order in proper form.
o Minimum amount is $50.
Requires ACH on Demand privileges.
--------------------------------------------------------------------------------
800-WARBURG (800-927-2874)
MONDAY-FRIDAY, 8 A.M.-8 P.M. ET SATURDAY, 8 A.M.-4 P.M. ET
3
<PAGE>
SELLING SHARES(*)
--------------------------------------------------------------------------------
SELLING SOME OR ALL OF YOUR SHARES CAN BE USED FOR
--------------------------------------------------------------------------------
BY MAIL
--------------------------------------------------------------------------------
Write us a letter of instruction that o Accounts of any type.
includes:
o Sales of any amount.
o your name(s) and signature(s)
For IRAs please use the IRA
o the fund name and account number Distribution Request Form.
o the dollar amount you want to sell
o how to send the proceeds
Obtain a signature guarantee or other
documentation, if required (see
"Selling Shares in Writing").
Mail the materials to Warburg Pincus
Funds.
If only a letter of instruction is
required, you can fax it to the
Shareholder Service Center.
--------------------------------------------------------------------------------
BY EXCHANGE
--------------------------------------------------------------------------------
o Call our Shareholder Service Center o Accounts with telephone privileges.
to request an exchange. Be sure to
read the current prospectus for the If you do not have telephone
new fund. Also please observe the privileges, mail or fax a letter of
minimum initial investment. instruction to exchange shares.
--------------------------------------------------------------------------------
BY PHONE
--------------------------------------------------------------------------------
Call our Shareholder Service Center to o Non-IRA accounts with telephone
request a redemption. You can receive privileges.
the proceeds as:
o a check mailed to the address of
record
o an ACH transfer to your bank ($50
minimum)
o a wire to your bank ($500 minimum)
See "By Wire or ACH Transfer" for
details.
--------------------------------------------------------------------------------
BY WIRE OR ACH TRANSFER
--------------------------------------------------------------------------------
o Complete the "Wire Instructions" or o Non-IRA accounts with
"ACH on Demand" section of your New wire-redemption or ACH on Demand
Account Application. privileges.
o For federal-funds wires, proceeds o Requests by phone or mail.
will be wired on the next business
day. For ACH transfers, proceeds
will be delivered within two
business days.
--------------------------------------------------------------------------------
* For the Japan Growth Fund and Japan Small Company Fund only: Each fund imposes
a 2.00% redemption fee (short-term trading fee) on fund shares redeemed or
exchanged less than six months from purchase. This fee is calculated based on
the shares' net asset value at redemption and deducted from the redemption
proceeds. The fee is paid to the fund to offset costs associated with short-term
shareholder trading. It does not apply to shares acquired through reinvestment
of distributions. For purposes of computing the redemption fee, any shares
bought through reinvestment of distributions will be redeemed first without
charging the fee, followed by the shares held longest. The redemption fee
applies to fund shares purchased on or after May 30, 2000.
4
<PAGE>
o SELLING SHARES IN WRITING
Some circumstances require a written sell order, along with a signature
guarantee. These include:
o accounts whose address of record has been changed within the past 30
days
o redemption in certain large amounts (other than by exchange)
o requests to send the proceeds to a different payee or address
o shares represented by certificates, which must be returned with your
sell order
A signature guarantee helps protect against fraud. You can obtain one from
most banks or securities dealers, but not from a notary public.
o RECENTLY PURCHASED SHARES
For fund shares purchased other than by bank wire, bank check, U.S.
Treasury check, certified check or money order, the funds will delay payment of
your cash redemption proceeds until the check or other purchase payment clears,
which generally takes up to 10 calendar days from the day of purchase. At any
time during this period, you may exchange into another fund.
o LOW-BALANCE ACCOUNTS
If your account balance falls below the minimum required to keep it open
due to redemptions or exchanges, the fund may ask you to increase your balance.
If it is still below the minimum after 60 days, the fund may close your account
and mail you the proceeds.
--------------------------------------------------------------------------------
MINIMUM TO KEEP AN ACCOUNT OPEN
Cash Reserve Fund: $ 750
New York Tax Exempt Fund: $ 750
Balanced Fund: $ 500
Value Fund: $ 500
WorldPerks Funds: $ 750
All other funds: $2,000
IRAs: $ 250
Transfers/Gifts to Minors: $ 250
--------------------------------------------------------------------------------
800-WARBURG (800-927-2874)
MONDAY-FRIDAY, 8 A.M.-8 P.M. ET SATURDAY, 8 A.M.-4 P.M. ET
5
<PAGE>
SHAREHOLDER SERVICES
o AUTOMATIC SERVICES
Buying or selling shares automatically is easy with the services described
below. You can set up most of these services with your account application or by
calling our Shareholder Service Center.
SAVEMYMONEY PROGRAM
SaveMyMoney(SM) is a low minimum, automatic investing program that makes
it easy to build a mutual fund portfolio. For an initial investment of $250
along with a minimum $50 monthly investment, you can invest in certain Warburg
Pincus funds. The SaveMyMoney Program will automatically transfer the monthly
investment amount you designate from your bank account.
AUTOMATIC MONTHLY INVESTMENT PLAN
For making automatic investments ($50 minimum) from a designated bank
account.
AUTOMATIC WITHDRAWAL PLAN
For making automatic monthly, quarterly, semiannual or annual withdrawals
of $250 or more.
