<PAGE>
As filed with the U.S. Securities and Exchange Commission
on November 2, 1999
Securities Act File No. 333-60687
Investment Company Act File No. 811-08925
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
---
Post-Effective Amendment No. 2 [X]
---
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 [X]
Amendment No. 3 [X]
---
(Check appropriate box or boxes)
Warburg, Pincus Long-Short Market Neutral Fund, Inc.
.......................................
(Exact Name of Registrant as Specified in Charter)
466 Lexington Avenue
New York, New York 10017-3147
............................................................
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 878-0600
Hal Liebes, Esq.
Warburg, Pincus Long-Short Market Neutral Fund, Inc.
466 Lexington Avenue
New York, New York 10017-3147
......................................
(Name and Address of Agent for Service)
Copy to:
Rose F. DiMartino, Esq.
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019-6099
<PAGE>
Approximate Date of Proposed Public Offering: December 31, 1999
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ x ] on December 31, 1999 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
- -------------------------------------------------------------------------------
PROSPECTUS
COMMON CLASS
JANUARY 1, 2000
WARBURG PINCUS
LONG-SHORT MARKET NEUTRAL FUND
As with all mutual funds, the Securities and Exchange Commission has not
approved this fund, nor has it passed upon the adequacy or accuracy of this
PROSPECTUS. It is a criminal offense to state otherwise.
[LOGO]
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
INVESTOR EXPENSES ....................................................... 6
Fees and Fund Expenses ............................................... 6
Example .............................................................. 7
THE FUND IN DETAIL ...................................................... 8
The Management Firm .................................................. 8
Multi-Class Structure ................................................ 8
Fund Information Key ................................................. 9
LONG-SHORT MARKET NEUTRAL FUND ..........................................10
MORE ABOUT RISK .........................................................13
Introduction .........................................................13
Types of Investment Risk .............................................13
Certain Investment Practices .........................................16
MEET THE MANAGERS .......................................................18
ABOUT YOUR ACCOUNT ......................................................19
Share Valuation ......................................................19
Buying and Selling Shares ............................................19
Account Statements ...................................................20
Distributions ........................................................20
Taxes ................................................................20
OTHER INFORMATION .......................................................22
About the Distributor ................................................22
FOR MORE INFORMATION ........................................... back cover
3
<PAGE>
<TABLE>
<CAPTION>
KEY POINTS
GOALS AND PRINCIPAL STRATEGIES
- -------------------------------------------------------------------------------------------------------------
FUND/RISK FACTORS GOAL STRATEGIES
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG-SHORT MARKET Long-term capital appreciation - Seeks a total return greater than the
NEUTRAL FUND while minimizing exposure to return of the Salomon Smith Barney 1-Month
Risk factors: general equity market risk Treasury Bill Index-TM-
MARKET RISK
NON-DIVERSIFIED STATUS
SHORT POSITIONS - Takes long positions in stocks that the
portfolio manager has identified as
attractive
- Takes short positions in stocks that the
manager has identified as unattractive
- Seeks minimal net exposure to the general
U.S. equity market and low to neutral
exposure to any particular industry or
specific capitalization range
- -------------------------------------------------------------------------------------------------------------
</TABLE>
INVESTOR PROFILE
- -----------------------------
THIS FUND IS DESIGNED FOR INVESTORS WHO:
- are investing for long-term goals
- are willing to assume the risk of losing money in exchange for attractive
potential long-term returns
- are investing for total return or capital appreciation
IT MAY NOT BE APPROPRIATE IF YOU:
- are investing for a shorter time horizon
- are uncomfortable with an investment that will fluctuate in value
- are looking primarily for income
You should base your selection of a fund on your own goals, risk preferences
and time horizon.
4
<PAGE>
A WORD ABOUT RISK
- -----------------------------
All investments involve some level of risk. Simply defined, risk is the
possibility that you will lose money or not make money.
Principal risk factors for the fund 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 fund are not bank deposits and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
MARKET RISK
The market value of a security may move up and down, sometimes rapidly and
unpredictably. These fluctuations, which are often referred to as "volatility,"
may cause a security to be worth less than it was worth at an earlier time.
Market risk may affect a single issuer, industry, sector of the economy, or the
market as a whole. Market risk is common to most investments--including stocks
and bonds, and the mutual funds that invest in them.
NON-DIVERSIFIED STATUS
The 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 to greater volatility with respect to its portfolio
securities than a fund that is more broadly diversified.
SHORT POSITIONS
The fund takes short positions by selling borrowed securities that it does
not currently own, with the intention of repurchasing them later for a profit on
the expectation that the market price will drop.
Because they expose the fund to risks associated with securities it does not
own, short positions involve speculative exposure risk. As a result, if the fund
takes short positions in stocks that increase in value, then it will be likely
to underperform similar stock mutual funds that do not take short positions. In
addition, short positions typically involve increased liquidity risk and
transaction costs.
5
<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 ended August 31, 1999.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
LONG-SHORT
MARKET
NEUTRAL
FUND
- ----------------------------------------------------------------------
SHAREHOLDER FEES
(paid directly from your investment)
- ----------------------------------------------------------------------
<S> <C>
Sales charge "load" on purchases NONE
Deferred sales charge "load" NONE
Sales charge "load" on reinvested distributions NONE
Redemption fees NONE
Exchange fees NONE
- ----------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(deducted from fund assets)
- ----------------------------------------------------------------------
Management fee 1.50%(1)
Distribution and service (12b-1) fee .25%
Other expenses(2) 2.25%
TOTAL ANNUAL FUND OPERATING EXPENSES(3) 4.00%
- ----------------------------------------------------------------------
</TABLE>
(1) The basic management fee is 1.50%. The management fee of the fund may be
increased or decreased pursuant to the application of an adjustment formula
based upon the fund's investment performance as compared to the Salomon
Smith Barney 1-Month U.S. Treasury Bill Index-TM-. The management fee, as
adjusted, may range from 1.00% to 2.00%. The management fee, as adjusted
and effective August 1, 1999, was 1.00%.
(2) "Other expenses" and "Total annual fund operating expenses" include
dividend and interest expenses incured in connection with short sales,
which are included in and reduce the investment return of the funds.
(3) Actual fees and expenses for the fiscal year ended August 31, 1999 are
shown below. Fee waivers and expense reimbursements or credits reduced
expenses for some funds during 1999 but may be discontinued at any time.
<TABLE>
<CAPTION>
EXPENSES AFTER WAIVERS AND
REIMBURSEMENTS
<S> <C>
Management fee .99%
Distribution and service (12b-1) fee .25%
Other expenses 2.16%
-----
TOTAL ANNUAL FUND OPERATING EXPENSES 3.40%
</TABLE>
6
<PAGE>
EXAMPLE
This example may help you compare the cost of investing in this fund with the
cost of investing in other mutual funds. Because it uses hypothetical
conditions, your actual costs may be higher or lower.
Assume you invest $10,000, the fund returns 5% annually, expense ratios remain
as listed in the first table 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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
ONE YEAR THREE YEARS FIVE YEARS 10 YEARS
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LONG-SHORT MARKET
NEUTRAL FUND $402 $1,218 $2,051 $4,206
- -----------------------------------------------------------------------------
</TABLE>
7
<PAGE>
THE FUND IN DETAIL
THE MANAGEMENT FIRM
- -------------------
CREDIT SUISSE ASSET MANAGEMENT, LLC
One Citicorp Center
153 East 53rd Street
New York, NY 10022
- - Investment adviser for the fund
- - Responsible for managing the fund's assets according to its goal and
strategies
- - A member of Credit Suisse Asset Management (CSAM), the institutional asset
management and mutual fund arm of Credit Suisse Group, one of the world's
leading banks
- - CSAM companies manage more than $57 billion in the U.S. and $175 billion
globally
- - CSAM has offices in 14 countries, including SEC-registered offices in New
York and London; other offices (such as those in Budapest, Frankfurt, Milan,
Moscow, Paris, Prague, Sydney, Tokyo, Warsaw and Zurich) are not registered
with the U.S. Securities and Exchange Commission
MULTI-CLASS STRUCTURE
- ---------------------
The fund offers two classes of shares, Common and Institutional. This
PROSPECTUS offers Common Class. Common Class shares are no-load. The
Institutional Class is described in a separate prospectus.
8
<PAGE>
FUND INFORMATION KEY
- --------------------
A concise fund description begins 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 1999 fiscal year. Future expenses may be higher
or lower.
- - MANAGEMENT FEE The fee paid to the investment adviser for providing
investment advice to the fund. Expressed as a percentage of average net
assets after waivers.
- - DISTRIBUTION AND SERVICE (12b-1) FEES Fees paid by the fund to the
distributor for making shares of the fund available to you. Expressed as a
percentage of average net assets.
- - OTHER EXPENSES Fees paid by the fund for items such as administration,
transfer agency, custody, auditing, legal registration fees and miscellaneous
expenses. Expressed as a percentage of average net assets after waivers,
credits and reimbursements.
FINANCIAL HIGHLIGHTS
A table showing the fund's audited financial performance for up to five
years.
- - TOTAL RETURN How much you would have earned on an investment in the fund,
assuming you had reinvested all dividend and capital-gain distributions.
- - PORTFOLIO TURNOVER An indication of trading frequency. The fund 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.
9
<PAGE>
LONG-SHORT MARKET NEUTRAL FUND
GOAL AND STRATEGIES
- -------------------
The Long-Short Market Neutral Fund seeks long-term capital appreciation while
minimizing exposure to general equity market risk. This fund seeks a total
return greater than the return of the Salomon Smith Barney 1-Month Treasury Bill
Index.-TM-
To pursue its goal, the fund takes long positions in stocks that the
portfolio manager has identified as attractive and short positions in stocks
that the manager has identified as unattractive. In doing so, the fund attempts
to minimize directional market risks associated with investing in the equity
market by neutralizing the effects of general stock-market movements on its
performance.
In choosing long and short positions for the fund, the portfolio managers use
quantitative techniques to analyze the tradeoff between the attractiveness of
each position and its impact on the risk of the overall portfolio. The managers
seek to construct a portfolio that has:
- - minimal net exposure to the general U.S. equity market
- - low to neutral exposure to any particular industry or specific capitalization
range (e.g., large cap, mid cap and small cap)
PORTFOLIO INVESTMENTS
- ---------------------
Under normal market conditions, this fund takes long and short positions in
equity securities that are principally traded in U.S. markets. These securities
may include:
- - common stocks of U.S. issuers
- - American depositary receipts of foreign issuers
To a limited extent, the fund may also engage in other investment practices.
RISK FACTORS
- ------------
This fund's principal risk factors are:
- - market risk
- - non-diversified risk
- - short positions
The value of your investment will fluctuate in response to stock market
movements.
Although all mutual funds are subject to the risk that the fund's portfolio
managers will not make good investments, the fund's strategy of taking both long
and short positions increases this risk because long positions could decline in
value at the same time short positions increase. As with other mutual funds,
taking long positions in stocks that decline in value would hurt the fund's
performance. Additionally, however, if the fund were to take short positions in
stocks that increase in value, then it would be likely to underperform similar
stock mutual funds that do not take short positions. Short sales also involve
expenses that will decrease the fund's return.
An investment in the fund involves greater volatility and significantly more
10
<PAGE>
risks than investing in one-month U.S. Treasury bills. Unlike Treasury bills:
- - an investment in the fund is not guaranteed by the U.S. government
- - the fund does not provide a fixed rate of return
- - you can lose money by investing in the fund
Although the portfolio managers typically have diversified the fund's
investments, the fund's non-diversified status allows the fund to invest a
greater share of its assets in the securities of fewer companies.
Non-diversification might cause the fund to be more volatile than a diversified
fund. "More About Risk" details certain other investment practices the fund may
use. Please read that section carefully before you invest.
PORTFOLIO MANAGEMENT
- --------------------
William W. Priest, Jr., Eric N. Remole, Marc Bothwell and Michael Welhoelter
manage the fund's investment portfolio. You can find out more about them in
"Meet the Managers."
INVESTOR EXPENSES
- -----------------
<TABLE>
<S> <C>
Management fee .99%*
Distribution and service
(12b-1) fee .25%
All other expenses 2.16%
-----
Total expenses 3.40%
</TABLE>
* The basic management fee is 1.50%. The management fee of the fund may be
increased or decreased pursuant to the application of an adjustment formula
based upon the fund's investment performance as compared to the Salomon Smith
Barney 1-Month U.S. Treasury Bill Index.-TM- The management fee, as adjusted,
may range from 1.00% to 2.00%. The management fee, as adjusted and
effective August 1, 1999, was 1.00%.
11
<PAGE>
FINANCIAL HIGHLIGHTS
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP, whose report on the fund's financial statements
is included in the ANNUAL REPORT.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
PERIOD ENDED: 8/99(1)
- -----------------------------------------------------------------------------------------
PER-SHARE DATA
- -----------------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $15.19
- -----------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Net investment income 0.32(5)
Net gains or losses on investments and securities sold short
(both realized and unrealized) (1.12)
- -----------------------------------------------------------------------------------------
Total from investment activities (0.80)
- -----------------------------------------------------------------------------------------
DISTRIBUTIONS:
From net investment income (0.07)
From realized capital gains (0.13)
- -----------------------------------------------------------------------------------------
Total distributions (0.20)
- -----------------------------------------------------------------------------------------
Net asset value, end of period $14.19
- -----------------------------------------------------------------------------------------
Total return (5.33)%(2)
- -----------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) $1,885
Ratio of expenses to average
net assets (including dividend expense) 3.40%(3,4)
Ratio of expenses to average
net assets (excluding dividend expense) 2.24%(3,4)
Ratio of net income to
average net assets 2.46%(4)
Portfolio turnover rate 705%
- -----------------------------------------------------------------------------------------
</TABLE>
(1) For the period September 9, 1998 (commencement of operations) to August 31,
1999.
(2) Not Annualized.
(3) Without the voluntary waiver of advisory fees and administration fees, the
ratios of expenses to average net assets would have been 2.84% (excluding
dividend expense) and 4.00% (including dividend expense) annualized for the
period ended August 31, 1999.
(4) Annualized.
(5) Per share information is calculated using the average share outstanding
method.
12
<PAGE>
MORE ABOUT RISK
INTRODUCTION
- ----------------------------
A fund's goal and principal strategies largely determine its risk profile.
You will find a concise description of the fund's risk profile in "Key Points."
The fund discussion contains more detailed information. This section discusses
other risks that may affect the fund.
The fund may use certain investment practices that have higher risks
associated with them. However, the 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.
CORRELATION RISK The risk that changes in the value of a hedging instrument
will not match those of the investment being hedged.
CREDIT RISK The issuer of a security or the counterparty to a contract may
default or otherwise become unable to honor a financial obligation.
CURRENCY RISK Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. Adverse changes in
exchange rates may erode or reverse any gains produced by foreign-currency-
denominated investments and may widen any losses.
EXPOSURE RISK The risk associated with investments (such as derivatives) or
practices (such as short selling) that increase the amount of money a fund could
gain or lose on an investment.
- HEDGED Exposure risk could multiply losses generated by a derivative or
practice used for hedging purposes. Such losses should be substantially
offset by gains on the hedged investment. However, while hedging can reduce
or eliminate losses, it can also reduce or eliminate gains.
- SPECULATIVE To the extent that a derivative or practice is not used as a
hedge, 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.
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.
13
<PAGE>
LIQUIDITY RISK Certain fund securities may be difficult or impossible to sell
at the time and the price that the fund would like. The 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
investmentsincluding stocks and bonds, and the mutual funds that invest in them.
Bonds and other fixed-income securities generally involve less market risk
than stocks. However, the risk of bonds can vary significantly depending upon
factors such as issuer and maturity. The bonds of some companies may be riskier
than the stocks of others.
POLITICAL RISK Foreign governments may expropriate assets, impose capital or
currency controls, impose punitive taxes, or nationalize a company or industry.
Any of these actions could have a severe effect on security prices and impair
the 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.
VALUATION RISK The lack of an active trading market may make it difficult to
obtain an accurate price for a fund security.
YEAR 2000 PROCESSING RISK Many services provided to the fund and its
shareholders by CSAM and certain of its affiliates (CSAM Service Providers) and
the fund's others service providers rely on the functioning of their respective
computer systems. Many computer systems cannot distinguish the year 2000 from
the year 1900, resulting in potential difficulty in performing various
calculations (Year 2000 Issue). The Year 2000 Issue affects practically all
companies, organizations, governments, markets and economies throughout the
world-- including companies or governmental entities in which the fund invests
and markets in which it trades. The fund's operations are dependent upon
interactions among many participants in the financial-services and other related
industries, and the Year 2000 Issue could potentially have an adverse impact on
the handling of security trades, the payment of interest and dividends, pricing,
account services and other fund operations. It has been reported that foreign
institutions have made less progress in addressing the Year 2000 Issue than
major U.S. entities, which could adversely affect the fund's foreign
investments. The CSAM Service Providers are monitoring this progress with the
assistance of the fund's custodian and are evaluating appropriate actions.
The CSAM Service Providers recognize the importance of the Year 2000
14
<PAGE>
Issue and are taking appropriate steps in preparation for the year 2000. The
CSAM Service Providers anticipate that their systems and those of the fund's
other major service providers will be adapted in time for the Year 2000. The
CSAM Service Providers have completed mission critical systems testing and have
participated in industry-wide testing programs. In addition, the CSAM Service
Providers have formulated a contingency plan to address the Year 2000 Issue.
The CSAM Service Providers continue to monitor the Year 2000 Issue and its
potential impact on the fund. However, at this time no one knows precisely what
the degree of impact will be, and there can be no assurance that these steps
will be sufficient to avoid any adverse impact on the fund nor can there be any
assurance that the Year 2000 Issue will not have an adverse effect on the fund's
investments or on global markets or economies, generally. To the extent that the
impact on the fund holding or on markets or economies is negative, it could
seriously affect the fund's performance.
15
<PAGE>
CERTAIN INVESTMENT PRACTICES
For each of the following practices, this table shows the applicable investment
limitation. Risks are indicated for each practice.
KEY TO TABLE:
/X/ Permitted without limitation; does not indicate actual use
20% ITALIC TYPE (E.G., 20%) represents an investment limitation as a
percentage of NET fund assets; does not indicate actual use
20% Roman type (e.g., 20%) represents an investment limitation as a
percentage of TOTAL fund assets; does not indicate actual use
/ / Permitted, but not expected to be used to a significant extent
- -- Not permitted
- -------------------------------------------------------------------------------
LONG-SHORT MARKET NEUTRAL FUND
INVESTMENT PRACTICE LIMIT
- -------------------------------------------------------------------------------
BORROWING The borrowing of money from banks to meet redemptions or
for other temporary or emergency purposes. SPECULATIVE EXPOSURE RISK. 33 1/3%
- -------------------------------------------------------------------------------
FOREIGN SECURITIES Securities of foreign issuers. May include
depositary receipts. CURRENCY, INFORMATION, LIQUIDITY, MARKET,
POLITICAL, VALUATION RISKS. / /
- -------------------------------------------------------------------------------
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. / /
- -------------------------------------------------------------------------------
RESTRICTED AND OTHER ILLIQUID SECURITIES Securities with
restrictions on trading, or those not actively traded. May include
private placements. LIQUIDITY, MARKET, VALUATION RISKS. 15%
- -------------------------------------------------------------------------------
16
<PAGE>
- -------------------------------------------------------------------------------
LONG-SHORT MARKET NEUTRAL FUND
INVESTMENT PRACTICE LIMIT
- -------------------------------------------------------------------------------
SHORT POSITIONS Selling borrowed securities with the intention of
repurchasing them for a profit on the expectation that the market
price will drop. If a fund were to take short positions in stocks
that increase in value, then it would be likely to underperform
similar mutual funds that do not take short positions. LIQUIDITY,
MARKET, SPECULATIVE EXPOSURE RISKS. /X/
- -------------------------------------------------------------------------------
START-UP AND OTHER SMALL COMPANIES Companies with small relative
market capitalizations, including those with continuous operations
of less than three years. INFORMATION, LIQUIDITY, MARKET, VALUATION
RISKS. / /
- -------------------------------------------------------------------------------
STRUCTURED INSTRUMENTS Swaps, structured securities and other
instruments that allow 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. / /
- -------------------------------------------------------------------------------
(1) The fund is not obligated to pursue any hedging strategy. In addition,
hedging practices may not be available, may be too costly to be used
effectively or may be unable to be used for other reasons.
(2) The fund is limited to 5% of net assets for initial margin and premium
amounts on futures positions considered to be speculative by the Commodity
Futures Trading Commission.
17
<PAGE>
MEET THE MANAGERS
The Credit Suisse Asset Management Structured Equity Team is responsible for
the day-to-day management of the Long-Short Market Neutral Fund. The Structured
Equity Team consists of the following individuals:
[PHOTO]
WILLIAM W. PRIEST, JR.
CEO, MANAGING DIRECTOR
- Team member since 1972
- With Credit Suisse Asset Management for more than 25 years
[PHOTO]
ERIC N. REMOLE
MANAGING DIRECTOR
- Team member since 1997
- With Credit Suisse Asset Management since 1997
- Managing director and portfolio manager of Chancellor/LGT Asset
Management, Inc., 1983 to 1997
[INSERT PHOTO]
MARC BOTHWELL
VICE PRESIDENT
- Team member since 1997
- With Credit Suisse Asset Management since 1997
- Vice president and portfolio manager at Chancellor/LGT Asset
Management, Inc., 1994 to 1997
[INSERT PHOTO]
MICHAEL WELHOELTER
VICE PRESIDENT
- Team member since 1997
- With Credit Suisse Asset Management since 1997
- Vice president and portfolio manager at Chancellor/LGT Asset
Management, Inc., 1986 to 1997
18
<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.
The 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 fund does not compute their prices. This could
cause the value of the fund's portfolio investments to be affected by trading on
days when you cannot buy or sell shares.
BUYING AND SELLING SHARES
- -----------------------------
The accompanying SHAREHOLDER GUIDE explains how to invest directly with the
funds. You will find information about purchases, redemptions, exchanges and
services.
The fund is 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. ET), 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 fund has 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.
19
<PAGE>
Some of the firms through which the fund is available include:
- Charles Schwab & Co., Inc. Mutual Fund OneSource-Registered Trademark-
service
- Fidelity Brokerage Services, Inc. FundsNetwork-TM- Program
- Waterhouse Securities, Inc.
ACCOUNT STATEMENTS
- -----------------------------
In general, you will receive account statements as follows:
- - after every transaction that affects your account balance (except for
distribution reinvestments and automatic transactions)
- - after any changes of name or address of the registered owner(s)
- - otherwise, every calendar quarter
You will receive annual and semiannual financial reports.
DISTRIBUTIONS
- -----------------------------
As a fund investor, you will receive distributions.
The fund earns dividends from stocks and interest from bond, money-market and
other investments. These are passed along as dividend distributions. The 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 fund distributes dividends annually. The fund typically distributes
capital gains annually in December.
Most investors have their distributions reinvested in additional shares of
the same fund. Distributions will be reinvested unless you choose on your
account application to have a check for your distributions mailed to you or sent
by electronic transfer.
TAXES
- -----------------------------
As with any investment, you should consider how your investment in a fund
will be taxed. If your account is not a tax-advantaged account, you should be
especially aware of the following potential tax implications. Please consult
your tax professional concerning your own tax situation.
TAXES ON DISTRIBUTIONS
As long as the fund continues to meet the requirements for being a
tax-qualified regulated investment company, it pays no federal income tax on the
earnings it distributes to shareholders.
Distributions you receive from the 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 fund will mostly make capital-gain distributions, which
could be short-term or long-term. Any
20
<PAGE>
gain or loss from the fund's short positions will be short-term gain or loss,
regardless of the length of time the short positions remain open. Thus, net gain
from short positions will potentially increase the amount of the fund's ordinary
income dividends, while net losses would potentially reduce the amount of the
fund's long-term gain distributions.
If you buy shares shortly before or on the "record date"the date that
establishes you as the person to receive the upcoming distributionyou may
receive a portion of the money you just invested in the form of a taxable
distribution.
The Form 1099 that is mailed to you every January details your distributions
and their federal tax category, including the portion taxable as long-term
capital gains.
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.
21
<PAGE>
OTHER INFORMATION
ABOUT THE DISTRIBUTOR
- -----------------------------
Credit Suisse Asset Management Securities, Inc., a wholly owned subsidiary of
Credit Suisse, is responsible for:
- making the fund available to you
- account servicing and maintenance
- other administrative services related to sale of the Common Class
As part of its business strategy, the fund has adopted a Rule 12b-1
shareholder-servicing and distribution plan to compensate Credit Suisse Asset
Management Securities for the above services. Under the plan, Credit Suisse
Asset Management Securities 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
the 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.
22
<PAGE>
- -------------------------------------------------------------------------------
FOR MORE INFORMATION
More information about this fund 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 fund's manager 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 fund, 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.
Please contact Warburg Pincus Funds to obtain, without charge, the SAI and
ANNUAL and SEMIANNUAL REPORTS 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 NUMBER:
Warburg Pincus Long-Short
Market Neutral Fund 811-08925
[Logo]
P.O. BOX 9030, BOSTON, MA 02205-9030
800-WARBURG (800-927-2874) www.warburg.com
CREDIT SUISSE ASSET MANAGEMENT SECURITIES, INC., DISTRIBUTOR WPLSN-1-1299
- --------------------------------------------------------------------------------
<PAGE>
WARBURG PINCUS FUNDS
SHAREHOLDER
GUIDE
Common Class
September 16, 1999
This SHAREHOLDER GUIDE is incorporated into and legally part of each
Warburg Pincus (Common Class) prospectus.
[Warburg Pincus Funds Logo]
<PAGE>
Warburg Pincus Funds is a division of Credit Suisse Asset Management, LLC
BUYING SHARES
OPENING AN ACCOUNT
Your account application provides us with key information we need to set up
your account correctly. It also lets you authorize services that you may find
convenient in the future.
If you need an application, call our Shareholder Service Center to receive
one by mail or fax. Or you can download it from our Internet Web site:
www.warburg.com.
You can make your initial investment by check or wire. The "By Wire" method
in the table enables you to buy shares on a particular day at that day's closing
NAV.
ADDING TO AN ACCOUNT
You can add to your account in a variety of ways, as shown in the table. If
you want to use ACH transfer, be sure to complete the "ACH on Demand" section of
the account application.
INVESTMENT CHECKS
Please use either a personal or bank check payable in U.S. dollars to Warburg
Pincus Funds. Unfortunately, we cannot accept "starter" checks that do not have
your name preprinted on them. We also cannot accept checks payable to you or to
another party and endorsed to the order of Warburg Pincus Funds. These types of
checks may be returned to you and your purchase order may not be processed.
Limited exceptions include properly endorsed government checks.
MINIMUM INITIAL INVESTMENT
<TABLE>
<S> <C>
Cash Reserve Fund: $ 1,000
New York Tax Exempt Fund: $ 1,000
Balanced Fund: $ 1,000
Growth & Income Fund: $ 1,000
WorldPerks-Registered Trademark- Funds: $ 5,000
Long-Short Funds: $ 25,000
All other funds: $ 2,500
IRAs: $ 500*
Transfers/Gifts to Minors: $ 500*
</TABLE>
* $25,000 minimum for Long-Short Funds.
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>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------------------
BY CHECK
- --------------------------------------------------------------------------------------------
<S> <C>
- - Complete the NEW ACCOUNT APPLICATION. - Make your check payable to Warburg
For IRAs use the UNIVERSAL IRA Pincus Funds.
APPLICATION.
- Write the account number and the fund
- - Make your check payable to Warburg name on your check.
Pincus Funds.
- Mail to Warburg Pincus Funds.
- - Mail to Warburg Pincus Funds.
- Minimum amount is $100.
- --------------------------------------------------------------------------------------------
BY EXCHANGE
- --------------------------------------------------------------------------------------------
- - Call our Shareholder Service Center to - Call our Shareholder Service Center to
request an exchange. Be sure to read request an exchange.
the current prospectus for the new
fund. Also please observe the minimum - Minimum amount is $250.
initial investment.
If you do not have telephone privileges,
If you do not have telephone mail or fax a signed letter of
privileges, mail or fax a signed letter instruction.
of instruction.
- --------------------------------------------------------------------------------------------
BY WIRE
- --------------------------------------------------------------------------------------------
- - Complete and sign the NEW ACCOUNT - Call our Shareholder Service Center by
APPLICATION. 4 p.m. ET to inform us of the incoming
wire. Please be sure to specify your
- - Call our Shareholder Service Center and name, the account number and the fund
fax the signed NEW ACCOUNT APPLICATION name on your wire advice.
by 4 p.m. ET.
- Wire the money for receipt that day.
- - Shareholder Services will telephone you
with your account number. Please be - Minimum amount is $500.
sure to specify your name, the account
number and the fund name on your wire
advice.
- - Wire your initial investment for
receipt that day.
- - Mail the original, signed application
to Warburg Pincus Funds.
This method is not available for IRAs.
- --------------------------------------------------------------------------------------------
BY AUTOMATED CLEARING HOUSE (ACH) TRANSFER
- --------------------------------------------------------------------------------------------
- - Cannot be used to open an account. - Call our Shareholder Service Center to
request an ACH transfer from your bank.
- Your purchase will be effective at the
next NAV calculated after we receive your
order in proper form.
- Minimum amount is $50.
Requires ACH on Demand
privileges.
- --------------------------------------------------------------------------------------------
</TABLE>
800-WARBURG (800-927-2874)
MONDAY-FRIDAY, 8 A.M.-8 P.M. ET SATURDAY, 8 A.M.-4 P.M. ET
3
<PAGE>
SELLING SHARES*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
SELLING SOME OR ALL OF YOUR SHARES CAN BE USED FOR
- --------------------------------------------------------------------------------------------
BY MAIL
- --------------------------------------------------------------------------------------------
<S> <C>
Write us a letter of instruction that - Accounts of any type.
includes:
- Sales of any amount.
- - your name(s) and signature(s)
For IRAs please use the IRA DISTRIBUTION
- - the fund name and account number REQUEST FORM.
- - the dollar amount you want to sell
- - how to send the proceeds
Obtain a signature guarantee or other
documentation, if required (see "Selling
Shares in Writing").
Mail the materials to Warburg Pincus
Funds.
If only a letter of instruction is
required, you can fax it to the
Shareholder Service Center.
- --------------------------------------------------------------------------------------------
BY EXCHANGE
- --------------------------------------------------------------------------------------------
- - Call our Shareholder Service Center to - Accounts with telephone privileges.
request an exchange. Be sure to read the
current prospectus for the new fund. Also If you do not have telephone privileges,
please observe the minimum initial mail or fax a letter of instruction to
investment. exchange shares.
- --------------------------------------------------------------------------------------------
BY PHONE
- --------------------------------------------------------------------------------------------
Call our Shareholder Service Center to - Non-IRA accounts with telephone
request a redemption. You can receive the privileges.
proceeds as:
- - a check mailed to the address of record
- - an ACH transfer to your bank ($50
minimum)
- - a wire to your bank ($500 minimum)
See "By Wire or ACH Transfer" for
details.
- --------------------------------------------------------------------------------------------
BY WIRE OR ACH TRANSFER
- --------------------------------------------------------------------------------------------
- - Complete the "Wire Instructions" or - Non-IRA accounts with wire-redemption
"ACH on Demand" section of your NEW or ACH on Demand privileges.
ACCOUNT APPLICATION.
- Requests by phone or mail.
- - For federal-funds wires, proceeds will
be wired on the next business day. For
ACH transfers, proceeds will be
delivered within two business days.
- --------------------------------------------------------------------------------------------
</TABLE>
* For the Japan Small Company Fund only: The fund imposes a 1.00% 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 November 17, 1999.
4
<PAGE>
SELLING SHARES IN WRITING
Some circumstances require a written sell order, along with a signature
guarantee. These include:
- accounts whose address of record has been changed within the past 30 days
- redemption in certain large amounts (other than by exchange)
- requests to send the proceeds to a different payee or address
- shares represented by certificates, which must be returned with your sell
order
A signature guarantee helps protect against fraud. You can obtain one from
most banks or securities dealers, but not from a notary public.
RECENTLY PURCHASED SHARES
If the fund has not yet collected payment for the shares you are selling, it
will delay sending you the proceeds until your purchase payment clears. This may
take up to 10 calendar days after the purchase. To avoid the collection period,
consider buying shares by bank wire, bank check, certified check or money order.
LOW-BALANCE ACCOUNTS
If your account balance falls below the minimum required to keep it open due
to redemptions or exchanges, the fund may ask you to increase your balance. If
it is still below the minimum after 60 days, the fund may close your account and
mail you the proceeds.
MINIMUM TO KEEP AN ACCOUNT OPEN
<TABLE>
<S> <C>
Cash Reserve Fund: $ 750
New York Tax Exempt Fund: $ 750
Balanced Fund: $ 500
Growth & Income Fund: $ 500
WorldPerks Funds: $ 750
All other funds: $2,000
IRAs: $ 250
Transfers/Gifts to Minors: $ 250
</TABLE>
800-WARBURG (800-927-2874)
MONDAY-FRIDAY, 8 A.M.-8 P.M. ET SATURDAY, 8 A.M.-4 P.M. ET
5
<PAGE>
SHAREHOLDER SERVICES
AUTOMATIC SERVICES
Buying or selling shares automatically is easy with the services described
below. You can set up most of these services with your account application or by
calling our Shareholder Service Center.
AUTOMATIC MONTHLY INVESTMENT PLAN
For making automatic investments ($50 minimum) from a designated bank
account.
AUTOMATIC WITHDRAWAL PLAN
For making automatic monthly, quarterly, semiannual or annual withdrawals of
$250 or more.
DISTRIBUTION SWEEP
For automatically reinvesting your dividend and capital-gain distributions
into another identically registered Warburg Pincus fund. Not available for IRAs.
RETIREMENT PLANS
Warburg Pincus offers a range of tax-advantaged retirement accounts,
including:
- Traditional IRAs
- Roth IRAs
- Roth Conversion IRAs
- Spousal IRAs
- Rollover IRAs
- SEP IRAs
To transfer your IRA to Warburg Pincus, use the IRA TRANSFER/DIRECT ROLLOVER
FORM. If you are opening a new IRA, you will also need to complete the UNIVERSAL
IRA APPLICATION. Please consult your tax professional concerning your IRA
eligibility and tax situation.
TRANSFERS/GIFTS TO MINORS
Depending on state laws, you can set up a custodial account under the Uniform
Transfers-to-Minors Act (UTMA) or the Uniform Gifts-to-Minors Act (UGMA). Please
consult your tax professional about these types of accounts.
ACCOUNT CHANGES
Call our Shareholder Service Center to update your account records whenever
you change your address. Shareholder Services can also help you change your
account information or privileges.
6
<PAGE>
OTHER POLICIES
TRANSACTION DETAILS
You are entitled to capital-gain and earned dividend distributions as soon as
your purchase order is executed. For the Intermediate Maturity Government, New
York Intermediate Municipal and Fixed Income Funds and the Money Market Funds,
you begin to earn dividend distributions the business day after your purchase
order is executed. However, if we receive your purchase order and payment to
purchase shares of a Money Market Fund before 12 p.m. (noon), you begin to earn
dividend distributions on that day.
Your purchase order will be canceled and you may be liable for losses or fees
incurred by the fund if:
- your investment check or ACH transfer does not clear
- you place a telephone order by 4 p.m. ET and we do not receive your wire that
day
If you wire money without first calling Shareholder Services to place an
order, and your wire arrives after the close of regular trading on the NYSE,
then your order will not be executed until the end of the next business day. In
the meantime, your payment will be held uninvested. Your bank or other
financial-services firm may charge a fee to send or receive wire transfers.
While we monitor telephone servicing resources carefully, during periods of
significant economic or market change it may be difficult to place orders by
telephone.
Uncashed redemption or distribution checks do not earn interest.
SPECIAL SITUATIONS
A fund reserves the right to:
- refuse any purchase or exchange request, including those from any person or
group who, in the fund's view, is likely to engage in excessive trading
- change or discontinue its exchange privilege after 30 days' notice to current
investors, or temporarily suspend this privilege during unusual market
conditions
- change its minimum investment amounts after 15 days' notice to current
investors of any increases
- charge a wire-redemption fee
- make a "redemption in kind"--payment in portfolio securities rather than
cash--for certain large redemption amounts that could hurt fund operations
- suspend redemptions or postpone payment dates as permitted by the Investment
Company Act of 1940 (such as during periods other than weekends or holidays
when the NYSE is closed or trading on the NYSE is restricted, or any other
time that the SEC permits)
- modify or waive its minimum investment requirements for 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 Funds, investments through certain financial-services firms
($10,000 minimum) and through retirement plan programs (no minimum)
- stop offering its shares for a period of time (such as when management
believes that a substantial increase in assets could adversely affect it)
800-WARBURG (800-927-2874)
MONDAY-FRIDAY, 8 A.M.-8 P.M. ET SATURDAY, 8 A.M.-4 P.M. ET
7
<PAGE>
[WARBURG PINCUS FUNDS LOGO]
P.O. BOX 9030, BOSTON, MA 02205-9030
800-WARBURG (800-927-2874) B www.warburg.com
CREDIT SUISSE ASSET MANAGEMENT SECURITIES, INC., DISTRIBUTOR.
WPCOM-31-0999
8
<PAGE>
JANUARY 1, 2000 PROSPECTUS
[CSAM] A member of CREDIT SUISSE/ASSET MANAGEMENT
INTERNATIONAL GROWTH FUND
EUROPEAN EQUITY FUND
U.S. CORE EQUITY FUND
FOCUS FUND
LONG-SHORT MARKET NEUTRAL FUND
U.S. CORE FIXED INCOME FUND
HIGH YIELD FUND
MUNICIPAL BOND FUND
STRATEGIC GLOBAL FIXED INCOME FUND
CREDIT SUISSE ASSET MANAGEMENT SECURITIES, INC., DISTRIBUTOR
As with all mutual funds, the Securities and Exchange Commission
has not approved these funds, nor has it passed upon the adequacy or
accuracy of this PROSPECTUS. It is a criminal offense to state otherwise.
INSTITUTIONAL SHARES
<PAGE>
CONTENTS
<TABLE>
<S> <C>
KEY POINTS.................................................. 1
PERFORMANCE SUMMARY......................................... 7
Year-by-Year Total Returns ............................... 7
Average Annual Total Returns.............................. 8
INVESTOR EXPENSES........................................... 10
THE FUNDS IN DETAIL......................................... 14
The Management Firms...................................... 14
Multi-Class Structure..................................... 14
Fund Information Key...................................... 15
INTERNATIONAL GROWTH FUND................................... 16
EUROPEAN EQUITY FUND........................................ 18
U.S. CORE EQUITY FUND....................................... 20
FOCUS FUND.................................................. 22
LONG-SHORT MARKET NEUTRAL FUND.............................. 24
U.S. CORE FIXED INCOME FUND................................. 26
HIGH YIELD FUND............................................. 28
MUNICIPAL BOND FUND......................................... 31
STRATEGIC GLOBAL FIXED INCOME FUND.......................... 33
MORE ABOUT RISK............................................. 35
Introduction.............................................. 35
Types of Investment Risk.................................. 35
CERTAIN INVESTMENT PRACTICES ............................... 37
MEET THE MANAGERS........................................... 41
ABOUT YOUR ACCOUNT.......................................... 48
Share Valuation........................................... 48
Buying and Selling Shares................................. 48
Buying Fund Shares........................................ 48
Selling Fund Shares....................................... 49
Exchanging Fund Shares.................................... 49
Other Policies............................................ 50
Account Statements........................................ 50
Distributions............................................. 50
Taxes .................................................... 51
OTHER INFORMATION........................................... 52
About the Distributor..................................... 52
FOR MORE INFORMATION........................................ back cover
</TABLE>
<PAGE>
KEY POINTS
GOAL AND PRINCIPAL STRATEGIES
<TABLE>
<CAPTION>
FUND/RISK FACTORS GOAL STRATEGIES
<S> <C> <C>
INTERNATIONAL GROWTH FUND Long-term appreciation of capital / / Invests in foreign equity securities
Risk factors: / / Emphasizes developed countries, but
FOREIGN SECURITIES may also invest in emerging markets
MARKET RISK / / Combines top-down regional analysis with
NON-DIVERSIFIED STATUS bottom-up company research
/ / Seeks countries, sectors and companies with
solid growth prospects and attractive market
valuations
EUROPEAN EQUITY FUND Capital appreciation / / Invests in European equity securities
Risk factors: / / Targets Western European countries
FOREIGN SECURITIES / / Uses both growth and value criteria (seeks
MARKET RISK "growth at a resonable price")
REGION FOCUS / / Portfolio managers look at factors such as
earnings growth, stock price, relative
valuation and merger-and-acquisition trends
</TABLE>
- --- INVESTOR PROFILE
- ---------------------------
THESE FUNDS ARE DESIGNED FOR INVESTORS WHO:
- are investing for long-term goals
- are willing to assume the risk of losing money in exchange for attractive
potential long-term returns
- are looking for capital appreciation
- want to diversify their portfolios internationally
THEY MAY NOT BE APPROPRIATE IF YOU:
- are investing for a shorter time horizon
- are uncomfortable with an investment that has a higher degree of
volatility
- want to limit your exposure to foreign securities
- are looking for income
You should base your selection of a fund on your own goals, risk preferences and
time horizon.