DISTRIBUTION SWEEP
For automatically reinvesting your dividend and capital-gain distributions
into another identically registered Warburg Pincus fund. Not available for IRAs.
o STATEMENTS AND REPORTS
Each Fund produces financial reports, which include among other things a
list of the Fund's portfolio holdings, semiannually and updates its prospectus
annually. Each Fund generally does not hold shareholder meetings. To reduce
expenses by eliminating duplicate mailings to the same address, a Fund may
choose to mail only one report, prospectus or proxy statement, as applicable, to
your household, even if more than one person in the household has an account
with the same Fund. Please call 800-WARBURG if you would like to receive
additional reports, prospectuses or proxy statements.
o RETIREMENT PLANS
Warburg Pincus offers a range of tax-advantaged retirement accounts,
including:
o Traditional IRAs
o Roth IRAs
o Roth Conversion IRAs
o Spousal IRAs
o Rollover IRAs
o SEP IRAs
To transfer your IRA to Warburg Pincus, use the IRA Transfer/Direct
Rollover Form. If you are opening a new IRA, you will also need to complete the
Universal IRA Application. Please consult your tax professional concerning your
IRA eligibility and tax situation.
o TRANSFERS/GIFTS TO MINORS
Depending on state laws, you can set up a custodial account under the
Uniform Transfers-to-Minors Act (UTMA) or the Uniform Gifts-to-Minors Act
(UGMA). Please consult your tax professional about these types of accounts.
o ACCOUNT CHANGES
Call our Shareholder Service Center to update your account records
whenever you change your address. Shareholder Services can also help you change
your account information or privileges.
6
<PAGE>
OTHER POLICIES
o TRANSACTION DETAILS
You are entitled to capital-gain and earned dividend distributions as soon
as your purchase order is executed. For the Intermediate Maturity Government,
New York Intermediate Municipal and Fixed Income Funds and the Money Market
Funds, you begin to earn dividend distributions the business day after your
purchase order is executed. However, if we receive your purchase order and
payment to purchase shares of a Money Market Fund before 12 p.m. (noon), you
begin to earn dividend distributions on that day.
Your purchase order will be canceled and you may be liable for losses or
fees incurred by the fund if:
o your investment check or ACH transfer does not clear
o you place a telephone order by 4 p.m. ET and we do not receive your wire
that day
If you wire money without first calling Shareholder Services to place an
order, and your wire arrives after the close of regular trading on the NYSE,
then your order will not be executed until the end of the next business day. In
the meantime, your payment will be held uninvested. Your bank or other
financial-services firm may charge a fee to send or receive wire transfers.
While we monitor telephone servicing resources carefully, during periods
of significant economic or market change it may be difficult to place orders by
telephone.
Uncashed redemption or distribution checks do not earn interest.
o SPECIAL SITUATIONS
A fund reserves the right to:
o 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
o change or discontinue its exchange privilege after 30 days' notice to
current investors, or temporarily suspend this privilege during unusual
market conditions
o change its minimum investment amounts after 15 days' notice to current
investors of any increases
o charge a wire-redemption fee
o make a "redemption in kind"--payment in portfolio securities rather than
cash--for certain large redemption amounts that could hurt fund operations
o suspend redemptions or postpone payment dates as permitted by the
Investment Company Act of 1940 (such as during periods other than weekends
or holidays when the NYSE is closed or trading on the NYSE is restricted,
or any other time that the SEC permits)
o modify or waive its minimum investment requirements for investments
through certain financial-services firms and for employees and clients of
its adviser, sub-adviser, distributor and their affiliates and, for the
Long-Short Fund, investments through certain financial-services firms
($10,000 minimum) and through retirement plan programs (no minimum)
o stop offering its shares for a period of time (such as when management
believes that a substantial increase in assets could adversely affect it)
800-WARBURG (800-927-2874)
MONDAY-FRIDAY, 8 A.M.-8 P.M. ET SATURDAY, 8 A.M.-4 P.M. ET
7
<PAGE>
--------------------
WARBURG PINCUS FUNDS
--------------------
PART OF CREDIT | ASSET
SUISSE | MANAGEMENT
P.O. BOX 9030, BOSTON, MA 02205-9030
800-WARBURG (800-927-2874) o www.warburg.com
CREDIT SUISSE ASSET MANAGEMENT SECURITIES, INC., DISTRIBUTOR WPCOM-31-0101
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
January 1, 2001
Common Shares of the
Warburg Pincus Global Telecommunications Fund
Warburg Pincus Municipal Bond Fund
Warburg Pincus Focus Fund
Warburg Pincus Long-Short Market Neutral Fund
P.O. Box 9030, Boston, Massachusetts 02205-9030
For information, call 800-WARBURG
This combined Statement of Additional Information provides
information about Warburg Pincus Global Telecommunications Fund ("Global
Telecommunications 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 Fund") (each a "Fund" and collectively, the
"Funds") that supplements information contained in the Prospectuses for the
Common Shares of each Fund, each dated January 1, 2001, as amended or
supplemented from time to time, and is incorporated by reference in its entirety
into those Prospectuses.
Each Fund's audited Annual Report dated August 31, 2000, 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 Prospectuses, Annual Reports and
information regarding each Fund's current performance may be obtained by writing
or telephoning:
Common Shares
Warburg Pincus Funds
P.O. Box 9030
Boston, Massachusetts 02205-9030
800-WARBURG
<PAGE>
CONTENTS
Page
----
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........................................................5
Securities of Other Investment Companies.........................6
Options Generally................................................6
Securities Options.........................................6
Securities Index Options...................................9
Common Investment Objectives and Policies -- Global Telecommunications,
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 -- Global
Telecommunications, Focus and Long-Short Funds........................11
U.S. Government Securities......................................11
Foreign Investments.............................................11
Foreign Debt Securities...................................12
Foreign Currency Exchange.................................12
Information...............................................13
Political Instability.....................................13
Foreign Markets...........................................13
Increased Expenses........................................13
Dollar-Denominated Debt Securities of Foreign Issuers.....13
Depositary Receipts.......................................13
Brady Bonds...............................................14
Emerging Markets..........................................14
Sovereign Debt............................................14
Convertible Securities..........................................15
Debt Securities.................................................16
Below Investment Grade Securities.........................16
Mortgage-Backed Securities................................18
Asset-Backed Securities...................................19
Loan Participations and Assignments.......................20
Structured Notes, Bonds or Debentures.....................20
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Collateralized Mortgage Obligations.......................20
Zero Coupon Securities....................................21
Futures Activities..............................................21
Futures Contracts.........................................22
Options on Futures Contracts..............................23
Currency Exchange Transactions..................................23
Forward Currency Contracts................................23
Currency Options..........................................24
Currency Hedging..........................................25
Hedging Generally...............................................25
Short Sales "Against the Box"...................................26
Section 4(2) Paper..............................................27
Supplemental Investment Objectives and Policies -- Global
Telecommunications and Focus Funds....................................27
Rights Offerings and Purchase Warrants..........................27
Supplemental Investment Objectives and Policies -- Global
Telecommunications Fund...............................................28
Supplemental Investment Objectives and Policies -- Municipal
Bond Fund.............................................................28
Supplemental Investment Objectives and Policies -- Long-Short Fund....29
Short Sales.....................................................29
INVESTMENT RESTRICTIONS.....................................................30
PORTFOLIO VALUATION.........................................................32
PORTFOLIO TRANSACTIONS......................................................33
PORTFOLIO TURNOVER..........................................................36
MANAGEMENT OF THE FUNDS.....................................................36
Officers and Board of Directors.................................36
Directors' Total Compensation for Fiscal Year Ended August 31, 2000...40
Investment Advisers and Co-Administrators.......................40
Code of Ethics..................................................46
Custodian and Transfer Agent....................................47
Organization of the Funds.......................................47
Distribution and Shareholder Servicing..........................48
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..............................50
Automatic Cash Withdrawal Plan..................................51
EXCHANGE PRIVILEGE..........................................................51