1
<PAGE>
GOAL AND PRINCIPAL STRATEGIES
<TABLE>
<CAPTION>
FUND/RISK FACTORS GOAL STRATEGIES
<S> <C> <C>
U.S. CORE EQUITY FUND Long-term appreciation of capital / / Invests primarily in U.S. equity securities
Risk factors: / / Focuses on large companies
MARKET RISK / / Stock-selection process uses quantitative
NON-DIVERSIFIED STATUS techniques to seek to identify companies with
improving momentum and reasonable relative
valuations
FOCUS FUND Long-term appreciation of capital / / Invests in securities of 40-60 U.S.
Risk factors: companies
MARKET RISK / / Focuses on industry sectors with favorable
NON-DIVERSIFIED STATUS economic profit trends
/ / Uses both traditional value-based analyses
(such as price/book ratio), as well as the
economic profit of a company
</TABLE>
- --- INVESTOR PROFILE
- ---------------------------
THESE FUNDS ARE DESIGNED FOR INVESTORS WHO:
- are investing for long-term goals
- are willing to assume the risk of losing money in exchange for attractive
potential long-term returns
- are looking for capital appreciation
- want to diversify their portfolios into common stocks
THEY MAY NOT BE APPROPRIATE IF YOU:
- are investing for a shorter time horizon
- are uncomfortable with an investment that will fluctuate in value
- are looking for income
You should base your selection of a fund on your own goals, risk preferences and
time horizon.
2
<PAGE>
GOAL AND PRINCIPAL STRATEGIES
<TABLE>
<CAPTION>
FUND/RISK FACTORS GOAL STRATEGIES
<S> <C> <C>
LONG-SHORT MARKET NEUTRAL FUND Long-term capital appreciation / / Seeks a total return greater than the return
Risk factors: while minimizing exposure to of the Salomon Smith Barney 1-Month Treasury
MARKET RISK general equity market risk Bill Index-TM-
NON-DIVERSIFIED STATUS / / Takes long positions in stocks that the
SHORT POSITIONS portfolio manager has identified as attractive
/ / Takes short positions in stocks that the
manager has identified as unattractive
/ / Seeks minimal net exposure to the general
U.S. equity market and low to neutral exposure
to any particular industry or specific
capitalization range
</TABLE>
- --- INVESTOR PROFILE
- ---------------------------
THIS FUND IS DESIGNED FOR INVESTORS WHO:
- are investing for long-term goals
- are willing to assume the risk of losing money in exchange for attractive
potential long-term returns
- are investing for total return or capital appreciation
IT MAY NOT BE APPROPRIATE IF YOU:
- are investing for a shorter time horizon
- are uncomfortable with an investment that will fluctuate in value
- are looking primarily for income
You should base your selection of a fund on your own goals, risk preferences and
time horizon.
3
<PAGE>
GOAL AND PRINCIPAL STRATEGIES
<TABLE>
<CAPTION>
FUND/RISK FACTORS GOAL STRATEGIES
<S> <C> <C>
U.S. CORE FIXED High total return / / Invests primarily in fixed-income securities
INCOME FUND of U.S. issuers
Risk factors: / / Typically maintains a weighted-average
CREDIT RISK portfolio maturity of between five and
INTEREST-RATE RISK 15 years
MARKET RISK / / Focuses on high-grade securities (average
NON-DIVERSIFIED STATUS credit rating AA)
HIGH YIELD FUND High total return / / Invests primarily in high-yield, higher-risk
Risk factors: fixed-income securities (junk bonds)
CREDIT RISK / / Typically maintains a weighted-average
INTEREST-RATE RISK portfolio maturity of between five and
MARKET RISK 15 years
NON-DIVERSIFIED STATUS / / Emphasizes top-down analysis of industry
sectors and themes
/ / Seeks to allocate risk by investing among a
variety of industry sectors
MUNICIPAL BOND FUND High total return / / Invests primarily in municipal securities
Risk factors: / / Typically maintains a weighted-average
CREDIT RISK portfolio maturity of between 10 and 15 years
INTEREST-RATE RISK / / Focuses on high-grade securities (average
MARKET RISK credit rating AA)
NON-DIVERSIFIED STATUS
STRATEGIC GLOBAL FIXED INCOME FUND High total return / / Invests in U.S. and foreign fixed-income
Risk factors: securities denominated in various currencies
CREDIT RISK / / Seeks to maintain an average credit rating
FOREIGN SECURITIES of BBB or higher
INTEREST-RATE RISK / / Seeks to invest in countries exhibiting an
MARKET RISK attractive combination of fixed-income returns
NON-DIVERSIFIED STATUS and currency exchange rates
/ / Focuses on high-grade securities (average
credit rating AA)
</TABLE>
- --- INVESTOR PROFILE
- ---------------------------
THESE FUNDS ARE DESIGNED FOR INVESTORS WHO:
- are seeking investment income
- want to diversify their portfolios with fixed-income funds
- are willing to accept risk and volatility
THEY MAY NOT BE APPROPRIATE IF YOU:
- are investing for maximum return over a long time horizon
- require stability of your principal
You should base your selection of a fund on your own goals, risk preferences and
time horizon.
BECAUSE THE HIGH YIELD FUND AND THE STRATEGIC GLOBAL FIXED INCOME FUND INVOLVE A
HIGH LEVEL OF RISK, YOU SHOULD CONSIDER THEM ONLY FOR THE AGGRESSIVE PORTION OF
YOUR PORTFOLIO. THE HIGH YIELD FUND AND THE STRATEGIC GLOBAL FIXED INCOME FUND
MAY NOT BE APPROPRIATE FOR EVERYONE.
4
<PAGE>
- --- A WORD ABOUT RISK
- -----------------------------
All investments involve some level of risk. Simply defined, risk is the
possibility that you will lose money or not make money.
Principal risk factors for the funds are discussed below. Before you invest,
please make sure you understand the risks that apply to the funds. As with any
mutual fund, you could lose money over any period of time.
Investments in the funds are not bank deposits and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
CREDIT RISK
U.S. CORE FIXED INCOME, HIGH YIELD, MUNICIPAL BOND AND STRATEGIC GLOBAL FIXED
INCOME FUNDS
The issuer of a security or the counterparty to a contract may default or
otherwise become unable to honor a financial obligation.
FOREIGN SECURITIES
INTERNATIONAL GROWTH, EUROPEAN EQUITY AND STRATEGIC GLOBAL FIXED INCOME FUNDS
A fund that invests outside the U.S. carries additional risks that include:
- CURRENCY RISK Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. Adverse changes in
exchange rates may erode or reverse any gains produced by foreign-currency
denominated investments and may widen any losses. A fund may, but is not
required to, seek to reduce currency risk by hedging part or all of its
exposure to various foreign currencies.
- INFORMATION RISK Key information about an issuer, security or market may
be inaccurate or unavailable.
- POLITICAL RISK Foreign governments may expropriate assets, impose capital
or currency controls, impose punitive taxes, or nationalize a company or
industry. Any of these actions could have a severe effect on security
prices and impair a fund's ability to bring its capital or income back to
the U.S. Other political risks include economic policy changes, social and
political instability, military action and war.
INTEREST-RATE RISK
U.S. CORE FIXED INCOME, HIGH YIELD, MUNICIPAL BOND AND STRATEGIC GLOBAL FIXED
INCOME FUNDS
Changes in interest rates may cause a decline in the market value of an
investment. With bonds and other fixed-income securities, a rise in interest
rates typically causes a fall in values, while a fall in interest rates
typically causes a rise in values.
MARKET RISK
ALL FUNDS
The market value of a security may move up and down, sometimes rapidly and
unpredictably. These fluctuations, which are often referred to as "volatility,"
may cause a security to be worth less than it was worth at an earlier time.
Market risk may affect a single issuer, industry, sector of the economy, or the
market as a whole. Market risk is common to most investments -- including stocks
and bonds, and the mutual funds that invest in them.
NON-DIVERSIFIED STATUS
ALL FUNDS EXCEPT EUROPEAN EQUITY FUND
The funds are considered non-diversified investment companies under the
Investment Company Act of 1940 and are permitted to invest a greater proportion
of their assets in the securities of a smaller number of
5
<PAGE>
issuers. As a result, the funds may be subject to greater volatility with
respect to their respective portfolio securities than a fund that is more
broadly diversified.
SHORT POSITIONS
LONG-SHORT MARKET NEUTRAL FUND
The fund takes short positions by selling borrowed securities that it does
not currently own, with the intention of repurchasing them later for a profit on
the expectation that the market price will drop.
Because they expose the fund to risks associated with securities it does not
own, short positions involve speculative exposure risk. As a result, if the fund
takes short positions in stocks that increase in value, then it will be likely
to underperform similar stock mutual funds that do not take short positions. In
addition, short positions typically involve increased liquidity risk and
transaction costs.
REGION FOCUS
EUROPEAN EQUITY FUND
Focusing on a single region involves increased currency, political,
regulatory and other risks. Market swings in the targeted region (Western
Europe) will be likely to have a greater effect on fund performance than they
would in a more geographically diversified equity fund.
6
<PAGE>
PERFORMANCE SUMMARY
The bar chart below and the table on the next page provide an indication of the
risks of investing in these funds. The bar chart shows you how fund performance
has varied from year to year for up to 10 years. The table compares each fund's
performance over time to that of a broadly based securities market index. As
with all mutual funds, past performance is not a prediction of the future.
YEAR-BY-YEAR TOTAL RETURNS
<TABLE>
<CAPTION>
YEAR ENDED 12/31: 1995 1996 1997 1998
<S> <C> <C> <C> <C>
INTERNATIONAL GROWTH FUND
Best quarter: % (Q )
Worst quarter: % (Q )
Inception date: 9/30/92
Total return for the period 1/1/99 -
9/30/99: % (not annualized)
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1995 -8.06%
1996 6.81%
1997 15.93%
1998 16.74%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
U.S. CORE EQUITY FUND
Best quarter: % (Q )
Worst quarter: % (Q )
Inception date: 8/31/94
Total return for the period 1/1/99 -
9/30/99: % (not annualized)
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1996 17.59%
1997 38.32%
1998 3.18%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
FOCUS FUND
Best quarter: % (Q )
Worst quarter: % (Q )
Inception date: 7/31/98
Total return for the period 1/1/99 -
9/30/99: % (not annualized)
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C> <C>
U.S. CORE FIXED INCOME FUND
Best quarter: % (Q )
Worst quarter: % (Q )
Inception date: 3/31/94
Total return for the period 1/1/99 -
9/30/99: % (not annualized)
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1995 10.60%
1996 5.23%
1997 11.53%
1998 7.77%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
HIGH YIELD FUND
Best quarter: % (Q )
Worst quarter: % (Q )
Inception date: 11/1/96
Total return for the period 1/1/99 -
9/30/99: % (not annualized)
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1995 7.79%
1996 12.42%
1997 15.17%
1998 5.48%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
MUNICIPAL BOND FUND
Best quarter: % (Q )
Worst quarter: % (Q )
Inception date: 6/20/94
Total return for the period 1/1/99 -
9/30/99: % (not annualized)
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1995 8.42%
1996 2.27%
1997 9.74%
1998 7.62%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
STRATEGIC GLOBAL FIXED INCOME FUND
Best quarter: % (Q )
Worst quarter: % (Q )
Inception date: 6/27/94
Total return for the period 1/1/99 -
9/30/99: % (not annualized)
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1995 10.72%
1996 9.65%
1997 4.48%
1998 4.19%
</TABLE>
7
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS LIFE OF INCEPTION
PERIOD ENDED 12/31/98: 1998 1996-1998 1994-1998 FUND DATE
<S> <C> <C> <C> <C> <C>
INTERNATIONAL GROWTH FUND 13.88% 15.51% 8.64% 11.76% 9/30/92
MSCI EUROPE, AUSTRALASIA AND
FAR EAST INDEX(1) % % % %
U.S. CORE EQUITY FUND 38.07% 25.37% 22.64% 22.62% 9/1/94
STANDARD & POOR'S 500
INDEX(2) % % % %
FOCUS FUND 53.21% N/A N/A N/A 7/31/98
STANDARD & POOR'S 500
INDEX(2) % N/A N/A N/A
U.S. CORE FIXED INCOME FUND 2.37% 7.15% 7.44% 6.88% 3/31/94
LEHMAN BROTHERS AGGREGATE
BOND INDEX(3) % N/A %
HIGH YIELD FUND 0.39% N/A N/A 5.96% 11/1/96
CS FIRST BOSTON DOMESTIC +
HIGH YIELD INDEX(4) % % %
MUNICIPAL BOND DOMESTIC FUND 0.36% 5.83% 5.62% 5.47% 6/20/94
LEHMAN BROTHERS MUNICIPAL
BOND INDEX(5) % N/A %
STRATEGIC GLOBAL FIXED
INCOME FUND 2.78% 2.81% 6.31% 6.08% 6/27/94
JP MORGAN GLOBAL GOVERNMENT
BOND INDEX UNHEDGED(6) % N/A %
</TABLE>
(1) The Morgan Stanley Capital International Europe, Australasia and Far East
Index is an unmanaged index (with no defined investment objective) of
international equities that includes reinvestments of dividends, and is the
exclusive property of Morgan Stanley Capital International & Co.,
Incorporated.
(2) 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.
(3) The Lehman Brothers Aggregate Bond Index is composed of the Lehman
Government/Corporate Index and the Mortgage-Backed Securities Index. The
Aggregate Bond Index includes U.S. Treasury and agency issues, corporate
bond issues and mortgage-backed securities rated investment-grade or higher
by Moody's Investors Service, Standard & Poor's Corporation or Fitch
Investors' Service.
(4) The Credit Suisse First Boston Domestic + High Yield Index is an unmanaged
index (with no defined investment objective) of high yield bonds and is
compiled by Credit Suisse First Boston, an affiliate of the fund's adviser.
(5) The Lehman Brothers Municipal Bond Index is an unmanaged index of
municipal bonds (with no defined investment objective) and is calculated by
Lehman Brothers Inc.
8
<PAGE>
(6) The JP Morgan Global Government Bond Index Unhedged (including U.S. $) is
a market-capitalization index consisting of the government bond markets of
the following countries: Australia, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, Netherlands, Spain, Sweden, the U.K. and the U.S. All
issues have a remaining maturity of at least one year and the index is
rebalanced monthly.
UNDERSTANDING PERFORMANCE
/ / TOTAL RETURN tells you how much an investment in a fund has changed in
value over a given time period. It assumes that all dividends and
capital gains (if any) were reinvested in additional shares. The change
in value can be stated either as a CUMULATIVE RETURN or as an AVERAGE
ANNUAL RATE OF RETURN.
/ / A CUMULATIVE TOTAL RETURN is the actual return of an investment for a
specified period. The YEAR-BY-YEAR TOTAL RETURNS in the bar chart are
examples of one-year cumulative total returns.
/ / An AVERAGE ANNUAL TOTAL RETURN applies to periods longer than one year.
It smoothes out the variations in year-by-year performance to tell you
what CONSTANT annual return would have produced the investment's actual
cumulative return. This gives you an idea of an investment's annual
contribution to your portfolio, ASSUMING you held it for the entire
period.
/ / Because of compounding, the average annual total returns in the table
cannot be computed by averaging the returns in the bar chart.
------------------------------------------------------------------------------
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 period ending August 31, 1999.
<TABLE>
<CAPTION>
EUROPEAN
INTERNATIONAL EQUITY
GROWTH FUND FUND
<S> <C> <C>
SHAREHOLDER FEES
(PAID DIRECTLY FROM YOUR INVESTMENT)
Sales charge "load" on purchases NONE NONE
Deferred sales charge "load" NONE NONE
Sales charge "load" on reinvested distributions NONE NONE
Redemption fees NONE NONE
Exchange fees NONE NONE
ANNUAL FUND OPERATING EXPENSES
(DEDUCTED FROM FUND ASSETS)
Management fee .80% 1.00%
Distribution and service (12b-1) fee NONE NONE
Other expenses .42% 1.29%
TOTAL ANNUAL FUND OPERATING EXPENSES* 1.22% 2.29%
</TABLE>
* Actual fees and expenses for the fiscal year ended August 31, 1999 are shown
below. Fee waivers and expense reimbursements or credits reduced expenses
for some funds during 1999 but may be discontinued at any time.
<TABLE>
<CAPTION>
EUROPEAN
INTERNATIONAL EQUITY
EXPENSES AFTER WAIVERS AND REIMBURSEMENTS GROWTH FUND FUND
<S> <C> <C>
Management fee .80% .00%
Distribution and service (12b-1) fee NONE NONE
Other expenses .41% 1.16%
TOTAL ANNUAL FUND OPERATING EXPENSES 1.21% 1.16%
</TABLE>
EXAMPLE
This example may help you compare the cost of investing in these funds with the
cost of investing in other mutual funds. Because it uses hypothetical
conditions, your actual costs may be higher or lower.
Assume you invest $10,000, each fund returns 5% annually, expense ratios remain
as listed in the first table above (before fee waivers and expense
reimbursements and credits), and you close your account at the end of each of
the time periods shown. Based on these assumptions, your cost would be:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS 10 YEARS
<S> <C> <C> <C> <C>
INTERNATIONAL GROWTH FUND $ 124 $ 387 $ 670 $1,477
EUROPEAN EQUITY FUND $ 232 $ 715 $1,225 $2,626
</TABLE>
10
<PAGE>
FEES AND FUND EXPENSES
This table describes the fees and expenses you may bear as a shareholder. Annual
fund operating expense figures are for the fiscal year ended August 31, 1999.
<TABLE>
<CAPTION>
U.S. CORE
EQUITY FOCUS
FUND FUND
<S> <C> <C>
SHAREHOLDER FEES
(PAID DIRECTLY FROM YOUR INVESTMENT)
Sales charge "load" on purchases NONE NONE
Deferred sales charge "load" NONE NONE
Sales charge "load" on reinvested distributions NONE NONE
Redemption fees NONE NONE
Exchange fees NONE NONE
ANNUAL FUND OPERATING EXPENSES
(DEDUCTED FROM FUND ASSETS)
Management fee .75% .75%
Distribution and service (12b-1) fee NONE NONE
Other expenses .47% .67%
TOTAL ANNUAL FUND OPERATING EXPENSES* 1.22% 1.42%
</TABLE>
* Actual fees and expenses for the fiscal year ended August 31, 1999 are shown
below. Fee waivers and expense reimbursements or credits reduced expenses
for some funds during 1999 but may be discontinued at any time.
<TABLE>
<CAPTION>
U.S. CORE
EQUITY FOCUS
EXPENSES AFTER WAIVERS AND REIMBURSEMENTS FUND FUND
<S> <C> <C>
Management fee .53% .33%
Distribution and service (12b-1) fee NONE NONE
Other expenses .46% .66%
TOTAL ANNUAL FUND OPERATING EXPENSES .99% .99%
</TABLE>
EXAMPLE
This example may help you compare the cost of investing in these funds with the
cost of investing in other mutual funds. Because it uses hypothetical
conditions, your actual costs may be higher or lower.
Assume you invest $10,000, each fund returns 5% annually, expense ratios remain
as listed in the first table above (before fee waivers and expense
reimbursements or credits), and you close your account at the end of each of the
time periods shown. Based on these assumptions, your cost would be:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS 10 YEARS
<S> <C> <C> <C> <C>
U.S. CORE EQUITY FUND $ 124 $ 387 $ 670 $1,477
FOCUS FUND $ 145 $ 449 $ 776 $1,702
</TABLE>
11
<PAGE>
FEES AND FUND EXPENSES
This table describes the fees and expenses you may bear as a shareholder. Annual
fund operating expense figures are for the fiscal year ended August 31, 1999.
<TABLE>
<CAPTION>
LONG-SHORT
MARKET
NEUTRAL
FUND
<S> <C>
SHAREHOLDER FEES
(PAID DIRECTLY FROM YOUR INVESTMENT)
Sales charge "load" on purchases NONE
Deferred sales charge "load" NONE
Sales charge "load" on reinvested distributions NONE
Redemption fees NONE
Exchange fees NONE
ANNUAL FUND OPERATING EXPENSES
(DEDUCTED FROM FUND ASSETS)
Management fee 1.50%(1)
Distribution and service (12b-1) fee NONE
Other expenses(2) 2.43%
TOTAL ANNUAL FUND OPERATING EXPENSES(3) 3.93%
</TABLE>
(1) The basic management fee is 1.50%. The management fee of the fund may be
increased or decreased pursuant to the application of an adjustment formula
based upon the fund's investment performance as compared to the Salomon
Smith Barney 1-Month U.S. Treasury Bill Index-TM-. The management fee, as
adjusted, may range from 1.00% to 2.00%. The management fee as adjusted and
effective August 1, 1999, was 1.00%.
(2) "Other expenses" and "Total annual fund operating expenses" include
dividend and interest expenses incured in connection with short sales, which
are included in and reduce the investment return of the fund.
(3) Actual fees and expenses for the fiscal year ended August 31, 1999 are
shown below. Fee waivers and expense reimbursements or credits reduced
expenses for the fund during 1999 but may be discontinued at any time.
<TABLE>
<CAPTION>
LONG-SHORT
MARKET
NEUTRAL
EXPENSES AFTER WAIVERS AND REIMBURSEMENTS FUND
<S> <C>
Management fee .99%
Distribution and service (12b-1) fee NONE
Other expenses 2.34%
TOTAL ANNUAL FUND OPERATING EXPENSES 3.33%
</TABLE>
EXAMPLE
This example may help you compare the cost of investing in these funds with the
cost of investing in other mutual funds. Because it uses hypothetical
conditions, your actual costs may be higher or lower.
Assume you invest $10,000, the fund returns 5% annually, expense ratios remain
as listed in the first table above (before fee waivers and expense
reimbursements or credits), and you close your account at the end of each of the
time periods shown. Based on these assumptions, your cost would be:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS 10 YEARS
<S> <C> <C> <C> <C>
LONG-SHORT MARKET
NEUTRAL FUND $ 395 $1,198 $2,018 $4,147
</TABLE>
12
<PAGE>
FEES AND FUND EXPENSES
This table describes the fees and expenses you may bear as a shareholder. Annual
fund operating expense figures are for the fiscal year ended August 31, 1999.
<TABLE>
<CAPTION>
STRATEGIC
U.S. CORE GLOBAL
FIXED MUNICIPAL FIXED
INCOME HIGH YIELD BOND INCOME
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
SHAREHOLDER FEES
(PAID DIRECTLY FROM YOUR INVESTMENT)
Sales charge "load" on purchases NONE NONE NONE NONE
Deferred sales charge "load" NONE NONE NONE NONE
Sales charge "load" on reinvested
distributions NONE NONE NONE NONE
Redemption fees NONE NONE NONE NONE
Exchange fees NONE NONE NONE NONE
ANNUAL FUND OPERATING EXPENSES
(DEDUCTED FROM FUND ASSETS)
Management fee .37% .70% .70% .50%
Distribution and service (12b-1) fee NONE NONE NONE NONE
Other expenses .25% .34% .73% .77%
TOTAL ANNUAL FUND OPERATING EXPENSES* .62% 1.04% 1.43% 1.27%
</TABLE>
* Actual fees and expenses for the fiscal year ended August 31, 1999 are shown
below. Fee waivers and expense reimbursements or credits reduced expenses
for some funds during 1999 but may be discontinued at any time.
<TABLE>
<CAPTION>
STRATEGIC
U.S. CORE GLOBAL
FIXED MUNICIPAL FIXED
EXPENSES AFTER WAIVERS AND INCOME HIGH YIELD BOND INCOME
REIMBURSEMENTS FUND FUND FUND FUND
<S> <C> <C> <C> <C>
Management fee .21% .39% .28% .00%
Distribution and service (12b-1) fee NONE NONE NONE NONE
Other expenses .23% .30% .71% .74%
TOTAL ANNUAL FUND OPERATING EXPENSES .44% .69% .99% .74%
</TABLE>
EXAMPLE
This example may help you compare the cost of investing in these funds with the
cost of investing in other mutual funds. Because it uses hypothetical
conditions, your actual costs may be higher or lower.
Assume you invest $10,000, each fund returns 5% annually, expense ratios remain
as listed in the first table above (before fee waivers and expense
reimbursements or credits), and you close your account at the end of each of the
time periods shown. Based on these assumptions, your cost would be:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS 10 YEARS
<S> <C> <C> <C> <C>
U.S. CORE FIXED INCOME FUND $ 63 $ 199 $ 346 $ 774
HIGH YIELD FUND $ 106 $ 331 $ 574 $1,271
MUNICIPAL BOND FUND $ 146 $ 452 $ 782 $1,713
STRATEGIC GLOBAL FIXED
INCOME FUND $ 129 $ 403 $ 697 $1,544
</TABLE>
13
<PAGE>
THE FUNDS IN DETAIL
- --- THE MANAGEMENT FIRMS
- ----------------------------------
CREDIT SUISSE ASSET MANAGEMENT, LLC
One Citicorp Center
153 East 53rd Street
New York, NY 10022
- - Investment adviser for the funds
- - Responsible for managing each fund's assets according to its goal and strategy
and supervising the activities of the sub-investment adviser for the European
Equity and Strategic Global Fixed Income Funds
- - A member of Credit Suisse Asset Management (CSAM), the institutional asset
management and mutual fund arm of Credit Suisse Group, one of the world's
leading banks
- - CSAM companies manage more than $57 billion in the U.S. and $175 billion
globally
- - CSAM has offices in 14 countries, including SEC-registered offices in New York
and London; other offices (such as those in Budapest, Frankfurt, Milan,
Moscow, Paris, Prague, Sydney, Tokyo, Warsaw and Zurich) are not registered
with the U.S. Securities and Exchange Commission
CREDIT SUISSE ASSET MANAGEMENT LIMITED
Beaufort House
15 St. Botolph Street
London, EC 3A 7JJ
- - Sub-investment adviser for the European Equity and Strategic Global Fixed
Income Funds
- - A member of CSAM
- --- MULTI-CLASS STRUCTURE
- ----------------------------------
The Institutional Shares are the Institutional Classes of certain Warburg
Pincus Funds. This PROSPECTUS describes the Institutional Classes of the funds.
The Common Classes of the funds, if offered, are described in separate
prospectuses.
14
<PAGE>
- --- FUND INFORMATION KEY
- ---------------------------------
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
GOAL AND STRATEGIES
The fund's particular investment goal and the strategies it intends to use
in pursuing that goal. Percentages of fund assets are based on total assets
unless indicated otherwise.
PORTFOLIO INVESTMENTS
The primary types of securities in which the fund invests. Secondary
investments are described in "More About Risk."
RISK FACTORS
The major risk factors associated with the fund. Additional risk factors are
included in "More About Risk."
PORTFOLIO MANAGEMENT
The individuals designated by the investment adviser or sub-adviser to
handle the fund's day-to-day management.
INVESTOR EXPENSES
Expected expenses for the 1999 fiscal period. Actual expenses may be higher
or lower.
- MANAGEMENT FEE The fee paid to the investment adviser and sub-adviser for
providing investment advice to the fund. Expressed as a percentage of
average net assets after waivers.
- OTHER EXPENSES Fees paid by the fund for items such as administration,
transfer agency, custody, auditing, legal, registration fees and
miscellaneous expenses. Expressed as a percentage of average net assets
after waivers, credits and reimbursements.
FINANCIAL HIGHLIGHTS
A table showing each fund's audited financial performance for up to five
years.
- TOTAL RETURN How much you would have earned on an investment in the fund,
assuming you had reinvested all dividend and capital-gain distributions.
- PORTFOLIO TURNOVER An indication of trading frequency. The funds may sell
securities without regard to the length of time they have been held. A
high turnover rate may increase a fund's transaction costs and negatively
affect its performance. Portfolio turnover may also result in capital-gain
distributions that could raise your income-tax liability.
The ANNUAL REPORT includes the auditor's report, along with each fund's
financial statements. It is available free upon request.
15
<PAGE>
INTERNATIONAL GROWTH FUND
- --- GOAL AND STRATEGIES
- -------------------------------
The International Growth Fund seeks long-term appreciation of capital. To
pursue this goal, it invests in equity securities of companies located or
conducting a majority of their business outside the U.S.
Although it is not an index fund and does not seek to replicate the
performance of any index, this fund expects to focus primarily, but not
exclusively, on countries represented in the Morgan Stanley Capital
International Europe Australasia and Far East (MSCI-EAFE) Index. Although the
fund may invest in emerging markets, it does not expect to invest more than 30%
of assets in securities of emerging-markets issuers.
Under normal market conditions, the fund will invest at least 80% of assets
in equity securities of issuers from at least three foreign countries. The fund
may invest in companies of all sizes.
In managing the fund's investments, the portfolio managers:
- combine top-down regional analysis with bottom-up company research
- look for countries, sectors and companies with solid growth prospects and
attractive market valuations
- focus research efforts on early identification of new investment
opportunities while seeking to manage risk
- --- PORTFOLIO INVESTMENTS
- ----------------------------------
Equity holdings may include:
- common and preferred stocks
- securities convertible into common or preferred stock
- rights and warrants
- depositary receipts
To a limited extent, the fund may also engage in other investment practices.
- --- RISK FACTORS
- ---------------------
This fund's principal risk factors are:
- foreign securities
- market risk
- non-diversified risk
The value of your investment will fluctuate in response to stock-market
movements. Because the fund invests internationally, it carries additional
risks, including currency, information and political risks. These risks are
defined in "More About Risk."
Although the portfolio managers typically have diversified the fund's
investments, the fund's non-diversified status allows the fund to invest a
greater share of its assets in the securities of fewer companies. Non-
diversification might cause the fund to be more volatile than a diversified
fund.
To the extent that the fund invests in emerging markets or focuses on a
single country or region, it takes on additional risks that could hurt its
performance. Investing in emerging markets involves access, operational and
other risks not generally encountered in developed countries. "More About Risk"
details these and certain other investment practices the fund may use. Please
read that section carefully before you invest.
16
<PAGE>
- --- PORTFOLIO MANAGEMENT
- -----------------------------------
Steven D. Bleiberg, Richard Watt, Emily Alejos, Robert B. Hrabchak and Alan
Zlatar manage the fund's investment portfolio. You can find out more about them
in "Meet the Managers."
- --- INVESTOR EXPENSES
- ----------------------------
<TABLE>
<S> <C>
Management fee .80%
All other expenses .41%
----
Total expenses 1.21%
</TABLE>
- --- FINANCIAL HIGHLIGHTS
- --------------------------------
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP, whose report on the fund's financial statements is
included in the ANNUAL REPORT.
<TABLE>
<CAPTION>
8/99 8/98 8/97 8/96 8/95
PERIOD ENDED: ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of year............. $ 22.70 $ 22.22 $ 19.41 $ 18.24 $ 20.73
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income (loss)............... 0.14 0.15 0.18 0.19 0.06
Net gain (loss) on investments and foreign
currency transactions (both realized and
unrealized).............................. 2.90 3.26 2.89 1.05 (1.75)
-------- -------- -------- -------- --------
Total from investment operations........... 3.04 3.41 3.07 1.24 (1.69)
-------- -------- -------- -------- --------
Less distributions:
Dividends from net investment income....... (0.28) -- (0.26) (0.07) --
Distributions from capital gains........... (1.99) (2.93) -- -- (0.80)
-------- -------- -------- -------- --------
Total distributions........................ (2.27) (2.93) (0.26) (0.07) (0.80)
-------- -------- -------- -------- --------
Net asset value, end of year................... $ 23.47 $ 22.70 $ 22.22 $ 19.41 $ 18.24
======== ======== ======== ======== ========
Total return................................... 13.88% 16.74% 15.93% 6.81%(1) (8.06)%(1)
Ratios/supplemental data:
Net assets, end of year (000s omitted)....... $675,118 $623,482 $568,510 $682,271 $773,255
Ratio of expenses to average net assets...... 1.21%(2) 1.14%(2) 1.16%(2) 1.19%(2) 1.25%(2)
Ratio of net investment income (loss) to
average net assets......................... 0.60% 0.72% 0.71% 0.84% 0.35%
Fund turnover rate........................... 182% 141% 126% 86% 78%
</TABLE>
(1) Redemption fees not reflected in total return.
(2) Without the voluntary waiver of advisory fees and administration fees, the
ratios of expenses to average net assets for the Institutional Class would
have been 1.22%, 1.23%, 1.25%, 1.22% and 1.26% for the years ended August
31, 1999, 1998, 1997, 1996 and 1995, respectively.
17
<PAGE>
EUROPEAN EQUITY FUND
- --- GOAL AND STRATEGIES
- -------------------------------
The European Equity Fund seeks capital appreciation. To pursue this goal,
the fund invests primarily in equity securities of Western European companies.
The fund considers Western Europe to include the European Union, Norway and
Switzerland. The European Union currently consists of: Austria, Belgium,
Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, Spain, Sweden and the United Kingdom.
Under normal market conditions, the fund invests at least 65% of assets in
equity securities of companies located in or conducting a majority of their
business in Western Europe or companies whose securities trade primarily in
Western European markets. To enhance return potential, the fund may also pursue
opportunities in other European countries.
The fund intends to diversify its investments across different countries.
However, at times the fund may invest a significant part of its assets in a
single country. The fund may invest in companies of any size, although most of
the fund's investments will be in medium to larger capitalization companies.
In choosing stocks, the portfolio managers consider a number of factors
including:
- stock price relative to the company's rate of earnings growth
- valuation relative to other European companies and market averages
- merger-and-acquisition trends, particularly trends related to the impact
of the introduction of the new single European currency, the euro, on
companies' business strategies
- --- PORTFOLIO INVESTMENTS
- ----------------------------------
This fund currently intends to invest at least 80% of assets in equity
securities of Western European companies. These equity securities include:
- common and preferred stocks
- securities convertible into common stocks
- securities such as rights and warrants, whose values are based on common
stocks
To a limited extent, the fund may engage in other investment practices.
- --- RISK FACTORS
- ---------------------
This fund's principal risk factors are:
- market risk
- foreign securities
- region focus
The value of your investment will fluctuate in response to Western European
stock markets. Because the fund invests internationally, it carries additional
risks, including currency, information and political risks. These risks are
defined in "More About Risk."
Targeting a single region could hurt the fund's performance or may cause the
fund to be more volatile than a more geographically diversified equity fund.
Fund performance is closely tied to economic and political conditions within
Europe.
"More About Risk" details certain other investment practices the fund may
use. Please read that section carefully before you invest.
18
<PAGE>
- --- PORTFOLIO MANAGEMENT
- -----------------------------------
Harold W. Ehrlich, J.H. Cullum Clark and Nancy Nierman manage the fund's
investment portfolio. You can find out more about them in "Meet the Managers."
- --- INVESTOR EXPENSES
- ----------------------------
<TABLE>
<S> <C>
Management fee 0.00%
All other expenses 1.16%
----
Total expenses 1.16%
</TABLE>
- --- FINANCIAL HIGHLIGHTS
- --------------------------------
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP, whose report on the fund's financial statements is
included in the ANNUAL REPORT.
<TABLE>
<CAPTION>
8/99(1)
PERIOD ENDED: ---------------
<S> <C>
PER-SHARE DATA
Net asset value, beginning of period........................ $10.00
------
Income from investment operations:
Net investment income (loss)............................ 0.09
Net gain (loss) on investments and foreign currency
transactions (both realized and unrealized)............ (0.29)
------
Total from investment operations........................ (0.20)
------
Less distributions:
Dividends from net investment income.................... --
Distributions from capital gains........................ --
------
Total distributions..................................... --
------
Net asset value, end of period.............................. $ 9.80
======
Total return................................................ (2.00)%(2)
Ratios/supplemental data:
Net assets, end of period (000s omitted).................. $98
Ratio of expenses to average net assets................... 1.16%(3,4)
Ratio of net income (loss) to average net assets.......... 1.67%(4)
Fund turnover rate........................................ 1.61%(2)
</TABLE>
(1) For the period January 29, 1999 (commencement of operations) through
August 31, 1999.
(2) Not annualized.
(3) Without the voluntary waiver of advisory fees and administration fees, the
ratios of expenses to average net assets for the Institutional Class would
have been 2.29% annualized for the period ended August 31, 1999.
(4) Annualized.
19
<PAGE>
U.S. CORE EQUITY FUND
- --- GOAL AND STRATEGIES
- -------------------------------
The U.S. Core Equity Fund seeks long-term appreciation of capital. To pursue
this goal, it invests in equity securities of large U.S. companies.
In choosing stocks, the fund's portfolio managers use quantitative
techniques to seek to identify companies with improving momentum and reasonable
relative valuations. They emphasize the following five factors:
- earnings
- valuation
- stability/consistency
- relative price strength/sentiment
- financial strength
The managers seek to maintain characteristics that roughly mirror the S&P
500 Index with respect to:
- market capitalization
- industry/sector weightings
- style exposure
- --- PORTFOLIO INVESTMENTS
- ----------------------------------
Under normal market conditions, this fund invests at least 65% of assets in
U.S. equity securities. Equity holdings may consist of:
- common stocks
- preferred stocks
- securities convertible into common stocks
- securities such as rights and warrants, whose values are based on common
stocks
The fund may invest up to 35% of its assets in dollar-denominated American
Depositary Receipts (ADRs) and similar securities of foreign issuers. To a
limited extent, the fund may also engage in other investment practices.
- --- RISK FACTORS
- ---------------------
This fund's principal risk factors are:
- market risk
- non-diversified risk
The value of your investment will fluctuate in response to stock market
movements.
Although the portfolio managers typically have diversified the fund's
investments, the fund's non-diversified status allows the fund to invest a
greater share of its assets in the securities of fewer companies.
Non-diversification might cause the fund to be more volatile than a diversified
fund.
"More About Risk" details certain other investment practices the fund may
use. Please read that section carefully before you invest.
20
<PAGE>
- --- PORTFOLIO MANAGEMENT
- -----------------------------------
William W. Priest, Jr., Eric N. Remole, Marc Bothwell, Michael Welhoelter
and John B. Hurford manage the fund's investment portfolio. You can find out
more about them in "Meet the Managers."
- --- INVESTOR EXPENSES
- ----------------------------
<TABLE>
<S> <C>
Management fee .53%
All other expenses .46%
----
Total expenses .99%
</TABLE>
- --- FINANCIAL HIGHLIGHTS
- --------------------------------
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP, whose report on the fund's financial statements is
included in the ANNUAL REPORT.
<TABLE>
<CAPTION>
8/99 8/98 8/97 8/96 8/95(1)
PERIOD ENDED: ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of
period............................. $ 21.73 $ 24.40 $ 19.05 $ 17.86 $ 15.00
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income (loss)..... 0.07 0.01 0.14 0.20 0.22
Net gain (loss) on investments
(both realized and
unrealized).................... 7.56 0.88 6.82 2.81 2.72
-------- -------- -------- -------- --------
Total from investment
operations..................... 7.63 0.89 6.96 3.01 2.94
-------- -------- -------- -------- --------
Less distributions:
Dividends from net investment
income......................... (0.04) (0.13) (0.20) (0.21) (0.08)
Distributions from realized
capital gains.................. (9.74) (3.43) (1.41) (1.61) --
-------- -------- -------- -------- --------
Total distributions.............. (9.78) (3.56) (1.61) (1.82) (0.08)
-------- -------- -------- -------- --------
Net asset value, end of period....... $ 19.58 $ 21.73 $ 24.40 $ 19.05 $ 17.86
======== ======== ======== ======== ========
Total return......................... 38.07% 3.18% 38.32% 17.59% 19.75%
Ratios/supplemental data:
Net assets, end of period (000s
omitted)......................... $70,081 $63,514 $86,182 $59,015 $31,644
Ratio of expenses to average net
assets........................... 0.99%(2) 1.00%(2) 1.00%(2) 1.00%(2) 1.00%(2)
Ratio of net investment income
(loss) to average net assets..... 0.32% 0.23% 0.67% 1.25% 1.59%
Fund turnover rate................. 110% 164% 93% 127% 123%
</TABLE>
(1) For the period September 1, 1994 (commencement of operations) to
August 31, 1995.
(2) Without the voluntary waiver of advisory fees and administration fees, the
ratios of expenses to average net assets for the Institutional Class would
have been 1.22%, 1.18%, 1.18% and 1.34% for the years ended August 31, 1999,
1998, 1997 and 1996, respectively, and 1.51% annualized for the period ended
August 31, 1999.
21
<PAGE>
FOCUS FUND
- --- GOAL AND STRATEGIES
- -------------------------------
The Focus Fund seeks long-term appreciation of capital. To pursue this goal,
the fund invests in securities of 40-60 U.S. companies. The "top ten" (largest
company holdings) in the fund's portfolio may account for 40% or more of the
fund's assets. The fund's portfolio managers search for industry sectors with
favorable economic profit trends and may focus the portfolio in these sectors.
In choosing stocks, the fund's portfolio managers use both traditional
value-based analyses (such as
price/book ratio), as well as the economic profit of a company measured by its
cash flow relative to its capital assets. The managers look for companies that:
- earn rates of return exceeding their risk-adjusted costs of capital, as
opposed to earning more than they have spent (accounting profits)
- create shareholder value by gaining the most from their investment
spending, or use their cost of capital as a competitive advantage
- have current market valuations that do not fully recognize future
economically profitable growth
The managers believe this approach allows them to identify companies with
low disappointment risk, as well as those with potential restructuring
opportunities. The portfolio managers construct the fund's portfolio by
weighting selected securities based on results of a proprietary analysis and
risk-scoring system.
- --- PORTFOLIO INVESTMENTS
- ----------------------------------
Under normal market conditions, this fund invests at least 65% of assets in
U.S. equity securities. Equity holdings may consist of:
- common stocks
- preferred stocks
- securities convertible into common stocks
- securities such as rights and warrants, whose values are based on common
stocks
The fund may invest without limit in foreign securities, including
dollar-denominated ADRs of foreign issuers. To a limited extent, the fund may
also engage in other investment practices.
- --- RISK FACTORS
- ---------------------
This fund's principal risk factors are:
- market risk
- non-diversified risk
The value of your investment will vary with changes in interest rates and
other factors.
Although the portfolio managers typically have diversified the fund's
investments, the fund's non-diversified status allows the fund to invest a
greater share of its assets in the securities of fewer companies.
Non-diversification might cause the fund to be more volatile than a diversified
fund.
"More About Risk" details certain other investment practices the fund may
use. Please read that section carefully before you invest.
- --- PORTFOLIO MANAGEMENT
- -----------------------------------
James A. Abate and Susan Everley manage the fund's investment portfolio. You
can find out more about them in "Meet the Managers."
22
<PAGE>
- --- INVESTOR EXPENSES
- ----------------------------
<TABLE>
<S> <C>
Management fee .33%
All other expenses .66%
----
Total expenses .99%
</TABLE>
- --- FINANCIAL HIGHLIGHTS
- --------------------------------
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP, whose report on the fund's financial statements is
included in the ANNUAL REPORT.
<TABLE>
<CAPTION>
8/99 8/98(1)
PERIOD ENDED: ----------- -----------
<S> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period........................ $ 13.17 $15.00
------- ------
Income from investment operations:
Net investment income (loss)............................ 0.08 0.01
Net gain (loss) on investments (both realized and
unrealized)........................................... 6.92 (1.84)
------- ------
Total from investment operations........................ 7.00 (1.83)
------- ------
Less distributions:
Dividends from net investment income.................... (0.02) --
Distributions from capital gains........................ -- --
------- ------
Total distributions..................................... (0.02) --
------- ------
Net asset value, end of period.............................. $ 20.15 $13.17
======= ======
Total return................................................ 53.21% (12.20)%(2)
Ratios/supplemental data:
Net assets, end of period (000s omitted).................. $35,394 $22,659
Ratio of expenses to average net assets................... 0.99%(3) 1.00%(3,4)
Ratio of net investment income (loss) to average net
assets.................................................. 0.47% 0.92%(4)
Fund turnover rate........................................ 209% 52%(2)
</TABLE>
(1) For the period August 3, 1998 (commencement of operations) through August
31, 1998.
(2) Not annualized.
(3) Without the voluntary waiver of advisory fees and administration fees, the
ratios of expenses to average net assets for the Institutional Class would
have been 1.42% for the year ended August 31, 1999 and 1.30% annualized for
the period ended August 31, 1998.
(4) Annualized.
23
<PAGE>
LONG-SHORT MARKET NEUTRAL FUND
- --- GOAL AND STRATEGIES
- -------------------------------
The Long-Short Market Neutral Fund seeks long-term capital appreciation
while minimizing exposure to general equity market risk. This fund seeks a total
return greater than the return of the Salomon Smith Barney 1-Month Treasury Bill
Index-TM-.
To pursue its goal, the fund takes long positions in stocks that the
portfolio manager has identified as attractive and short positions in stocks
that the manager has identified as unattractive. In doing so, the fund attempts
to minimize directional market risks associated with investing in the equity
market by neutralizing the effects of general stock market movements on its
performance.
In choosing long and short positions for the fund, the portfolio managers
use quantitative techniques to analyze the tradeoff between the attractiveness
of each position and its impact on the risk of the overall portfolio. The
managers seek to construct a portfolio that has:
- minimal net exposure to the general U.S. equity market
- low to neutral exposure to any particular industry or specific
capitalization range (e.g., large cap, mid cap and small cap)
- --- PORTFOLIO INVESTMENTS
- ----------------------------------
Under normal market conditions, this fund takes long and short positions in
equity securities that are principally traded in U.S. markets. These securities
may include:
- common stocks of U.S. issuers
- American depositary receipts of foreign issuers
To a limited extent, the fund may also engage in other investment practices.
- --- RISK FACTORS
- ---------------------
This fund's principal risk factors are:
- market risk
- non-diversified risk
- short positions
The value of your investment will fluctuate in response to stock market
movements.
Although all mutual funds are subject to the risk that the fund's portfolio
managers will not make good investments, the fund's strategy of taking both long
and short positions increases this risk because long positions could decline in
value at the same time short positions increase. As with other mutual funds,
taking long positions in stocks that decline in value would hurt the fund's
performance. Additionally, however, if the fund were to take short positions in
stocks that increase in value, then it would be likely to underperform similar
stock mutual funds that do not take short positions. Short sales also involve
expenses that will decrease the fund's return.
An investment in the fund involves greater volatility and significantly more
risks than investing in one-month U.S. Treasury bills. Unlike Treasury bills:
- an investment in the fund is not guaranteed by the U.S. government
- the fund does not provide a fixed rate of return
- you can lose money by investing in the fund
24
<PAGE>
Although the portfolio managers typically have diversified the fund's
investments, the fund's non-diversified status allows the fund to invest a
greater share of its assets in the securities of fewer companies.
Non-diversification might cause the fund to be more volatile than a diversified
fund.
"More About Risk" details certain other investment practices the fund may
use. Please read that section carefully before you invest.
- --- PORTFOLIO MANAGEMENT
- -----------------------------------
William W. Priest, Jr., Eric N. Remole, Marc Bothwell and Michael Welhoelter
manage the fund's investment portfolio. You can find out more about them in
"Meet the Managers."
- --- INVESTOR EXPENSES
- ----------------------------
<TABLE>
<S> <C>
Management fee .99%*
All other expenses 2.34%
----
Total expenses 3.33%
</TABLE>
* The management fee of the fund may be increased or decreased pursuant to the
application of an adjustment formula based upon the fund's investment
performance as compared to the Salomon Smith Barney 1-Month U.S. Treasury
Bill Index-TM-. The basic management fee is 1.50%. The management fee, as
adjusted, may range from 1.00% to 2.00%. The management fee as adjusted and
effective August 1, 1999, was 1.00%.
- --- FINANCIAL HIGHLIGHTS
- --------------------------------
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP, whose report on the fund's financial statements is
included in the ANNUAL REPORT.
<TABLE>
<CAPTION>
8/99 8/98(1)
PERIOD ENDED: --------- ----------------
<S> <C> <C>
PER-SHARE DATA
Net asset value, beginning of period........................ $15.27 $15.00
------ ------
Income from investment operations:
Net investment income (loss)............................ 0.39(5) 0.05
Net gain (loss) on investments and securities sold short
(both realized and unrealized)........................ (1.25) 0.22
------ ------
Total from investment operations........................ (0.86) 0.27
------ ------
Less distributions:
Dividends from net investment income.................... (0.07) --
Distributions from capital gains........................ (0.13) --
------ ------
Total distributions..................................... (0.20) --
------ ------
Net asset value, end of period.............................. $14.21 $15.27
====== ======
Total return................................................ (5.68)% 1.80%(2)
Ratios/supplemental data:
Net assets, end of period (000s omitted).................. $5,901 $6,302
Ratio of expenses to average net assets (including
dividend expenses)...................................... 3.33%(3) 4.32%(3,4)
Ratio of expenses to average net assets (excluding
dividend expenses)...................................... 2.00%(3) 2.00%(3,4)
Ratio of net investment income (loss) to average net
assets.................................................. 2.65% 1.96%(4)
Fund turnover rate........................................ 705% 130%(2)
</TABLE>
(1) For the period August 3, 1998 (commencement of operations) through August
31, 1998.
(2) Not annualized.
(3) Without the voluntary waiver of advisory fees and administration fees, the
ratios of expenses to average net assets for the Institutional Class would
have been 2.56% (excluding dividend expense) and 3.93% (including dividend
expense) for the year ended August 31, 1999 and 5.12% (excluding dividend
expense) and 7.44% (including dividend expense) annualized for the period
ended August 31, 1998.
(4) Annualized.
(5) Per share information is calculated using the average share outstanding
method.
25
<PAGE>
U.S. CORE FIXED INCOME FUND
- --- GOAL AND STRATEGIES
- -------------------------------
The U.S. Core Fixed Income Fund seeks high total return. To pursue this
goal, it invests primarily in fixed-income securities of U.S. issuers.
The fund seeks to maintain a weighted-average credit rating comparable to
the AA rating of Standard & Poor's Ratings Services. The fund's weighted-average
maturity will typically be between five and 15 years.
- --- PORTFOLIO INVESTMENTS
- ----------------------------------
Under normal market conditions, this fund invests at least 65% of assets in
U.S. fixed-income securities such as:
- corporate bonds, debentures and notes
- government and agency securities
- mortgage-backed securities
The fund may invest:
- up to 35% of assets in debt securities of foreign issuers
- up to 20% of assets in securities denominated in foreign currency
- up to 10% of assets in non-investment-grade debt securities (junk bonds)
of issuers located in emerging markets
- up to 10% of assets in bonds convertible into equity securities
- up to 10% of assets in preferred stocks
To a limited extent, the fund may also engage in other investment practices.
- --- RISK FACTORS
- ---------------------
This fund's principal risk factors are:
- credit risk
- interest-rate risk
- market risk
- non-diversified risk
You should expect fluctuations in share price, yield and total return,
particularly with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of fixed-income securities. There is also
the risk that an issuer of a debt security will fail to make timely payments of
principal or interest to the fund.
Although the portfolio managers typically have diversified the fund's
investments, the fund's non-diversified status allows the fund to invest a
greater share of its assets in the securities of fewer companies.
Non-diversification might cause the fund to be more volatile than a diversified
fund.
To the extent that it invests in certain securities, the fund may be
affected by additional risks:
- mortgage-backed securities: extension and prepayment risks
- junk bonds: above-average credit, information, market and other risks
- foreign securities: currency, information and political risks
- equity securities (including convertible bonds and preferred stocks):
information, market and other risks
26
<PAGE>
These risks are defined in "More About Risk." That section also details
certain other investment practices the fund may use. Please read "More About
Risk" carefully before you invest.
- --- PORTFOLIO MANAGEMENT
- -----------------------------------
Gregg M. Diliberto, Mark K. Silverstein, Jo Ann Corkran, Jose A. Rodriguez
and Dilip K. Rasgotra manage the fund's investment portfolio. You can find out
more about them in "Meet the Managers."
- --- INVESTOR EXPENSES
- ----------------------------
<TABLE>
<S> <C>
Management fee .21%
All other expenses .23%
----
Total expenses .44%
</TABLE>
- --- FINANCIAL HIGHLIGHTS
- --------------------------------
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP, whose report on the fund's financial statements is
included in the ANNUAL REPORT.
<TABLE>
<CAPTION>
8/99 8/98 8/97 8/96 8/95
PERIOD ENDED: --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of year...... $ 15.72 $ 15.65 $ 15.06 $ 15.42 $ 14.77
-------- -------- -------- -------- -------
Income from investment operations:
Net investment income (loss)........ 0.93 0.84 0.92 0.95 0.88
Net gain (loss) on investments,
futures and foreign currency
transactions (both realized and
unrealized)....................... (0.56) 0.33 0.76 (0.16) 0.61
-------- -------- -------- -------- -------
Total from investment operations.... 0.37 1.17 1.68 0.79 1.49
-------- -------- -------- -------- -------
Less distributions:
Dividends from net investment
income............................ (0.91) (0.87) (0.97) (0.93) (0.84)
Distributions from capital gains.... (0.17) (0.23) (0.12) (0.22) --
-------- -------- -------- -------- -------
Total distributions................. (1.08) (1.10) (1.09) (1.15) (0.84)
-------- -------- -------- -------- -------
Net asset value, end of year............ $ 15.01 $ 15.72 $ 15.65 $ 15.06 $ 15.42
======== ======== ======== ======== =======
Total return............................ 2.37% 7.77% 11.53% 5.23% 10.60%
Ratios/supplemental data:
Net assets, end of year (000s
omitted)............................ $350,844 $393,533 $177,219 $118,596 $99,250
Ratio of expenses to average net
assets.............................. 0.44%* 0.47%* 0.50%* 0.50%* 0.50%*
Ratio of net investment income (loss)
to average net assets............... 5.90% 5.87% 6.31% 6.43% 6.47%
Fund turnover rate.................... 569% 372% 372% 201% 304%
</TABLE>
* Without the voluntary waiver of advisory fees and administration fees, the
ratios of expenses to average net assets for the Institutional Class would
have been .62%, .74%, .78%, .78% and .84% for the years ended August 31,
1999, 1998, 1997, 1996 and 1995, respectively.
27
<PAGE>
HIGH YIELD FUND
- --- GOAL AND STRATEGIES
- -------------------------------
The High Yield Fund seeks high total return. To pursue this goal, it invests
primarily in fixed-income securities rated below investment grade by primary
ratings services such as Standard & Poor's Ratings Service and Moody's Investor
Service. These high-yield, higher-risk securities are commonly known as "junk
bonds."
In choosing investments for the fund, the portfolio managers:
- emphasize top-down analysis of industry sectors and themes to determine
which sectors may benefit from current and future changes in the economy
- seek to allocate risk by investing among a variety of industry sectors
- look at the financial condition of the issuers (including debt/equity
ratios), as well as features of the securities themselves
- --- PORTFOLIO INVESTMENTS
- ----------------------------------
Under normal market conditions, this fund invests at least 65% of assets in
high-yield, higher-risk fixed-income securities issued by U.S. and foreign
corporations, governments and agencies.
The fund may invest:
- without limit in junk bonds, including their unrated equivalents
- up to 35% of assets in equity and equity-related securities, including
preferred stocks, securities convertible into equity securities, warrants,
rights and options
To a limited extent, the fund may also engage in other investment practices.
- --- RISK FACTORS
- ---------------------
This fund's principal risk factors are:
- credit risk
- interest-rate risk
- market risk
- non-diversified risk
The value of your investment will vary with changes in interest rates and
other factors. Typically, a rise in interest rates causes a decline in the
market value of fixed-income securities. You should expect greater fluctuations
in share price, yield and total return compared with less aggressive bond funds.
These fluctuations, whether positive or negative, may be sharp and
unanticipated. Like equity markets, junk-bond markets may react strongly to
adverse news about an issuer or the economy, or to the expectation of adverse
news.
Junk bonds generally provide higher yields than higher-rated debt securities
of similar maturity, but are subject to greater credit, liquidity and valuation
risks. These risks are defined in "More About Risk."
Junk bonds are considered speculative with respect to the issuer's
continuing ability to meet principal and interest payments. In the event of a
payment problem by an issuer of junk bonds, more senior debt (such as bank loans
and investment-grade bonds) will likely be paid a greater portion of payments
owed to it. Because investing in junk bonds involves greater investment risk,
achieving the fund's investment objective will depend more on the portfolio
managers' analysis than would be the case if the fund were investing in
higher-quality bonds.
Although the portfolio managers typically have diversified the fund's
investments, the fund's non-diversified status allows it to invest a greater
share of its assets in the securities of fewer companies. Non-diversification
might cause the fund to be more volatile than a diversified fund.
28
<PAGE>
To the extent that the fund invests in foreign securities and securities of
start-up and other small companies, it takes on further risks that could hurt
its performance. "More About Risk" details these and certain other investment
practices the fund may use. Please read that section carefully before you
invest.
- --- PORTFOLIO MANAGEMENT
- -----------------------------------
Richard Lindquist, Marianne Rossi, Misia Dudley, John Tobin and Mary Ann
Thomas manage the fund's investment portfolio. You can find out more about them
in "Meet the Managers."
- --- INVESTOR EXPENSES
- ----------------------------
<TABLE>
<S> <C>
Management fee .39%
All other expenses .30%
----
Total expenses .69%
</TABLE>
ANALYSIS OF CREDIT QUALITY
During the fiscal period ended August 31, 1999, the percentage of fund
securities holdings by rating category based upon a weighted monthly average
was:
<TABLE>
<CAPTION>
BONDS-S&P RATING:
<S> <C>
AAA......................................................... %
AA.......................................................... %
A........................................................... %
BBB......................................................... 2.57%
BB.......................................................... 10.81%
B........................................................... 59.17%
CCC......................................................... %
CC.......................................................... %
C........................................................... %
Below C or unrated.......................................... 22.32%
Cash/Governments/Agencies................................... 5.13%
-----
TOTAL....................................................... 100%
</TABLE>
29
<PAGE>
- --- FINANCIAL HIGHLIGHTS
- --------------------------------
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP, whose report on the fund's financial statements is
included in the ANNUAL REPORT.
<TABLE>
<CAPTION>
8/99 8/98 8/97 8/96 8/95
PERIOD ENDED --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of year...... $ 16.60 $ 17.08 $ 16.09 $ 15.72 $ 15.94
------- ------- ------- ------- --------
Income from investment operations:
Net investment income (loss)........ 1.42 1.43 1.37 1.47 1.42
Net gain (loss) on investments (both
realized and unrealized).......... (1.33) (0.49) 0.96 0.40 (0.30)
------- ------- ------- ------- --------
Total from investment operations.... 0.09 0.94 2.33 1.87 1.12
------- ------- ------- ------- --------
Less distributions:
Dividends from net investment
income............................ (1.37) (1.42) (1.34) (1.50) (1.34)
Distributions from realized capital
gains............................. -- -- -- -- --
------- ------- ------- ------- --------
Total distributions................. (1.37) (1.42) (1.34) (1.50) (1.34)
------- ------- ------- ------- --------
Net asset value, end of year............ $ 15.32 $ 16.60 $ 17.08 $ 16.09 $ 15.72
======= ======= ======= ======= ========
Total return............................ 0.67% 5.48% 15.17% 12.42% 7.79%(2)
Ratios/supplemental data:
Net assets, end of year (000s
omitted)............................ $95,129 $94,044 $92,630 $75,849 $153,621
Ratio of expenses to average net
assets.............................. 0.69%(1) 0.70%(1) 0.70%(1) 0.88%(1) 1.00%(1)
Ratio of net investment income (loss)
to average net assets............... 9.10% 8.12% 8.44% 8.92% 9.37%
Fund turnover rate.................... 40% 60% 84% 143% 70%
</TABLE>
(1) Without the voluntary waiver of advisory fees and administration fees, the
ratios of expenses to average net assets for the Institutional Class would
have been 1.04%, 1.14%, 1.13%, 1.11% and 1.08% for the years ended
August 31, 1999, 1998, 1997, 1996 and 1995, respectively.
(2) Redemption fees not reflected in total return.
30
<PAGE>
MUNICIPAL BOND FUND
- --- GOAL AND STRATEGIES
- -------------------------------
The Municipal Bond Fund seeks high total return. To pursue this goal, it
invests in municipal securities -- debt obligations issued by state and local
governments within the U.S.
The fund seeks to maintain a weighted-average credit rating comparable to
the AA rating of Standard & Poor's Ratings Services. The fund's weighted average
maturity will typically be between 10 and 15 years.
Holdings may include both general-obligation and revenue securities. General
obligation securities are secured by the issuing government's full faith and
credit, as well as its taxing power. Revenue securities are payable only from
specific revenue sources related to the project being financed.
- --- PORTFOLIO INVESTMENTS
- ----------------------------------
Under normal market conditions, this fund invests at least 80% of assets in
municipal securities.
The fund may invest:
- up to 40% of assets in municipal securities issued to finance private
activities
- without limit in securities rated below investment grade (junk bonds),
including their unrated equivalents
To a limited extent, the fund may also engage in other investment practices.
- --- RISK FACTORS
- ---------------------
This fund's principal risk factors are:
- credit risk
- interest-rate risk
- market risk
- non-diversified status
You should expect fluctuations in share price, yield and total return,
particularly with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of fixed-income securities. There is also
the risk that an issuer of a debt security will fail to make timely payments of
principal or interest to the fund.
Compared to a diversified mutual fund, a non-diversified fund may invest a
greater portion of its assets in the securities of fewer issuers. Because the
fund is non-diversified, its share price and yield might fluctuate more than
they would for a diversified fund.
A portion of the fund's assets may generate income that could be taxable to
you. "More About Risk" details certain other investment practices the fund may
use. Please read that section carefully before you invest.
- --- PORTFOLIO MANAGEMENT
- -----------------------------------
Gregg M. Diliberto, Mark K. Silverstein, Jo Ann Corkran, Jose A. Rodriguez
and Dilip K. Rasgotra manage the fund's investment portfolio. You can find out
more about them in "Meet the Managers."
- --- INVESTOR EXPENSES
- ----------------------------
<TABLE>
<S> <C>
Management fee .28%
All other expenses .71%
----
Total expenses .99%
</TABLE>
31
<PAGE>
- --- FINANCIAL HIGHLIGHTS
- --------------------------------
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP, whose report on the fund's financial statements is
included in the ANNUAL REPORT.
<TABLE>
<CAPTION>
8/99 8/98 8/97 8/96 8/95
PERIOD ENDED: --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of year...... $ 15.12 $ 14.84 $ 14.65 $ 15.46 $ 15.06
------- ------- ------- ------- -------
Income from investment operations:
Net investment income (loss)........ 0.67 0.70 0.72 0.73 0.71
Net gain (loss) on investments (both
realized and unrealized).......... (0.60) 0.40 0.65 (0.37) 0.50
------- ------- ------- ------- -------
Total from investment operations.... 0.07 1.10 1.37 0.36 1.21
------- ------- ------- ------- -------
Less distributions:
Dividends from net investment
income............................ (0.68) (0.71) (0.72) (0.74) (0.76)
Distributions from capital gains.... (0.21) (0.11) (0.46) (0.43) (0.05)
------- ------- ------- ------- -------
Total distributions................. (0.89) (0.82) (1.18) (1.17) (0.81)
------- ------- ------- ------- -------
Net asset value, end of year............ $ 14.30 $ 15.12 $ 14.84 $ 14.65 $ 15.46
======= ======= ======= ======= =======
Total return............................ 0.36% 7.62% 9.74% 2.27% 8.42%
Ratios/supplemental data
Net assets, end of year (000s
omitted)............................ $22,423 $22,229 $19,810 $19,581 $48,978
Ratio of expenses to average net
assets.............................. 0.99%* 1.00%* 1.00%* 1.00%* 1.00%*
Ratio of net investment income (loss)
to average net assets............... 4.49% 4.72% 4.88% 4.62% 4.76%
Fund turnover rate.................... 26% 57% 43% 34% 25%
</TABLE>
* Without the voluntary waiver of advisory fees and administration fees, the
ratios of expenses to average net assets for the Institutional Class would
have been 1.43%, 1.39%, 1.37%, 1.42% and 1.19% for the years ended
August 31, 1999, 1998, 1997, 1996 and 1995, respectively.
32
<PAGE>
STRATEGIC GLOBAL FIXED INCOME FUND
- --- GOAL AND STRATEGIES
- -------------------------------
The Strategic Global Fixed Income Fund seeks high total return. To pursue
this goal, it invests in fixed-income securities of U.S. and foreign issuers
denominated in various currencies.
This fund may invest in any country or region, including emerging markets.
The portfolio managers generally seek to invest in countries exhibiting an
attractive combination of fixed-income returns and currency exchange rates. If
the currency trend is unfavorable, the managers may seek to reduce the currency
risk through hedging. In addition, the portfolio managers may also engage in
currency transactions to seek to generate income.
The fund seeks to maintain a weighted-average credit rating comparable to at
least the BBB rating of Standard & Poor's Ratings Services.
- --- PORTFOLIO INVESTMENTS
- ----------------------------------
Under normal market conditions, this fund invests at least 65% of assets in
fixed-income securities of corporate, government and agency issuers located in
at least three countries, including the U.S.
Fixed-income holdings may include:
- corporate bonds, debentures and notes
- U.S. and foreign government and agency securities
- securities of supranational organizations
- preferred stocks
- securities convertible into equity securities
- mortgage-backed and asset-backed securities
The fund may:
- concentrate its investments in a single country or region
- invest without limit in fixed-income securities rated below
investment-grade (junk bonds)
To a limited extent, the fund may also engage in other investment practices.
- --- RISK FACTORS
- ---------------------
This fund's principal risk factors are:
- credit risk
- foreign securities
- interest-rate risk
- market risk
- non-diversified status
You should expect fluctuations in share price, yield and total return,
particularly with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of fixed-income securities. There is also
the risk that an issuer of a debt security will fail to make timely payments of
either principal or interest to the fund.
International investing, particularly in emerging markets, carries
additional risks, including currency, information and political risks. These
risks are defined in "More About Risk."
33
<PAGE>
Although the portfolio managers typically have diversified the fund's
investments, the fund's non-diversified status allows the fund to invest a
greater share of its assets in the securities of fewer companies.
Non-diversification might cause the fund to be more volatile than a diversified
fund.
To the extent that the fund invests in junk bonds and securities of start-up
and other small companies, it takes on further risks that could hurt its
performance. "More About Risk" details these and certain other investment
practices the fund may use. Please read that section carefully before you
invest.
- --- PORTFOLIO MANAGEMENT
- -----------------------------------
Gregg M. Diliberto, Mark K. Silverstein, Jo Ann Corkran, Jose A. Rodriguez
and Dilip K. Rasgotra manage the fund's investment portfolio. You can find out
more about them in "Meet the Managers."
- --- INVESTOR EXPENSES
- ----------------------------
<TABLE>
<S> <C>
Management fee .00%
All other expenses .74%
----
Total expenses .74%
</TABLE>
- --- FINANCIAL HIGHLIGHTS
- --------------------------------
The figures below have been audited by the fund's independent auditors,
PricewaterhouseCoopers LLP, whose report on the fund's financial statements is
included in the ANNUAL REPORT.
<TABLE>
<CAPTION>
8/99 8/98 8/97 8/96 8/95
PERIOD ENDED: --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA
Net asset value, beginning of year...... $ 15.10 $ 15.41 $ 15.75 $ 15.67 $ 15.00
------- ------- ------- ------- -------
Income from investment operations:
Net investment income (loss)........ 0.79 0.87 0.85 0.87 1.06
Net gain (loss) on investments,
futures and foreign currency
transactions (both realized and
unrealized)....................... (0.35) (0.25) (0.16) 0.58 0.49
------- ------- ------- ------- -------
Total from investment operations.... 0.44 0.62 0.69 1.45 1.55
------- ------- ------- ------- -------
Less distributions:
Dividends from net investment
income............................ (0.29) (0.45) (0.71) (1.22) (0.88)
Distributions from realized capital
gains............................. (0.28) (0.48) (0.32) (0.15) --
------- ------- ------- ------- -------
Total distributions................. (0.57) (0.93) (1.03) (1.37) (0.88)
------- ------- ------- ------- -------
Net asset value, end of year............ $ 14.97 $ 15.10 $ 15.41 $ 15.75 $ 15.67
======= ======= ======= ======= =======
Total return............................ 2.78% 4.19% 4.48% 9.65% 10.72%
Ratios/supplemental data
Net assets, end of year (000s
omitted)............................ $27,342 $28,483 $44,285 $38,348 $19,565
Ratio of expenses to average net
assets.............................. 0.74%* 0.75%* 0.75%* 0.75%* 0.75%*
Ratio of net investment income (loss)
to average net assets............... 4.96% 5.30% 5.31% 7.37% 7.26%
Fund turnover rate.................... 305% 283% 98% 87% 91%
</TABLE>
* Without the voluntary waiver of advisory fees and administration fees, the
ratios of expenses to average net assets for the Institutional Class would
have been 1.27%, 1.17%, 0.98%, 1.07% and 1.29% for the years ended
August 31, 1999, 1998, 1997, 1996 and 1995, respectively.
34
<PAGE>
MORE ABOUT RISK
- --- INTRODUCTION
- ----------------------
A fund's goal and principal strategies largely determine its risk profile.
You will find a concise description of each fund's risk profile in "Key Points."
The fund-by-fund discussions contain more detailed information. This section
discusses other risks that may affect the funds.
The funds may use certain investment practices that have higher risks
associated with them. However, each fund has limitations and policies designed
to reduce many of the risks. The "Certain Investment Practices" table describes
these practices and the limitations on their use.
- --- TYPES OF INVESTMENT RISK
- -------------------------------------
The following risks are referred to throughout this PROSPECTUS.
ACCESS RISK Some countries may restrict a fund's access to investments or
offer terms that are less advantageous than those for local investors. This
could limit the attractive investment opportunities available to the fund.
CORRELATION RISK The risk that changes in the value of a hedging instrument
will not match those of the investment being hedged.
CREDIT RISK The issuer of a security or the counterparty to a contract may
default or otherwise become unable to honor a financial obligation.
CURRENCY RISK Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. Adverse changes in
exchange rates may erode or reverse any gains produced by foreign-currency
denominated investments and may widen any losses.
EXPOSURE RISK The risk associated with investments (such as derivatives) or
practices (such as short selling) that increase the amount of money a fund could
gain or lose on an investment.
- HEDGED Exposure risk could multiply losses generated by a derivative or
practice used for hedging purposes. Such losses should be substantially
offset by gains on the hedged investment. However, while hedging can
reduce or eliminate losses, it can also reduce or eliminate gains.
- SPECULATIVE To the extent that a derivative or practice is not used as a
hedge, a fund is directly exposed to its risks. Gains or losses from
speculative positions in a derivative may be much greater than the
derivative's original cost. For example, potential losses from writing
uncovered call options and from speculative short sales are unlimited.
EXTENSION RISK An unexpected rise in interest rates may extend the life of
a mortgage-backed security beyond the expected prepayment time, typically
reducing the security's value.
INFORMATION RISK Key information about an issuer, security or market may be
inaccurate or unavailable.
INTEREST-RATE RISK Changes in interest rates may cause a decline in the
market value of an investment. With bonds and other fixed-income securities, a
rise in interest rates typically causes a fall in values, while a fall in
interest rates typically causes a rise in values.
LIQUIDITY RISK Certain fund securities may be difficult or impossible to
sell at the time and the price that the fund would like. A fund may have to
lower the price, sell other securities instead or forego an investment
opportunity. Any of these could have a negative effect on fund management or
performance.
MARKET RISK The market value of a security may move up and down, sometimes
rapidly and unpredictably. These fluctuations, which are often referred to as
"volatility," may cause a security to be worth less than it was worth at an
earlier time. Market risk may affect a single issuer, industry, sector of the
economy, or the market as a whole. Market risk is common to most investments --
including stocks and bonds, and the mutual funds that invest in them.
35
<PAGE>
OPERATIONAL RISK Some countries have less-developed securities markets (and
related transaction, registration and custody practices) that could subject a
fund to losses from fraud, negligence, delay or other actions.
POLITICAL RISK Foreign governments may expropriate assets, impose capital
or currency controls, impose punitive taxes, or nationalize a company or
industry. Any of these actions could have a severe effect on security prices and
impair a fund's ability to bring its capital or income back to the U.S. Other
political risks include economic policy changes, social and political
instability, military action and war.
PREPAYMENT RISK Securities with high stated interest rates may be prepaid
prior to maturity. During periods of falling interest rates, a fund would
generally have to reinvest the proceeds at lower rates.
REGULATORY RISK Governments, agencies or other regulatory bodies may adopt
or change laws or regulations that could adversely affect the issuer, the market
value of the security, or a fund's performance.
VALUATION RISK The lack of an active trading market may make it difficult
to obtain an accurate price for a fund security.
YEAR 2000 PROCESSING RISK Many services provided to the funds and their
shareholders by CSAM and certain of its affiliates (CSAM Service Providers) and
the funds' other service providers rely on the functioning of their respective
computer systems. Many computer systems cannot distinguish the year 2000 from
the year 1900, resulting in potential difficulty in performing various
calculations (Year 2000 Issue). The Year 2000 Issue affects practically all
companies, organizations, governments, markets and economies throughout the
world -- including companies or governmental entities in which the funds invest
and markets in which they trade. The funds' operations are dependent upon
interactions among many participants in the financial-services and other related
industries, and the Year 2000 Issue could potentially have an adverse impact on
the handling of security trades, the payment of interest and dividends, pricing,
account services and other fund operations. It has been reported that foreign
institutions have made less progress in addressing the Year 2000 Issue than
major U.S. entities, which could adversely affect the funds' foreign
investments. The CSAM Service Providers are monitoring this progress with the
assistance of the funds' custodian and are evaluating appropriate actions.
The CSAM Service Providers recognize the importance of the Year 2000 Issue
and are taking appropriate steps in preparation for the year 2000. The CSAM
Service Providers anticipate that their systems and those of the funds' other
major service providers will be adapted in time for the year 2000. The CSAM
Service Providers have completed mission critical systems testing and have
participated in industry-wide testing programs. In addition, the CSAM Service
Providers have formulated a contingency plan to address the Year 2000 Issue.
The CSAM Service Providers continue to monitor the Year 2000 Issue and its
potential impact on the funds. However, at this time no one knows precisely what
the degree of impact will be, and there can be no assurance that these steps
will be sufficient to avoid any adverse impact on the funds nor can there be any
assurance that the Year 2000 Issue will not have an adverse effect on the funds'
investments or on global markets or economies, generally. To the extent that the
impact on a fund holding or on markets or economies is negative, it could
seriously affect a fund's performance.
36
<PAGE>
CERTAIN INVESTMENT PRACTICES
For each of the following practices, this table shows the applicable
investment limitation. Risks are indicated for each practice.
KEY TO TABLE:
/x/ Permitted without limitation; does not indicate actual use
20% ITALIC TYPE (E.G., 20%) represents an investment limitation as a
percentage of NET fund assets; does not indicate actual use
20% Roman type (e.g., 20%) represents an investment limitation as a
percentage of TOTAL fund assets; does not indicate actual use
/ / Permitted, but not expected to be used to a significant extent
- -- Not permitted
<TABLE>
<CAPTION>
INTERNATIONAL
GROWTH FUND
INVESTMENT PRACTICE LIMIT
- ---------------------------------------------------------------------------------------------------
<S> <C>
BORROWING The borrowing of money from banks to meet redemptions or for other
temporary or emergency purposes. SPECULATIVE EXPOSURE RISK. 33 1/3%
COUNTRY/REGION FOCUS Investing a significant portion of fund assets in a
single country or region. Market swings in the targeted country or region will
be likely to have a greater effect on fund performance than they would in a
more geographically diversified equity fund. CURRENCY, MARKET, POLITICAL RISKS. /x/
CURRENCY HEDGING Instruments, such as options, futures, forwards or swaps,
intended to manage fund exposure to currency risk. Options, futures or
forwards involve the right or obligation to buy or sell a given amount of
foreign currency at a specified price and future date. Swaps involve the right
or obligation to receive or make payments based on two different currency
rates.(1) CORRELATION, CREDIT, CURRENCY, HEDGED EXPOSURE, LIQUIDITY, POLITICAL,
VALUATION RISKS. /x/
EMERGING MARKETS Countries generally considered to be relatively less
developed or industrialized. Emerging markets often face economic problems
that could subject the fund to increased volatility or substantial declines in
value. Deficiencies in regulatory oversight, market infrastructure,
shareholder protections and company laws could expose the fund to risks beyond
those generally encountered in developed countries. ACCESS, CURRENCY, INFORMATION,
LIQUIDITY, MARKET, OPERATIONAL, POLITICAL, VALUATION RISKS. 30%
EQUITY AND EQUITY-RELATED SECURITIES Common stocks and other securities
representing or related to ownership in a company. May also include warrants,
rights, options, preferred stocks and convertible debt securities. These
investments may go down in value due to stock market movements or negative
company or industry events. LIQUIDITY, MARKET, VALUATION RISKS. /x/
FOREIGN SECURITIES Securities of foreign issuers. May include depositary
receipts. CURRENCY, INFORMATION, LIQUIDITY, MARKET, POLITICAL, VALUATION RISKS. /x/
FUTURES AND OPTIONS ON FUTURES Exchange-traded contracts that enable the fund to
hedge against or speculate on future changes in currency values, interest
rates or stock indexes. Futures obligate the fund (or give it the right, in the
case of options) to receive or make payment at a specific future time based
on those future changes.(1) CORRELATION, CURRENCY, HEDGED EXPOSURE, INTEREST-RATE,
MARKET, SPECULATIVE EXPOSURE RISKS.(2) / /
INVESTMENT-GRADE DEBT SECURITIES Debt securities rated within the four highest
grades (AAA/Aaa through BBB/Baa) by Standard & Poor's or Moody's rating
service, and unrated securities of comparable quality. CREDIT, INTEREST-
RATE, MARKET RISKS. / /
MORTGAGE-BACKED AND ASSET-BACKED (3) SECURITIES Debt securities backed by
pools of mortgages, including passthrough certificates and other
senior classes of collateralized mortgage obligations (CMOs), or other
receivables. CREDIT, EXTENSION, INTEREST-RATE, LIQUIDITY, PREPAYMENT RISKS. / /
MUNICIPAL SECURITIES Debt obligations issued by or on behalf of states,
territories and possessions of the U.S. and the District of Columbia and their
political subdivisions, agencies and instrumentalities. Municipal securities
may be affected by uncertainties regarding their tax status, legislative
changes or rights of municipal-securities holders. CREDIT, INTEREST-RATE, MARKET,
REGULATORY RISKS. [/ /]
NON-INVESTMENT-GRADE DEBT SECURITIES Debt securities and convertible
securities rated below the fourth-highest grade (BBB/Baa) by Standard & Poor's or
Moody's rating service, and unrated securities of comparable quality.