ADDITIONAL INFORMATION CONCERNING TAXES.....................................52
The Funds and Their Investments.................................52
Special Tax Considerations......................................56
Straddles.................................................56
Options And Section 1256 Contracts........................56
Foreign Currency Transactions.............................57
Passive Foreign Investment Companies......................57
Asset Diversification Requirement.........................58
Foreign Taxes.............................................58
Fund Taxes on Swaps.......................................58
Dividends and Distributions...............................59
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Sales of Shares...........................................59
Backup Withholding........................................60
Notices...................................................60
Other Taxation............................................60
DETERMINATION OF PERFORMANCE................................................60
Total Return....................................................60
Yield...........................................................63
INDEPENDENT ACCOUNTANTS AND COUNSEL.........................................64
MISCELLANEOUS...............................................................64
FINANCIAL STATEMENTS........................................................66
APPENDIX A----DESCRIPTION OF RATINGS.......................................A-1
iii
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the descriptions of each Fund's
investment objectives and policies in the Prospectuses. There are no assurances
that the Funds will achieve their investment objectives.
The investment objective of the Global Telecommunications Fund and
Focus Fund (formerly, Warburg Pincus Select Economic Value Equity Fund) is to
provide long-term appreciation of capital.
The investment objective of the Municipal Bond Fund is to provide
high total return.
The investment objective of the Long-Short 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 ("CSAM"), each Fund's adviser, or, if
applicable, Credit Suisse Asset Management Limited ("CSAM Ltd."), the Fund's
sub-investment adviser (each, an "Adviser"), each Fund may reduce its holdings
in other securities and invest up to 100% of its assets in 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
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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 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
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<PAGE>
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 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
3
<PAGE>
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.
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,
4
<PAGE>
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.
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.
5
<PAGE>
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, which may involve speculation.
For purpose of this section, a "Fund" refers to each of the Funds except for the
Municipal Bond Fund.
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 it would
otherwise sell.
The principal reason for writing covered options on a security is to
attempt to realize, through the receipt of premiums, a greater return than would
be realized on the securities alone. In return for a premium, a Fund, as the
writer of a covered call option, forfeits the right to any appreciation in the
value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). A Fund that
writes call options retains the risk of an increase in the price of the
underlying security. The size of the premiums that 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.
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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-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
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<PAGE>
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 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.
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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 -- Global Telecommunications,
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 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.
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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 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.
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Common Investment Objectives and Policies -- Global Telecommunications, Focus
and Long-Short 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 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 as well.
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.
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Foreign Debt Securities. The returns on foreign debt securities
reflect interest rates and other market conditions prevailing in those countries
and the effect of gains and losses in the denominated currencies against the
U.S. dollar, which have had a substantial impact on investment in foreign
fixed-income securities. The relative performance of various countries'
fixed-income markets historically has reflected wide variations relating to the
unique characteristics of each country's economy. Year-to-year fluctuations in
certain markets have been significant, and negative returns have been
experienced in various markets from time to time.
The foreign government securities in which the Funds may invest
generally consist of obligations issued or backed by national, state or
provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt obligations
of supranational entities, which include international organizations designated,
or backed by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples include the International Bank for Reconstruction and Development (the
"World Bank"), the European Coal and Steel Community, the Asian Development Bank
and the InterAmerican Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt securities
of quasi-governmental agencies are issued by entities owned by either a
national, state or equivalent government or are obligations of a political unit
that is not backed by the national government's full faith and credit and
general taxing powers. An example of a multinational currency unit is the 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
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<PAGE>
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 a foreign currency 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.
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
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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.
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.
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A sovereign debtor's willingness or ability to repay principal and
pay interest in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which a
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local government
or agency.
The occurrence of political, social or diplomatic changes in one or
more of the countries issuing sovereign debt could adversely affect a Fund's
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their sovereign debt. While the Adviser intends to manage the Funds in a manner
that will minimize the exposure to such risks, there can be no assurance that
adverse political changes will not cause a Fund to suffer a loss of interest or
principal on any of its holdings.
Investors should also be aware that certain sovereign debt
instruments in which a Fund may invest involve great risk. Sovereign debt issued
by issuers in many emerging markets generally is deemed to be the equivalent in
terms of quality to securities rated below investment grade by Moody's 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
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<PAGE>
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. 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 Municipal Bond Fund has
established no rating criteria for the debt securities in which it 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.
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Below investment grade securities (commonly referred to as "junk
bonds"), (i) will likely have some quality and protective characteristics that,
in the judgment of the rating organizations, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (ii) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. The market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
investment grade securities. In addition, these securities generally present a
higher degree of credit risk. The risk of loss due to default is significantly
greater because these securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness.
While the market values of 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
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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.
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'
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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 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. 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.
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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"). 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
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.
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
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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 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.
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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 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
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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 purposes and to increase 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
transaction, will incur a gain or a loss to the extent that movement has
occurred in forward contract prices.