Commonly referred to as junk bonds. CREDIT, INFORMATION, INTEREST-RATE,
LIQUIDITY, MARKET, VALUATION RISKS. / /
OPTIONS Instruments that provide a right to buy (call) or sell (put) a particular
security, currency or index of securities at a fixed price within a certain time
period. The fund may purchase or sell (write) both put and call options for
hedging or speculative purposes.(1) CORRELATION, CREDIT, HEDGED EXPOSURE,
LIQUIDITY, MARKET, SPECULATIVE EXPOSURE RISKS. / /
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
STRATE-
LONG- U.S. GIC
EURO- U.S. SHORT- CORE MUNICI- GLOBAL
PEAN CORE MARKET FIXED HIGH PAL FIXED
EQUITY EQUITY FOCUS NEUTRAL INCOME YIELD BOND INCOME
FUND FUND FUND FUND FUND FUND FUND FUND
INVESTMENT PRACTICE LIMIT
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BORROWING The borrowing of money from
banks to meet redemptions or for other
temporary or emergency purposes.
SPECULATIVE EXPOSURE RISK. 30% 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
COUNTRY/REGION FOCUS Investing a
significant portion of fund assets in a
single country or region. Market swings
in the targeted country or region will
be likely to have a greater effect on
fund performance than they would in a
more geographically diversified equity
fund. CURRENCY, MARKET, POLITICAL RISKS. /x/ / / / / / / /x/ / / -- /x/
CURRENCY HEDGING Instruments, such as
options, futures, forwards or swaps,
intended to manage fund exposure to
currency risk. Options, futures or
forwards involve the right or obligation
to buy or sell a given amount of foreign
currency at a specified price and future
date. Swaps involve the right or
obligation to receive or make payments
based on two different currency rates.(1)
CORRELATION, CREDIT, CURRENCY, HEDGED
EXPOSURE, LIQUIDITY, POLITICAL,
VALUATION RISKS. /x/ / / / / / / /x/ / / -- /x/
EMERGING MARKETS Countries generally
considered to be relatively less
developed or industrialized. Emerging
markets often face economic problems
that could subject the fund to increased
volatility or substantial declines in
value. Deficiencies in regulatory
oversight, market infra-structure,
shareholder protections and company laws
could expose the fund to risks beyond
those generally encountered in developed
countries. ACCESS, CURRENCY, INFORMATION,
LIQUIDITY, MARKET, OPERATIONAL,
POLITICAL, VALUATION RISKS. 20% / / / / / / / / / / / / /x/
EQUITY AND EQUITY-RELATED SECURITIES
Common stocks and other securities
representing or related to ownership in
a company. May also include warrants,
rights, options, preferred stocks and
convertible debt securities. These
investments may go down in value due
to stock market movements or negative
company or industry events. LIQUIDITY,
MARKET, VALUATION RISKS. /x/ /x/ /x/ /x/ / / / / / / / /
FOREIGN SECURITIES Securities of foreign
issuers. May include depositary receipts.
CURRENCY, INFORMATION, LIQUIDITY, MARKET,
POLITICAL, VALUATION RISKS. /x/ / / 35% / / 35% / / -- /x/
FUTURES AND OPTIONS ON FUTURES Exchange-
traded contracts that enable the fund to
hedge against or speculate on future
changes in currency values, interest
rates or stock indexes. Futures obligate
the fund (or give it the right, in the
case of options) to receive or make
payment at a specific future time based
on those future changes.(1) CORRELATION,
CURRENCY, HEDGED EXPOSURE, INTEREST-RATE,
MARKET, SPECULATIVE EXPOSURE RISKS.(2) / / / / / / / / / / / / -- / /
INVESTMENT-GRADE DEBT SECURITIES Debt
securities rated within the four highest
grades (AAA/Aaa through BBB/Baa) by
Standard & Poor's or Moody's rating
service, and unrated securities of
comparable quality. CREDIT, INTEREST-
RATE, MARKET RISKS. / / / / / / / / / / / / / / / /
MORTGAGE-BACKED AND ASSET-BACKED (3)
SECURITIES Debt securities backed by
pools of mortgages, including
passthrough certificates and other
senior classes of collateralized
mortgage obligations (CMOs), or other
receivables. CREDIT, EXTENSION, INTEREST-
RATE, LIQUIDITY, PREPAYMENT RISKS. / / / / / / / / /x/ / / -- /x/
MUNICIPAL SECURITIES Debt obligations
issued by or on behalf of states,
territories and possessions of the U.S.
and the District of Columbia and their
political subdivisions, agencies and
instrumentalities. Municipal securities
may be affected by uncertainties
regarding their tax status, legislative
changes or rights of municipal-securities
holders. CREDIT, INTEREST-RATE, MARKET,
REGULATORY RISKS. / / / / / / / / / / / / /x/ / /
NON-INVESTMENT-GRADE DEBT SECURITIES
Debt securities and convertible
securities rated below the fourth-highest
grade (BBB/Baa) by Standard & Poor's or
Moody's rating service, and unrated
securities of comparable quality.
Commonly referred to as junk bonds.
CREDIT, INFORMATION, INTEREST-RATE,
LIQUIDITY, MARKET, VALUATION RISKS. 20% / / / / / / / / /x/ -- / /
OPTIONS Instruments that provide a right
to buy (call) or sell (put) a particular
security, currency or index of securities
at a fixed price within a certain time
period. The fund may purchase or sell
(write) both put and call options for
hedging or speculative purposes.(1)
CORRELATION, CREDIT, HEDGED EXPOSURE,
LIQUIDITY, MARKET, SPECULATIVE EXPOSURE
RISKS. / / / / / / / / / / / / / / / /
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
INTER-
NATIONAL
GROWTH
FUND
INVESTMENT PRACTICE LIMIT
- ------------------------------------------------------------------------------------------------
<S> <C>
PRIVATIZATION PROGRAMS Foreign governments may sell all or part of their
interests in enterprises they own or control. ACCESS, CURRENCY, INFORMATION,
LIQUIDITY, OPERATIONAL, POLITICAL, VALUATION RISKS. /x/
RESTRICTED AND OTHER ILLIQUID SECURITIES Securities with restrictions on trading,
or those not actively traded. May include private placements. LIQUIDITY, MARKET,
VALUATION RISKS. 15%
SECURITIES LENDING Lending portfolio securities to financial institutions;
the fund receives cash, U.S. government securities or bank letters of credit as
collateral. CREDIT, LIQUIDITY, MARKET, OPERATIONAL RISKS. 33 1/3%
SHORT POSITIONS Selling borrowed securities with the intention of
repurchasing them for a profit on the expectation that the market price will
drop. If a fund were to take short positions in stocks that increase in
value, then it would be likely to underperform similar mutual funds
that do not take short positions. LIQUIDITY, MARKET, SPECULATIVE EXPOSURE
RISKS. [/ /]
SHORT SALES "AGAINST THE BOX" A short sale when the fund owns enough shares
of the security involved to cover the borrowed securities, if necessary.
LIQUIDITY, MARKET, SPECULATIVE EXPOSURE RISKS. / /
SHORT-TERM TRADING Selling a security shortly after purchase. A fund engaging
in short-term trading will have higher turnover and transaction expenses.
Increased short-term capital gains distributions could raise shareholders'
income tax liability. [/ /]
START-UP AND OTHER SMALL COMPANIES Companies with small relative market
capitalizations, including those with continuous operations of less than
three years. INFORMATION, LIQUIDITY, MARKET, VALUATION RISKS. 5%
STRUCTURED INSTRUMENTS Swaps, structured securities and other
instruments that allow the fund to gain access to the performance of a benchmark
asset (such as an index or selected stocks) where the fund's direct invest-
ment is restricted. CREDIT, CURRENCY, INFORMATION,
INTEREST-RATE, LIQUIDITY, MARKET, POLITICAL, SPECULATIVE EXPOSURE,
VALUATION RISKS. / /
TEMPORARY DEFENSIVE TACTICS Placing some or all of the fund's assets in
investments such as money-market obligations and investment-grade debt
securities for defensive purposes. Although intended to avoid losses in
adverse market, economic, political or other conditions, defensive tactics
might be inconsistent with the fund's principal investment strategies and
might prevent the fund from achieving its goal. / /
WARRANTS Options issued by a company granting the holder the right to buy
certain securities, generally common stock, at a specified price and usually
for a limited time. LIQUIDITY, MARKET, SPECULATIVE EXPOSURE RISKS. / /
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS The purchase or sale of
securities for delivery at a future date; market value may change before
delivery. LIQUIDITY, MARKET, SPECULATIVE EXPOSURE RISKS. 25%
ZERO-COUPON BONDS Debt securities that pay no cash income to holders
for either an intial period or until maturity and are issued at a discount
from maturity value. At maturity, return comes from the difference between
purchase price and maturity value. INTEREST-RATE, MARKET RISKS. / /
</TABLE>
1 The fund is not obligated to pursue any hedging strategy. In addition,
hedging practices may not be available, may be too costly to be used
effectively or may be unable to be used for other reasons.
2 The Fund is limited to 5% of net assets for initial margin and premium
amounts on futures positions considered to be speculative by the
Commodity Futures Trading Commission.
3 Although there is no stated investment limitation with respect to
mortgage-backed securities, each fund will limit its investments in
asset-backed securities to 25% of total assets.
39
<PAGE>
<TABLE>
<CAPTION>
STRATE-
LONG- U.S. GIC
EURO- U.S. SHORT- CORE MUNICI- GLOBAL
PEAN CORE MARKET FIXED HIGH PAL FIXED
EQUITY EQUITY FOCUS NEUTRAL INCOME YIELD BOND INCOME
FUND FUND FUND FUND FUND FUND FUND FUND
INVESTMENT PRACTICE LIMIT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRIVATIZATION PROGRAMS Foreign govern-
ments may sell all or part of their
interests in enterprises they own or
control. ACCESS, CURRENCY, INFORMATION,
LIQUIDITY, OPERATIONAL, POLITICAL,
VALUATION RISKS. /x/ / / / / / / / / / / -- / /
RESTRICTED AND OTHER ILLIQUID SECURITIES
Securities with restrictions on trading,
or those not actively traded. May include
private placements. LIQUIDITY, MARKET,
VALUATION RISKS. 15% 15% 15% 15% 15% 15% 15% 15%
SECURITIES LENDING Lending portfolio
securities to financial institutions;
the fund receives cash, U.S. government
securities or bank letters of credit as
collateral. CREDIT, LIQUIDITY, MARKET,
OPERATIONAL RISKS. 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
SHORT POSITIONS Selling borrowed
securities with the intention of
repurchasing them for a profit on the
expectation that the market price will
drop. If a fund were to take short
positions in stocks that increase in
value, then it would be likely to
underperform similar mutual funds
that do not take short positions.
LIQUIDITY, MARKET, SPECULATIVE EXPOSURE
RISKS. / / / / / / /x/ / / / / -- / /
SHORT SALES "AGAINST THE BOX" A short
sale when the fund owns enough shares
of the security involved to cover the
borrowed securities, if necessary.
LIQUIDITY, MARKET, SPECULATIVE EXPOSURE
RISKS. / / / / / / / / / / / / -- / /
SHORT-TERM TRADING Selling a security
shortly after purchase. A fund engaging
in short-term trading will have higher
turnover and transaction expenses.
Increased short-term capital gains
distributions could raise shareholders'
income tax liability. /x/ / / / / / / / / / / / / / /
START-UP AND OTHER SMALL COMPANIES
Companies with small relative market
capitalizations, including those with
continuous operations of less than
three years. INFORMATION, LIQUIDITY,
MARKET, VALUATION RISKS. 5% 5% 5% / / 5% 5% 5% 5%
STRUCTURED INSTRUMENTS Swaps,
structured securities and other
instruments that allow the fund to gain
access to the performance of a benchmark
asset (such as an index or selected
stocks) where the fund's direct invest-
ment is restricted. CREDIT, CURRENCY,
INFORMATION,
INTEREST-RATE, LIQUIDITY, MARKET,
POLITICAL, SPECULATIVE EXPOSURE,
VALUATION RISKS. / / / / / / / / / / / / -- / /
TEMPORARY DEFENSIVE TACTICS Placing
some or all of the fund's assets in
investments such as money-market
obligations and investment-grade debt
securities for defensive purposes.
Although intended to avoid losses in
adverse market, economic, political or
other conditions, defensive tactics
might be inconsistent with the fund's
principal investment strategies and
might prevent the fund from achieving
its goal. / / / / / / / / / / / / / / / /
WARRANTS Options issued by a company
granting the holder the right to buy
certain securities, generally common
stock, at a specified price and usually
for a limited time. LIQUIDITY, MARKET,
SPECULATIVE EXPOSURE RISKS. 15% / / /x/ / / / / / / / / / /
WHEN-ISSUED SECURITIES AND FORWARD
COMMITMENTS The purchase or sale of
securities for delivery at a future
date; market value may change before
delivery. LIQUIDITY, MARKET, SPECULATIVE
EXPOSURE RISKS. 20% 25% 25% / / 25% 25% 25% 25%
ZERO-COUPON BONDS Debt securities
that pay no cash income to holders
for either an intial period or until
maturity and are issued at a discount
from maturity value. At maturity, return
comes from the difference between
purchase price and maturity value.
INTEREST-RATE, MARKET RISKS. / / / / / / / / / / / / -- / /
</TABLE>
40
<PAGE>
MEET THE MANAGERS
The Credit Suisse Asset Management International Equity Management Team is
responsible for the day-to-day management of the International Growth Fund. The
team consists of the following individuals:
[PHOTO]
STEVEN D. BLEIBERG
MANAGING DIRECTOR
/ / Team member since 1991
/ / With Credit Suisse Asset Management since 1991
[PHOTO]
RICHARD WATT
MANAGING DIRECTOR
/ / Team member since 1995
/ / With Credit Suisse Asset Management since 1995
/ / Director and head of emerging markets investments and research at Gartmore
Investment Limited in London, 1992 to 1995
[PHOTO]
EMILY ALEJOS
DIRECTOR
/ / Team member since 1997
/ / With Credit Suisse Asset Management since 1997
/ / Vice president and emerging markets portfolio manager with Bankers Trust,
1993 to 1997
[PHOTO]
ROBERT B. HRABCHAK
DIRECTOR
/ / Team member since 1997
/ / With Credit Suisse Asset Management since 1997
/ / Senior portfolio manager at Merrill Lynch Asset Management, 1995 to 1997
/ / Salomon Brothers, 1993 to 1995
[PHOTO]
ALAN ZLATAR
VICE PRESIDENT
/ / Team member since 1997
/ / With Credit Suisse Asset Management since 1997
/ / European equity analyst at Credit Suisse Group in Zurich, 1994 to 1997
41
<PAGE>
The following individuals manage the European Equity Fund:
[PHOTO]
HAROLD W. EHRLICH
MANAGING DIRECTOR
/ / Co-Portfolio Manager, European Equity Fund since 1999
/ / Joined Credit Suisse Asset Management in 1999 as a result of CSAM's
acquisition of Warburg Pincus Asset Management
/ / With Warburg Pincus Asset Management since 1995
/ / Senior vice president, portfolio manager and analyst at Templeton
Investment Counsel Inc., 1987 to 1995
[PHOTO]
NANCY NIERMAN
DIRECTOR
/ / Co-Portfolio Manager, European Equity Fund since 1999
/ / Joined Credit Suisse Asset Management in 1999 as a result of CSAM's
acquisition of Warburg Pincus Asset Management
/ / With Warburg Pincus Asset Management since 1996
/ / Vice president at Fiduciary Trust Company International, 1990 to 1996
[PHOTO]
J.H. CULLUM CLARK
DIRECTOR
/ / Co-Portfolio Manager, European Equity Fund since 1999
/ / Joined Credit Suisse Asset Management in 1999 as a result of CSAM's
acquisition of Warburg Pincus Asset Management
/ / With Warburg Pincus Asset Management since 1996
/ / Analyst and portfolio manager at Brown Brothers Harriman, 1993 to 1996
42
<PAGE>
The Credit Suisse Asset Management Equity Management Team is responsible for
the day-to-day management of the U.S. Core Equity Fund. The team consists of the
following individuals:
[PHOTO]
WILLIAM W. PRIEST, JR.
CEO, MANAGING DIRECTOR
/ / Team member since 1972
/ / With Credit Suisse Asset Management for more than 25 years
[PHOTO]
ERIC N. REMOLE
MANAGING DIRECTOR
/ / Team member since 1983
/ / With Credit Suisse Asset Management since 1997
/ / Managing director and portfolio manager of Chancellor/LGT Asset Management,
Inc., 1983 to 1997
[PHOTO]
MARC BOTHWELL
VICE PRESIDENT
/ / Team member since 1997
/ / With Credit Suisse Asset Management since 1997
/ / Vice president and portfolio manager at Chancellor/LGT Asset Management,
Inc., 1994 to 1997
[PHOTO]
MICHAEL WELHOELTER
VICE PRESIDENT
/ / Team member since 1993
/ / With Credit Suisse Asset Management since 1997
/ / Vice president and portfolio manager at Chancellor/LGT Asset Management,
Inc., 1986 to 1997
43
<PAGE>
The day-to-day portfolio management of the Focus Fund is the responsibility
of the Credit Suisse Asset Management Value Equity Management Team. The Value
Equity Team consists of the following investment professionals:
[PHOTO]
JAMES A. ABATE
DIRECTOR
/ / Team member since 1995
/ / With Credit Suisse Asset Management since 1995
/ / Managing director at VERT Independent Capital Research, [ ] to 1995
[PHOTO]
D. SUSAN EVERLEY
VICE PRESIDENT
/ / Team member since 1998
/ / With Credit Suisse Asset Management since 1998
/ / Securities analyst at Goldman Sachs, 1996 to 1998
44
<PAGE>
The Credit Suisse Asset Management Structured Equity Team is responsible for
the day-to-day management of the Long-Short Market Neutral Fund. The Structured
Equity Team consists of the following individuals:
[PHOTO]
WILLIAM W. PRIEST, JR.
CEO, MANAGING DIRECTOR
/ / Team member since 1972
/ / With Credit Suisse Asset Management for more than 25 years
[PHOTO]
ERIC N. REMOLE
MANAGING DIRECTOR
/ / Team member since 1997
/ / With Credit Suisse Asset Management since 1997
/ / Managing director and portfolio manager of Chancellor/LGT Asset Management,
Inc., 1983 to 1997
[PHOTO]
MARC BOTHWELL
VICE PRESIDENT
/ / Team member since 1997
/ / With Credit Suisse Asset Management since 1997
/ / Vice president and portfolio manager at Chancellor/LGT Asset Management,
Inc., 1994 to 1997
[PHOTO]
MICHAEL WELHOELTER
VICE PRESIDENT
/ / Team member since 1997
/ / With Credit Suisse Asset Management since 1997
/ / Vice president and portfolio manager at Chancellor/LGT Asset Management,
Inc., 1986 to 1997
45
<PAGE>
The Credit Suisse Asset Management Fixed Income Management Team is
responsible for the day-to-day management of the Municipal Bond Fund and the
U.S. Core Fixed Income Fund and supervising the activities of Credit Suisse
Asset Management Limited, the sub-investment adviser for the Strategic Global
Fixed Income Fund. The team consists of the following individuals:
[PHOTO]
GREGG M. DILIBERTO
MANAGING DIRECTOR
/ / Team member since 1984
/ / Joined Credit Suisse Asset Management in 1995 as a result of CSAM's
acquisition of CS First Boston
/ / With CS First Boston since 1984
[PHOTO]
MARK K. SILVERSTEIN
MANAGING DIRECTOR
/ / Team member since 1991
/ / Joined Credit Suisse Asset Management in 1995 as a result of CSAM's
acquisition of CS First Boston
/ / With CS First Boston since 1991
[PHOTO]
JO ANN CORKRAN
DIRECTOR
/ / Team member since 1997
/ / With Credit Suisse Asset Management since 1997
/ / Director of mortgage- and asset-backed research at Morgan Stanley, 1994 to
1997
[PHOTO]
JOSE A. RODRIGUEZ
DIRECTOR
/ / Team member since 1999
/ / With Credit Suisse Asset Management since 1999
/ / Managing director and senior portfolio manager at Prudential Investments,
1988 to 1999
SUB-INVESTMENT ADVISER
PORTFOLIO MANAGER
STRATEGIC GLOBAL FIXED INCOME FUND
DILIP K. RASGOTRA manages the Strategic Global Fixed Income Fund's
investments. Mr. Rasgotra is a Managing Director of Credit Suisse Asset
Management Limited, the fund's sub-investment adviser. Mr. Rasgotra has
been with Credit Suisse Asset Management Limited since 1983.
----------------------------------
46
<PAGE>
The day-to-day portfolio management of the High Yield Fund is the
responsibility of the Credit Suisse Asset Management High Yield Management Team.
The team consists of the following investment professionals:
[PHOTO]
RICHARD LINDQUIST
MANAGING DIRECTOR
/ / Team member since 1989
/ / Joined Credit Suisse Asset Management in 1995 as a result of CSAM's
acquisition of CS First Boston
/ / With CS First Boston since 1989
[PHOTO]
MISIA DUDLEY
DIRECTOR
/ / Team member since 1989
/ / Joined Credit Suisse Asset Management in 1995 as a result of CSAM's
acquisition of CS First Boston
/ / With CS First Boston since 1989
[PHOTO]
MARIANNE ROSSI
DIRECTOR
/ / Team member since 1991
/ / Joined Credit Suisse Asset Management in 1995 as a result of CSAM's
acquisition of CS First Boston
/ / With CS First Boston since 1991
[PHOTO]
MARYANN THOMAS
DIRECTOR
/ / Team member since 1997
/ / With Credit Suisse Asset Management since 1997
/ / Vice president and high yield bond analyst at Prudential Insurance Company
of America, 1994 to 1997
[PHOTO]
JOHN TOBIN
DIRECTOR
/ / Team member since 1990
/ / Joined Credit Suisse Asset Management in 1995 as a result of CSAM's
acquisition of CS First Boston
/ / With CS First Boston since 1990
[PHOTO]
JOHN DESSAUER
ASSISTANT VICE PRESIDENT
/ / Team member since 1999
/ / With Credit Suisse Asset Management since 1999
/ / Senior analyst at SEI Investments, 1994 to 1997
47
<PAGE>
ABOUT YOUR ACCOUNT
- --- SHARE VALUATION
- --------------------------
The price of your shares is also referred to as their net asset value (NAV).
The NAV is determined at the close of regular trading on the New York Stock
Exchange (NYSE) (usually 4 p.m. Eastern Time) each day the NYSE is open for
business. It is calculated by dividing the Institutional Class's total assets,
less its liabilities, by the number of Institutional Class shares outstanding.
The funds value their 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 believes accurately
reflects fair value. Debt obligations that will mature in 60 days or less are
valued on the basis of amortized cost, unless the Board determines that using
this method would not reflect an investment's value.
Some fund securities may be listed on foreign exchanges that are open on
days (such as U.S. holidays) when a fund does not compute its price. This could
cause the value of the fund's portfolio investments to be affected by trading on
days when you cannot buy or sell shares.
- --- BUYING AND SELLING SHARES
- ---------------------------------------
The funds are open on those days when the NYSE is open, typically Monday
through Friday. If we receive your request in proper form by the close of the
NYSE (usually 4 p.m. ET), 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.
You are entitled to dividend and capital-gain distributions (described below) as
soon as your purchase order is executed.
The funds have authorized financial-services firms, such as banks, brokers
and financial advisors (and other intermediaries that the firms may designate)
to accept orders. When an authorized firm or its designee has received your
order, it is considered received by a fund and will be priced at the
next-computed NAV.
- --- BUYING FUND SHARES
- ------------------------------
INVEST BY WIRE
Institutional Class shares are generally available only to investors who
have entered into an investment management agreement with the adviser. Investors
should complete an account application and forward it to CSAM Institutional
Shares. After calling a fund to place an order, you may wire funds to:
State Street Bank and Trust Company
ABA# 0110 000 28
Attn: Mutual Funds/Custody Department
CSAM Institutional Shares
DDA# 9905-227-6
F/F/C: [ACCOUNT NUMBER AND REGISTRATION]
You can also purchase shares by mailing a check or Federal Reserve draft to:
CSAM Institutional Shares
P.O. Box 8500
Boston, Massachusetts 02266-8500
or overnight to:
Boston Financial
Attn: CSAM Institutional Shares
66 Brooks Drive
Braintree, Massachusetts 02184
Please use either a personal, company or bank check payable in U.S. dollars.
Unfortunately, we cannot accept checks that are not pre-printed or checks that
are payable to you or another party. These types of checks may be returned to
you and your purchase order may not be processed. Limited exceptions include IRA
Rollover and government checks. Federal Reserve drafts are available at national
banks and at state Federal Reserve member banks. Please indicate the fund's name
on any check or Federal Reserve draft. The application contains further
instructions.
48
<PAGE>
INVEST BY PURCHASES IN KIND
With the adviser's permission, investors may acquire Institutional
Class shares in exchange for fund portfolio securities. The portfolio securities
must meet the following requirements:
- - Match the investment objectives and policies of the fund to be purchased
- - Be considered by the fund's adviser or sub-adviser to be an appropriate fund
investment
- - Be easily valued, liquid and not subject to restrictions on transfer
You may have to pay administrative or custody costs if you make purchases in
kind and the execution of your purchase order may be delayed.
MINIMUM INVESTMENTS
Minimum investments for Institutional Class shares are the following,
including investment by purchases in-kind and by exchange (described below):
<TABLE>
<S> <C>
Initial investment $3,000,000
Subsequent investment $ 100,000
</TABLE>
Clients of the adviser, along with the adviser's affiliates, client officers
and certain other related persons, may purchase shares without entering into an
investment management agreement with the adviser subject to a minimum initial
investment of $100,000 and a minimum subsequent investment of $1,000. The
minimum investments for Institutional Shares of certain funds may be waived or
modified by the fund's Board of Directors for former holders of the fund's
Common Shares who have exchanged such shares for Institutional Shares at the
request of the Board.
You must maintain an account balance in the fund of at least $500. If your
account balance falls below the minimum required to keep it open due to
redemptions or exchanges, the fund may ask you to increase your balance. If it
is still below the minimum after 30 days, the fund may close your account and
mail you the proceeds.
- --- SELLING FUND SHARES
- -------------------------------
SELL FUND SHARES IN WRITING
You can sell (redeem) your shares on any day the funds are open by writing
to CSAM Institutional Shares. The request must be signed by all record owners
(exactly as registered) or by an authorized person such as an investment adviser
or other agent. Additional documents may be required for redemption by a
corporation, partnership, trust, fiduciary, executor or administrator or in
certain other cases.
REDEMPTION PROCEEDS
After selling fund shares you will receive the proceeds by either wire or
check, mailed within seven days of the redemption. For shares purchased by
check, if the fund has not yet collected payment for the shares you are selling
it will delay sending you the proceeds until your purchase payment clears. This
may take up to 10 calendar days after the purchase.
- --- EXCHANGING FUND SHARES
- ------------------------------------
You may exchange Institutional Class shares for Institutional shares in any
other CSAM Fund by writing to CSAM Institutional Shares. If you are purchasing
shares in a new fund by exchange, the new fund account will be registered
exactly as the fund from which you are exchanging. If you want to change account
information or privileges you must specify this in the redemption request and
have all signatures guaranteed. You can obtain a signature guarantee from most
banks or securities dealers, but not from a notary public.
49
<PAGE>
- --- OTHER POLICIES
- ------------------------
TRANSACTION DETAILS
Your purchase order will be canceled and you may be liable for losses or
fees incurred by a fund if:
- your investment check or Federal Reserve draft does not clear
- you place a telephone order by 4 p.m. ET and we do not receive your wire
that day
If you wire money without first calling the fund to place an order, and your
wire arrives after the close of regular trading on the NYSE, then your order
will not be executed until the end of the next business day. In the meantime,
your payment will be held uninvested. Your bank or other financial-services firm
may charge a fee to send or receive wire transfers.
While we monitor telephone servicing resources carefully, during periods of
significant economic or market change it may be difficult to place orders by
telephone.
Uncashed redemption or distribution checks do not earn interest.
SPECIAL SITUATIONS
Each fund reserves the right to:
- refuse any purchase or exchange request, including those from any person
or group who, in the fund's view, is likely to engage in excessive trading
- change or discontinue its exchange privilege after 60 days' notice to
current investors, or temporarily suspend this privilege during unusual
market conditions
- change its minimum investment amounts after 15 days' notice to current
investors of any increases
- charge a wire-redemption fee
- make a "redemption in kind" -- payment in portfolio securities rather than
cash -- for certain large redemptions that could hurt fund operations
- suspend redemptions or postpone payment dates as permitted by the
Investment Company Act of 1940 (such as during periods other than weekends
or holidays when the NYSE is closed, or when trading on the NYSE is
restricted, or any other time that the SEC permits)
- stop offering its shares for a period of time (such as when management
believes that a substantial increase in assets could adversely affect it)
ACCOUNT CHANGES
You should update your account records whenever you change your address. You
can call 800-401-2230 to change your account information or privileges.
- --- ACCOUNT STATEMENTS
- -------------------------------
In general, you will receive account statements as follows:
- after every transaction that affects your account balance (except for
distribution reinvestments and automatic transactions)
- after any changes of name or address of the registered owner(s)
- otherwise, every quarter
You will receive annual and semiannual financial reports.
- --- DISTRIBUTIONS
- ----------------------
As a fund investor, you will receive distributions.
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Each fund earns dividends from stocks and interest from bond, money-market
and other investments. These are passed along as dividend distributions. A fund
realizes capital gains whenever it sells securities for a higher price than it
paid for them. These are passed along as capital-gain distributions.
The U.S. Core Fixed Income, High Yield and Strategic Global Fixed Income
Funds declare and pay dividend distributions quarterly. The Municipal Bond Fund
declares and pays dividend distributions monthly. The other funds typically
distribute dividends annually, usually in December. Each of the funds typically
distribute capital gains annually in December.
Most investors have their distributions reinvested in additional shares of
the same fund. Distributions will be reinvested unless you choose on your
account application to have a check for your distributions mailed to you or sent
by electronic transfer.
- --- TAXES
- ------------
As with any investment, you should consider how your investment in a fund
will be taxed. If your account is not a tax-advantaged account, you should be
especially aware of the following potential tax implications. Please consult
your tax professional concerning your own tax situation.
TAXES ON DISTRIBUTIONS
As long as a fund continues to meet the requirements for being a
tax-qualified regulated investment company, the fund pays no federal income tax
on the earnings it distributes to shareholders.
Distributions you receive from a fund, whether reinvested or taken in cash,
are generally considered taxable. Distributions from a fund's long-term capital
gains are taxed as long-term capital gains, regardless of how long you have held
fund shares. Distributions from other sources are generally taxed as ordinary
income. The funds will mostly make capital-gain distributions, which could be
short-term or long-term.
If you buy shares shortly before or on the "record date" -- the date that
establishes you as the person to receive the upcoming distribution -- you may
receive a portion of the money you just invested in the form of a taxable
distribution.
The Form 1099 that is mailed to you every January details your distributions
and their federal tax category, including the portion taxable as long-term
capital gains.
Any gain or loss from a fund's short positions will be short-term gain or
loss, regardless of the length of time the short positions remain open. Thus,
net gain from short positions will potentially increase the amount of the fund's
ordinary income dividends, while net losses would potentially reduce the amount
of the fund's long-term gain distributions.
MUNICIPAL BOND FUND -- SPECIAL TAX MATTERS
The Municipal Bond Fund intends to pay federally tax-exempt distributions
derived from qualifying municipal securities.
Some income from the fund that is exempt from federal tax may be subject to
state and local income taxes. In addition, the fund may invest a portion of its
assets in securities that generate income that is not exempt from federal or
state income tax. The interest earned by the fund from its investments in
private entities is a tax-preference item for purposes of the federal
alternative-minimum tax.
TAXES ON TRANSACTIONS
Any time you sell or exchange shares, it is considered a taxable event for
you. Depending on the purchase price and the sale price of the shares you sell
or exchange, you may have a gain or loss on the transaction. In addition, you
may have a gain or loss when you purchase shares in exchange for fund portfolio
securities. You are responsible for any tax liabilities generated by your
transactions.
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OTHER INFORMATION
- --- ABOUT THE DISTRIBUTOR
- ----------------------------------
Credit Suisse Asset Management Securities, Inc., at no cost, is responsible
for:
- making the funds available to you
- account servicing and maintenance
- other administrative services related to the sale of the Institutional
Class
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FOR MORE INFORMATION
More information about these funds is available free upon request, including
the following:
- --- ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS
- ---------------------------------------------------------------
Includes financial statements, portfolio investments and detailed
performance information.
The ANNUAL REPORT also contains a letter from the funds' managers discussing
market conditions and investment strategies that significantly affected fund
performance during their past fiscal year.
- --- OTHER INFORMATION
- ------------------------------
A current STATEMENT OF ADDITIONAL INFORMATION (SAI) which provides more
details about the funds is on file with the Securities and Exchange Commission
(SEC) and is incorporated by reference.
You may visit the SEC's Internet website (www.sec.gov) to view the SAI,
material incorporated by reference and other information. You can also obtain
copies by visiting the SEC's Public Reference Room in Washington, DC (phone
800-SEC-0330) or by sending your request and a duplicating fee to the SEC's
Public Reference Section, Washington, DC 20549-6009.
Please contact CSAM Institutional Shares to obtain, without charge, the SAI
and ANNUAL AND SEMIANNUAL REPORTS and to make shareholder inquiries:
<TABLE>
<S> <C>
BY TELEPHONE:
800-275-4232
BY MAIL:
CSAM Institutional Shares
P.O. Box 8500
Boston, MA 02266-8500
BY OVERNIGHT OR COURIER SERVICE:
Boston Financial
Attn: CSAM Institutional Shares
66 Brooks Drive
Braintree, MA 02171
SEC FILE NUMBER:
CSAM Institutional Shares/Warburg Pincus
International Growth Fund 811-08933
European Equity Fund 811-08903
U.S. Core Equity Fund 811-08919
Focus Fund 811-08921
Long-Short Market Neutral Fund 811-08925
U.S. Core Fixed Income Fund 811-08917
High Yield Fund 811-08927
Municipal Bond Fund 811-08923
Strategic Global Fixed Income Fund 811-08931
</TABLE>
<TABLE>
<C> <S>
[C S A M] A member of [LOGO]
P.O. BOX 8500, BOSTON, MA 02266-8500
800-401-2230
</TABLE>
CREDIT SUISSE ASSET MANAGEMENT SECURITIES, INC., DISTRIBUTOR CSISB-1-0100
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 2, 1999
STATEMENT OF ADDITIONAL INFORMATION
January 1, 2000
Common Shares of the
WARBURG PINCUS GLOBAL TELECOMMUNICATIONS FUND
WARBURG PINCUS HIGH YIELD FUND
WARBURG PINCUS MUNICIPAL BOND FUND
WARBURG PINCUS FOCUS FUND
WARBURG PINCUS LONG-SHORT MARKET NEUTRAL FUND
P.O. Box 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 High Yield Fund ("High Yield Fund"),
Warburg Pincus Municipal Bond Fund ("Municipal Bond Fund"), Warburg Pincus Focus
Fund ("Focus Fund") and Warburg Pincus Long-Short Market Neutral Fund
("Long-Short Neutral Fund") (each a "Fund" and collectively, the "Funds") that
supplements information contained in the PROSPECTUSES for the Common Shares of
High Yield and Municipal Bond Funds, dated January 1, 2000, Focus Fund, dated
January 1, 2000 and Global Telecommunications Fund, dated January 1, 2000 and
the combined PROSPECTUS for the Common and Institutional Shares of the
Long-Short Neutral Fund dated January 1, 2000, 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, 1999, which
either accompanies this STATEMENT OF ADDITIONAL INFORMATION or has previously
been provided to the investor to whom this STATEMENT OF ADDITIONAL INFORMATION
is being sent, is incorporated herein by reference.
This STATEMENT OF ADDITIONAL INFORMATION is not itself a
prospectus and no investment in shares of the Funds should be made solely upon
the information contained herein. Copies of the PROSPECTUSES, ANNUAL REPORTS and
information regarding each Fund's current performance may be obtained by writing
or telephoning:
COMMON SHARES ADVISOR SHARES
Warburg Pincus Funds Warburg Pincus Advisor Funds
P.O. Box 9030 P.O. Box 9030
Boston, Massachusetts 02205-9030 Boston, Massachusetts 02205-9030
800-WARBURG Attn: Institutional Services
800-222-8977
<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.....................................................................5
Lending of Portfolio Securities.............................................5
Borrowing...................................................................6
Securities of Other Investment Companies....................................6
Options Generally...........................................................6
Securities Options..........................................................6
Securities Index Options...................................................10
Common Investment Objectives and Policies -- Global Telecommunications,
High Yield, Municipal Bond and Focus Funds.................................10
When-Issued Securities, Delayed Delivery Transactions And Forward
Commitments................................................................10
Stand-By Commitment Agreements.............................................11
Common Investment Objectives and Policies -- Global Telecommunications,
High Yield, and Focus and Long-Short Neutral Funds.........................12
U.S. Government Securities.................................................12
Foreign Investments........................................................13
Foreign Debt Securities.................................................13
Foreign Currency Exchange...............................................14
Information.............................................................14
Political Instability...................................................14
Foreign Markets.........................................................15
Increased Expenses......................................................15
Dollar-Denominated Debt Securities of Foreign Issuers...................15
Depositary Receipts.....................................................15
Brady Bonds.............................................................15
Emerging Markets........................................................16
Sovereign Debt..........................................................16
Convertible Securities.....................................................17
Debt Securities............................................................18
Below Investment Grade Securities..........................................18
Mortgage-Backed Securities.................................................20
Asset-Backed Securities.................................................21
Loan Participations and Assignments.....................................22
Structured Notes, Bonds or Debentures...................................22
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Collateralized Mortgage Obligations.....................................22
Zero Coupon Securities..................................................23
Futures Activities.........................................................24
Futures Contracts.......................................................24
Options on Futures Contracts............................................25
Currency Exchange Transactions.............................................26
Forward Currency Contracts..............................................26
Currency Options........................................................27
Currency Hedging........................................................27
Hedging Generally..........................................................28
Short Sales "Against the Box..................................................29
Section 4(2) Paper.........................................................29
Supplemental Investment Objectives and Policies -- Global Telecommunications
and Focus Funds............................................................30
Rights Offerings and Purchase Warrants.....................................30
Supplemental Investment Objectives and Policies -- Global Telecommunications
Fund.......................................................................30
Supplemental Investment Objectives and Policies -- Municipal Bond Fund........31
Supplemental Investment Objectives and Policies -- Long-Short Neutral Fund....32
INVESTMENT RESTRICTIONS.......................................................33
PORTFOLIO VALUATION...........................................................35
PORTFOLIO TRANSACTIONS........................................................36
PORTFOLIO TURNOVER............................................................39
MANAGEMENT OF THE FUNDS.......................................................40
Officers and Board of Directors............................................40
Directors' Total Compensation for Fiscal Year Ended August 31, 1999........44
Investment Adviser and Co-Administrators...................................45
Custodian and Transfer Agent...............................................50
Organization of the Funds..................................................50
Distribution and Shareholder Servicing.....................................52
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................54
Automatic Cash Withdrawal Plan.............................................54
EXCHANGE PRIVILEGE............................................................55
ADDITIONAL INFORMATION CONCERNING TAXES.......................................55
The Funds and Their Investments............................................56
Special Tax Considerations.................................................60
Straddles...............................................................60
Options and Section 1256 Contracts......................................60
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Foreign Currency Transactions...........................................61
Passive Foreign Investment Companies....................................62
Asset Diversification Requirement.......................................62
Foreign Taxes...........................................................63
Fund Taxes on Swaps.....................................................63
Dividends and Distributions.............................................63
Sales of Shares.........................................................64
Backup Withholding......................................................64
NOTICES.................................................................64
Other Taxation..........................................................65
DETERMINATION OF PERFORMANCE..................................................65
Total Return...............................................................65
Yield......................................................................67
INDEPENDENT ACCOUNTANTS AND COUNSEL...........................................70
MISCELLANEOUS.................................................................70
FINANCIAL STATEMENTS..........................................................73
APPENDIX A ---- DESCRIPTION OF RATINGS.......................................A-1
APPENDIX B ---- DESCRIPTION OF FUTURES TRANSACTIONS..........................B-1
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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, the Warburg Pincus Select Economic Value Equity Fund)
is to provide long-term appreciation of capital.