Currency Options. The Funds may purchase exchange-traded put and
call options on foreign currencies. Put options convey the right to sell the
underlying currency at a price which is anticipated to be higher than the spot
price of the currency at the time the option is exercised. Call options convey
the right to buy the underlying currency at a price which is expected to be
lower than the spot price of the currency at the time the option is exercised.
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Currency Hedging. 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 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,
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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 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
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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 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 -- Global Telecommunications 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 or warrants
involves the risk that the effective price
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<PAGE>
paid for the rights or warrants in addition to the subscription price of the
related security may exceed the value of the subscribed security's market price
if, for instance, when there is no movement in the level of the underlying
security.
Supplemental Investment Objectives and Policies -- Global Telecommunications
Fund
Telecommunications companies in both developed and emerging
countries are undergoing significant change due to varying and evolving levels
of governmental regulation or deregulation and other factors. As a result,
competitive pressures are intense and the securities of such companies may be
subject to rapid price volatility. Telecommunications regulation typically
limits rates charged, returns earned, providers of services, types of services,
ownership, areas served and terms for dealing with competitors and customers.
Telecommunications regulation generally has tended to be less stringent for
newer services than for traditional telephone service, although there can be no
assurances that such newer services will not be heavily regulated in the future.
Regulation may also limit the use of new technologies and hamper efficient
depreciation of existing assets. If regulation limits the use of new
technologies by established carriers or forces cross-subsidies, large private
networks may emerge. Service providers may also be subject to regulations
regarding ownership and control, providers of services, subscription rates and
technical standards.
Companies offering telephone services are experiencing increasing
competition from cellular telephones, and the cellular telephone industry,
because it has a limited operating history, faces uncertainty concerning the
future of the industry and demand for cellular telephones. All
telecommunications companies in both developed and emerging countries are
subject to the additional risk that technological innovations will make their
products and services obsolete. While telephone companies in developed countries
and certain emerging countries may pay an above average dividend, the Fund's
investment decisions are based upon capital appreciation potential rather than
income considerations.
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.
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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 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 Fund
Short Sales. The Long-Short 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.
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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 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 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. Except for the Global Telecommunications Fund, 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. The Telecommunications Fund will concentrate in the
telecommunications 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 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 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
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established by the Boards. Although the Long-Short 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 and has retained CSAM Ltd. to act as sub-investment adviser to the
Global Telecommunications Fund. 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.
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 other affiliates
of Credit Suisse Group ("Credit Suisse"). A
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<PAGE>
Fund may utilize CSAMSI or other 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, 2000
Fund Brokerage Commissions
---- ---------------------
Global Telecommunications $1,599,215
Municipal Bond $ 4
Focus $ 94,752
Long-Short $ 23,150
August 31, 1999
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Fund Brokerage Commissions
---- ---------------------
Global Telecommunications $178,506
Municipal Bond $ 0
Focus $192,853
Long-Short $214,482
August 31, 1998
Fund Brokerage Commissions
---- ---------------------
Global Telecommunications $ 2,639
Municipal Bond $ 0
Focus $17,675
Long-Short $ 3,790
With respect to the Global Telecommunications and Long-Short Funds,
the reason for the respective increase or decrease in brokerage commissions for
the year ended August 31, 2000 was due to the respective increase or decrease in
the Fund's trading volumes.
In no instance will portfolio securities be purchased from or sold
to CSAM, CSAM Ltd., CSAMSI or Credit Suisse First Boston ("CSFB") 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.
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<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.
Richard H. Francis (68) Director
40 Grosvenor Road Currently retired; Executive Vice
Short Hills, New Jersey 07078 President and Chief Financial Officer of
Pan Am Corporation and Pan American
World Airways, Inc. from 1988 to 1991;
Director of The Infinity Mutual Funds,
BISYS Group Incorporated;
Director/Trustee of other Warburg Pincus
Funds
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and other CSAM-advised investment
companies.
Jack W. Fritz (72) Director
2425 North Fish Creek Road Private investor; Consultant and
P.O. Box 483 Director of Fritz Broadcasting, Inc. and
Wilson, Wyoming 83014 Fritz Communications (developers and
operators of radio stations); Director
of Advo, Inc. (direct mail advertising);
Director/Trustee of other Warburg Pincus
Funds and other CSAM-advised investment
companies.
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 of Aetna, Inc.;
Director of Calpine Energy Corporation;
Director/Trustee of other Warburg Pincus
Funds and other CSAM-advised investment
companies.
James S. Pasman, Jr. (70) Director
29 The Trillium Currently retired; President and Chief
Pittsburgh, Pennsylvania 15238 Operating Officer of National
InterGroup, Inc. from April 1989 to
March 1991; Chairman of Permian Oil Co.
from April 1989 to March 1991; Director
of Education Management Corp., Tyco
International Ltd.; Trustee, Deutsche
Bank VIT Funds; Director/Trustee of
other Warburg Pincus Funds and other
CSAM-advised investment companies.
William W. Priest* (58) Chairman of the Board
466 Lexington Avenue Chairman of CSAM since 2000; Chief
New York, New York 10017 Executive Officer and Managing Director
of CSAM from 1990 to 2000;
Director/Trustee of other Warburg Pincus
Funds and other CSAM-advised investment
companies.
----------
* Indicates a Director who is an "interested person" of the Fund as defined
in the 1940 Act.
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Steven N. Rappaport (52) Director
40 East 52nd Street President of Loanet, Inc. since 1997;
New York, New York 10022 Executive 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
5th Floor Trowbridge Partners, Inc. (business
Washington, DC 20004 consulting) from January 1990 to
November 1996; Director or Trustee of
New England Mutual Life Insurance Co.,
ICOS Corporation (biopharmaceuticals),
IRI International (energy services), The
Rouse Company (real estate development),
Harris Corp. (electronics and
communications equipment), The Gillette
Co. (personal care products) and Sunoco,
Inc. (petroleum refining and marketing);
Director/Trustee of other Warburg Pincus
Funds and other CSAM-advised investment
companies.
Eugene L. Podsiadlo (43) President
466 Lexington Avenue Managing Director of CSAM; Associated
New York, New York 10017-3147 with CSAM since CSAM acquired the Funds'
predecessor adviser in July 1999; with
the predecessor adviser since 1991; Vice
President of Citibank, N.A. from 1987 to
1991.
Hal Liebes, Esq. (36) Vice President and Secretary
466 Lexington Avenue Managing Director and General Counsel of
New York, New York 10017-3147 CSAM; Associated with Lehman Brothers,
Inc. from 1996 to 1997; Associated with
CSAM from 1995 to 1996; Associated with
CSFB 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.
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Michael A. Pignataro (40) Treasurer and Chief Financial Officer
466 Lexington Avenue Director and Director of Fund
New York, New York 10017-3147 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
New York, New York 10017-3147 CSAM; Associated with CSAM since CSAM
acquired the Funds' predecessor adviser
in July 1999; with the predecessor
adviser since 1997; Associated with the
law firm of Gordon Altman Butowsky
Weitzen Shalov & Wein from 1995 to 1997;
Officer of other Warburg Pincus Funds
and other CSAM-advised investment
companies.
Gregory N. Bressler, Esq. (34) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel of CSAM
New York, New York 10017-3147 since January 2000; Associated with the
law firm of Swidler Berlin Shereff
Friedman LLP from 1996 to 2000; Officer
of other Warburg Pincus Funds and other
CSAM-advised investment companies.
Rocco A. DelGuercio (36) Assistant Treasurer
466 Lexington Avenue Vice President and Administrative
New York, New York 10017-3147 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.
Joseph Parascondola (37) Assistant Treasurer
466 Lexington Avenue Assistant Vice President - Fund
New York, New York 10017-3147 Administration of CSAM since April 2000;
Assistant Vice President, Deutsche Asset
Management from January 1999 to April
2000; Assistant Vice President, Weiss,
Peck & Greer LLC from November 1995 to
December 1998; Officer of other Warburg
Pincus Funds and other CSAM-advised
investment companies.
No employee of CSAM, CSAM, Ltd., PFPC Inc. ("PFPC") and CSAMSI, the
Funds' co-administrators, or any of their affiliates, receives any compensation
from the Funds for
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<PAGE>
acting as an officer or director of a Fund. Each Director who is not a director,
trustee, officer or employee of CSAM, CSAM Ltd., PFPC, 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
member of the Audit Committee receives an annual fee of $250, and the chairman
of the Audit Committee receives an annual fee of $325, for serving on the Audit
Committee.
Directors' Total Compensation for Fiscal Year Ended August 31, 2000
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Global
Tele- All Investment
communications Municipal Long-Short Companies in the
Name of Director Fund Bond Fund Focus Fund Fund CSAM Fund Complex*
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
William W. Priest** None None None None None
---------------------------------------------------------------------------------------------------------------------
Richard H. Francis $2,500 $2,500 $2,500 $2,500 $102,000
---------------------------------------------------------------------------------------------------------------------
Jack W. Fritz $2,500 $2,500 $2,500 $2,500 $102,000
---------------------------------------------------------------------------------------------------------------------
Jeffrey E. Garten $2,500 $2,500 $2,500 $2,500 $102,000
---------------------------------------------------------------------------------------------------------------------
James S. Pasman, Jr. $2,500 $2,500 $2,500 $2,500 $102,000
---------------------------------------------------------------------------------------------------------------------
Steven N. Rappaport $2,500 $2,500 $2,500 $2,500 $102,000
---------------------------------------------------------------------------------------------------------------------
Alexander B. Trowbridge $2,725 $2,725 $2,725 $2,725 $108,375
---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Each Director serves as a Director or Trustee of 45 investment companies
and portfolios for which CSAM serves as investment adviser..
** 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.
As of September 30, 2000, Directors and officers as a group, owned
of record less than 1% of each Fund's outstanding Common Shares. No Director or
officer owned any of the Funds' outstanding Institutional Shares.
Investment Advisers and Co-Administrators. CSAM, located at 466
Lexington Avenue, New York, New York 10017, serves as investment adviser to each
Fund pursuant to a written agreement (the "Advisory Agreement"). CSAM Ltd.,
located at Beaufort House, 15 St. Botolph Street, London, EC 3A 7JJ, serves as
sub-investment adviser to the Global Telecommunication Fund pursuant to a
written agreement. CSAM and CSAM Ltd. are indirect wholly-owned subsidiaries of
Credit Suisse. Credit Suisse is a
40
<PAGE>
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 63,000 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 to Investment Advisory Agreements (the "BEA Advisory
Agreements"). 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 Global
Telecommunications, Municipal Bond and Focus Funds, CSAM will be paid (before
any voluntary waivers or reimbursements) a monthly fee computed at an annual
rate of 1.00%, .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 Telecommunication Fund.
The Long-Short 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
41
<PAGE>
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:
PERFORMANCE
TOTAL MANAGEMENT BASIC RATE ADJUSTMENT FEE RATE
---------------- ---------- ---------- --------
--------------------------------------------------------------------------------
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
42
<PAGE>
PERFORMANCE
TOTAL MANAGEMENT BASIC RATE ADJUSTMENT FEE RATE
---------------- ---------- ---------- --------
--------------------------------------------------------------------------------
but not more than 5
percentage points 1.50 .40 1.90
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
--------------------------------------------------------------------------------
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. For the services provided by CSAMSI under the CSAMSI
Co-Administration Agreements, each Fund pays CSAMSI a fee calculated at an
annual rate of .05% of each Fund's first $125 million in average daily net
assets of the Common Shares and .10% of average daily net assets of the Common
Shares over $125 million. For the services provided by PFPC, PFPC received a
fee, for the period September 1, 1999 to July 31, 2000, 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 CSAMSI and PFPC in
the proportion that its assets bear to the aggregate assets of the Funds at the
time of calculation.