The investment objective of the High Yield and Municipal Bond
Funds is to provide high total return.
The investment objective of the Long-Short Neutral Fund is to
seek long-term capital appreciation while minimizing exposure to general
equity market risk.
Unless otherwise indicated, all of the Funds are permitted,
but not obligated, to engage in the following investment strategies, subject to
any percentage limitations set forth below. The Funds do not represent that
these techniques are available now or will be available at any time in the
future.
COMMON INVESTMENT OBJECTIVES AND POLICIES -- ALL FUNDS
NON-DIVERSIFIED STATUS. Each Fund is classified as
non-diversified within the meaning of the Investment Company Act of 1940, as
amended (the "1940 Act"), which means that each Fund is not limited by such Act
in the proportion of its assets that it may invest in securities of a single
issuer. As a non-diversified fund, each Fund may invest a greater proportion of
its assets in the obligations of a smaller number of issuers and, as a result,
may be subject to greater risk with respect to portfolio securities. The
investments of these Funds will be limited, however, in order to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"). See "Additional Information Concerning Taxes." To
qualify, a Fund will comply with certain requirements, including limiting its
investments so that at the close of each quarter of the taxable year (i) not
more than 25% of the market value of its total assets will be invested in the
securities of a single issuer, and (ii) with respect to 50% of the market value
of its total assets, not more than 5% of the market value of its total assets
will be invested in the securities of a single issuer and the Fund will not own
more than 10% of the outstanding voting securities of a single issuer.
TEMPORARY INVESTMENTS. To the extent permitted by its
investment objectives and policies, each of the Funds may hold cash or cash
equivalents pending investment or to meet redemption requests. In addition, for
defensive purposes due to abnormal market conditions or economic situations as
determined by the Credit Suisse Asset Management, LLC ("CSAM"), the Fund's
adviser (the "Adviser"), each Fund may
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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 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, acting under the supervision
of the Fund's Board of Directors (the "Board"), 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
2
<PAGE>
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 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, but does not
presently intend to, invest 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
3
<PAGE>
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 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 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.
4
<PAGE>
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, 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
Fund's Board of Directors (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, letters of credit or
U.S. government securities, which are maintained at all times in an amount equal
to at least 100% of the current market value of the loaned securities. Any gain
or loss in the market price of the securities loaned that might occur during the
term of the loan would be for the account of the 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 100% cash collateral or equivalent securities
of the type discussed in the preceding paragraph from the borrower;
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<PAGE>
(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 331/3 percent 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 net assets. Although the principal of such borrowings will
be fixed, a Fund's assets may change in value during the time the borrowing is
outstanding. Each Fund expects that some of its borrowings may be made on a
secured basis. In such situations, either the custodian will segregate the
pledged assets for the benefit of the lender or arrangements will be made with a
suitable subcustodian, which may include the lender.
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 may purchase and write (sell)
options on securities, securities indices and currencies for both hedging
purposes and to increase total return, which may involve speculation.
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
6
<PAGE>
foreign and U.S. exchanges, as well as OTC options. A Fund realizes fees
(referred to as "premiums") for granting the rights evidenced by the options it
has written. A put option embodies the right of its purchaser to compel the
writer of the option to purchase from the option holder an underlying security
at a specified price for a specified time period or at a specified time. In
contrast, a call option embodies the right of its purchaser to compel the writer
of the option to sell to the option holder an underlying security at a specified
price for a specified time period or at a specified time.
The potential loss associated with purchasing an option is
limited to the premium paid, and the premium would partially offset any gains
achieved from its use. However, for an option writer the exposure to adverse
price movements in the underlying security or index is potentially unlimited
during the exercise period. Writing securities options may result in substantial
losses to a Fund, force the sale or purchase of portfolio securities at
inopportune times or at less advantageous prices, limit the amount of
appreciation the Fund could realize on its investments or require the Fund to
hold securities its would otherwise sell.
The principal reason for writing covered options on a security
is to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. In return for a premium, a Fund, as
the writer of a covered call option, forfeits the right to any appreciation in
the value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). A Fund that
writes call options retains the risk of an increase in the price of the
underlying security. The size of the premiums that the Funds may receive may be
adversely affected as new or existing institutions, including other investment
companies, engage in or increase their option-writing activities.
If security prices rise, a put writer would generally expect
to profit, although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that the
writer will also profit, because it should be able to close out the option at a
lower price. If security prices decline, the put writer would expect to suffer a
loss. This loss may be less than the loss from purchasing the underlying
instrument directly to the extent that the premium received offsets the effects
of the decline.
In the case of options written by a Fund that are deemed
covered by virtue of the Fund's holding convertible or exchangeable preferred
stock or debt securities, the time required to convert or exchange and obtain
physical delivery of the underlying common stock with respect to which the Fund
has written options may exceed the time within which the Fund must make delivery
in accordance with an exercise notice. In these instances, a Fund may purchase
or temporarily borrow the underlying securities for purposes of physical
delivery. By so doing, the Fund will not bear any market risk, since the Fund
will have the absolute right to receive from the issuer of the underlying
security an equal number of shares to replace the borrowed securities, but the
Fund may incur
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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 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
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<PAGE>
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
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<PAGE>
other sanctions. These limits may restrict the number of options the Funds will
be able to purchase on a particular security.
SECURITIES INDEX OPTIONS. A securities index measures the
movement of a certain group of securities by assigning relative values to the
securities included in the index, fluctuating with changes in the market values
of the securities included in the index. Some securities index options are based
on a broad market index, such as the NYSE Composite Index, or a narrower market
index such as the Standard & Poor's 100. Indexes may also be based on a
particular industry or market segment.
Options on securities indexes are similar to options on
securities except that (i) the expiration cycles of securities index options are
monthly, while those of securities options are currently quarterly, and (ii) the
delivery requirements are different. Instead of giving the right to take or make
delivery of securities at a specified price, an option on a securities index
gives the holder the right to receive a cash "exercise settlement amount" equal
to (a) the amount, if any, by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of exercise, multiplied by (b)
a fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the securities index upon which the option is based being
greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the index and the exercise price of the option times a
specified multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Securities index options may
be offset by entering into closing transactions as described above for
securities options.
COMMON INVESTMENT OBJECTIVES AND POLICIES -- GLOBAL TELECOMMUNICATIONS, HIGH
YIELD, MUNICIPAL BOND AND FOCUS FUNDS
WHEN-ISSUED SECURITIES, DELAYED DELIVERY TRANSACTIONS AND
FORWARD COMMITMENTS. Each Fund may purchase securities on a when-issued basis or
on a forward commitment basis, and it may purchase or sell securities for
delayed delivery (I.E., payment or 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
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<PAGE>
purpose of leverage, but may sell the right to acquire a when-issued security
prior to its acquisition or dispose of its right to deliver or receive
securities in a delayed-delivery transaction before the settlement date if
the Adviser deems it advantageous to do so. The payment obligation and the
interest rate that will be received on when-issued and delayed-delivery
transactions are fixed at the time the buyer enters into the commitment. Due
to fluctuations in the value of securities purchased or sold on a when-issued
or delayed-delivery basis, the prices obtained on such securities may be higher
or lower than the prices available in the market on the dates when the
investments are actually delivered to the buyers. Each Fund will establish
a segregated account with its custodian consisting of cash or liquid
securities in an amount equal to its when-issued and delayed-delivery
purchase commitments and will segregate the securities underlying
commitments to sell securities for delayed delivery.
When a Fund agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash or liquid securities that are
acceptable as collateral to the appropriate regulatory authority equal to the
amount of the commitment in a segregated account. Normally, the custodian will
set aside portfolio securities to satisfy a purchase commitment, and in such a
case a Fund may be required subsequently to place additional assets in the
segregated account in order to ensure that the value of the account remains
equal to the amount of the Fund's commitment. It may be expected that a Fund's
net assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash. When
a Fund engages in when-issued or delayed-delivery transactions, it relies on the
other party to consummate the trade. Failure of the seller to do so may result
in the Funds' incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
STAND-BY COMMITMENT AGREEMENTS. Each Fund may from time to
time enter into stand-by commitment agreements. The Funds do not presently
intend to invest more than 5% of net assets in stand-by commitment agreements
during the coming year.
Such agreements commit a Fund, for a stated period of time, to
purchase a stated amount of a fixed income securities which may be issued and
sold to the Fund at the option of the issuer. The price and coupon of the
security is fixed at the time of the commitment. At the time of entering into
the agreement, a Fund is paid a commitment fee, regardless of whether or not the
security is ultimately issued. A Fund will enter into such agreements only for
the purpose of investing in the security underlying the commitment at a yield
and price that is considered advantageous to a Fund. Each Fund will not enter
into a stand-by commitment with a remaining term in excess of 45 days and it
will limit its 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
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in an aggregate amount equal to the purchase price of the securities underlying
the commitment. The assets contained in the segregated account will be
marked-to-market daily and additional assets will be placed in such account on
any day in which assets fall below the amount of the purchase price. A Fund's
liquidity and ability to manage its assets might be affected when it sets aside
cash or portfolio securities to cover such commitments.
There can be no assurance that the securities subject to a
stand-by commitment will be issued and the value of the security, if issued, on
the delivery date may be more or less than its purchase price. Because the
issuance of the security underlying the commitment is at the option of the
issuer, a Fund may bear the risk of a decline in the value of such security and
may not benefit from an appreciation in the value of the security during the
commitment period.
The purchase of a security subject to a stand-by commitment
agreement and the related commitment fee will be recorded on the date on which
the security can reasonably be expected to be issued, and the value of the
security will be adjusted by the amount of the commitment fee. In the event the
security is not issued, the commitment fee will be recorded as income on the
expiration date of the stand-by commitment.
COMMON INVESTMENT OBJECTIVES AND POLICIES -- GLOBAL TELECOMMUNICATIONS, HIGH
YIELD, AND FOCUS AND LONG-SHORT NEUTRAL FUNDS
U.S. GOVERNMENT SECURITIES. The obligations issued or
guaranteed by the U.S. government in which a Fund may invest include direct
obligations of the U.S. Treasury and obligations issued by U.S. government
agencies and instrumentalities. Included among direct obligations of the United
States are Treasury Bills, Treasury Notes and Treasury Bonds, which differ in
terms of their interest rates, maturities and dates of issuance. Treasury Bills
have maturities of less than one year, Treasury Notes have maturities of one to
10 years and Treasury Bonds generally have maturities of greater than 10 years
at the date of issuance. Included among the obligations issued by agencies and
instrumentalities of the United States are instruments that are supported by the
full faith and credit of the United States (such as certificates issued by the
Government National Mortgage Association ("GNMA")); instruments that are
supported by the right of the issuer to borrow from the U.S. Treasury (such as
securities of Federal Home Loan Banks); and instruments that are supported by
the credit of the instrumentality (such as Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") bonds).
Other U.S. government securities the Funds may invest in
include securities issued or guaranteed by the Federal Housing Administration,
Farmers Home Loan 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
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<PAGE>
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.
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
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issuer (including supranational issuers). Debt securities of quasi-governmental
agencies are issued by entities owned by either a national, state or equivalent
government or are obligations of a political unit that is not backed by the
national government's full faith and credit and general taxing powers. An
example of a multinational currency unit is the euro, the new single currency
for eleven Economic and Monetary Union member states. The euro represents
specified amounts of the currencies of certain member states of the Economic and
Monetary Union and was introduced on January 1, 1999. National currencies of the
eleven member states participating in the euro will become subdivisions of the
euro, but will continue to circulate as legal tender until January 1, 2002, when
they will be withdrawn permanently.
FOREIGN CURRENCY EXCHANGE. Since the Funds may invest in
securities denominated in currencies of non-U.S. countries, the Funds may be
affected favorably or unfavorably by exchange control regulations or changes in
the exchange rate between such currencies and the dollar. A change in the value
of a foreign currency relative to the U.S. dollar will result in a corresponding
change in the dollar value of the Fund assets denominated in that foreign
currency. Changes in foreign currency exchange rates may also affect the value
of dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by a Fund. Unless otherwise contracted, the rate of exchange
between the U.S. dollar and other currencies is determined by the forces of
supply and demand in the foreign exchange markets. Changes in the exchange rate
may result over time from the interaction of many factors directly or indirectly
affecting economic and political conditions in the United States and a
particular foreign country, including economic and political developments in
other countries. Governmental intervention may also play a significant role.
National governments rarely voluntarily allow their currencies to float freely
in response to economic forces. Sovereign governments use a variety of
techniques, such as intervention by a country's central bank or imposition of
regulatory controls or taxes, to affect the exchange rates of their currencies.
The Funds may use hedging techniques with the objective of protecting against
loss through the fluctuation of the value of the yen against the U.S. dollar,
particularly the forward market in foreign exchange, currency options and
currency futures.
INFORMATION. The majority of the securities held by the Funds
will not be registered with, nor will the issuers thereof be subject to
reporting requirements of the SEC. Accordingly, there may be less publicly
available information about the securities and about the foreign company or
government issuing them than is available about a domestic company or government
entity. Foreign companies are generally subject to financial reporting
standards, practices and requirements that are either not uniform or less
rigorous than those applicable to U.S. companies.
POLITICAL INSTABILITY. With respect to some foreign countries,
there is the possibility of expropriation or confiscatory taxation, limitations
on the removal of funds or other assets of the Funds, political or social
instability, or domestic developments which could affect U.S. investments in
those and neighboring countries.
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<PAGE>
FOREIGN MARKETS. Securities of some foreign companies are less
liquid and their prices are more volatile than securities of comparable U.S.
companies. Certain foreign countries are known to experience long delays between
the trade and settlement dates of securities purchased or sold which may result
in increased exposure to market and foreign exchange fluctuations and increased
illiquidity.
INCREASED EXPENSES. The operating expenses of the Funds can be
expected to be higher than that of an investment company investing exclusively
in U.S. securities, since the expenses of the Funds, such as cost of converting
foreign currency into U.S. dollars, the payment of fixed brokerage commissions
on foreign exchanges, custodial costs, valuation costs and communication costs,
as well as the rate of the investment advisory fees, though similar to such
expenses of some other international funds, are higher than those costs incurred
by other investment companies not investing in foreign securities. In addition,
foreign securities may be subject to foreign government taxes that would reduce
the net yield on such securities.
DOLLAR-DENOMINATED DEBT SECURITIES OF FOREIGN ISSUERS. The
returns on foreign debt securities reflect interest rates and other market
conditions prevailing in those countries. The relative performance of various
countries' fixed income markets historically has reflected wide variations
relating to the unique characteristics of each country's economy. Year-to-year
fluctuations in certain markets have been significant, and negative returns have
been experienced in various markets from time to time.
DEPOSITARY RECEIPTS. The assets of each Fund may be invested
in the securities of foreign issuers in the form of American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and International Depositary
Receipts ("IDRs"). These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs are
receipts typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. EDRs, which
are sometimes referred to as Continental Depositary Receipts ("CDRs"), are
receipts issued in Europe, and IDRs, which are sometimes referred to as Global
Depositary Receipts ("GDRs"), are issued outside the United States. EDRs (CDRs)
and IDRs (GDRs) are typically issued by non-U.S. banks and trust companies and
evidence ownership of either foreign or domestic securities. Generally, ADRs in
registered form are designed for use in U.S. securities markets and EDRs (CDRs)
and IDRs (GDRs) in bearer form are designed for use in European and non-U.S.
securities markets, respectively.
BRADY BONDS. Each Fund may invest in so-called "Brady Bonds,"
which are securities created through the exchange of existing commercial bank
loans to public and private entities for new bonds in connection with debt
restructurings under a debt restructuring plan announced by former U.S.
Secretary of the Treasury Nicholas F. Brady. Brady Bonds may be collateralized
or uncollateralized, are issued in various currencies (primarily the U.S.
dollar) and are currently actively traded in the OTC secondary market for debt
instruments. Brady Bonds have been issued only recently and therefore do not
have a
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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.
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
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<PAGE>
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 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.
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<PAGE>
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 High Yield and
Municipal Bond Funds have established no rating criteria for the debt securities
in which they may invest.
Below investment grade debt securities may be rated as low as
C by Moody's or D by S&P, or be deemed by the Adviser to be of equivalent
quality. Securities that are rated C by Moody's are the lowest rated class and
can be regarded as having extremely poor prospects of ever attaining any real
investment standing. A security rated D by S&P is in default or is expected to
default upon maturity or payment date. Investors should be aware that ratings
are relative and subjective and are not absolute standards of quality.
Below investment grade securities (commonly referred to as
"junk bonds"), (i) will likely have some quality and protective characteristics
that, in the judgment of the rating organizations, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (ii) are
predominantly speculative with respect to the issuer's
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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
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operating history, the quality of the issuer's management and regulatory
matters. Interest rate trends and specific developments which may affect
individual issuers will also be analyzed. Subsequent to its purchase by a Fund,
an issue of securities may cease to be rated or its rating may be reduced.
Neither event will require sale of such securities, although the Adviser will
consider such event in its determination of whether a Fund should continue to
hold the securities. Normally, medium- and lower-rated and comparable unrated
securities are not intended for short-term investment. A Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings of such
securities. At times, adverse publicity regarding lower-rated securities has
depressed the prices for such securities to some extent.
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
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shortening the actual average life of a pool of mortgage-related securities.
Conversely, in periods of rising rates the rate of prepayment tends to decrease,
thereby lengthening the actual average life of the pool. However, these effects
may not be present, or may differ in degree, if the mortgage loans in the pools
have adjustable interest rates or other special payment terms, such as a
prepayment charge. Actual prepayment experience may cause the yield of
mortgage-backed securities to differ from the assumed average life yield.
Reinvestment of prepayments may occur at higher or lower interest rates than the
original investment, thus affecting the Funds' yield. In addition,
mortgage-backed securities issued by certain non-government entities and
collateralized mortgage obligations may be less marketable than other
securities.
The rate of interest on mortgage-backed securities is lower
than the interest rates paid on the mortgages included in the underlying pool
due to the annual fees paid to the servicer of the mortgage pool for passing
through monthly payments to certificate holders and 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.
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,
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there is no assurance that the security interest in the collateral can be
realized. The remaining maturity of any asset-backed security a Fund invests in
will be 397 days or less. A Fund may purchase asset-backed securities that are
unrated.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Each Fund may invest in
fixed and floating rate loans ("Loans") arranged through private negotiations
between a foreign government (a "Borrower") and one or more financial
institutions ("Lenders"). The majority of each Fund's investments in Loans are
expected to be in the form of participations in Loans ("Participations") and
assignments of portions of Loans from third parties ("Assignments"). 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
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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.
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.
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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 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 and
increasing return. Aggregate initial margin and premiums (discussed below)
required to establish positions other than those considered to be "bona fide
hedging" by the CFTC will not exceed 5% of the 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.
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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.
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
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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 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.
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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.
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.
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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, 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.
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<PAGE>
SHORT SALES "AGAINST THE BOX." In a short sale, a Fund sells a
borrowed security and has a corresponding obligation to the lender to return the
identical security. The seller does not immediately deliver the securities sold
and is said to have a short position in those securities until delivery occurs.
While a short sale is made by selling a security the Fund does not own, a short
sale is "against the box" to the extent that the Fund contemporaneously owns or
has the right to obtain, at no added cost, securities identical to those sold
short. It may be entered into by the Fund, for example, to lock in a sales price
for a security the Fund does not wish to sell immediately. If the Fund engages
in a short sale, the collateral for the short position will be maintained by the
Fund's custodian or qualified sub-custodian. While the short sale is open, the
Fund will maintain in a segregated account an amount of securities equal in kind
and amount to the securities sold short or securities convertible into or
exchangeable for such equivalent securities. These securities constitute the
Fund's long position.
A Fund may make a short sale as a hedge when it believes that
the price of a security may decline, causing a decline in the value of a
security owned by the Fund (or a security convertible or exchangeable for such
security). In such case, any future losses in a Fund's long position should be
offset by a gain in the short position and, conversely, any gain in the long
position should be reduced by a loss in the short position. The extent to which
such gains or losses are reduced will depend upon the amount of the security
sold short relative to the amount a Fund owns. There will be certain additional
transactions costs associated with short sales against the box, but a Fund will
endeavor to offset these costs with the income from the investment of the cash
proceeds of short sales.
If a Fund effects a short sale of securities at a time when it
has an unrealized gain on the securities, it may be required to recognize that
gain as if it had actually sold the securities (as a "constructive sale") on the
date it effects the short sale. However, such constructive sale treatment may
not apply if a Fund closes out the short sale with securities other than the
appreciated securities held at the time of the short sale and if certain other
conditions are satisfied. Uncertainty regarding the tax consequences of
effecting short sales may limit the extent to which a Fund may effect short
sales.
The Funds do not presently intend to invest more than 5% of
net assets in short sales against the box.
SECTION 4(2) PAPER. "Section 4(2) paper" is commercial paper
which is issued in reliance on the "private placement" exemption from
registration which is afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) paper is restricted as to disposition 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.
29
<PAGE>
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 and/or warrants
involves the risk that the effective price paid for the right and/or warrant
added to the subscription price of the related security may exceed the value of
the subscribed security's market price such as when there is no movement in the
level of the underlying security.
SUPPLEMENTAL INVESTMENT OBJECTIVES AND POLICIES -- GLOBAL TELECOMMUNICATIONS
FUND
Telecommunications companies in both developed and emerging
countries are undergoing significant change due to varying and evolving levels
of governmental regulation
30
<PAGE>
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.
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
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<PAGE>
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 NEUTRAL FUND
SHORT SALES. The Long-Short Neutral Fund will seek to realize
additional gains through short sales. Short sales are transactions in which the
Fund sells a security it does not own, in anticipation of a decline in the value
of that security relative to the long positions held by the Fund. To complete
such a transaction, the Fund must borrow the security from a broker or other
institution to make delivery to the buyer. The Fund then is obligated to replace
the security borrowed by purchasing it at the market price at or prior to the
time of replacement. The price at such time may be more or less than the price
at which the security was sold by the Fund. Until the security is replaced, the
Fund is required to repay the lender any dividends or interest that accrue
during the period of the loan. To borrow the security, the Fund also may be
required to pay a premium, which would increase the cost of the security sold.
The net proceeds of the short sale will be retained by the broker (or by the
Fund's custodian in a special custody account), to the extent necessary to meet
margin requirements, until the short position is closed out. The Fund also will
incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if
the price of the security increases between the date of the short sale and the
date on which the Fund replaces the borrowed security. The Fund will realize a
gain if the security declines in price between those dates. The amount of any
gain will be decreased, and the amount of any loss increased, by the amount of
the premium, dividends, interest or expenses the Fund may be required to pay in
connection with a short sale. An increase in the value of a security sold short
by the Fund over the price at which it was sold short will result in a loss to
the Fund, and there can be no assurance that the Fund will be able to close out
the position at any particular time or at an acceptable price. Although the
Fund's gain is limited to the amount at which it sold a security short, its
potential loss is limited only by the maximum attainable price of the security
less the price at which the security was sold. Until the Fund replaces a
borrowed security, it will maintain in a segregated account at all times cash,
U.S. Government Securities, or other liquid securities in an amount which, when
added to any amount deposited with a broker as collateral will at least equal
the current market value of the security sold short. Depending on arrangements
made with brokers, the Fund may not receive any payments (including interest) on
collateral deposited with them. The Fund will not make a short sale if, after
giving effect to such sale, the market value of all securities sold short
exceeds 100% of the value of the Fund's net assets.
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<PAGE>
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.
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 (for the Long-Short Neutral Fund only, provided 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,
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<PAGE>
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
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;
4. (LONG-SHORT NEUTRAL FUND ONLY) Purchase or retain the
securities of any issuer, if those individual officers and directors of
the Fund, the Adviser or
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<PAGE>
any subsidiary thereof each owning beneficially more than 1/2 of 1% of the
securities of such issuer own in the aggregate more than 5% of the
securities of such issuer; and
5. (LONG-SHORT NEUTRAL FUND ONLY) Acquire any securities
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.
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
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<PAGE>
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 established by the Boards. Although the
Long-Short Neutral Fund does not invest directly in foreign securities, it
invests in American Depositary Receipts, the value of which depends on the
underlying foreign security.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for establishing, reviewing and,
where necessary, modifying each Fund's investment program to achieve its
investment objective. Purchases and sales of newly issued portfolio securities
are usually principal transactions without brokerage commissions effected
directly with the issuer or with an underwriter acting as principal. Other
purchases and sales may be effected on a securities exchange or
over-the-counter, depending on where it appears that the best price or execution
will be obtained. The purchase price paid by a Fund to underwriters of newly
issued securities usually includes a concession paid by the issuer to the
underwriter, and purchases of securities from dealers, acting as either
principals or agents in the after market, are normally executed at a price
between the bid and asked price, which includes a dealer's mark-up or mark-down.
Transactions on U.S. stock exchanges and some foreign stock exchanges involve
the payment of negotiated brokerage commissions. On exchanges on which
commissions are negotiated, the cost of transactions may vary among different
brokers. On most foreign exchanges, commissions are generally fixed. There is
generally no stated commission in the case of securities traded in domestic or
foreign OTC markets, but the price of securities traded in OTC markets includes
an undisclosed commission or mark-up. U.S. government securities are generally
purchased from underwriters or dealers, although certain newly issued U.S.
government securities may be purchased directly from the U.S. Treasury or from
the issuing agency or instrumentality. No brokerage commissions are typically
paid on purchases and sales of U.S. Government Securities.
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<PAGE>
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
affiliates of Credit Suisse Group ("Credit Suisse"). A Fund may utilize
Credit Suisse Asset Management Securities, Inc. ("CSAMSI") or affiliates of
Credit Suisse in connection with a purchase or sale of securities when the
Adviser believes that the charge for the transaction does not exceed usual
and customary levels and when doing so is consistent with guidelines adopted
by the Board.
Investment decisions for the Funds concerning specific
portfolio securities are made independently from those for other clients advised
by the Adviser. Such other investment clients may invest in the same securities
as the Funds. When purchases or sales of the same security are made at
substantially the same time on behalf of such other clients, transactions are
averaged as to price and available investments allocated as to amount, in a
manner which the Adviser believes to be equitable to each client, including the
Funds. In some instances, this investment procedure may adversely affect the
price paid or received by the Funds or the size of the position obtained or sold
for the Funds. To the extent permitted by law, the Adviser may aggregate the
securities to be sold or purchased for each Fund with those to be sold or
purchased for such other investment clients in order to obtain best execution.
Transactions for each of the Funds may be effected on foreign
securities exchanges. In transactions for securities not actively traded on a
foreign securities exchange, the Funds will deal directly with the dealers who
make a market in the securities involved, except in those circumstances where
better prices and execution are available elsewhere. Such dealers usually are
acting as principal for their own account. On occasion, securities may be
purchased directly from the issuer. Such portfolio securities are generally
traded on a net basis and do not normally involve brokerage commissions.
Securities firms may receive brokerage commissions on certain portfolio
transactions, including options,
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<PAGE>
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 fiscal years ended August 31, the Funds have paid
brokerage commissions as follows:
AUGUST 31, 1999
<TABLE>
<CAPTION>
FUND BROKERAGE COMMISSION
<S> <C>
Global Telecommunications $178,506
High Yield $112,134
Municipal Bond N/A
Focus $192,853
Long-Short Neutral $214,482
AUGUST 31, 1998
BEA FUND BROKERAGE COMMISSION
Global Telecommunications $ 2,639
High Yield $ 250
Municipal Bond N/A
Focus $ 17,675
Long-Short Neutral $ 3,790
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<PAGE>
AUGUST 31, 1997
<CAPTION>
BEA FUND BROKERAGE COMMISSION
<S> <C>
Global Telecommunications $ 1,261
High Yield $ 0
Municipal Bond N/A
Focus N/A
Long-Short Neutral N/A
</TABLE>
In no instance will portfolio securities be purchased from or
sold to CSAM, CSAMSI or Credit Suisse First Boston ("CS First Boston") or any
affiliated person of such companies except as permitted by the SEC exemptive
order or by applicable law. In addition, the Funds will not give preference
to any institutions with whom the Funds enter into distribution or shareholder
servicing agreements concerning the provision of distribution services or
support services.
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.
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<PAGE>
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 (67) DIRECTOR
40 Grosvenor Road Currently retired; Executive Vice
Short Hills, New Jersey 07078 President and Chief Financial Officer of
Pan Am Corporation and Pan American World
Airways, Inc. from 1988 to 1991; Director
of The Infinity Mutual Funds, BISYS Group
Incorporated; Director/Trustee of other
Warburg Pincus Funds and other
CSAM-advised investment companies.
Jack W. Fritz (72) DIRECTOR
2425 North Fish Creek Road Private investor; Consultant and Director
P.O. Box 483 of Fritz Broadcasting, Inc. and Fritz
Wilson, Wyoming 83014 Communications (developers and operators
of radio stations); Director of Advo, Inc.
(direct mail advertising);
Director/Trustee of other Warburg Pincus
Funds.
Jeffrey E. Garten (53) DIRECTOR
Box 208200 Dean of Yale School of Management and
New Haven, Connecticut 06520-8200 William S. Beinecke Professor in the
Practice of International Trade and
Finance; Undersecretary of Commerce for
International Trade from November 1993 to
October 1995; Professor at Columbia
University from September 1992 to November
1993; Director/Trustee of other Warburg
Pincus Funds.
40
<PAGE>
James S. Pasman, Jr. (68) DIRECTOR
29 The Trillium Currently retired; President and Chief
Pittsburgh, Pennsylvania 15238 Operating Officer of National InterGroup,
Inc. from April 1989 to March 1991;
Chairman of Permian Oil Co. from April
1989 to March 1991; Director of Education
Management Corp., Tyco International Ltd.;
Trustee, BT Insurance Funds Trust;
Director/Trustee of other Warburg Pincus
Funds and other CSAM-advised investment
companies.
William W. Priest* (58) CHAIRMAN OF THE BOARD
153 East 53rd Street Chairman- Management Committee, Chief
New York, New York 10022 Executive Officer and Managing Director of
CSAM (U.S.) since 1990; Director of TIG
Holdings, Inc.; Director/Trustee of other
Warburg Pincus Funds and other
CSAM-advised investment companies.
Steven N. Rappaport (51) DIRECTOR
153 East 53rd Street, President of Loanet, Inc. since 1997;
Suite 5500 Executive Vice President of Loanet, Inc.
New York, New York 10022 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.
- --------------------------
* Indicates a Director who is an "interested person" of the Fund as defined in
the 1940 Act.
41
<PAGE>
Alexander B. Trowbridge (69) DIRECTOR
1317 F Street, N.W., Currently retired; President of Trowbridge
5th Floor Partners, Inc. (business consulting) from
Washington, DC 20004 January 1990 to November 1996; Director or
Trustee of New England Mutual Life
Insurance Co., ICOS Corporation
(biopharmaceuticals), IRI International
(energy services), The Rouse Company (real
estate development), Harris Corp.
(electronics and communications
equipment), The Gillette Co. (personal
care products) and Sunoco, Inc. (petroleum
refining and marketing); Director/Trustee
of other Warburg Pincus Funds.
Eugene L. Podsiadlo (42) PRESIDENT
466 Lexington Avenue Managing Director of CSAM; Associated with
New York, New York 10017-3147 CSAM since CSAM acquired the Funds'
predecessor adviser in July 1999; with the
predecessor adviser since 1991; Vice
President of Citibank, N.A. from 1987 to
1991; Officer of CSAMSI and of other
Warburg Pincus Funds.
Hal Liebes, Esq. (35) VICE PRESIDENT AND SECRETARY
153 East 53rd Street Director and General Counsel of CSAM;
New York, New York 10022 Associated with CSAM since 1995;
Associated with CS First Boston Investment
Management from 1994 to 1995; Associated
with Division of Enforcement, U.S.
Securities and Exchange Commission from
1991 to 1994; Officer of CSAMSI, other
Warburg Pincus Funds and other CSAM-
advised investment companies.
Michael A. Pignataro (40) TREASURER AND CHIEF FINANCIAL OFFICER
153 East 53rd Street Vice President and Director of Fund
New York, New York 10022 Administration of CSAM; Associated with
CSAM since 1984; Officer of other Warburg
Pincus Funds and other CSAM-advised
investment companies.
42
<PAGE>
Stuart J. Cohen, Esq. (30) ASSISTANT SECRETARY
466 Lexington Avenue Vice President and Legal Counsel of CSAM;
New York, New York 10017-3147 Associated with CSAM since CSAM acquired
the Funds' predecessor adviser in July
1999; with the predecessor adviser since
1997; Associated with the law firm of
Gordon Altman Butowsky Weitzen Shalov &
Wein from 1995 to 1997; Officer of other
Warburg Pincus Funds.
Rocco A. DelGuercio (36) ASSISTANT TREASURER
153 East 53rd Street Assistant Vice President and
New York, New York 10022 Administrative Officer of CSAM; Associated
with CSAM since June 1996; Assistant
Treasurer, Bankers Trust Corp. -- Fund
Administration from March 1994 to June
1996; Mutual Fund Accounting Supervisor,
Dreyfus Corporation from April 1987 to
March 1994; Officer of other Warburg
Pincus Funds and other CSAM-advised
investment companies.
No employee of CSAM, PFPC Inc. ("PFPC") and CSAMSI, the Funds'
co-administrators, or any of their affiliates, receives any compensation from
the Funds for acting as an officer or director of a Fund. Each Director who is
not a director, trustee, officer or employee of CSAM, PFPC, CSAMSI or any of
their affiliates receives an annual fee of $500 and $250 for each meeting of the
Boards attended by him for his services as Director, and is reimbursed for
expenses incurred in connection with his attendance at Board meetings. Each
member of the Audit Committee receives an annual fee of $250, and the chairman
of the Audit Committee receives an annual fee of $325.
43
<PAGE>
DIRECTORS' TOTAL COMPENSATION FOR FISCAL YEAR ENDED AUGUST 31, 1999
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Global Long-Short All Investment
Tele- Neutral Companies in
Name of communications High Yield Municipal Focus Fund the [CSAM] Fund
Director Fund Fund Bond Fund Fund Complex*
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William W. Priest** None None None None None None
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Arnold M. Reichman*** None None None None None None
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Richard N. Cooper**** 1,125 1,125 1,125 1,125 1,125 $73,250
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Richard H. Francis***** 750 750 750 750 750 $16,500
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Jack W. Fritz 2,000 2,000 2,000 2,000 2,000 $73,250
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Jeffrey E. Garten 2,000 2,000 2,000 2,000 2,000 $73,250
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
James S. Pasman, Jr.***** 750 750 750 750 750 $16,500
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Steven N. Rappaport***** 750 750 750 750 750 $16,500
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Alexander B. Trowbridge 2,075 2,075 2,075 2,075 2,075 $76,025
----------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------------------
* Each Director serves as a Director or Trustee of 51 investment
companies and portfolios in the [Credit Suisse Asset Management Fund
Complex].
** Mr. Priest receives compensation as an affiliate of CSAM, and,
accordingly, receives no compensation from any Fund or any other
investment company advised by CSAM.
*** Mr. Reichman resigned as a Director of each Fund effective August 18,
1999.
**** Mr. Cooper resigned as a Director of each Fund effective July 6, 1999.
***** Messrs. Francis, Pasman and Rappaport became Directors of the Funds
effective July 6, 1999.
44
<PAGE>
As of September 30, 1999, 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 Advisor Shares.
INVESTMENT ADVISER AND CO-ADMINISTRATORS. CSAM, located at 153
East 53rd Street, New York, New York 10022, serves as investment adviser to each
Fund pursuant to a written agreement (the "Advisory Agreement"). CSAM is an
indirect wholly-owned U.S. subsidiary of Credit Suisse. Credit Suisse is a
global financial services company, providing a comprehensive range of banking
and insurance products. Active on every continent and in all major financial
centers, Credit Suisse comprises five business units -- Credit Suisse Asset
Management (asset management); Credit Suisse First Boston (investment banking);
Credit Suisse Private Banking (private banking); Credit Suisse (retail banking);
and Winterthur (insurance). Credit Suisse has approximately $680 billion of
global assets under management and employs approximately 62,000 people
worldwide. The principal business address of Credit Suisse is Paradeplatz 8, CH
8070, Zurich, Switzerland.
CSAM's predecessor, BEA Associates, had rendered advisory
services to the predecessor to the Funds, each a series of The RBB Fund, Inc.
(the "BEA Funds"), pursuant 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, High Yield, Municipal Bond and Focus Funds, CSAM will be
paid (before any voluntary waivers or reimbursements) a monthly fee computed at
an annual rate of 1.00%, .70%, .70% and, .75% of average daily net assets,
respectively.
The Long-Short Neutral Fund pays CSAM a basic management fee,
computed daily and payable monthly, at the annual rate of 1.50% of the average
net assets of the Fund. After the first year of operations, 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
45
<PAGE>
second step would occur if the Fund's performance during the most recent
12-month period differed from that of the Target by more than two but not more
than three percentage points. In this event, the Performance Adjustment would be
0.20%, and the annual rate of the total management fee would be either 1.30% or
1.70%. The third step would occur if the Fund's performance during the most
recent 12-month period differed from that of the Target by more than three but
not more than four percentage points. In this event, the Performance Adjustment
would be 0.30%, and the annual rate of the total management fee would be either
1.20% or 1.80%. The fourth step would occur if the Fund's performance during the
most recent 12-month period differed from that of the Target by more than four
but not more than five percentage points. In this event, the Performance
Adjustment would be 0.40%, and the annual rate of the total management fee would
be either 1.10% or 1.90%. The fifth step would occur if the Fund's performance
during the most recent 12-month period differed from that of the Target by five
percentage points or more. In this event, the Performance Adjustment would be
0.50%, and the annual rate of the total management fee would be either 1.00% or
2.00%. Thus:
<TABLE>
<CAPTION>
PERFORMANCE
TOTAL MANAGEMENT BASIC RATE ADJUSTMENT FEE RATE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
No adjustment 1.50% N/A 1.50%
- --------------------------------------------------------------------------------------------------
First Step:
Performance exceeds Target by
more than 1 but not more than 2
percentage points 1.50 .10% 1.60
Performance lags Target by more than
1 but not more than 2 percent
points 1.50 (.10) 1.40
- --------------------------------------------------------------------------------------------------
Second Step:
Performance exceeds Target by
more than 2 but not more than 3
percentage points 1.50 .20 1.70
Performance lags Target by more than
1 but not more than 3 percent
points 1.50 (.20) 1.30
46
<PAGE>
<CAPTION>
PERFORMANCE
TOTAL MANAGEMENT BASIC RATE ADJUSTMENT FEE RATE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
No adjustment 1.50% N/A 1.50%
- --------------------------------------------------------------------------------------------------
Third Step:
Performance exceeds Target by
more than 3 but not more than 4
percentage points 1.50 .30 1.80
Performance lags Target by more than
3 but not more than 4 percent
points 1.50 (.30) 1.20
- --------------------------------------------------------------------------------------------------
Fourth Step:
Performance exceeds Target by
more than 4 but not more than 5
percentage points 1.50 .40 1.90
Performance lags Target by more than
4 but not more than 5 percent
points 1.50 (.40) 1.10
- --------------------------------------------------------------------------------------------------
Fifth Step:
Performance exceeds Target by
more than 5 percentage points 1.50 .50 2.00
Performance lags Target by more than
5 percent points 1.50 (.50) 1.00
- --------------------------------------------------------------------------------------------------
</TABLE>
CSAMSI and PFPC, an indirect, wholly owned subsidiary of PNC
Bank Corp., both serve as co-administrators to the Funds pursuant to separate
written agreements (the "CSAMSI Co-Administration Agreements" and the "PFPC
Co-Administration Agreements," respectively). CSAMSI became co-administrator to
each Fund on October 26, 1999. Prior to that, Counsellors Funds Service, Inc.