As of August 1, 2000, PFPC receives a fee calculated on each Fund's
average daily net assets, subject to a minimum annual fee and exclusive of
out-of-pocket expenses, as follows:
Fund Annual Rate
--------------------------------------------------------------------------------
Global Telecommunications .11% for the first $500 million
.09% for next $1 billion
.07% for over $1.5 billion
Focus & Long-Short .10% for the first $500 million
43
<PAGE>
.08% for next $1 billion
.06% for over $1.5 billion
Municipal Bond .07% for the first $150 million
.06% for next $150 million
.05% for over $300 million
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, 2000
Fees Paid
Fund (after waivers) Waivers Reimbursements
---- --------------- ------- --------------
Global Telecommunications $3,387,398 $208,789 $ 0
Municipal Bond $ 16,239 $102,278 $29,397
Focus $ 18,715 $ 85,919 $93,867
Long-Short $ 599 $ 88,716 $59,965
August 31, 1999
Fees Paid
Fund (after waivers) Waivers Reimbursements
---- --------------- ------- --------------
Global Telecommunications $ 93,200 $101,660 $33,124
Municipal Bond $ 64,918 $ 95,749 $ 0
Focus $ 111,197 $139,116 $ 0
Long-Short $ 193,807 $ 97,341 $ 0
August 31, 1998
Fees Paid
Fund (after waivers) Waivers Reimbursements
---- --------------- ------- --------------
Global Telecommunications $ 0 $ 9,174 $37,067
Municipal Bond $ 93,618 $ 51,669 $ 0
Focus $ 14,224 $ 643 $ 0
Long-Short $ 4,661 $ 2,758 $ 0
44
<PAGE>
From August 31, 1998 to August 31, 2000, 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, 2000
<TABLE>
<CAPTION>
PFPC Counsellors Service
---- -------------------
Fund Fees Paid Waivers Reimburse- Fund Fees Paid Waivers Reimburse-
---- (after ------- ments ---- (after ------- ments
Waivers) ---------- Waivers) ----------
--------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Municipal Bond $ 35,217 $ 0 $0 Municipal Bond $ 3 $ 15 $0
Focus $ 16,094 $1,076 $0 Focus $ 2 $ 8 $0
Global Telecommunications $443,622 $ 0 $0 Global Telecommunications $6,554 $ 0 $0
Long-Short $ 2,223 $6,336 $0 Long-Short $ 32 $ 131 $0
</TABLE>
August 31, 1999
<TABLE>
<CAPTION>
PFPC Counsellors Service
---- -------------------
Fund Fees Paid Waivers Reimburse- Fund Fees Paid Waivers Reimburse-
---- (after ------- ments ---- (after ------- ments
Waivers) ---------- Waivers) ----------
--------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Municipal Bond $ 37,500 $ 0 $0 Municipal Bond $ 9 $ 40 $0
Focus $ 41,719 $ 0 $0 Focus $ 2 $ 7 $0
Global Telecommunications $ 0 $24,357 $0 Global Telecommunications $ 246 $9,463 $0
Long-Short $ 12,643 $11,902 $0 Long-Short $1,036 $4,144 $0
</TABLE>
August 31, 1998
<TABLE>
<CAPTION>
PFPC BEA Associates
---- --------------
Fund Fees Paid Waivers Reimburse- BEA Fund Fees Paid Waivers Reimburse-
---- (after ------- ments -------- (after ------- ments
Waivers) ---------- Waivers) ----------
--------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Municipal Bond $30,402 $ 0 $0 Municipal Bond $2,076 $29,057 $0
Focus $ 0 $2,478 $0 Focus $ 198 $ 2,775 $0
Global Telecommunications $ 0 $1,147 $0 Global Telecommunications $ 0 $ 459 $0
Long-Short $ 0 $ 618 $0 Long-Short $ 148 $ 594 $0
</TABLE>
For the period November 1, 1999 to August 31, 2000,
Co-administrative service fees earned and waived by CSAMSI on the Common Shares
were as follows:
45
<PAGE>
Fees Paid
Fund (after waivers) Waivers Reimbursements
---- --------------- ------- --------------
Global Telecommunications $173,255 $179,809 $ 0
Municipal Bond $ 22 $ 84 $ 0
Focus $ 115 $ 459 $ 0
Long-Short $ 233 $ 929 $ 0
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.
Global Telecommunication Fund, Focus Fund and CSAM have applied for
an order of exemption (the "Order") from the Securities and Exchange Commission
to permit CSFB to act as lending agent for these Funds, to permit securities
loans to broker-dealer affiliates of CSFB, and to permit the investment of cash
collateral received by CSFB in the Cash Reserve Portfolio of Credit Suisse
Institutional Services Fund (the "Portfolio"). If the Order were granted, the
Order will contain a number of conditions that are designed to ensure that
CSFB's securities lending program does not involve overreaching by CSAM, CSFB or
any of their affiliates. These conditions will include percentage limitations on
the amount of a fund's assets that may be invested in the Portfolio,
restrictions on the Portfolio's ability to collect sales charges and certain
other fees, and a requirement that each fund that invests in the Portfolio will
do so at the same price as each other fund and will bear its proportionate
shares of expenses and receive its proportionate share of any dividends.
Code of Ethics. Each Fund, CSAM, CSAM Ltd., and CSAMSI have each
adopted a written Code of Ethics (the "Code"), which permits personnel covered
by the Code ("Covered Persons") to invest in securities, including securities
that may be purchased or held by the Portfolio. The Code also contains
provisions designed to address
46
<PAGE>
the conflicts of interest that could arise from personal trading by advisory
personnel, including: (1) all Covered Persons must report their personal
securities transactions at the end of each quarter; (2) with certain limited
exceptions, all Covered Persons must obtain preclearance before executing any
personal securities transactions; (3) Covered Persons may not execute personal
trades in a security if there are any pending orders in that security by the
Portfolio; and (4) Covered Persons may not invest in initial public offerings.
The Board of each Fund reviews the administration of the Code at
least annually and may impose sanctions for violations of the Code.
Custodian and Transfer Agent. Except for the Long-Short 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 Custodian Agreement"). Custodial Trust Company ("CTC") acts
as the custodian for the Long-Short 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
47
<PAGE>
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.
With the exception of the Global Telecommunications Fund, each Fund
currently offers two separate classes of shares: Common Shares and Institutional
Shares. The Global Telecommunications Fund currently offers only Common 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 higher fees paid by
Common Shares, the total return on Common Shares can be expected to be lower
than the total return on Institutional Shares. Investors may obtain information
concerning the Institutional 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
800-927-2874 or on the Warburg Pincus Funds web site at www.warburg.com.
Distribution and Shareholder Servicing. CSAMSI serves as distributor
of the Fund's shares. CSAMSI offers the Fund's shares on a continuous basis. No
compensation is payable by the Fund to CSAMSI for distribution services;
however, pursuant to a separate agreement with CSAM, CSAMSI is compensated for
the services provided to the Fund. CSAMSI's principal business address is 466
Lexington Avenue, New York, New York
48
<PAGE>
10017. The Funds have each adopted a Shareholder Servicing and Distribution Plan
(the "12b-1 Plan"), pursuant to Rule 12b-1 under the 1940 Act, pursuant to which
the Fund pays CSAMSI under the CSAMSI Co-Administration Agreement a fee
calculated at an annual rate of .25% of the average daily net assets of the
Common Shares of the Fund. The fee is intended to compensate CSAMSI, or to
enable CSAMSI to compensate other persons ("Service Providers"), for providing
Services (as defined below) to the Funds. Services performed by CSAMSI under the
CSAMSI Co-Administration Agreement or Service Providers include (i) services
that are primarily intended to result in, or that are primarily attributable to,
the sale of the Common Shares, as set forth in the 12b-1 Plan ("Selling
Services") and (ii) ongoing servicing and/or maintenance of the accounts of
Common Shareholders of the Fund, as set forth in the 12b-1 Plan ("Shareholder
Services", together with Selling Services, "Services"). Shareholder Services may
include, without limitation, responding to Fund shareholder inquiries and
providing services to shareholders not otherwise provided by the Funds'
distributor or transfer agent. Selling Services may include, without limitation,
(a) the printing and distribution to prospective investors in Common Shares of
prospectuses and statements of additional information describing the Funds; (b)
the preparation, including printing, and distribution of sales literature,
advertisements and other informational materials relating to the Common Shares;
(c) providing telephone services relating to the Funds, including responding to
inquiries of prospective Fund investors; (d) formulating and implementing
marketing and promotional activities, including, but not limited to, direct mail
promotions and television, radio, newspaper, magazine and other mass media
advertising and obtaining whatever information, analyses and reports with
respect to marketing and promotional activities that the Funds may, from time to
time, deem advisable. In providing compensation for Services in accordance with
this Plan, CSAMSI is expressly authorized (i) to make, or cause to be made,
payments to Service Providers reflecting an allocation of overhead and other
office expenses related to providing Services and (ii) to make, or cause to be
made, payments to compensate selected dealers or other authorized persons for
providing any Services.
Payments under the 12b-1 Plan are not tied exclusively to the
distribution expenses actually incurred by CSAMSI under the CSAMSI
Co-Administration Agreement or any other service provider and the payments may
exceed distribution expenses actually incurred.
Pursuant to the 12b-1 Plan, CSAMSI provides the Board with periodic
reports of amounts expended under the 12b-1 Plan and the purpose for which the
expenditures were made.
The 12b-1 Plans will continue in effect for so long as their
continuance is specifically approved at least annually by each Fund's Board,
including a majority of the Directors/Trustees who are not interested persons of
the Fund and who have no direct or indirect financial interest in the operation
of the 12b-1 Plans ("Independent Directors/Trustees"). Any material amendment of
the 12b-1 Plans would require the approval of the Board in the same manner. The
12b-1 Plans may not be amended to increase materially the amount to be spent
thereunder without shareholder approval of the Common Shares. The 12b-1 Plan may
be terminated at any time, without penalty, by vote of a majority of the
Independent Directors/Trustees or by a vote of a majority of the outstanding
voting securities of the relevant class of shares.
49
<PAGE>
The 12b-1 Plans were adopted on November 1, 1999. Prior to that
date, a substantially similar plan was in place with respect to the Common
Shares of each Fund (the "Prior 12b-1 Plan"). For the fiscal year ended August
31, 2000, the Common Class shares of the Global Telecommunications Fund, the
Municipal Bond Fund, the Focus Fund and the Long-Short Fund have paid CSAMSI
under the 12b-1 Plans $899,136, $622, $2,919 and $6,625, respectively.
Each Fund has authorized certain broker-dealers, financial
institutions, recordkeeping organizations and other financial intermediaries
(collectively, "Service Organizations") or, if applicable, their designees to
enter confirmed purchase and redemption orders on behalf of their clients and
customers, with payment to follow no later than the Fund's pricing on the
following business day. If payment is not received by such time, the Service
Organization could be held liable for resulting fees or losses. The Fund may be
deemed to have received a purchase or redemption order when a Service
Organization, or, if applicable, its authorized designee, accepts the order.
Such orders received by the Fund in proper form will be priced at the Fund's net
asset value next computed after they are accepted by the Service Organization or
its authorized designee. Service Organizations may impose transaction or
administrative charges or other direct fees, which charges or fees would not be
imposed if Fund shares are purchased directly from the Funds.
For administration, subaccounting, transfer agency and/or other
services, CSAM or its affiliates may pay Service Organizations a fee of up to
.50% of the average annual value of accounts with the Funds maintained by such
Service Organizations. Service Organizations may also be reimbursed for
marketing costs. The Service Fee payable to any one Service Organization is
determined based upon a number of factors, including the nature and quality of
services provided, the operations processing requirements of the relationship
and the standardized fee schedule of the Service Organization or recordkeeper.
The Funds may reimburse part of the Service Fee at rates they would normally pay
to the transfer agent for providing the services.
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.
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 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.)
If conditions exist which make payment of redemption proceeds wholly
in cash unwise or undesirable, a Fund may make payment wholly or partly in
securities or other investment instruments which may not constitute securities
as such term is defined in
50
<PAGE>
the applicable securities laws. If a redemption is paid wholly or partly in
securities or other property, a shareholder would incur transaction costs in
disposing of the redemption proceeds. The Funds have elected, however, to be
governed by Rule 18f-1 under the 1940 Act as a result of which a Fund is
obligated to redeem shares, with respect to any one shareholder during any 90-
day period, solely in cash up to the lesser of $250,000 or 1% of the net asset
value of that Fund at the beginning of the period.