("Counsellors Service") served as co-administrator to the Funds. Provident
Distributors, Inc. ("Provident Distributors") 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-
47
<PAGE>
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 under the PFPC Co-Administration
Agreements, each Fund pays PFPC a fee calculated at an annual rate of .125% of
each Fund's average daily net assets, subject in each case to a minimum annual
fee and exclusive of out-of-pocket expenses. Each class of shares of the Funds
bears its proportionate share of fees payable to CSAMSI and PFPC in the
proportion that its assets bear to the aggregate assets of the Funds at the time
of calculation.
For the fiscal years ended August 31, the Funds have paid CSAM
or BEA Associates advisory fees and csaM or BEA Associates has waived fees
and/or reimbursed expenses of the Funds under the Advisory Agreements or BEA
Advisory Agreements as follows:
AUGUST 31, 1999
<TABLE>
<CAPTION>
FEES PAID
FUND (AFTER WAIVERS) WAIVERS REIMBURSEMENTS
---- --------------- ------- --------------
<S> <C> <C> <C>
Global Telecommunications $93,200 $101,660 $33,124
High Yield $497,661 $405,408 $0
Municipal Bond $64,918 $95,749 $0
Focus $111,197 $139,116 $0
Long-Short Neutral $193,807 $97,341 $0
</TABLE>
AUGUST 31, 1998
<TABLE>
<CAPTION>
FEES PAID
BEA FUND (AFTER WAIVERS) WAIVERS REIMBURSEMENTS
-------- --------------- ------- --------------
<S> <C> <C> <C>
Global Telecommunications $0 $9,174 $37,067
High Yield $422,069 $271,277 $0
Municipal Bond $93,618 $51,669 $0
Focus $14,224 $643 $0
Long-Short Neutral $4,661 $2,758 $0
</TABLE>
AUGUST 31, 1997
<TABLE>
<CAPTION>
FEES PAID
BEA FUND (AFTER WAIVERS) WAIVERS REIMBURSEMENTS
-------- --------------- ------- --------------
<S> <C> <C> <C>
Global Telecommunications $0 $3,745 $0
High Yield $393,841 $233,336 $0
Municipal Bond $91,093 $44,791 $0
Focus N/A N/A N/A
Long-Short Neutral N/A N/A N/A
</TABLE>
48
<PAGE>
From August 31, 1997 to August 31, 1999, the Funds paid
Provident Distributors or Counsellors Service and PFPC administration fees and
BEA Associates or Counsellors Service and PFPC have waived fees and/or
reimbursed expenses as follows:
AUGUST 31, 1999
<TABLE>
<CAPTION>
PFPC COUNSELLORS SERVICE
FEES PAID FEES PAID
(AFTER REIMBURSE- (AFTER REIMBURSE-
FUND WAIVERS) WAIVERS MENTS FUND WAIVERS) WAIVERS MENTS
---- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
High Yield $129,010 $32,252 $0 High Yield $2,733 $9,930 $0
Municipal Bond $37,500 $0 $0 Municipal Bond $9 $40 $0
Focus $41,719 $0 $0 Focus $2 $7 $0
Global Telecommunications $0 $24,357 $0 Global Telecommunications $246 $9,463 $0
Long-Short Neutral $12,643 $11,902 $0 Long-Short Neutral $1,036 $4,144 $0
</TABLE>
AUGUST 31, 1998
<TABLE>
<CAPTION>
PFPC PROVIDENT DISTRIBUTORS
FEES PAID FEES PAID
(AFTER REIMBURSE- (AFTER REIMBURSE-
BEA FUND WAIVERS) WAIVERS MENTS BEA FUND WAIVERS) WAIVERS MENTS
- -------- -------- ------- ---------- ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
High Yield $99,050 $24,762 $0 High Yield $9,905 $138,669 $0
Municipal Bond $30,402 $0 $0 Municipal Bond $2,076 $29,057 $0
Focus $0 $2,478 $0 Focus $198 $2,775 $0
Global Telecommunications $0 $1,147 $0 Global Telecommunications $0 $459 $0
Long-Short Neutral $0 $618 $0 Long-Short Neutral $148 $594 $0
</TABLE>
AUGUST 31, 1997
<TABLE>
<CAPTION>
PFPC COUNSELLORS SERVICE
FEES PAID FEES PAID
(AFTER REIMBURSE- (AFTER REIMBURSE-
BEA FUND WAIVERS) WAIVERS MENTS BEA FUND WAIVERS) WAIVERS MENTS
- -------- -------- ------- ---------- ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
High Yield $89,597 $22,399 $0 High Yield $8,959 $125,436 $0
Municipal Bond $24,265 $0 $0 Municipal Bond $1,941 $27,177 $0
Focus N/A N/A N/A Focus N/A N/A N/A
Global Telecommunications N/A N/A N/A Global Telecommunications N/A N/A N/A
Long-Short Neutral N/A N/A N/A Long-Short Neutral N/A N/A N/A
</TABLE>
Each class of a Fund bears all of its own expenses not
specifically assumed by the Adviser or another service provider to the Fund.
General expenses of the Funds not readily identifiable as belonging to a
particular Fund are allocated among all investment funds by or under the
direction of the Funds' Board of Directors in such manner as the Board
determines fair and accurate. Each class of the Funds pays its own
49
<PAGE>
administration fees, and may pay a different share than the other classes of the
Funds of other expenses (excluding advisory and custodial fees) if those
expenses are actually incurred in a different amount by such class or if a class
receives different services.
CUSTODIAN AND TRANSFER AGENT. Except for the Long-Short
Neutral Fund, Brown Brothers Harriman & Co. ("BBH") acts as the custodian for
the Funds and also acts as the custodian for the Funds' foreign securities
pursuant to a Custodian Agreement (the "BBH Custodian Agreement"). Custodial
Trust Company ("CTC") acts as the custodian for the Long-Short Neutral Fund and
also acts as the custodian for the Long-Short Neutral Fund's foreign securities
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.
Each Fund's charter authorizes its Board to issue three
billion full and fractional shares of capital stock, $.001 par value per share,
of which one billion shares are designated Common Shares, one billion shares are
designated Institutional Shares and one billion shares are designated Advisor
Shares. Under each Fund's charter
50
<PAGE>
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 and Advisor Shares, the total return on Common Shares can be
expected to be lower than the total return on Institutional Shares and the total
return of Advisor Shares can be expected to be lower than the total return on
Common Shares and 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 800-369-2728. Unless
the context clearly suggests otherwise, references to a Fund in this prospectus
are to the Fund as a whole and not to any particular class of the Fund's shares.
Investors in a Fund are entitled to one vote for each full
share held and fractional votes for fractional shares held. Shareholders of a
Fund will vote in the aggregate except where otherwise required by law and
except that each class will vote separately on certain matters pertaining to its
distribution and shareholder servicing arrangements. There will normally be no
meetings of investors for the purpose of electing members of the Board unless
and until such time as less than a majority of the members holding office have
been elected by investors. Any Director of a Fund may be removed from office
upon the vote of shareholders holding at least a majority of the relevant Fund's
outstanding shares, at a meeting called for that purpose. A meeting will be
called for the purpose of voting on the removal of a Board member at the written
request of holders of 10% of the outstanding shares of a Fund.
Each investor will receive a quarterly statement of his
account, as well as a statement of his account after any transaction that
affects his share balance or share registration (other than the reinvestment of
dividends or distributions or investment made through the Automatic Monthly
Investment Plan). Each Fund will also send to its investors a semiannual report
and an audited annual report, each of which includes a list of the investment
securities held by the Fund and a statement of the performance of the Fund.
Periodic listings of the investment securities held by the Fund, as well as
certain statistical characteristics of the Fund, may be obtained by calling
Warburg Pincus Funds at 800-WARBURG or on the Warburg Pincus Funds web site at
www.warburg.com.
51
<PAGE>
DISTRIBUTION AND SHAREHOLDER SERVICING. In addition to serving
as each Fund's co-administrator, CSAMSI serves as distributor of each Fund's
shares. CSAMSI offers each Fund's shares on a continuous basis. No compensation
is payable by any of the Funds to CSAMSI for distribution services under the
Distribution Agreement, but CSAMSI receives compensation from each Fund under
the CSAMSI Co-Administration Agreement as described herein. CSAMSI's principal
business address is 466 Lexington Avenue, New York, New York 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.
52
<PAGE>
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.
The 12b-1 Plans were adopted on October 26, 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, 1999, the Common Class shares of the Global Telecommunications Fund, the
High Yield Fund, the Municipal Bond Fund, the Focus Fund and the Long-Short
Neutral Fund have paid CSAMSI under the prior 12b-1 Plans $48,715, $63,586,
$247, $46 and $25,940, 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 .40% of the average
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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 The
New York Stock Exchange, Inc. (the "NYSE") is closed (other than customary
weekend and holiday closings), or during which trading on said Exchange is
restricted, or during which (as determined by the SEC by rule or regulation) an
emergency exists as a result of which disposal or valuation of Fund securities
is not reasonably practicable, or for such other periods as the SEC may permit.
(A Fund may also suspend or postpone the recordation of the transfer of its
shares upon the occurrence of any of the foregoing conditions.)
AUTOMATIC CASH WITHDRAWAL PLAN. An automatic cash withdrawal
plan (the "Plan") is available to shareholders who wish to receive specific
amounts of cash periodically. Withdrawals may be made under the Plan by
redeeming as many shares of the relevant Fund as may be necessary to cover the
stipulated withdrawal payment. To the extent that withdrawals exceed dividends,
distributions and appreciation of a shareholder's investment in a Fund, there
will be a reduction in the value of the shareholder's investment and continued
withdrawal payments may reduce the shareholder's investment and ultimately
exhaust it. Withdrawal payments should not be considered as income from
investment in a Fund.
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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 Advisor
Shareholder may exchange Advisor Shares of a Fund for Advisor 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 1-800-222-8977.
The Funds reserve the right to refuse exchange purchases by
any person or group if, in CSAM's judgment, a Fund would be unable to invest the
money effectively in accordance with its investment objective and policies, or
would otherwise potentially be adversely affected. Examples of when an exchange
purchase could be refused are when the Fund receives or anticipates receiving
large exchange orders at or about the same time and/or when a pattern of
exchanges within a short period of time (often associated with a "market timing"
strategy) is discerned. The Funds reserve the right to terminate or modify the
exchange privilege at any time upon 30 days' notice to shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is a summary of the material United States
federal income tax considerations regarding the purchase, ownership and
disposition of shares in 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.
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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 and gains from the sale or other
disposition of stock or securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies; and (b) diversify its holdings so that, at the end of
each quarter of the Fund's taxable year, (i) at least 50% of the market value of
the Fund's assets is represented by cash, securities of other regulated
investment companies, United States government securities and other securities,
with such other securities limited, in respect of any one issuer, to an amount
not greater than 5% of the Fund's assets and not greater than 10% of the
outstanding voting securities of such issuer and (ii) not more than 25% of the
value of its assets is invested in the securities (other than 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., 90% of its taxable income minus the
excess, if any, of its net realized long-term capital gains over its net
realized short-term capital losses (including any capital loss carryovers), plus
or minus certain other adjustments as specified in the Code) for the taxable
year is distributed, but will be subject to tax at regular corporate rates on
any taxable income or gains that it does not distribute. Any dividend declared
by a Fund in October, November or December of any calendar year and payable to
shareholders of record on a specified date in such a month shall be deemed to
have been received by each shareholder on December 31 of such calendar year and
to have been paid by the Fund not later than such December 31, provided that
such dividend is actually paid by the Fund during January of the following
calendar year.
Each Fund intends to distribute annually to its shareholders
substantially all of its investment company taxable income. The Board of
Directors of the Fund will determine annually whether to distribute any net
realized long-term capital gains in excess of net realized short-term capital
losses (including any capital loss carryovers). Each Fund currently expects to
distribute any excess annually to its shareholders. However, if a Fund retains
for investment an amount equal to all or a portion of its net long-term capital
gains in excess of its net short-term capital losses and capital loss
carryovers, it will be subject to a corporate tax (currently at a rate of 35%)
on the amount retained. In that event, the Fund will designate such retained
amounts as undistributed capital gains in a notice to its shareholders who (a)
will be required to
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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.
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 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
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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, a swap contract, 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 occupies 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
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Regulations to include a nonexempt person who regularly uses a part of such
facilities in his trade or business and (a) whose gross revenues are more than
5% of the total revenue derived by all users of such facilities, (b) who
occupies more than 5% of the entire usable area of such facilities, or (c) for
whom such facilities or a part thereof were specifically constructed,
reconstructed or acquired. "Related persons" include certain related natural
persons, affiliated corporations, a partnership and its partners and an S
corporation and its shareholder.
The alternative minimum tax is a special tax that applies to a
limited number of taxpayers who have certain adjustments or tax preference
items. Available returns on Alternative Minimum Tax Bonds acquired by a Fund may
be lower than those from other municipal obligations acquired by the Municipal
Bond Fund due to the possibility of federal, state and local alternative minimum
or minimum income tax liability on Alternative Minimum Tax Bonds.
Under the Code, interest on specified private activity bonds
issued after August 7, 1986, although otherwise exempt from federal income tax,
is treated as an item of tax preference for purposes of the alternative minimum
tax on individuals and corporations. If the Municipal Bond Fund invests in such
specified "private activity bonds," it will report a portion of the
"exempt-interest dividends" paid to its shareholders as interest on specified
private activity bonds, and hence as a tax preference item. Exempt interest
dividends are included in adjusted current earnings. The amount of the
alternative minimum tax imposed by the Code is the excess, if any, of the
taxpayer's "tentative minimum tax" over the taxpayer's regular tax liability for
the taxable year. The "tentative minimum tax" is equal to (i) 26% of the first
$175,000, and 28% of any amount over $175,000 (for corporations, 20% of the
whole), of the taxpayer's alternative minimum taxable income (defined as regular
taxable income modified by certain adjustments and increased by the taxpayer's
"items of tax preference," including the adjustment for corporate current
earnings and the tax preference for tax-exempt interest on private activity
bonds described above) for the taxable year in excess of the exemption amount,
less (ii) the alternative minimum tax foreign tax credit for the taxable year.
The exemption amount is $40,000 for corporations, $45,000 for those filing joint
returns, lesser amounts for others, and is phased out over certain income
levels. Prospective investors should consult their own tax advisers with respect
to the possible application of the alternative minimum tax to their tax
situations.
In addition, the receipt of Municipal Bond Fund dividends and
distributions may affect a foreign corporate shareholder's federal "branch
profits" tax liability and a Subchapter S corporation shareholder's federal
"excess net passive income" tax liability. Shareholders should consult their own
tax advisers as to whether they are (i) substantial users with respect to a
facility or related to such users within the meaning of the Code or (ii) subject
to a federal alternative minimum tax, any applicable state alternative minimum
tax, the federal branch profits tax, or the federal excess net passive income
tax.
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A Fund may acquire standby commitments with respect to
Municipal Obligations held in its portfolio and will treat any interest received
on Municipal Obligations subject to such stand-by commitments as tax-exempt
income. In Rev. Rul. 82-144, 1982-2 C.B. 34, the Internal Revenue Service held
that a mutual fund acquired ownership of municipal obligations for federal
income tax purposes, even though the fund simultaneously purchased "put"
agreements with respect to the same municipal obligations from the seller of the
obligations. The Funds will not engage in transactions involving the use of
stand-by commitments that differ materially from the transaction described in
Rev. Rul. 82-144 without first obtaining a private letter ruling from the
Internal Revenue Service or the opinion of counsel.
Interest on indebtedness incurred by a shareholder to purchase
or carry shares if the Municipal Bond Fund is not deductible for income tax
purposes of (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 persons subject to alternative minimum tax (see
Prospectus and discussion below), financial institutions, property and casualty
insurance companies, individual recipients of Social Security or Railroad
Retirement benefits, and foreign corporations engaged in a trade or business in
the United States. Prospective investors should consult their own tax advisers
as to such consequences.
SPECIAL TAX CONSIDERATIONS. The following discussion relates
to the particular federal income tax consequences of the investment policies of
the Funds.
STRADDLES. The options transactions that the Funds enter into
may result in "straddles" for federal income tax purposes. The straddle rules of
the Code may affect the character of gains and losses realized by the Funds. In
addition, losses realized by the Funds on positions that are part of a straddle
may be deferred under the straddle rules, rather than being taken into account
in calculating the investment company taxable income and net capital gain of the
Funds for the taxable year in which such losses are realized. Losses realized
prior to October 31 of any year may be similarly deferred under the straddle
rules in determining the "required distribution" that the Funds must make in
order to avoid federal excise tax. Furthermore, in determining their investment
company taxable income and ordinary income, the Funds may be required to
capitalize, rather than deduct currently, any interest expense on indebtedness
incurred or continued to purchase or carry any positions that are part of a
straddle. The tax consequences to the Funds of holding straddle positions may be
further affected by various elections provided under the Code and Treasury
regulations, but at the present time the Funds are uncertain which (if any) of
these elections they will make.
OPTIONS AND SECTION 1256 CONTRACTS. The writer of a covered
put or call option generally does not recognize income upon receipt of the
option premium. If the option expires unexercised or is closed on an exchange,
the writer generally recognizes short-term capital gain. If the option is
exercised, the premium is included in the consideration received by the writer
in determining the capital gain or loss recognized in the resultant sale.
However, certain options transactions as well as futures transactions and
transactions in forward foreign
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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.
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
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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 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.
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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 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.
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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 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
64
<PAGE>
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 Advisor Shares in advertisements or in
reports and other communications to shareholders. The net asset value of Common
Shares is listed in THE WALL STREET JOURNAL each business day under the heading
"Warburg Pincus Funds." Current total return figures may be obtained by calling
Warburg Pincus Funds at 800-927-2874.
Each Fund that advertises its "average annual total return"
computes such return separately for each class of shares by determining the
average annual compounded rate of return during specified periods that equates
the initial amount invested to the ending redeemable value of such investment
according to the following formula:
n
P(1+T) = ERV
Where: T = average annual total return;
ERV = ending redeemable value of a
hypothetical $1,000 payment made at the
beginning of the l, 5 or 10 year (or
other) periods at the end of the
applicable period (or a fractional portion
thereof);
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed in years.
Each Fund that advertises its "aggregate total return"
computes such returns separately for each class of shares by determining the
aggregate compounded rates of return during specified periods that likewise
equate the initial amount invested to the ending redeemable value of such
investment. The formula for calculating aggregate total return is as follows:
65
<PAGE>
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, 1999 were as follows:
<TABLE>
<CAPTION>
Since
5 Year 10 Year Inception
Fund 1 Year (Annualized) (Annualized) (Annualized)
- ---- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
High Yield 0.39% 8.04% N/A 8.48%
Global Telecommunications 120.73% N/A N/A 52.69%
Focus 52.83% N/A N/A 31.04%
Municipal Bond 0.05% 5.55% N/A 5.40%
Long-Short Neutral (5.83)% N/A N/A (3.81)%
</TABLE>
The aggregate total returns for the Common Shares of the
following Funds for the period ended August 31, 1999 since inception were as
follows:
<TABLE>
<CAPTION>
FUND AGGREGATE RETURN
- ---- ----------------
<S> <C>
High Yield 69.98%
Global Telecommunications 219.20%
Focus 34.18%
Municipal Bond 31.55%
Long-Short Neutral (4.13)%
</TABLE>
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 (except
for the Long-Short Neutral 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
66
<PAGE>
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 11/02/98
High Yield 02/26/93 11/01/96 11/02/98
Municipal Bond 06/17/94 N/A 11/02/98
Focus 07/31/98 N/A 11/02/98
Long-Short Neutral 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 Investment Technologies, Inc. or Weisenberger
Investment Company Service, or with the performance of the Standard & Poor's 500
Stock Index or the Dow Jones Industrial Average, as appropriate, a Fund may
calculate its aggregate and/or average annual total return for the specified
periods of time by assuming the investment of $10,000 in Fund shares and
assuming the reinvestment of each dividend or other distribution at net asset
value on the reinvestment date. The Funds do not, for these purposes, deduct
from the initial value invested any amount representing sales charges. The Funds
will, however, disclose the maximum sales charge and will also disclose that the
performance data do not reflect sales charges and that inclusion of sales
charges would reduce the performance quoted. Such alternative total return
information will be given no greater prominence in such advertising than the
information prescribed under SEC rules, and all advertisements containing
performance data will include a legend disclosing that such performance data
represent past performance and that the investment return and principal value of
an investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
YIELD. Certain Funds may advertise a 30-day (or one month)
standard yield as described in the Prospectus. Such yields are calculated
separately for each class of shares in each Fund in accordance with the method
prescribed by the SEC for mutual funds:
67
<PAGE>
6
YIELD = 2[(a - b +1) - 1)
-----
cd
Where: a = dividends and interest earned by a Fund during the
period;
b = expenses accrued for the period (net of
reimbursements);
c = average daily number of shares outstanding during
the period, entitled to receive dividends; and
d = maximum offering price per share on the last day
of the period.
For the purpose of determining net investment income earned during the period
(variable "a" in the formula), dividend income on equity securities held by a
Fund is recognized by accruing 1/360 of the stated dividend rate of the security
each day that the security is in the Fund. Except as noted below, interest
earned on debt obligations held by a Fund is calculated by computing the yield
to maturity of each obligation based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest) and dividing the result
by 360 and multiplying the quotient by the market value of the obligation
(including actual accrued interest) in order to determine the interest income on
the obligation for each day of the subsequent month that the obligation is held
by the Fund. For purposes of this calculation, it is assumed that each month
contains 30 days. The maturity of an obligation with a call provision is the
next call date on which the obligation reasonably may be expected to be called
or, if none, the maturity date. With respect to debt obligations purchased at a
discount or premium, the formula generally calls for amortization of the
discount or premium. The amortization schedule will be adjusted monthly to
reflect changes in the market value of such debt obligations. Expenses accrued
for the period (variable "b" in the formula) include all recurring fees charged
by a Fund to all shareholder accounts in proportion to the length of the base
period and the Fund's mean (or median) account size. Undeclared earned income
will be subtracted from the offering price per share (variable "d" in the
formula).
With respect to receivables-backed obligations that are
expected to be subject to monthly payments of principal and interest
("pay-downs"), (i) gain or loss attributable to actual monthly pay downs are
accounted for as an increase or decrease to interest income during the period,
and (ii) each Fund may elect either (a) to amortize the discount and premium on
the remaining security, based on the cost of the security, to the weighted
average maturity date, if such information is available, or to the remaining
term of the security, if any,
68
<PAGE>
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 the High Yield Fund and Municipal Bond Fund for the 30-day
period ended August 31, 1999 was 10.43% and 4.40%.
69
<PAGE>
INDEPENDENT ACCOUNTANTS AND COUNSEL
PricewaterhouseCoopers LLP ("PwC"), with principal offices at
2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as independent
accountants for each Fund. The financial statements that are incorporated by
reference in this Statement of Additional Information have been audited by PwC,
and have been included herein in reliance upon the report of such firm of
independent accountants given upon their authority as experts in accounting and
auditing.
Willkie Farr & Gallagher serves as counsel for each Fund and
provides legal services from time to time for CSAM, CSAMSI, and Counsellors
Service.
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.
70
<PAGE>
As of October 29, 1999, the names, address and percentage of
ownership of each person that owns of record 5% or more of a class of each
Fund's outstanding shares were as follows:
<TABLE>
<CAPTION>
PERCENT
OWNED AS OF
FUND NAME AND ADDRESS OCTOBER 29, 1999
- ---- ---------------- ----------------
<S> <C> <C>
Focus Fund-- Common State Street Bank & Trust Co. 41.97%
Cust for the IRA of
Pascal Scemuma De Gialluly FTC
91 Druid Hill Rd.
Summit, NJ 07901-3226
Charles Schwab & Co. Inc. 30.99%
Special Custody Account for the Exclusive
Benefit of Customers
Attn Mutual Funds
101 Montgomery St.
San Francisco, CA 94104-4122
High Yield Fund-- Common Credit Suisse Asset Mgmt Intl 60.17%
Holding Attn: Thomas Federer
Uetlibergstrasse 231
Postfach 800 Ch-8070
Zurich
John Vogelstein TR 13.00%
Charitable Trust
U/A 012799
466 Lexington Ave
New York, NY 10017-3140
71
<PAGE>
<CAPTION>
PERCENT
OWNED AS OF
FUND NAME AND ADDRESS OCTOBER 29, 1999
- ---- ---------------- ----------------
<S> <C> <C>
John L. Vogelstein 9.63%
Charitable Remainder Trust #4
466 Lexington Avenue
New York, NY 10017-3140
Municipal Bond Fund-- Common Jack W. Sullivan 82.25%
4880 Island View Dr
Oshkosh WI 54901-1318
Deborah Susan Diamond 8.55%
7 Diamond Ln
New Milford, CT 06776-5251
Philip E. Srokowski 6.25%
Edith A. Srokowski JT TEN
13670 Cantaberry CT
South Lyon, MI 48178-9597
Global Telecommunications Fund-- Common Charles Schwab & Co. 42.63%
Special Custody Account for the Exclusive
Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104-4122
Nat'l Financial Svcs Corp 16.91%
FBO Customers
Church St Station
PO Box 3908
New York, NY 10008-3908
Long-Short Neutral Fund-- Common Charles Schwab & Co Inc. 81.87%
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 6.46%
FBO Customers
Church St Station
PO Box 3908
New York, NY 10008-3908
National Investors Services Corp for the 6.31%
Exclusive Benefit of Our Customers
55 Water St FL 32
New York, NY 10041-3299
</TABLE>
72
<PAGE>
FINANCIAL STATEMENTS
Each Fund's audited financial report dated August 31, 1999,
which either accompanies this Statement of Additional Information or has
previously been provided to the investor to whom this Statement of Additional
Information is being sent, is incorporated herein by reference with respect to
all information regarding the relevant Fund included therein. Each Fund will
furnish without charge a copy of the annual reports upon request by calling
Warburg Pincus Funds at 800-927-2874.
73
<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
A-1
<PAGE>
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which could
lead to inadequate capacity to meet timely interest and principal payments. The
BB rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B - Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable
vulnerability to default and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic conditions,
it is not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt rating. The C
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on
which no interest is being paid. Such debt is rated between debt rated C and
debt rated D.
To provide more detailed indications of credit quality, the
ratings may be modified by the addition of a plus or minus sign to show relative
standing within this major rating category.
D - Debt rated D is in payment default. The D rating category
is used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The D rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The following summarizes the ratings used by Moody's for
corporate bonds:
A-2
<PAGE>
Aaa - Bonds that are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, I.E., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers (1, 2 and 3) with respect
to the bonds rated "Aa" through "B." The modifier 1 indicates that the bond
being rated ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range 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.
A-3
<PAGE>
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.
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.
A-4
<PAGE>
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-5
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 2, 1999
STATEMENT OF ADDITIONAL INFORMATION
January 1, 2000
Institutional Shares of the
Warburg, Pincus International Growth Fund, Inc.
Warburg, Pincus U.S. Core Equity Fund, Inc.
Warburg, Pincus U.S. Core Fixed Income Fund, Inc.
Warburg, Pincus Strategic Global Fixed Income Fund, Inc.
Warburg Pincus High Yield 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 International Growth Fund ("International
Growth Fund"), Warburg Pincus U.S. Core Equity Fund ("U.S. Equity Fund"),
Warburg Pincus U.S. Core Fixed Income Fund ("U.S. Fixed Income Fund"), Warburg
Pincus Strategic Global Fixed Income Fund ("Global Income Fund"), Warburg Pincus
Global Telecommunications Fund ("Global Telecommunications Fund"), Warburg
Pincus High Yield Fund ("High Yield Fund"), Warburg Pincus Municipal Bond Fund
("Municipal Bond Fund"), Warburg Pincus Focus Fund ("Focus Fund") and Warburg
Pincus Long-Short Market Neutral Fund ("Long-Short Neutral Fund") (each a "Fund"
and collectively, the "Funds") that supplements information contained in the
combined Prospectus for the Institutional Shares of the Funds, dated January 1,
2000, as amended or supplemented from time to time, and is incorporated by
reference in its entirety into that Prospectus.
Each Fund's audited Annual Report dated August 31, 1999, which
either accompanies this Statement of Additional Information or has previously
been provided to the investor to whom this Statement of Additional Information
is being sent, is incorporated herein by reference.
This Statement of Additional Information is not itself a prospectus
and no investment in shares of the Funds should be made solely upon the
information contained herein. Copies of the Prospectus, Annual Report and
information regarding each Fund's current performance may be obtained by writing
or telephoning:
CSAM Institutional Shares
P.O. Box 8500
Boston, Massachusetts 02266-8500
800-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 ................................................ 5
Lending of Portfolio Securities ....................................... 5
Borrowing ............................................................. 6
Securities of Other Investment Companies .............................. 6
Options Generally ..................................................... 6
Securities Options ................................................ 6
Securities Index Options .......................................... 9
Common Investment Objectives and Policies -- International
Growth, U.S. Equity, U.S. Fixed Income, Global Income,
High Yield, Municipal Bond and Focus Funds ............................ 10
When-Issued Securities, Delayed Delivery Transactions And
Forward Commitments ............................................... 10
Stand-By Commitment Agreements ........................................ 11
Common Investment Objectives and Policies -- International
Growth, U.S. Equity, U.S. Fixed Income, Global Income,
High Yield, Focus and Long-Short Neutral Funds ........................ 12
U.S. Government Securities ............................................ 12
Foreign Investments ................................................... 12
Foreign Debt Securities ........................................... 13
Foreign Currency Exchange ......................................... 14
Information ....................................................... 14
Political Instability ............................................. 14
Foreign Markets ................................................... 14
Increased Expenses ................................................ 14
Dollar-Denominated Debt Securities of Foreign Issuers ............. 15
Depositary Receipts ............................................... 15
Brady Bonds ....................................................... 15
Emerging Markets .................................................. 15
Sovereign Debt .................................................... 16
Convertible Securities ................................................ 17
Debt Securities ....................................................... 17
i
<PAGE>
Below Investment Grade Securities ................................. 18
Mortgage-Backed Securities ........................................ 20
Asset-Backed Securities ........................................... 21
Loan Participations and Assignments ............................... 21
Structured Notes, Bonds or Debentures ............................. 22
Collateralized Mortgage Obligations ............................... 22
Zero Coupon Securities ............................................ 23
Futures Activities .................................................... 24
Futures Contracts ................................................. 24
Options on Futures Contracts ...................................... 25
Currency Exchange Transactions ........................................ 26
Forward Currency Contracts ........................................ 26
Currency Options .................................................. 27
Currency Hedging .................................................. 27
Hedging Generally ..................................................... 28
Short Sales "Against the Box .......................................... 29
Section 4(2) Paper .................................................... 30
Supplemental Investment Objectives and Policies --
International Growth, U.S. Equity and Focus Funds ..................... 30
Rights Offerings and Purchase Warrants ................................ 30
Supplemental Investment Objectives and Policies -- Municipal Bond Fund ..... 31
Supplemental Investment Objectives And Policies -- Long-Short
Neutral Fund .......................................................... 31
Short Sales ........................................................... 31
INVESTMENT RESTRICTIONS .................................................... 32
PORTFOLIO VALUATION ........................................................ 34
PORTFOLIO TRANSACTIONS ..................................................... 36
PORTFOLIO TURNOVER ......................................................... 39
MANAGEMENT OF THE FUNDS .................................................... 40
Officers and Board of Directors ....................................... 40
Directors' Total Compensation for Fiscal Year Ended August 31, 1999 ... 43
Investment Adviser and Co-Administrators .............................. 44
Custodian and Transfer Agent .......................................... 50
Organization of the Funds ............................................. 50
Distribution and Shareholder Servicing ................................ 52
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION ............................. 52
Automatic Cash Withdrawal Plan ........................................ 52
EXCHANGE PRIVILEGE ......................................................... 53
ADDITIONAL INFORMATION CONCERNING TAXES .................................... 53
The Funds and Their Investments ....................................... 54
Special Tax Considerations ............................................ 58
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Straddles ......................................................... 58
Options And Section 1256 Contracts ................................ 59
Foreign Currency Transactions ..................................... 59
Passive Foreign Investment Companies .............................. 60
Asset Diversification Requirement ................................. 60
Foreign Taxes ..................................................... 61
Fund Taxes on Swaps ............................................... 61
Dividends and Distributions ....................................... 61
Sales of Shares ................................................... 62
Backup Withholding ................................................ 62
Notices ........................................................... 63
Other Taxation .................................................... 63
DETERMINATION OF PERFORMANCE ............................................... 63
Total Return .......................................................... 63
Yield ................................................................. 66
INDEPENDENT ACCOUNTANTS AND COUNSEL ........................................ 67
MISCELLANEOUS .............................................................. 68
FINANCIAL STATEMENTS ....................................................... 72
APPENDIX A ---- DESCRIPTION OF RATINGS .....................................A-1
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INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the descriptions of each Fund's
investment objectives and policies in the Prospectus. There are no assurances
that the Funds will achieve their investment objectives.
The investment objective of the International Growth Fund, Focus
Fund (formerly, the Warburg Pincus Select Economic Value Equity Fund) and U.S.
Equity Fund is to provide long-term appreciation of capital.
The investment objective of the High Yield, Municipal Bond, Global
Income and U.S. Fixed Income Funds is to provide high total return.
The investment objective of the Long-Short Neutral Fund is to seek
long-term capital appreciation while minimizing exposure to general equity
market risk.
Unless otherwise indicated, all of the Funds are permitted, but not
obligated, to engage in the following investment strategies, subject to any
percentage limitations set forth below. The Funds do not represent that these
techniques are available now or will be available at any time in the future.
Common Investment Objectives and Policies -- All Funds
Non-Diversified Status. Each Fund is classified as non-diversified
within the meaning of the Investment Company Act of 1940, as amended (the "1940
Act"), which means that each Fund is not limited by such Act in the proportion
of its assets that it may invest in securities of a single issuer. As a
non-diversified fund, each Fund may invest a greater proportion of its assets in
the obligations of a smaller number of issuers and, as a result, may be subject
to greater risk with respect to portfolio securities. The investments of these
Funds will be limited, however, in order to qualify as a "regulated investment
company" for purposes of the Internal Revenue Code of 1986, as amended (the
"Code"). See "Additional Information Concerning Taxes." To qualify, a Fund will
comply with certain requirements, including limiting its investments so that at
the close of each quarter of the taxable year (i) not more than 25% of the
market value of its total assets will be invested in the securities of a single
issuer, and (ii) with respect to 50% of the market value of its total assets,
not more than 5% of the market value of its total assets will be invested in the
securities of a single issuer and the Fund will not own more than 10% of the
outstanding voting securities of a single issuer.
Temporary Investments. To the extent permitted by its investment
objectives and policies, each of the Funds may hold cash or cash equivalents
pending investment or to meet redemption requests. In addition, for defensive
purposes due to abnormal market conditions or economic situations as determined
by the Credit Suisse Asset Management, LLC, the Fund's adviser ("CSAM"), or, if
applicable, Credit Suisse Asset Management Limited ("CSAM Ltd"), the Fund's
sub-investment adviser, as the
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case may be (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 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, acting under the supervision of
the Fund's Board of Directors (the "Board"), 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
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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 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, but does not presently
intend to, invest 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
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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 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 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
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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, 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
Fund's Board of Directors (the "Board"). These loans, if and when made, may not
exceed 331/3% 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, letters of credit or
U.S. government securities, which are maintained at all times in an amount equal
to at least 100% of the current market value of the loaned securities. Any gain
or loss in the market price of the securities loaned that might occur during the
term of the loan would be for the account of the 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
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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 100%
cash collateral or equivalent securities of the type discussed in the preceding
paragraph from the borrower; (ii) the borrower must increase such collateral
whenever the market value of the securities rises above the level of such
collateral; (iii) the 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 331/3 percent 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 net assets. Although the principal of such borrowings will
be fixed, a Fund's assets may change in value during the time the borrowing is
outstanding. Each Fund expects that some of its borrowings may be made on a
secured basis. In such situations, either the custodian will segregate the
pledged assets for the benefit of the lender or arrangements will be made with a
suitable subcustodian, which may include the lender.
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 may purchase and write (sell)
securities, securities indices and currencies for both hedging purposes and to
increase total return.
Securities Options. Each Fund may write covered put and call options
on stock and debt securities and each Fund may purchase such options that are
traded on foreign and U.S. exchanges, as well as OTC options. A Fund realizes
fees (referred to as "premiums") for granting the rights evidenced by the
options it has written. A put option embodies the right of its purchaser to
compel the writer of the option to purchase from the option holder an underlying
security at a specified price for a specified time period or at a specified
time. In contrast, a call option embodies the right of its
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purchaser to compel the writer of the option to sell to the option holder an
underlying security at a specified price for a specified time period or at a
specified time.
The potential loss associated with purchasing an option is limited
to the premium paid, and the premium would partially offset any gains achieved
from its use. However, for an option writer the exposure to adverse price
movements in the underlying security or index is potentially unlimited during
the exercise period. Writing securities options may result in substantial losses
to a Fund, force the sale or purchase of portfolio securities at inopportune
times or at less advantageous prices, limit the amount of appreciation the Fund
could realize on its investments or require the Fund to hold securities its
would otherwise sell.
The principal reason for writing covered options on a security is to
attempt to realize, through the receipt of premiums, a greater return than would
be realized on the securities alone. In return for a premium, a Fund, as the
writer of a covered call option, forfeits the right to any appreciation in the
value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). A Fund that
writes call options retains the risk of an increase in the price of the
underlying security. The size of the premiums that the Funds may receive may be
adversely affected as new or existing institutions, including other investment
companies, engage in or increase their option-writing activities.
If security prices rise, a put writer would generally expect to
profit, although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that the
writer will also profit, because it should be able to close out the option at a
lower price. If security prices decline, the put writer would expect to suffer a
loss. This loss may be less than the loss from purchasing the underlying
instrument directly to the extent that the premium received offsets the effects
of the decline.
In the case of options written by a Fund that are deemed covered by
virtue of the Fund's holding convertible or exchangeable preferred stock or debt
securities, the time required to convert or exchange and obtain physical
delivery of the underlying common stock with respect to which the Fund has
written options may exceed the time within which the Fund must make delivery in
accordance with an exercise notice. In these instances, a Fund may purchase or
temporarily borrow the underlying securities for purposes of physical delivery.
By so doing, the Fund will not bear any market risk, since the Fund will have
the absolute right to receive from the issuer of the underlying security an
equal number of shares to replace the borrowed securities, but the Fund may
incur additional transaction costs or interest expenses in connection with any
such purchase or borrowing.
Additional risks exist with respect to certain of the securities for
which a Fund may write covered call options. For example, if the Fund writes
covered call options on mortgage-backed securities, the mortgage-backed
securities that it holds as
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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 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
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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.
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
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index. Some securities index options are based on a broad market index, such as
the NYSE Composite Index, or a narrower market index such as the Standard &
Poor's 100. Indexes may also be based on a particular industry or market
segment.
Options on securities indexes are similar to options on securities
except that (i) the expiration cycles of securities index options are monthly,
while those of securities options are currently quarterly, and (ii) the delivery
requirements are different. Instead of giving the right to take or make delivery
of securities at a specified price, an option on a securities index gives the
holder the right to receive a cash "exercise settlement amount" equal to (a) the
amount, if any, by which the fixed exercise price of the option exceeds (in the
case of a put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (b) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the securities index upon which the option is based being greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
index and the exercise price of the option times a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Securities index options may be offset by entering into
closing transactions as described above for securities options.
Common Investment Objectives and Policies -- International Growth, U.S. Equity,
U.S. Fixed Income, Global Income, High Yield, Municipal Bond and Focus Funds
When-Issued Securities, Delayed Delivery Transactions And Forward
Commitments. Each Fund may purchase securities on a when-issued basis or on a
forward commitment basis, and it may purchase or sell securities for delayed
delivery (i.e., payment or 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-
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delivery purchase commitments and will segregate the securities underlying
commitments to sell securities for delayed delivery.
When a Fund agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash or liquid securities that are
acceptable as collateral to the appropriate regulatory authority equal to the
amount of the commitment in a segregated account. Normally, the custodian will
set aside portfolio securities to satisfy a purchase commitment, and in such a
case a Fund may be required subsequently to place additional assets in the
segregated account in order to ensure that the value of the account remains
equal to the amount of the Fund's commitment. It may be expected that a Fund's
net assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash. When
a Fund engages in when-issued or delayed-delivery transactions, it relies on the
other party to consummate the trade. Failure of the seller to do so may result
in the Funds' incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
Stand-By Commitment Agreements. Each Fund may from time to time
enter into stand-by commitment agreements. The Funds do not presently intend to
invest more than 5% of net assets in stand-by commitment agreements during the
coming year.
Such agreements commit a Fund, for a stated period of time, to
purchase a stated amount of a fixed income securities which may be issued and
sold to the Fund at the option of the issuer. The price and coupon of the
security is fixed at the time of the commitment. At the time of entering into
the agreement, a Fund is paid a commitment fee, regardless of whether or not the
security is ultimately issued. A Fund will enter into such agreements only for
the purpose of investing in the security underlying the commitment at a yield
and price that is considered advantageous to a Fund. Each Fund will not enter
into a stand-by commitment with a remaining term in excess of 45 days and it
will limit its 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
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commitment is at the option of the issuer, a Fund may bear the risk of a decline
in the value of such security and may not benefit from an appreciation in the
value of the security during the commitment period.
The purchase of a security subject to a stand-by commitment
agreement and the related commitment fee will be recorded on the date on which
the security can reasonably be expected to be issued, and the value of the
security will be adjusted by the amount of the commitment fee. In the event the
security is not issued, the commitment fee will be recorded as income on the
expiration date of the stand-by commitment.
Common Investment Objectives and Policies -- International Growth, U.S. Equity,
U.S. Fixed Income, Global Income, High Yield, Focus and Long-Short Neutral Funds
U.S. Government Securities. The obligations issued or guaranteed by
the U.S. government in which a Fund may invest include direct obligations of the
U.S. Treasury and obligations issued by U.S. government agencies and
instrumentalities. Included among direct obligations of the United States are
Treasury Bills, Treasury Notes and Treasury Bonds, which differ in terms of
their interest rates, maturities and dates of issuance. Treasury Bills have
maturities of less than one year, Treasury Notes have maturities of one to 10
years and Treasury Bonds generally have maturities of greater than 10 years at
the date of issuance. Included among the obligations issued by agencies and
instrumentalities of the United States are instruments that are supported by the
full faith and credit of the United States (such as certificates issued by the
Government National Mortgage Association ("GNMA")); instruments that are
supported by the right of the issuer to borrow from the U.S. Treasury (such as
securities of Federal Home Loan Banks); and instruments that are supported by
the credit of the instrumentality (such as Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") bonds).
Other U.S. government securities the Funds may invest in include
securities issued or guaranteed by the Federal Housing Administration, Farmers
Home Loan 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
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gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. In addition, foreign
investments by the Funds are subject to the risk that natural disasters (such as
an earthquake) will weaken a country's economy and cause investments in that
country to lose money. Natural disaster risks are, of course, not limited to
foreign investments and may apply to a Fund's domestic investments as well. The
Funds may invest in securities of foreign governments (or agencies or
instrumentalities thereof), and many, if not all, of the foregoing
considerations apply to such investments.
For the purposes of this investment policy, foreign investments
include investments in companies located or conducting a majority of their
business outside of the U.S., companies which have issued securities traded
principally outside of the U.S., or non-U.S. governments, governmental entities
or political subdivisions.
Foreign Debt Securities. The returns on foreign debt securities
reflect interest rates and other market conditions prevailing in those countries
and the effect of gains and losses in the denominated currencies against the
U.S. dollar, which have had a substantial impact on investment in foreign
fixed-income securities. The relative performance of various countries'
fixed-income markets historically has reflected wide variations relating to the
unique characteristics of each country's economy. Year-to-year fluctuations in
certain markets have been significant, and negative returns have been
experienced in various markets from time to time.
The foreign government securities in which the Funds may invest
generally consist of obligations issued or backed by national, state or
provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt obligations
of supranational entities, which include international organizations designated,
or backed by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples include the International Bank for Reconstruction and Development (the
"World Bank"), the European Coal and Steel Community, the Asian Development Bank
and the InterAmerican Development Bank.
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.
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Foreign Currency Exchange. Since the Funds may invest in securities
denominated in currencies of non-U.S. countries, the Funds may be affected
favorably or unfavorably by exchange control regulations or changes in the
exchange rate between such currencies and the dollar. A change in the value of a
foreign currency relative to the U.S. dollar will result in a corresponding
change in the dollar value of the Fund assets denominated in that foreign
currency. Changes in foreign currency exchange rates may also affect the value
of dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by a Fund. Unless otherwise contracted, the rate of exchange
between the U.S. dollar and other currencies is determined by the forces of
supply and demand in the foreign exchange markets. Changes in the exchange rate
may result over time from the interaction of many factors directly or indirectly
affecting economic and political conditions in the United States and a
particular foreign country, including economic and political developments in
other countries. Governmental intervention may also play a significant role.
National governments rarely voluntarily allow their currencies to float freely
in response to economic forces. Sovereign governments use a variety of
techniques, such as intervention by a country's central bank or imposition of
regulatory controls or taxes, to affect the exchange rates of their currencies.
The Funds may use hedging techniques with the objective of protecting against
loss through the fluctuation of the value of the yen against the U.S. dollar,
particularly the forward market in foreign exchange, currency options and
currency futures.
Information. The majority of the securities held by the Funds will
not be registered with, nor will the issuers thereof be subject to reporting
requirements of the SEC. Accordingly, there may be less publicly available
information about the securities and about the foreign company or government
issuing them than is available about a domestic company or government entity.
Foreign companies are generally subject to financial reporting standards,
practices and requirements that are either not uniform or less rigorous than
those applicable to U.S. companies.
Political Instability. With respect to some foreign countries, there
is the possibility of expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Funds, political or social instability,
or domestic developments which could affect U.S. investments in those and
neighboring countries.
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
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costs, valuation costs and communication costs, as well as the rate of the
investment advisory fees, though similar to such expenses of some other
international funds, are higher than those costs incurred by other investment
companies not investing in foreign securities. In addition, foreign securities
may be subject to foreign government taxes that would reduce the net yield on
such securities.
Dollar-Denominated Debt Securities of Foreign Issuers. The returns
on foreign debt securities reflect interest rates and other market conditions
prevailing in those countries. The relative performance of various countries'
fixed income markets historically has reflected wide variations relating to the
unique characteristics of each country's economy. Year-to-year fluctuations in
certain markets have been significant, and negative returns have been
experienced in various markets from time to time.
Depositary Receipts. The assets of each Fund may be invested in the
securities of foreign issuers in the form of American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and International Depositary
Receipts ("IDRs"). These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs are
receipts typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. EDRs, which
are sometimes referred to as Continental Depositary Receipts ("CDRs"), are
receipts issued in Europe, and IDRs, which are sometimes referred to as Global
Depositary Receipts ("GDRs"), are issued outside the United States. EDRs (CDRs)
and IDRs (GDRs) are typically issued by non-U.S. banks and trust companies and
evidence ownership of either foreign or domestic securities. Generally, ADRs in
registered form are designed for use in U.S. securities markets and EDRs (CDRs)
and IDRs (GDRs) in bearer form are designed for use in European and non-U.S.
securities markets, respectively.
Brady Bonds. Each Fund may invest in so-called "Brady Bonds," which
are securities created through the exchange of existing commercial bank loans to
public and private entities for new bonds in connection with debt restructurings
under a debt restructuring plan announced by former U.S. Secretary of the
Treasury Nicholas F. Brady. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (primarily the U.S. dollar)
and are currently actively traded in the OTC secondary market for debt
instruments. Brady Bonds have been issued only recently and therefore do not
have a long payment history. In light of the history of commercial bank loan
defaults by Latin American public and private entities, investments in Brady
Bonds may be viewed as speculative.
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
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emerging markets experienced significant declines in value due to political and
currency volatility in emerging markets countries during the latter part of 1997
and the first half of 1998. Other characteristics of emerging markets that may
affect investment include certain national policies that may restrict investment
by foreigners in issuers or industries deemed sensitive to relevant national
interests and the absence of developed structures governing private and foreign
investments and private property. The typically small size of the markets of
securities of issuers located in emerging markets and the possibility of a low
or nonexistent volume of trading in those securities may also result in a lack
of liquidity and in price volatility of those securities.
Sovereign Debt. Investments in sovereign debt involve special risks.
The issuer of the debt or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal or interest
when due in accordance with the terms of such debt, and a Fund may have limited
legal recourse in the event of a default.
Sovereign debt differs from debt obligations issued by private
entities in that, generally, remedies for defaults must be pursued in the courts
of the defaulting party. Legal recourse is therefore somewhat limited. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt obligations, are of considerable significance. Also, there can be no
assurance that the holders of commercial bank loans to the same sovereign entity
may not contest payments to the holders of sovereign debt in the event of
default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and
pay interest in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which a
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local government
or agency.
The occurrence of political, social or diplomatic changes in one or
more of the countries issuing sovereign debt could adversely affect a Fund's
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their sovereign debt. While the Adviser intends to manage the Funds in a manner
that will minimize the exposure to such risks, there can be no assurance 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
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Standard & Poor's Ratings Services ("S&P"). Such securities are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations and involve
major risk exposure to adverse conditions. Some of such sovereign debt, which
may not be paying interest currently or may be in payment default, may be
comparable to securities rated "D" by S&P or "C" by Moody's. A Fund may have
difficulty disposing of certain sovereign debt obligations because there may be
a limited trading market for such securities. Because there is no liquid
secondary market for many of these securities, the Funds anticipate that such
securities could be sold only to a limited number of dealers or institutional
investors. The lack of a liquid secondary market may have an adverse impact on
the market price of such securities and a Fund's ability to dispose of
particular issues when necessary to meet a Fund's liquidity needs or in response
to a specific economic event, such as a deterioration in the creditworthiness of
the issuer. The lack of a liquid secondary market for certain securities also
may make it more difficult for a Fund to obtain accurate market quotations for
purposes of valuing a Fund's portfolio and calculating its net asset value. When
and if available, fixed income securities may be purchased by a Fund at a
discount from face value. However, the Funds do not intend to hold such
securities to maturity for the purpose of achieving potential capital gains,
unless current yields on these securities remain attractive. From time to time,
a Fund may purchase securities not paying interest at the time acquired if, in
the opinion of the "Adviser," such securities have the potential for future
income or capital appreciation.
Convertible Securities. Convertible securities in which a fund may
invest, including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an investor
to benefit from increases in the market price of the underlying common stock.
Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. The value of convertible securities fluctuates in relation to
changes in interest rates like bonds and, in addition, fluctuates in relation to
the underlying common stock. Subsequent to purchase by a Fund, convertible
securities may cease to be rated or a rating may be reduced below the minimum
required for purchase by the Fund. Neither event will require sale of such
securities, although the "Adviser" will consider such event in its determination
of whether a Fund should continue to hold the securities.
Debt Securities. Each Fund may invest in investment grade debt
securities (other than money market obligations) for the purpose of seeking
capital appreciation. Any percentage limitation on a Fund's ability to invest in
debt securities will not be applicable during periods when the Fund pursues a
temporary defensive strategy as discussed below. 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.
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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 High Yield and Municipal Bond
Funds have established no rating criteria for the debt securities in which they
may invest.
Below investment grade debt securities may be rated as low as C by
Moody's or D by S&P, or be deemed by the Adviser to be of equivalent quality.
Securities that are rated C by Moody's are the lowest rated class and can be
regarded as having extremely poor prospects of ever attaining any real
investment standing. A security rated D by S&P is in default or is expected to
default upon maturity or payment date. Investors should be aware that ratings
are relative and subjective and are not absolute standards of quality.
Below investment grade securities (commonly referred to as "junk
bonds"), (i) will likely have some quality and protective characteristics that,
in the judgment of the rating organizations, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (ii) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. The market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
investment grade securities. In addition, these securities generally present a
higher degree of credit risk. The risk of loss due to default is significantly
greater because these securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness.
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While the market values of medium- and lower-rated securities and
unrated securities of comparable quality tend to react less to fluctuations in
interest rate levels than do those of higher-rated securities, the market values
of certain of these securities also tend to be more sensitive to individual
corporate developments and changes in economic conditions than higher-quality
securities. In addition, medium- and lower-rated securities and comparable
unrated securities generally present a higher degree of credit risk. Issuers of
medium- and lower-rated securities and unrated securities are often highly
leveraged and may not have more traditional methods of financing available to
them so that their ability to service their obligations during an economic
downturn or during sustained periods of rising interest rates may be impaired.
The risk of loss due to default by such issuers is significantly greater because
medium- and lower-rated securities and unrated securities generally are
unsecured and frequently are subordinated to the prior payment of senior
indebtedness.
An economic recession could disrupt severely the market for such
securities and may adversely affect the value of such securities and the ability
of the issuers of such securities to repay principal and pay interest thereon. A
Fund may have difficulty disposing of certain of these securities because there
may be a thin trading market. Because there is no established retail secondary
market for many of these securities, the Funds anticipate that these securities
could be sold only to a limited number of dealers or institutional investors. To
the extent a secondary trading market for these securities does exist, it
generally is not as liquid as the secondary market for higher-rated securities.
The lack of a liquid secondary market, as well as adverse publicity and investor
perception with respect to these securities, may have an adverse impact on
market price and a Fund's ability to dispose of particular issues when necessary
to meet the Fund's liquidity needs or in response to a specific economic event
such as a deterioration in the creditworthiness of the issuer. The lack of a
liquid secondary market for certain securities also may make it more difficult
for a Fund to obtain accurate market quotations for purposes of valuing the Fund
and calculating its net asset value.
The market value of securities in medium- and lower-rated categories
is also more volatile than that of higher quality securities. Factors adversely
impacting the market value of these securities will adversely impact a Fund's
net asset value. A Fund will rely on the judgment, analysis and experience of
the Adviser in evaluating the creditworthiness of an issuer. In this evaluation,
in addition to relying on ratings assigned by Moody's or S&P, the Adviser will
take into consideration, among other things, the issuer's financial resources,
its sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. Interest rate trends
and specific developments which may affect individual issuers will also be
analyzed. Subsequent to its purchase by a Fund, an issue of securities may cease
to be rated or its rating may be reduced. Neither event will require sale of
such securities, although the Adviser will consider such event in its
determination of whether a Fund should continue to hold the securities.
Normally, medium- and lower-rated and comparable unrated securities are not
intended for short-term investment. A Fund may
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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
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original investment, thus affecting the Funds' yield. In addition,
mortgage-backed securities issued by certain non-government entities and
collateralized mortgage obligations may be less marketable than other
securities.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificate holders and 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.
Asset-backed securities present certain risks that are not presented
by other securities in which the Funds may invest. Automobile receivables
generally are secured by automobiles. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations. If
the servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the holders of
the asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in the underlying automobiles. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities. Credit card receivables are
generally unsecured, and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. In addition, there is no assurance that the security interest in
the collateral can be realized. The remaining maturity of any asset-backed
security a Fund invests in will be 397 days or less. A Fund may purchase
asset-backed securities that are unrated.
Loan Participations and Assignments. Each Fund may invest in fixed
and floating rate loans ("Loans") arranged through private negotiations between
a foreign government (a "Borrower") and one or more financial institutions
("Lenders"). The
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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
collateralized mortgage obligations CMOs issued by a U.S. Government
instrumentality which are backed by a portfolio of mortgages or mortgage-backed
securities. The issuer's obligations to make interest and principal payments is
secured by the underlying portfolio of mortgages or mortgage-backed securities.
Generally, CMOs are partitioned into several classes with a ranked priority by
which the classes of obligations are redeemed. These securities may be
considered mortgage derivatives. The Funds may only invest in CMOs
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issued by FHLMC, FNMA or other agencies of the U.S. Government or
instrumentalities established or sponsored by the U.S. Government.
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
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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 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 and
increasing return. Aggregate initial margin and premiums (discussed below)
required to establish positions other than those considered to be "bona fide
hedging" by the CFTC will not exceed 5% of the 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
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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.
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,
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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 in connection with conversion
between various currencies. Currency exchange transactions may be from any
non-U.S. currency into U.S. dollars or into other appropriate currencies. Each
Fund will conduct its currency exchange transactions (i) on a spot (i.e., cash)
basis at the rate prevailing in the currency exchange market, (ii) through
entering into futures contracts or options on such contracts (as described
above), (iii) through entering into forward contracts to purchase or sell
currency or (iv) by purchasing exchange-traded currency options. The funds may
engage in currency exchange transactions for both hedging payable and to reverse
total return, which may involve speculation.
Forward Currency Contracts. Each Fund may use forward currency
contracts to protect against uncertainty in the level of future exchange rates
and to enhance total return. The Funds will not invest more than 50% of their
respective total assets in such contracts for the purpose of enhancing total
return. There is no limit on the amount of assets that the Funds may invest in
such transactions for hedging purposes.
The Funds may also enter into forward currency contracts with respect to
specific transactions. For example, when a Fund anticipates the receipt in a
foreign currency of interest payments on a security that it holds, a Fund may
desire to "lock-in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such payment, as the case may be, by entering into a forward
contract for the purchase or sale, for a fixed amount of U.S. dollars, of the
amount of foreign currency involved in the underlying transaction. A Fund will
thereby be able to protect itself against a possible loss resulting from an
adverse change in the relationship
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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.
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
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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, 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
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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 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.
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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 -- International Growth, U.S.
Equity and Focus Funds
Rights Offerings and Purchase Warrants. Rights offerings and
purchase warrants are privileges issued by a corporation which enable the owner
to subscribe to and purchase a specified number of shares of the corporation at
a specified price during a specified period of time. Subscription rights
normally have a short lifespan to expiration. The purchase of rights or warrants
involves the risk that a Fund could lose the purchase value of a right or
warrant if the right to subscribe to additional shares is not executed prior to
the rights and warrants expiration. Also, the purchase of rights and/or warrants
involves the risk that the effective price paid for the right and/or warrant
added to the subscription price of the related security may exceed the value of
the subscribed security's market price such as when there is no movement in the
level of the underlying security.
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Supplemental Investment Objectives and Policies -- Municipal Bond Fund
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance, and opinions relating
to the validity of and the tax-exempt status of payments received by the Fund
from tax-exempt derivative securities are rendered by counsel to the respective
sponsors of such securities. The Fund and the Adviser will rely on such opinions
and will not review independently the underlying proceedings relating to the
issuance of Municipal Obligations, the creation of any tax-exempt derivative
securities, or the basis for such opinions.
Certain Municipal Obligations are classified as private activity
bonds. Interest on private activity bonds is tax-exempt only if the bonds fall
within certain defined categories of qualified private activity bonds and meet
the requirements specified in those respective categories. In addition, interest
on certain private activity bonds ("Alternative Minimum Tax Securities") is a
specific preference item under the federal alternative minimum tax. Investors
should also be aware of the possibility of state and local alternative minimum
or minimum income tax liability on interest from Alternative Minimum Tax
Securities.
Although the Municipal Bond Fund may invest 25% or more of its net
assets in Municipal Obligations the interest on which is paid solely from
revenues of similar projects, and may invest up to 40% of its total assets in
private activity bonds when added together with any taxable investments held by
the Municipal Bond Fund, it will not do so unless in the opinion of the Adviser
the investment is warranted. To the extent the Municipal Bond Fund's assets are
invested in Municipal Obligations payable from the revenues of similar projects
or are invested in private activity bonds, the Municipal Bond Fund will be
subject to the peculiar risks presented by the laws and economic conditions
relating to such projects and bonds to a greater extent than it would be if its
assets were not so invested.
Supplemental Investment Objectives And Policies -- Long-Short Neutral Fund
Short Sales. The Long-Short Neutral Fund will seek to realize
additional gains through short sales. Short sales are transactions in which the
Fund sells a security it does not own, in anticipation of a decline in the value
of that security relative to the long positions held by the Fund. To complete
such a transaction, the Fund must borrow the security from a broker or other
institution to make delivery to the buyer. The Fund then is obligated to replace
the security borrowed by purchasing it at the market price at or prior to the
time of replacement. The price at such time may be more or less than the price
at which the security was sold by the Fund. Until the security is replaced, the
Fund is required to repay the lender any dividends or interest that accrue
during the period of the loan. To borrow the security, the Fund also may be
required to pay a premium, which would increase the cost of the security sold.
The net proceeds of the short sale will be retained by the broker (or by the
Fund's custodian in a special custody account), to
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the extent necessary to meet margin requirements, until the short position is
closed out. The Fund also will incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the
price of the security increases between the date of the short sale and the date
on which the Fund replaces the borrowed security. The Fund will realize a gain
if the security declines in price between those dates. The amount of any gain
will be decreased, and the amount of any loss increased, by the amount of the
premium, dividends, interest or expenses the Fund may be required to pay in
connection with a short sale. An increase in the value of a security sold short
by the Fund over the price at which it was sold short will result in a loss to
the Fund, and there can be no assurance that the Fund will be able to close out
the position at any particular time or at an acceptable price. Although the
Fund's gain is limited to the amount at which it sold a security short, its
potential loss is limited only by the maximum attainable price of the security
less the price at which the security was sold. Until the Fund replaces a
borrowed security, it will maintain in a segregated account at all times cash,
U.S. Government Securities, or other liquid securities in an amount which, when
added to any amount deposited with a broker as collateral will at least equal
the current market value of the security sold short. Depending on arrangements
made with brokers, the Fund may not receive any payments (including interest) on
collateral deposited with them. The Fund will not make a short sale if, after
giving effect to such sale, the market value of all securities sold short
exceeds 100% of the value of the Fund's net assets.
INVESTMENT RESTRICTIONS
The following investment limitations of each Fund may not be changed
without the affirmative vote of the holders of a majority of a Fund's
outstanding shares ("Fundamental 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.
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 (for the Long-Short Neutral Fund only, provided that: (a) short sales
and related borrowings of securities are not subject to this
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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
7. Purchase any securities, which would cause 25% or more of the
value of the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
(i) instruments issued or guaranteed by the United States, any state, territory
or possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions, and (ii)
repurchase agreements secured by the instruments described in clause (i); (b)
wholly-owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents; and (c) utilities will be divided according to their
services, for example, gas, gas transmission, electric and gas, electric and
telephone will each be considered a separate industry.
For purposes of Investment Limitation No. 1, collateral arrangements
with respect to, if applicable, the writing of options, futures contracts,
options on futures contracts, forward currency contracts and collateral
arrangements with respect to initial and variation margin are not deemed to be a
pledge of assets and neither such arrangements nor the purchase
33
<PAGE>
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;
4. (Long-Short Neutral Fund only) Purchase or retain the securities
of any issuer, if those individual officers and directors of the Fund, the
Adviser or any subsidiary thereof each owning beneficially more than 1/2
of 1% of the securities of such issuer own in the aggregate more than 5%
of the securities of such issuer; and
5. (Long-Short Neutral Fund only) Acquire any securities 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.
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
34
<PAGE>
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 established by the Boards. Although the Long-Short Neutral
Fund does not invest directly in foreign securities, it invests in American
Depositary Receipts, the value of which depends on the underlying foreign
security.
35
<PAGE>
PORTFOLIO TRANSACTIONS
The Adviser is responsible for establishing, reviewing and, where
necessary, modifying each Fund's investment program to achieve its investment
objective. Purchases and sales of newly issued portfolio securities are usually
principal transactions without brokerage commissions effected directly with the
issuer or with an underwriter acting as principal. Other purchases and sales may
be effected on a securities exchange or over-the-counter, depending on where it
appears that the best price or execution will be obtained. The purchase price
paid by a Fund to underwriters of newly issued securities usually includes a
concession paid by the issuer to the underwriter, and purchases of securities
from dealers, acting as either principals or agents in the after market, are
normally executed at a price between the bid and asked price, which includes a
dealer's mark-up or mark-down. Transactions on U.S. stock exchanges and some
foreign stock exchanges involve the payment of negotiated brokerage commissions.
On exchanges on which commissions are negotiated, the cost of transactions may
vary among different brokers. On most foreign exchanges, commissions are
generally fixed. There is generally no stated commission in the case of
securities traded in domestic or foreign OTC markets, but the price of
securities traded in OTC markets includes an undisclosed commission or mark-up.
U.S. government securities are generally purchased from underwriters or dealers,
although certain newly issued U.S. government securities may be purchased
directly from the U.S. Treasury or from the issuing agency or instrumentality.
No brokerage commissions are typically paid on purchases and sales of U.S.
Government Securities.
In selecting broker-dealers, the Adviser does business exclusively
with those broker-dealers that, in the Adviser's judgment, can be expected to
provide the best service. The service has two main aspects: the execution of buy
and sell orders and the provision of research. In negotiating commissions with
broker-dealers, the Adviser will pay no more for execution and research services
that it considers either, or both together, to be worth. The worth of execution
service depends on the ability of the broker-dealer to minimize costs of
securities purchased and to maximize prices obtained for securities sold. The
worth of research depends on its usefulness in optimizing portfolio composition
and its changes over time. Commissions for the combination of execution and
research services that meet the Adviser's standards may be higher than for
execution services alone or for services that fall below the Adviser's
standards. The Adviser believes that these arrangements may benefit all clients
and not necessarily only the accounts in which the particular investment
transactions occur that are so executed. Further, the Adviser will only receive
brokerage or research service in connection with securities transactions that
are consistent with the "safe harbor" provisions of Section 28(e) of the
Securities Exchange Act of 1934 when paying such higher commissions.
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 and affiliates of Credit Suisse Group
("Credit Suisse"). A Fund
36
<PAGE>
may utilize Credit Suisse Asset Management Securities, Inc. ("CSAMSI") or
affiliates of Credit Suisse in connection with a purchase or sale of securities
when the Adviser believes that the charge for the transaction does not exceed
usual and customary levels and when doing so is consistent with guidelines
adopted by the Board.
Investment decisions for the Funds concerning specific portfolio
securities are made independently from those for other clients advised by the
Adviser. Such other investment clients may invest in the same securities as the
Funds. When purchases or sales of the same security are made at substantially
the same time on behalf of such other clients, transactions are averaged as to
price and available investments allocated as to amount, in a manner which the
Adviser believes to be equitable to each client, including the Funds. In some
instances, this investment procedure may adversely affect the price paid or
received by the Funds or the size of the position obtained or sold for the
Funds. To the extent permitted by law, the Adviser may aggregate the securities
to be sold or purchased for each Fund with those to be sold or purchased for
such other investment clients in order to obtain best execution.
Transactions for each of the Funds may be effected on foreign
securities exchanges. In transactions for securities not actively traded on a
foreign securities exchange, the Funds will deal directly with the dealers who
make a market in the securities involved, except in those circumstances where
better prices and execution are available elsewhere. Such dealers usually are
acting as principal for their own account. On occasion, securities may be
purchased directly from the issuer. Such portfolio securities are generally
traded on a net basis and do not normally involve brokerage commissions.
Securities firms may receive brokerage commissions on certain portfolio
transactions, including options, futures and options on futures transactions and
the purchase and sale of underlying securities upon exercise of options.
Each Fund may participate, if and when practicable, in bidding for
the purchase of securities for the Fund's portfolio directly from an issuer in
order to take advantage of the lower purchase price available to members of such
a group. A Fund will engage in this practice, however, only when the Adviser, in
its sole discretion, believe such practice to be otherwise in the Fund's
interest.
For the fiscal years ended August 31, the Funds have paid brokerage
commissions as follows:
37
<PAGE>
August 31, 1999
Fund Brokerage Commission
- ---- --------------------
International Growth $5,207,753
U.S. Equity $ 84,295
U.S. Fixed Income $ 62,630
Global Income $ 4,476
High Yield $ 112,134
Municipal Bond N/A
Focus $ 142,853
Long-Short Neutral $ 214,482
August 31, 1998
BEA Fund Brokerage Commission
- -------- --------------------
International Equity $3,481,661
U.S. Core Equity $ 352,567
U.S. Core Fixed Income $ 12,023
Strategic Global Fixed Income $ 678
High Yield $ 250
Municipal Bond N/A
Focus $ 17,675
Long-Short Neutral $ 3,790
38
<PAGE>
August 31, 1997
BEA Fund Brokerage Commission
- -------- --------------------
International Equity $5,041,204
U.S. Core Equity $ 181,354
U.S. Core Fixed Income $ 0
Strategic Global Fixed Income $ 0
High Yield $ 0
Municipal Bond N/A
Focus N/A
Long-Short Neutral N/A
In no instance will portfolio securities be purchased from or sold
to CSAM, CSAMSI or Credit Suisse First Boston ("CS First Boston") or any
affiliated person of such companies except as permitted by the SEC exemptive
order or by applicable law. In addition, the Funds will not give preference to
any institutions with whom the Funds enter into distribution or shareholder
servicing agreements concerning the provision of distribution services or
support services.
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.
39
<PAGE>
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 (67) Director
40 Grosvenor Road Currently retired; Executive Vice
Short Hills, New Jersey 07078 President and Chief Financial Officer
of Pan Am Corporation and Pan American
World Airways, Inc. from 1988 to 1991;
Director of The Infinity Mutual Funds,
BISYS Group Incorporated;
Director/Trustee of other Warburg
Pincus Funds and other CSAM-advised
investment companies.
Jack W. Fritz (72) Director
2425 North Fish Creek Road Private investor; Consultant and
P.O. Box 483 Director of Fritz Broadcasting, Inc.
Wilson, Wyoming 83014 and Fritz Communications (developers
and operators of radio stations);
Director of Advo, Inc. (direct mail
advertising); Director/Trustee of other
Warburg Pincus Funds. Director Dean of
Yale School of Management and William
S. Beinecke Professor in the Practice
of International Trade and Finance;
Undersecretary of Commerce for
International Warburg Pincus Funds.
Jeffrey E. Garten (53) Director
Box 208200 Director Dean of Yale School of
Connecticut 06520-8200 Management and 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; New Haven,
Director/Trustee of other Warburg
Pincus Funds.
40
<PAGE>
James S. Pasman, Jr. (68) Director
29 The Trillium Currently retired; President and Chief
Pittsburgh, Pennsylvania 15238 Operating Officer of National
InterGroup, Inc. from April 1989 to
March 1991; Chairman of Permian Oil Co.
from April 1989 to March 1991; Director
of Education Management Corp., Tyco
International Ltd.; Trustee, BT
Insurance Funds Trust; Director/Trustee
of other Warburg Pincus Funds and other
CSAM-advised investment companies.
William W. Priest* (58) Chairman of the Board
153 East 53rd Street Chairman- Management Committee, Chief
New York, New York 10022 Executive Officer and Managing Director
of CSAM (U.S.) since 1990; Director of
TIG Holdings, Inc.; Director/Trustee of
other Warburg Pincus Funds and other
CSAM-advised investment companies.
Steven N. Rappaport (51) Director
153 East 53rd Street, President of Loanet, Inc. since 1997;
Suite 5500 Executive Vice President of Loanet,
New York, New York 10022 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.*
- --------
* Indicates a Director who is an "interested person" of the Fund as defined
in the 1940 Act.
41
<PAGE>
Alexander B. Trowbridge (69) Director
1317 F Street, N.W., Currently retired; President of
5th Floor Trowbridge Partners, Inc. (business
Washington, DC 20004 consulting) from January 1990 to
November 1996; Director or Trustee of
New England Mutual Life Insurance Co.,
ICOS Corporation (biopharmaceuticals),
IRI International (energy services),
The Rouse Company (real estate
development), Harris Corp. (electronics
and communications equipment), The
Gillette Co. (personal care products)
and Sunoco, Inc. (petroleum refining
and marketing); Director/Trustee of
other Warburg Pincus Funds.
Eugene L. Podsiadlo (42) President
466 Lexington Avenue Managing Director of CSAM; Associated
New York, New York 10017-3147 with CSAM since CSAM acquired the
Funds' predecessor adviser in July
1999; with the predecessor adviser
since 1991; Vice President of Citibank,
N.A. from 1987 to 1991; Officer of
CSAMSI and of other Warburg Pincus
Funds.
Hal Liebes, Esq. (35) Vice President and Secretary
153 East 53rd Street Director and General Counsel of CSAM;
New York, New York 10022 Associated with CSAM since 1995;
Associated with CS First Boston
Investment Management from 1994 to
1995; Associated with Division of
Enforcement, U.S. Securities and
Exchange Commission from 1991 to 1994;
Officer of CSAMSI, other Warburg Pincus
Funds and other CSAM-advised investment
companies.
Michael A. Pignataro (40) Treasurer and Chief Financial Officer
153 East 53rd Street Vice President and Director of Fund
New York, New York 10022 Administration of CSAM; Associated with
CSAM since 1984; Officer of other
Warburg Pincus Funds and other
CSAM-advised investment companies.
42
<PAGE>
Stuart J. Cohen, Esq. (30) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel of
New York, New York 10017-3147 CSAM; Associated with CSAM since CSAM
acquired the Funds' predecessor adviser
in July 1999; with the predecessor
adviser since 1997; Associated with the
law firm of Gordon Altman Butowsky
Weitzen Shalov & Wein from 1995 to
1997; Officer of other Warburg Pincus
Funds.
Rocco A. DelGuercio (36) Assistant Treasurer
153 East 53rd Street Assistant Vice President and
New York, New York 10022 Administrative Officer of CSAM;
Associated with CSAM since June 1996;
Assistant Treasurer, Bankers Trust
Corp. -- Fund Administration from March
1994 to June 1996; Mutual Fund
Accounting Supervisor, Dreyfus
Corporation from April 1987 to March
1994; Officer of other Warburg Pincus
Funds and other CSAM-advised investment
companies.
No employee of CSAM, PFPC Inc. ("PFPC") and CSAMSI, the Funds'
co-administrators, or any of their affiliates, receives any compensation from
the Funds for acting as an officer or director of a Fund. Each Director who is
not a director, trustee, officer or employee of CSAM, PFPC, CSAMSI or any of
their affiliates receives an annual fee of $500 and $250 for each meeting of the
Boards attended by him for his services as Director, and is reimbursed for
expenses incurred in connection with his attendance at Board meetings. Each
member of the Audit Committee receives an annual fee of $250, and the chairman
of the Audit Committee receives an annual fee of $325.
Directors' Total Compensation for Fiscal Year Ended August 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
All
Investment
High Long-Short Companies in
Name of International U.S. U.S. Fixed Global Yield Municipal Focus Neutral the [CSAM]
Director Growth Fund Equity Fund Income Fund Income Fund Fund Bond Fund Fund Fund Fund Complex*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
William W. Priest** None None None None None None None None None
- ------------------------------------------------------------------------------------------------------------------------------------
Arnold M. Reichman*** None None None None None None None None None
- ------------------------------------------------------------------------------------------------------------------------------------
Richard N. Cooper**** 1,125 1,125 1,125 1,125 1,125 1,125 1,125 1,125 $73,250
- ------------------------------------------------------------------------------------------------------------------------------------
Richard H. Francis***** 750 750 750 750 750 750 750 750 $16,500
- ------------------------------------------------------------------------------------------------------------------------------------
Jack W. Fritz 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 $73,250
- ------------------------------------------------------------------------------------------------------------------------------------
Jeffrey E. Garten 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 $73,250
- ------------------------------------------------------------------------------------------------------------------------------------
James S. Pasman, Jr.***** 750 750 750 750 750 750 750 750 $16,500
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
All
Investment
High Long-Short Companies in
Name of International U.S. U.S. Fixed Global Yield Municipal Focus Neutral the [CSAM]
Director Growth Fund Equity Fund Income Fund Income Fund Fund Bond Fund Fund Fund Fund Complex*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Steven N. Rappaport***** 750 750 750 750 750 750 750 750 $16,500
- ------------------------------------------------------------------------------------------------------------------------------------
Alexander B. Trowbridge 2,075 2,075 2,075 2,075 2,075 2,075 2,075 2,075 $76,025
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Each Director serves as a Director or Trustee of 51 investment companies
and portfolios in the [Credit Suisse Asset Management Fund Complex].
** Mr. Priest receives compensation as an affiliate of CSAM, and,
accordingly, receives no compensation from any Fund or any other
investment company advised by CSAM.
*** Mr. Reichman resigned as a Director of each Fund effective August 18,
1999.
**** Mr. Cooper resigned as a Director of each Fund effective July 6, 1999.
***** Messrs. Francis, Pasman and Rappaport became Directors of the Funds
effective July 6, 1999.
As of September 30, 1999, Directors and officers as a group, owned
of record less than 1% of each Fund's outstanding Institutional Shares. No
Director or officer owned any of the Funds' outstanding Institutional Shares.
Investment Adviser and Co-Administrators. CSAM, located at 153 East
53rd Street, New York, New York 10022, serves as investment adviser to each Fund
pursuant to a written agreement (the "Advisory Agreement"). CSAM Ltd serves as
sub-investment adviser to the Global Income Fund. CSAM is an indirect
wholly-owned U.S. subsidiary of Credit Suisse. Credit Suisse is a global
financial services company, providing a comprehensive range of banking and
insurance products. Active on every continent and in all major financial
centers, Credit Suisse comprises five business units -- Credit Suisse Asset
Management (asset management); Credit Suisse First Boston (investment banking);
Credit Suisse Private Banking (private banking); Credit Suisse (retail banking);
and Winterthur (insurance). Credit Suisse has approximately $680 billion of
global assets under management and employs approximately 62,000 people
worldwide. The principal business address of Credit Suisse is Paradeplatz 8, CH
8070, Zurich, Switzerland.
CSAM's predecessor, BEA Associates, had rendered advisory services
to the predecessor to the Funds, each a series of The RBB Fund, Inc. (the "BEA
Funds"), pursuant to Investment Advisory Agreements (the "BEA Advisory
Agreements"). CSAM Ltd had not provided sub-investment advisory services to the
BEA Funds. CSAM, together with its predecessor firms, has been engaged in the
investment advisory business for over 60 years.
CSAM has investment discretion for the Funds and will make all
decisions affecting assets in the Funds under the supervision of the Funds'
Board of Directors and in accordance with each Fund's stated policies. The
Adviser will select investments for the Funds and will place purchase and sale
orders on behalf of the Funds. For its services to the International Growth,
U.S. Equity, U.S. Fixed Income, Global Income, High Yield, Municipal Bond and
Focus Funds, CSAM will be paid (before any voluntary waivers or
44
<PAGE>
reimbursements) a monthly fee computed at an annual rate of .80%, .75%, .375%,
.50%, .70%, .70% and, .75% of average daily net assets, respectively. CSAM pays
CSAM Ltd a sub-investment advisory fee out of the fees CSAM receives from the
Global Income Fund.