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. A Common Shareholder may exchange Common
Shares of a Fund for Common Shares of another Fund or for Common Shares of
another Warburg Pincus Fund at their respective net asset values. An
Institutional Shareholder may exchange Institutional Shares of a Fund for
Institutional Shares of another 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-WARBURG.
The Funds reserve the right to refuse exchange purchases by any
person or group if, in CSAM's judgment, a Fund would be unable to invest the
money effectively in accordance with its investment objective and policies, or
would otherwise potentially be adversely affected. Examples of when an exchange
purchase could be refused are when the Fund receives or anticipates receiving
large exchange orders at or about the same time and/or when a pattern of
exchanges within a short period of time (often associated with a "market timing"
strategy) is
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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.
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
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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 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
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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.
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
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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.
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
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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 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.
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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 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
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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 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
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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 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
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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.
DETERMINATION OF PERFORMANCE
Total Return. From time to time, a Fund may quote the total return
of its Common Shares and/or Institutional Shares in advertisements or in reports
and other communications to shareholders. The net asset value of Common Shares
is listed in The Wall Street Journal each business day under the heading
"Warburg Pincus Funds." Current total return figures may be obtained by calling
Warburg Pincus Funds at 800-927-2874.
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:
P(1+T)^n = 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);
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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:
Aggregate Total Return = [(ERV) - l]
---
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.
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 Common Shares of the
following Funds for the year ended August 31, 2000 were as follows:
Since
5 year 10 year Inception
Fund 1 year (annualized) (annualized) (annualized)
---- ------ ------------ ------------ ------------
Global Telecommunications 70.99% N/A N/A 57.32%
Focus 33.42% N/A N/A 32.70%
Municipal Bond 6.42% N/A N/A 2.96%
Long-Short 12.00% N/A N/A 3.00%
The aggregate total returns for the Common Shares of the following
Funds for the period ended August 31, 2000 since inception were as follows:
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<PAGE>
Fund Aggregate Return
---- ----------------
Global Telecommunications 445.81%
Focus 68.36%
Municipal Bond 5.52%
Long-Short 6.03%
Performance information provided above reflects the performance of
the Advisor 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) until the Fund's Common Shares (or BEA
Funds' Advisor Shares, as applicable) were first offered (as noted below).
Because the BEA Funds' Institutional Shares had no distribution fee and lower
co-administration fees, the expenses of the Institutional Shares are lower than
those of the Fund's Common Shares (or BEA Funds' Advisor Shares, as applicable).
Additionally, 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 reflect the higher expenses of the
Fund's Common Shares (or BEA Funds' Advisor Shares, as applicable) or to adjust
for the BEA Funds' Institutional Shares expense waivers and/or reimbursements.
Had these expense adjustments been made, the performance information shown above
for periods prior to the commencement of the Fund's Common Shares (or BEA Funds'
Advisor Shares, as applicable) would have been lower.
<TABLE>
<CAPTION>
Commencement of Advisor Shares of
Institutional Shares of Predecessor
Fund Predecessor BEA Fund BEA Fund Common Shares
---- -------------------- --------- -------------
<S> <C> <C> <C>
Global Telecommunications N/A 12/04/96 12/04/96
Municipal Bond 06/17/94 N/A 10/30/98
Focus 07/31/98 N/A 10/30/98
Long-Short Fund 07/31/98 N/A 09/08/98
</TABLE>
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,
62
<PAGE>
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:
YIELD = 2[(a - b +1)^6 - 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 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
63
<PAGE>
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
Common Shares of Municipal Bond Fund for the 30-day period ended August 31, 2000
was 4.23%
INDEPENDENT ACCOUNTANTS AND COUNSEL
PricewaterhouseCoopers LLP ("PwC"), with principal offices at Two
Commerce Square, 2100 Market Street, 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.
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 December 21, 2000, 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:
64
<PAGE>
<TABLE>
<CAPTION>
PERCENT
OWNED AS OF
FUND NAME AND ADDRESS December 21, 2000
---- ---------------- -----------------
<S> <C> <C>
Focus Fund-- Common Ocean View Memorial Foundation 24.99%
P O Box 1366
Myrtle Beach, SC 29578-1366
Charles Schwab & Co. Inc. 16.77%
Special Custody Account for the Exclusive
Benefit of Customers
Attn Mutual Funds
101 Montgomery St.
San Francisco, CA 94104-4122
William Holden Wildlife Foundation 6.43%
Phase III
c/o Stephanie Powers
P O Box 67981
Los Angeles, CA 90067-0981
State Street Bank & Trust Co. 5.10%
Cust for the IRA of
FBO Spencer Marsh
Glen Alpin Road
Morristown, NJ 07960
Municipal Bond Fund-- Common Jack W. Sullivan 46.10%
4880 Island View Dr
Oshkosh WI 54901-1318
Charles Schwab & Co. 29.57%
Special Custody Account for the Exclusive
Benefit of Customers
Attn. Mutual Funds
101 Montgomery St.
San Francisco, CA 94104-4122
Donald J. Donahue, Jr. 17.30%
2506 N Clarke Street, #139
Chicago, IL 60614-1712
Global Telecommunications Fund-- Common Charles Schwab & Co. 38.87%
Special Custody Account for the Exclusive
Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104-4122
Nat'l Financial Svcs Corp 17.51%
FBO Customers
Church St Station
PO Box 3908
New York, NY 10008-3908
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
PERCENT
OWNED AS OF
FUND NAME AND ADDRESS December 21, 2000
---- ---------------- -----------------
<S> <C> <C>
Long-Short Fund-- Common Charles Schwab & Co Inc. 60.58%
Special Custody Account for the Exclusive
Benefit of Customers
Attn Mutual Funds
101 Montgomery St
San Francisco, CA 94104-4122
Nat'l Financial Svcs Corp 30.97%
FBO Customers
Church St Station
PO Box 3908
New York, NY 10008-3908
</TABLE>
FINANCIAL STATEMENTS
Each Fund's audited financial report dated August 31, 2000, 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-WARBURG.
66
<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 and
A-1
<PAGE>
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 payments are protected by a large or exceptionally
stable margin and principal is secure. While
A-2
<PAGE>
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