The Long-Short Neutral Fund pays CSAM a basic management fee,
computed daily and payable monthly, at the annual rate of 1.50% of the average
net assets of the Fund. After the first year of operations, this basic
management fee may be increased or decreased by applying an adjustment formula
(the "Performance Adjustment"). The Performance Adjustment is calculated monthly
by comparing the Fund's investment performance to a Target (as defined below)
during the most recent twelve-month period. The "Target" is the investment
record of the Salomon Smith Barney 1-Month U.S. Treasury Bill Index-TM- plus 5
percentage points. The Performance Adjustment is added to or subtracted from the
basic fee.
The Performance Adjustment may increase or decrease the basic fee in
five steps. The first step would occur if the Fund's performance during the most
recent 12-month period differed from that of the Target by more than one but not
more than two percentage points. In this event, the Performance Adjustment would
be 0.10%, and the annual rate of the total management fee would be either 1.40%
or 1.60%. The second step would occur if the Fund's performance during the most
recent 12-month period differed from that of the Target by more than two but not
more than three percentage points. In this event, the Performance Adjustment
would be 0.20%, and the annual rate of the total management fee would be either
1.30% or 1.70%. The third step would occur if the Fund's performance during the
most recent 12-month period differed from that of the Target by more than three
but not more than four percentage points. In this event, the Performance
Adjustment would be 0.30%, and the annual rate of the total management fee would
be either 1.20% or 1.80%. The fourth step would occur if the Fund's performance
during the most recent 12-month period differed from that of the Target by more
than four but not more than five percentage points. In this event, the
Performance Adjustment would be 0.40%, and the annual rate of the total
management fee would be either 1.10% or 1.90%. The fifth step would occur if the
Fund's performance during the most recent 12-month period differed from that of
the Target by five percentage points or more. In this event, the Performance
Adjustment would be 0.50%, and the annual rate of the total management fee would
be either 1.00% or 2.00%. Thus:
45
<PAGE>
<TABLE>
<CAPTION>
TOTAL MANAGEMENT BASIC RATE PERFORMANCE ADJUSTMENT FEE RATE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
No adjustment 1.50% N/A 1.50%
- ----------------------------------------------------------------------------------------------------------------
First Step:
Performance exceeds Target by
more than 1 but not more than 2
percentage points 1.50 .10% 1.60
Performance lags Target by more than
1 but not more than 2 percent
points 1.50 (.10) 1.40
- ----------------------------------------------------------------------------------------------------------------
Second Step:
Performance exceeds Target by
more than 2 but not more than 3
percentage points 1.50 .20 1.70
Performance lags Target by more than
1 but not more than 3 percent
points 1.50 (.20) 1.30
- ----------------------------------------------------------------------------------------------------------------
Third Step:
Performance exceeds Target by
more than 3 but not more than 4
percentage points 1.50 .30 1.80
Performance lags Target by more than
3 but not more than 4 percent
points 1.50 (.30) 1.20
- ----------------------------------------------------------------------------------------------------------------
Fourth Step:
Performance exceeds Target by
more than 4 but not more than 5
percentage points 1.50 .40 1.90
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
TOTAL MANAGEMENT BASIC RATE PERFORMANCE ADJUSTMENT FEE RATE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
No adjustment 1.50% N/A 1.50%
- ----------------------------------------------------------------------------------------------------------------
Performance lags Target
by more than 4 but
not more than 5
percent points 1.50 (.40) 1.10
- ----------------------------------------------------------------------------------------------------------------
Fifth Step:
Performance exceeds
Target by more than 5
percentage points 1.50 .50 2.00
Performance lags Target
by more than 5
percent points 1.50 (.50) 1.00
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
CSAMSI and PFPC, an indirect, wholly owned subsidiary of PNC Bank
Corp., both serve as co-administrators to the Funds pursuant to separate written
agreements (the "CSAMSI Co-Administration Agreements" and the "PFPC
Co-Administration Agreements," respectively). CSAMSI became co-administrator to
each Fund on October 26, 1999. Prior to that, Counsellors Funds Service, Inc.
("Counsellors Service") served as co-administrator to the Funds. Provident
Distributors, Inc. ("Provident Distributors") 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 Institutional Shares and .10% of
average daily net assets of the Institutional Shares over $125 million. For the
services provided by PFPC under the PFPC Co-Administration Agreements, each Fund
pays PFPC a fee calculated at an annual rate of .125% of each Fund's average
daily net assets, subject in each case to a minimum annual fee and exclusive of
out-of-pocket expenses. Each class of shares of the Funds bears its
proportionate share of fees payable to CSAMSI and PFPC in the proportion that
its assets bear to the aggregate assets of the Funds at the time of calculation.
For the 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:
47
<PAGE>
<TABLE>
<CAPTION>
August 31, 1999
Fees Paid
Fund (after waivers) Waivers Reimbursements
---- --------------- ------- --------------
<S> <C> <C> <C>
International Growth $ 5,508,687 $ 0 $ 0
U.S. Equity $ 369,195 $ 148,230 $ 0
U.S. Fixed Income $ 827,811 $ 608,214 $ 0
Global Income $ 0 $ 144,265 $ 3,649
Global Telecommunications $ 93,200 $ 101,660 $ 33,124
High Yield $ 497,661 $ 405,408 $ 0
Municipal Bond $ 64,918 $ 95,749 $ 0
Focus $ 111,197 $ 139,116 $ 0
Long-Short Neutral $ 193,807 $ 97,341 $ 0
<CAPTION>
August 31, 1998
Fees Paid
BEA Fund (after waivers) Waivers Reimbursements
-------- --------------- ------- --------------
<S> <C> <C> <C>
International Equity $ 4,943,773 $ 27,976 $ 0
U.S. Core Equity $ 703,273 $ 36,437 $ 0
U.S. Core Fixed Income $ 579,143 $ 288,699 $ 0
Strategic Global Fixed Income $ 81,321 $ 89,310 $ 0
High Yield $ 422,069 $ 271,277 $ 0
Municipal Bond $ 93,618 $ 51,669 $ 0
Focus $ 14,224 $ 643 $ 0
Long-Short Neutral $ 4,661 $ 2,758 $ 0
<CAPTION>
August 31, 1997
Fees Paid
BEA Fund (after waivers) Waivers Reimbursements
-------- --------------- ------- --------------
<S> <C> <C> <C>
International Equity $ 5,300,316 $ 0 $ 0
U.S. Core Equity $ 537,237 $ 27,626 $ 0
U.S. Core Fixed Income $ 357,196 $ 177,539 $ 0
Strategic Global Fixed Income $ 180,945 $ 27,305 $ 0
High Yield $ 393,841 $ 233,336 $ 0
Municipal Bond $ 91,093 $ 44,791 $ 0
Focus N/A N/A N/A
Long-Short Neutral N/A N/A N/A
</TABLE>
From August 31, 1997 to August 31, 1999, the Funds paid Provident
Distributors or Counsellors Service and PFPC administration fees and Provident
Distributors or Counsellors Service and PFPC have waived fees and/or reimbursed
expenses as follows:
48
<PAGE>
<TABLE>
<CAPTION>
August 31, 1999
PFPC Counsellors Service
Fees Paid Fees Paid
(after Reimburse- (after Reimburse-
Fund Waivers) Waivers ments Fund Waivers) Waivers ments
---- -------- ------- ----------- ---- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
International Growth $860,732 $ 0 $0 International Growth $9,292 $ 0 $0
U.S. Equity $ 86,237 $ 0 $0 U.S. Equity $ 6 $ 25 $0
U.S. Fixed Income $286,470 $ 0 $0 U.S. Fixed Income $ 4 $ 18 $0
Global Income $ 50,059 $ 0 $0 Global Income $ 1 $ 4 $0
High Yield $129,010 $32,252 $0 High Yield $2,733 $9,930 $0
Municipal Bond $ 37,500 $ 0 $0 Municipal Bond $ 9 $ 40 $0
Focus $ 41,719 $ 0 $0 Focus $ 2 $ 7 $0
Long-Short Neutral $ 12,643 $11,902 $0 Long-Short Neutral $1,036 $4,144 $0
August 31, 1998
PFPC Provident Distributors
Fees Paid Fees Paid
(after Reimburse- (after Reimburse-
BEA Fund Waivers) Waivers ments BEA Fund Waivers) Waivers ments
- -------- -------- ------- -------------------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
International Equity $769,622 $ 7,213 $0 International Equity $435,028 $497,175 $0
U.S. Core Equity $123,285 $ 0 $0 U.S. Core Equity $ 9,863 $138,079 $0
U.S. Core Fixed Income $235,924 $ 0 $0 U.S. Core Fixed Income $ 23,143 $323,994 $0
Strategic Global Fixed Strategic Global Fixed
Income $42,937 $ 5,494 $0 Income $ 3,412 $ 47,777 $0
High Yield $99,050 $24,762 $0 High Yield $ 9,905 $138,669 $0
Municipal Bond $30,402 $ 0 $0 Municipal Bond $ 2,076 $ 29,057 $0
Focus $ 0 $ 2,478 $0 Focus $ 198 $ 2,775 $0
Long-Short Neutral $ 0 $ 618 $0 Long-Short Neutral $ 148 $ 594 $0
<CAPTION>
August 31, 1997
PFPC Counsellors Service
Fees Paid Fees Paid
(after Reimburse- (after Reimburse-
BEA Fund Waivers) Waivers ments BEA Fund Waivers) Waivers ments
- -------- -------- ------- -------------------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
International Equity $785,014 $43,161 $0 International Equity $463,778 $530,031 $0
U.S. Core Equity $ 94,144 $ 0 $0 U.S. Core Equity $ 7,532 $105,441 $0
U.S. Core Fixed Income $159,177 $19,068 $0 U.S. Core Fixed Income $ 14,258 $199,636 $0
Strategic Global Fixed Strategic Global Fixed
Income $ 41,650 $10,412 $0 Income $ 4,165 $ 58,310 $0
High Yield $ 89,597 $22,399 $0 High Yield $ 8,959 $125,436 $0
Municipal Bond $ 24,265 $ 0 $0 Municipal Bond $ 1,941 $ 27,177 $0
Focus N/A N/A N/A Focus N/A N/A N/A
Long-Short Neutral N/A N/A N/A Long-Short Neutral N/A N/A N/A
</TABLE>
Each class of a Fund bears all of its own expenses not specifically
assumed by the Adviser or another service provider to the Fund. General expenses
of the Funds
49
<PAGE>
not readily identifiable as belonging to a particular Fund are allocated among
all investment funds by or under the direction of the Funds' Board of Directors
in such manner as the Board determines fair and accurate. Each class of the
Funds pays its own administration fees, and may pay a different share than the
other classes of the Funds of other expenses (excluding advisory and custodial
fees) if those expenses are actually incurred in a different amount by such
class or if a class receives different services.
Custodian and Transfer Agent. Except for the Long-Short Neutral
Fund, Brown Brothers Harriman & Co. ("BBH") acts as the custodian for the Funds
and also acts as the custodian for the Funds' foreign securities pursuant to a
Custodian Agreement (the "BBH Custodian Agreement"). Custodial Trust Company
("CTC") acts as the custodian for the Long-Short Neutral Fund and also acts as
the custodian for the Long-Short Neutral Fund's foreign securities 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.
50
<PAGE>
Each Fund's charter authorizes its Board to issue three billion full
and fractional shares of capital stock, $.001 par value per share, of which one
billion shares are designated Common Shares, one billion shares are designated
Institutional Shares and one billion shares are designated Advisor Shares. Under
each Fund's charter documents, the Board has the power to classify or reclassify
any unissued shares of the Fund into one or more additional classes by setting
or changing in any one or more respects their relative rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption. A Board may similarly classify or reclassify any class
of its shares into one or more series and, without shareholder approval, may
increase the number of authorized shares of the Fund.
The High Yield, Municipal Bond, Focus and Long-Short Neutral Funds
currently offer two separate classes of shares: Common Shares and Institutional
Shares. The International Growth, U.S. Core Equity, U.S. Core Fixed Income and
Global Income Funds currently offer 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 lower fees paid by
Institutional Shares, the total return on Institutional Shares can be expected
to be higher than the total return on Common Shares and Advisor Shares.
Investors may obtain information concerning the Common Shares and, if and when
offered, the Advisor Shares from their investment professional or by calling
CSAMSI at 800-369-2728. 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
51
<PAGE>
statistical characteristics of the Fund, may be obtained by calling Warburg
Pincus Funds at 800-WARBURG or on the Warburg Pincus Funds web site at
www.warburg.com.
Distribution and Shareholder Servicing. In addition to serving as
each Fund's co-administrator, CSAMSI serves as distributor of each Fund's
shares. CSAMSI offers each Fund's shares on a continuous basis. No compensation
is payable by any of the Funds to CSAMSI for distribution services under the
Distribution Agreement, but CSAMSI receives compensation from each Fund under
the CSAMSI Co-Administration Agreement. CSAMSI's principal business address is
466 Lexington Avenue, New York, New York 10017.
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 The New
York Stock Exchange, Inc. (the "NYSE") is closed (other than customary weekend
and holiday closings), or during which trading on said Exchange is restricted,
or during which (as determined by the SEC by rule or regulation) an emergency
exists as a result of which disposal or valuation of Fund securities is not
reasonably practicable, or for such other periods as the SEC may permit. (A Fund
may also suspend or postpone the recordation of the transfer of its shares upon
the occurrence of any of the foregoing conditions.)
Automatic Cash Withdrawal Plan. An automatic cash withdrawal plan
(the "Plan") is available to shareholders who wish to receive specific amounts
of cash periodically. Withdrawals may be made under the Plan by redeeming as
many shares of the relevant Fund as may be necessary to cover the stipulated
withdrawal payment. To the extent that withdrawals exceed dividends,
distributions and appreciation of a
52
<PAGE>
shareholder's investment in a Fund, there will be a reduction in the value of
the shareholder's investment and continued withdrawal payments may reduce the
shareholder's investment and ultimately exhaust it. Withdrawal payments should
not be considered as income from investment in a Fund.
EXCHANGE PRIVILEGE
An exchange privilege with certain other funds advised by CSAM is
available to investors in each Fund. An Institutional Shareholder may exchange
Institutional Shares of a Fund for Institutional Shares of another Fund or for
Institutional Shares of another Warburg Pincus Fund at their respective net
asset values.
If an exchange request is received by Warburg Pincus Funds or their
agent prior to the close of regular trading on the NYSE, the exchange will be
made at each Fund's net asset value determined at the end of that business day.
Exchanges will be effected without a sales charge but must satisfy the minimum
dollar amount necessary for new purchases. The Fund may refuse exchange
purchases at any time without prior notice.
The exchange privilege is available to shareholders residing in any
state in which the shares being acquired may legally be sold. When an investor
effects an exchange of shares, the exchange is treated for federal income tax
purposes as a redemption. Therefore, the investor may realize a taxable gain or
loss in connection with the exchange. Investors wishing to exchange shares of a
Fund for shares in another Warburg Pincus Fund should review the prospectus of
the other fund prior to making an exchange. For further information regarding
the exchange privilege or to obtain a current prospectus for another Warburg
Pincus Fund, an investor should contact Warburg Pincus Funds at 1-800-401-2230.
The Funds reserve the right to refuse exchange purchases by any
person or group if, in CSAM's judgment, a Fund would be unable to invest the
money effectively in accordance with its investment objective and policies, or
would otherwise potentially be adversely affected. Examples of when an exchange
purchase could be refused are when the Fund receives or anticipates receiving
large exchange orders at or about the same time and/or when a pattern of
exchanges within a short period of time (often associated with a "market timing"
strategy) is discerned. The Funds reserve the right to terminate or modify the
exchange privilege at any time upon 30 days' notice to shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is a summary of the material United States federal
income tax considerations regarding the purchase, ownership and disposition of
shares in the Funds. Each prospective shareholder is urged to consult his own
tax adviser with respect
53
<PAGE>
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 and gains from the sale or other disposition
of stock or securities or foreign currencies, or other income (including, but
not limited to, gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies;
and (b) diversify its holdings so that, at the end of each quarter of the Fund's
taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash, securities of other regulated investment companies, United
States government securities and other securities, with such other securities
limited, in respect of any one issuer, to an amount not greater than 5% of the
Fund's assets and not greater than 10% of the outstanding voting securities of
such issuer and (ii) not more than 25% of the value of its assets is invested in
the securities (other than 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., 90% of its taxable income minus the
excess, if any, of its net realized long-term capital gains over its net
realized short-term capital losses (including any capital loss carryovers), plus
or minus certain other adjustments as specified in the Code) for the taxable
year is distributed, but will be subject to tax at regular corporate rates on
any taxable income or gains that it does not distribute. Any dividend declared
by a Fund in October, November or December of any calendar year and payable to
shareholders of record on a specified date in such a month shall be deemed to
have been received by each shareholder on December 31 of such calendar year and
to have been paid by the Fund not later than such December 31, provided that
such dividend is actually paid by the Fund during January of the following
calendar year.
Each Fund intends to distribute annually to its shareholders
substantially all of its investment company taxable income. The Board of
Directors of the Fund will determine annually whether to distribute any net
realized long-term capital gains in excess of net realized short-term capital
losses (including any capital loss carryovers). Each Fund currently expects to
distribute any excess annually to its shareholders. However, if a Fund retains
for investment an amount equal to all or a portion of its net
54
<PAGE>
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.
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.
55
<PAGE>
A Fund's short sales against the box, if any, and transactions in
foreign currencies, forward contracts, options and futures contracts (including
options and futures contracts on foreign currencies) will be subject to special
provisions of the Code that, among other things, may affect the character of
gains and losses realized by the Fund (i.e., may affect whether gains or losses
are ordinary or capital), accelerate recognition of income to the Fund and defer
Fund losses. These rules could therefore affect the character, amount and timing
of distributions to shareholders. These provisions also (a) will require the
Fund to mark-to-market certain types of the positions in its portfolio (i.e.,
treat them as if they were closed out) and (b) may cause the Fund to recognize
income without receiving cash with which to pay dividends or make distributions
in amounts necessary to satisfy the distribution requirements for avoiding
income and excise taxes. Each Fund will monitor its transactions, will make the
appropriate tax elections and will make the appropriate entries in its books and
records when it engages in short sales or acquires any foreign currency, forward
contract, option, futures contract or hedged investment in order to mitigate the
effect of these rules and prevent disqualification of the Fund as a regulated
investment company.
A Fund's investments in zero coupon securities, if any, may create
special tax consequences. Zero coupon securities do not make interest payments,
although a portion of the difference between a zero coupon security's face value
and its purchase price is imputed as income to the Fund each year even though
the Fund receives no cash distribution until maturity. Under the U.S. federal
tax laws, the Fund will not be subject to tax on this income if it pays
dividends to its shareholders substantially equal to all the income received
from, or imputed with respect to, its investments during the year, including its
zero coupon securities. These dividends ordinarily will constitute taxable
income to the shareholders of the Fund.
"Constructive sale" provisions apply to activities by the Fund which
lock in gain on an "appreciated financial position." Generally, a "position" is
defined to include stock, a debt instrument, or partnership interest, or an
interest in any of the foregoing, including through a short sale, a swap
contract, 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 occupies 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,
56
<PAGE>
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 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. 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
57
<PAGE>
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.
A Fund may acquire standby commitments with respect to Municipal
Obligations held in its portfolio and will treat any interest received on
Municipal Obligations subject to such stand-by commitments as tax-exempt income.
In Rev. Rul. 82-144, 1982-2 C.B. 34, the Internal Revenue Service held that a
mutual fund acquired ownership of municipal obligations for federal income tax
purposes, even though the fund simultaneously purchased "put" agreements with
respect to the same municipal obligations from the seller of the obligations.
The Funds will not engage in transactions involving the use of stand-by
commitments that differ materially from the transaction described in Rev. Rul.
82-144 without first obtaining a private letter ruling from the Internal Revenue
Service or the opinion of counsel.
Interest on indebtedness incurred by a shareholder to purchase or
carry shares if the Municipal Bond Fund is not deductible for income tax
purposes of (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 persons subject to alternative minimum tax (see
Prospectus and discussion below), financial institutions, property and casualty
insurance companies, individual recipients of Social Security or Railroad
Retirement benefits, and foreign corporations engaged in a trade or business in
the United States. Prospective investors should consult their own tax advisers
as to such consequences.
Special Tax Considerations. The following discussion relates to the
particular federal income tax consequences of the investment policies of the
Funds.
Straddles. The options transactions that the Funds enter into may
result in "straddles" for federal income tax purposes. The straddle rules of the
Code may affect the character of gains and losses realized by the Funds. In
addition, losses realized by the Funds on positions that are part of a straddle
may be deferred under the straddle rules, rather than being taken into account
in calculating the investment company taxable income and net capital gain of the
Funds for the taxable year in which such losses are realized. Losses realized
prior to October 31 of any year may be similarly deferred under the straddle
rules in determining the "required distribution" that the Funds must make in
order to avoid federal excise tax. Furthermore, in determining their investment
company taxable income and ordinary income, the Funds may be required to
capitalize, rather than deduct currently, any interest expense on indebtedness
incurred or continued to purchase or carry any positions that are part of a
straddle. The tax consequences to the Funds of holding straddle positions may be
further affected by various elections provided under the Code and Treasury
regulations, but at the present time the Funds are uncertain which (if any) of
these elections they will make.
58
<PAGE>
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.
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
59
<PAGE>
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 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
60
<PAGE>
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 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
61
<PAGE>
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 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
62
<PAGE>
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 Institutional Shares in advertisements or in reports and other
communications to shareholders. The net asset value of Institutional Shares is
listed in The Wall Street Journal each business day under the heading "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);
63
<PAGE>
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 Institutional Shares of the
following Funds for the year ended August 31, 1999 were as follows:
<TABLE>
<CAPTION>
Since
Inception
Fund 1 year 3 year (ann.) 5 year (ann.) (ann.)
- ---- ------ ------------- ------------- --------
<S> <C> <C> <C> <C> <C>
International Growth 13.88% 15.51% 8.64% 11.76% (9/30/92)
U.S. Equity 38.07% 25.37% 22.64% 22.62% (08/31/94)
U.S. Fixed Income 2.37% 7.15% 7.44% 6.88% (03/31/94)
Global Income 2.78% 3.81% 6.31% 6.08% (06/27/94)
High Yield 0.67% 6.94% 8.18% 8.59% (02/26/93)
Municipal Bond 0.36% 5.83% 5.62% 5.47% (06/17/94)
Focus N/A N/A N/A N/A (07/31/98)
Long-Short Neutral (5.68)% N/A N/A (3.67)% (07/31/98)
</TABLE>
The aggregate total returns for the Institutional Shares of the
following Funds for the period ended August 31, 1999 since inception were as
follows:
64
<PAGE>
Fund Inception Date Aggregate Return
- ---- -------------- ----------------
International Growth 09/30/92 115.88%
U.S. Equity 08/31/94 117.48%
U.S. Fixed Income 03/31/94 43.43%
Global Income 06/27/94 35.82%
High Yield 02/26/93 71.10%
Municipal Bond 06/17/94 31.95%
Focus 07/31/98 34.52%
Long-Short Neutral 07/31/98 (3.99)%
Performance information provided above reflects the performance of
the Institutional Shares of the corresponding BEA Funds to the extent applicable
(which are the predecessors of the Funds) for the periods noted.
Performance information provided above for each Fund (except for the
Long-Short Neutral Fund) also reflects the performance of the Institutional
Shares of the corresponding predecessor BEA Fund since inception (as noted
below). The BEA Funds' Institutional Shares performance was favorably affected
by expense waivers and/or reimbursements. The performance information provided
above has not been restated to adjust for the BEA Funds' Institutional Shares
expense waivers and/or reimbursements. Had these expense adjustments been made,
the performance information shown above would have been lower.
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 Investment Technologies, Inc. or Weisenberger Investment
Company Service, or with the performance of the Standard & Poor's 500 Stock
Index or the Dow Jones Industrial Average, as appropriate, a Fund may calculate
its aggregate and/or average annual total return for the specified periods of
time by assuming the investment of $10,000 in Fund shares and assuming the
reinvestment of each dividend or other distribution at net asset value on the
reinvestment date. The Funds do not, for these purposes, deduct from the initial
value invested any amount representing sales charges. The Funds will, however,
disclose the maximum sales charge and will also disclose that the performance
data do not reflect sales charges and that inclusion of sales charges would
reduce the performance quoted. Such alternative total return information will be
given no greater prominence in such advertising than the information prescribed
under SEC rules, and all advertisements containing performance data will include
a legend disclosing that such performance data represent past performance and
that the investment return and principal value of an investment will fluctuate
so that an investor's shares, when redeemed, may be worth more or less than
their original cost.
65
<PAGE>
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 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
66
<PAGE>
maturity date, if such information is available, or to the remaining term of the
security, if any, if the weighted average date is not available or (b) not to
amortize discount or premium on the remaining security.
Based on the foregoing calculation, the Standard Yield for the
Institutional Shares of the following funds for the 30-day period ended August
31, 1999 were as follows:
Fund 30-Day Yield
---- ------------
U.S. Fixed Income 6.02%
Global Income 4.96%
High Yield 10.00%
Municipal Bond 4.66%
Select Equity --
U.S. Core Equity --
INDEPENDENT ACCOUNTANTS AND COUNSEL
PricewaterhouseCoopers LLP ("PwC"), with principal offices at 2400
Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as independent
accountants for each Fund. The financial statements that are incorporated by
reference in this Statement of Additional Information have been audited by PwC,
and have been included herein in reliance upon the report of such firm of
independent accountants given upon their authority as experts in accounting and
auditing.
Willkie Farr & Gallagher serves as counsel for each Fund and
provides legal services from time to time for CSAM, CSAMSI, and Counsellors
Service.
67
<PAGE>
MISCELLANEOUS
The Funds are not sponsored, endorsed, sold or promoted by Warburg,
Pincus & Co. Warburg, Pincus & Co. makes no representation or warranty, express
or implied, to the owners of the Funds or any member of the public regarding the
advisability of investing in securities generally or in the Funds particularly.
Warburg, Pincus & Co. licenses certain trademarks and trade names of Warburg,
Pincus & Co., and is not responsible for and has not participated in the
calculation of the Funds' net asset value, nor is Warburg, Pincus & Co. a
distributor of the Funds. Warburg, Pincus & Co. has no obligation or liability
in connection with the administration, marketing or trading of the Funds.
As of October 29, 1999, the names, address and percentage of
ownership of each person that owns of record 5% or more of a class of each
Fund's outstanding shares were as follows:
<TABLE>
<CAPTION>
PERCENT
OWNED AS OF
FUND NAME AND ADDRESS OCTOBER 29, 1999
- ---- ---------------- ----------------
<S> <C> <C>
International Growth Fund Employees Ret Plan Marshfield 8.94%
- -- Institutional 1000 N. Oak Ave
Marshfield, WI 54449
MAC & Co. 7.33%
A/C# TYCF8754542
Mutual Funds Operations
P.O. Box 3198
Pittsburgh, PA 15210-3198
Indiana University Foundation 6.18%
Attn: Walter L. Koon, Jr.
PO Box 500
Bloomington, IN 47402
State Street Bank & Trust 5.27%
FBO Consumers Energy Company
DTD 3-1-1997
P.O. Box 1992
Boston, MA 02105-1992
U.S. Equity Fund-- Institutional First Union National Bank 40.33%
FBO Buckeye BEA Eqt
A/C 1541048836
1525 W WT Harris Blvd. CMG NC 1151
Charlotte, NC 28262-8522
Washington Hebrew Congregation 12.80%
3935 Macomb St. NW
Washington, DC 20016
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
PERCENT
OWNED AS OF
FUND NAME AND ADDRESS OCTOBER 29, 1999
- ---- ---------------- ---------------
<S> <C> <C>
Pension Plan for the Employees of 11.36%
Krupp Werner & Pfleiderer Corp.
663 E. Crescent Ave.
Ramsey, NJ 07446-1220
Fleet National Bank Trust 7.65%
Hospital ST Raphael
PO Box 92800
Rochester, NY 14692-8900
U.S. Fixed Income Fund-- Institutional The Northern Trust Company TTEE 15.18%
Uniroyal Holdings Bond Fund
c/o Uniroyal Holding Inc.
70 Great Hill Road
Naugatuck, CT 06770-2224
Patterson & Co. 6.76%
A/C 9888880836
1525 West WT Harris Blvd. CMG 1151
Charlotte, NC 28862-8522
Huntington Hospital Pension Plan 6.74%
270 Park Ave.
Huntington, NY 11743-2799
Local 239 Pension Fund 5.68%
RJ Waldbauer Jr., A Evarieto,
I Stockel TTEES DTD 04/01/1960
2380 Hempstead Tpke.
East Meadow, NY 11554-2030
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
PERCENT
OWNED AS OF
FUND NAME AND ADDRESS OCTOBER 29, 1999
- ---- ---------------- ----------------
<S> <C> <C>
Fidelity Investments Institutional 5.31%
Operations Co Inc (FIIOC) as
Agent for Credit Suisse First
Boston Employee's Savings PSP
100 Magellan Way #KWIC
Covington, KY 41015-1987
DCA Food Industries Inc. 5.23%
100 East Grand Ave.
Beloit, WI 53511-6255
Focus Fund-- Institutional BEA Associates 51.37%
Pension Trust
153 East 53rd Street
New York, NY 10022
Chase Manhattan Bank 16.24%
DCA/MMP Hourly Pension Plan
Plan No. 006
Kerry Ingredients
352 E. Grand Ave.
Beloit, WI 53511-6227
FTC & Co. 12.30%
Attn. Datalynx # House Acct.
P.O. Box 173736
Denver, CO 80217-3736
State Sreet Bank & Trust 6.06%
Cust for the IRA of
Joan B Erle MD
524 E. 72nd St. 46DE
New York, NY 10021-9807
Global Income Fund-- Institutional Sunkist Master Trust 56.39%
14130 Riverside Drive
Sherman Oaks, CA 91423-2392
Patterson & Co. 33.45%
PO Box 7829
Philadelphia, PA 19101-7829
State Street Bank & Trustee TTEE 6.52%
Fenway Holdings LLC Master Trust
PO Box 470
Boston, MA 02102-0470
High Yield Fund-- Institutional Advantus Capital Mgmt. Inc. 31.50%
400 Robert Stn.
Saint Paul, MN 55101-2015
Carl F. Besenbach 15.38%
TRST Michelin North America Inc.
Master Trust
PO Box 19001
Greenville, SC 29602-9001
Fidelity Investments Institutional 14.56%
Operations Co. Inc. as Agent for
Certain Employees Benefits Plan
100 Magellan Way # KWIC
Covington, KY 41015-1999
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
PERCENT
OWNED AS OF
FUND NAME AND ADDRESS OCTOBER 29, 1999
- ---- ---------------- ----------------
<S> <C> <C>
Municipal Bond Fund-- William A. Marquard 42.53%
Institutional 2199 Maysville Rd.
Carlisle, KY 40311-9716
Howard Isermann 16.37%
9 Tulane Dr.
Livingston, NJ 07039-6212
Howard T. Hallowell III 10.15%
P.O. Box 18298
Rochester, NY 14518-0298
S. Finkelstein Family Fund 5.14%
1755 York Ave. Apt. 35BC
New York, NY 10128-6827
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
PERCENT
OWNED AS OF
FUND NAME AND ADDRESS OCTOBER 29, 1999
- ---- ---------------- ----------------
<S> <C> <C>
Long-Short Neutral Fund -- Warburg Pincus Long-Short Equity Fund 26.38%
Institutional 400 Bellevue Pkwy.
Wilmington, DE 19809-3706
BEA Associates 20.78%
153 E. 53rd Street
New York, NY 10022-4611
Andrew M. Jarmel TTEE 13.83%
AAM Alpha Fund LP
Asset Allocation & Management Co.
30 N. LaSalle St. Fl. 35
Chicago, IL 60602-2590
EALSA & Co. 9.83%
P.O. Box 1768
Grand Central Station
New York, NY 10163-1768
BEA Associates 6.45%
FAO Pension Trust
153 E. 53rd Street
New York, NY 10022-4611
</TABLE>
FINANCIAL STATEMENTS
Each Fund's audited financial report dated August 31, 1999, which
either accompanies this Statement of Additional Information or has previously
been provided to the investor to whom this Statement of Additional Information
is being sent, is incorporated herein by reference with respect to all
information regarding the relevant Fund included therein. Each Fund will furnish
without charge a copy of the annual reports upon request by calling Warburg
Pincus Funds at 800-927-2874.
72
<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
1
<PAGE>
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which could
lead to inadequate capacity to meet timely interest and principal payments. The
BB rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B - Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on which no
interest is being paid. Such debt is rated between debt rated C and debt rated
D.
To provide more detailed indications of credit quality, the ratings
may be modified by the addition of a plus or minus sign to show relative
standing within this major rating category.
D - Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The following summarizes the ratings used by Moody's for corporate
bonds:
B-2
<PAGE>
Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers (1, 2 and 3) with respect to the
bonds rated "Aa" through "B." The modifier 1 indicates that the bond being rated
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range 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.
B-3
<PAGE>
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.
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.
B-4
<PAGE>
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
B-5
<PAGE>
PART C
OTHER INFORMATION
Item 23. EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
a Articles of Incorporation. (1)
b By-Laws. (1)
c Registrant's Forms of Stock Certificates. (2)
d Form of Investment Advisory Agreement. (3)
e Form of Distribution Agreement.
f Not applicable.
g(1) Custodian Agreement with Custodian Trust Company. (2)
h(1) Transfer Agency and Service Agreement. (3)
(2) Form of Co-Administration Agreement with Credit Suisse
Asset Management Securities, Inc.
(3) Form of Co-Administration Agreement with PFPC Inc. (3)
i(1) Opinion and Consent of Willkie Farr & Gallagher,
counsel to the Fund.
(2) Opinion and Consent of Venable, Baetjer and Howard,
LLP, Maryland counsel to the Fund. (2)
- -------------------------
(1) Incorporated by reference to Registrant's Registration Statement on
Form N-1A filed on August 5, 1998 (Securities Act File No. 333-60687).
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A filed on August 14,
1998 (Securities Act File No. 333-60687).
(3) Incorporated by reference; material provisions of this exhibit
substantially similar to those of the corresponding exhibit in
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A
of Warburg, Pincus Emerging Markets II Fund, Inc., filed on August 14,
1998 (Securities Act File No. 333-60677).
<PAGE>
j(1) Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
(2) Powers of Attorney.
k Not applicable.
l Form of Purchase Agreement. (3)
m(1) Form of Shareholder Servicing and
Distribution Plan.
(2) Form of Distribution Plan.
n Not applicable.
o Form of 18f-3 Plan.
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
WITH REGISTRANT
From time to time, Credit Suisse Asset Management, LLC ("CSAM, LLC"),
may be deemed to control the Fund and other registered investment companies it
advises through its beneficial ownership of more than 25% of the relevant fund's
shares on behalf of discretionary advisory clients. CSAM, LLC has three
wholly-owned subsidiaries: Warburg, Pincus Asset Management International, Inc.,
a Delaware corporation; Warburg Pincus Asset Management (Japan), Inc., a
Japanese corporation; and Warburg Pincus Asset Management (Dublin) Limited, an
Irish corporation.
Item 25. INDEMNIFICATION
Registrant, officers and directors of CSAM, LLC, of Credit Suisse
Asset Management Securities, Inc. ("CSAM Securities") and of Registrant are
covered by insurance policies indemnifying them for liability incurred in
connection with the operation of Registrant. Discussion of this coverage is
incorporated by reference to Item 27 of Part C of the Fund's initial
Registration Statement on Form N-1A filed on August 5, 1998.
Item 26. BUSINESS AND OTHER CONNECTIONS OF
INVESTMENT ADVISER
CSAM, LLC acts as investment adviser to the Registrant. CSAM, LLC
renders investment advice to a wide variety of individual and institutional
clients. The list required by this Item 26 of officers and directors of CSAM,
LLC, together with information as to their other business, profession, vocation
or employment of a substantial nature during the past two years, is incorporated
by reference to Schedules A and D of Form ADV filed by CSAM, LLC (SEC File No.
801-37170).
<PAGE>
Item 27. PRINCIPAL UNDERWRITER
(a) CSAM Securities will act as distributor for Registrant, as well
as for Warburg Pincus Balanced Fund; Warburg Pincus Capital Appreciation Fund;
Warburg Pincus Cash Reserve Fund; Warburg Pincus Central & Eastern Europe Fund;
Warburg Pincus Emerging Growth Fund; Warburg Pincus Emerging Markets Fund;
Warburg Pincus Emerging Markets II Fund; Warburg Pincus European Equity Fund;
Warburg Pincus Fixed Income Fund; Warburg Pincus Global Fixed Income Fund;
Warburg Pincus Global Post-Venture Capital Fund; Warburg Pincus Global
Telecommunications Fund; Warburg Pincus Growth & Income Fund; Warburg Pincus
Health Sciences Fund; Warburg Pincus High Yield Fund; Warburg Pincus
Institutional Fund; Warburg Pincus Intermediate Maturity Government Fund;
Warburg Pincus International Equity Fund; Warburg Pincus International Growth
Fund; Warburg Pincus International Small Company Fund; Warburg Pincus Japan
Growth Fund; Warburg Pincus Japan Small Company Fund; Warburg Pincus Long-Short
Equity Fund; Warburg Pincus Major Foreign Markets Fund; Warburg Pincus Municipal
Bond Fund; Warburg Pincus New York Intermediate Municipal Fund; Warburg Pincus
New York Tax Exempt Fund; Warburg Pincus Post-Venture Capital Fund; Warburg
Pincus Select Economic Value Equity Fund; Warburg Pincus Small Company Growth
Fund; Warburg Pincus Small Company Value Fund; Warburg Pincus Strategic Global
Fixed Income Fund; Warburg Pincus Trust; Warburg Pincus Trust II; Warburg Pincus
U.S. Core Equity Fund; Warburg Pincus U.S. Core Fixed Income Fund; Warburg
Pincus WorldPerks Money Market Fund; and Warburg Pincus WorldPerks Tax Free
Money Market Fund.
(b) For information relating to each director, officer or partner of
CSAM Securities, reference is made to Form BD (SEC File No. 8-32482) filed by
CSAM Securities under the Securities Exchange Act of 1934.
(c) None.
Item 28. LOCATION OF ACCOUNTS AND RECORDS
(1) Warburg, Pincus Long-Short Market Neutral Fund, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(Fund's Articles of Incorporation, By-Laws and minute books)
(2) Credit Suisse Asset Management, LLC
One Citicorp Center
153 East 53rd Street
New York, New York 10022
(records relating to its functions as investment adviser)
<PAGE>
(3) PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
(records relating to its functions as co-administrator)
(4) Credit Suisse Asset Management Securities, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as co-administrator and
distributor)
(5) State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
(records relating to its functions as transfer agent and dividend
disbursing agent)
(6) Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, Massachusetts 02171
(records relating to its functions as transfer agent and dividend
disbursing agent)
(7) Custodian Trust Company
101 Carnegie Center
Princeton, New Jersey 08540
(records relating to its functions as custodian)
Item 29. MANAGEMENT SERVICES
Not applicable.
Item 30. UNDERTAKINGS.
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the Registrant has
duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and the State of New York, on the 2nd day of November, 1999.
WARBURG, PINCUS LONG-SHORT MARKET NEUTRAL
FUND, INC.
By:/s/Eugene L. Podsiadlo
----------------------
Eugene L. Podsiadlo
President
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment has been signed below by the following persons in the
capacities and on the date indicated:
@@
Signature Title Date
- --------- ----- ----
/s/William W. Priest* Chairman of the Board of November 2, 1999
- --------------------- Directors
William W. Priest
/s/Eugene L. Podsiadlo President November 2, 1999
- ----------------------
Eugene L. Podsiadlo
/s/Michael A. Pignataro Treasurer and Chief November 2, 1999
- ----------------------- Financial Officer
Michael A. Pignataro
/s/Richard H. Francis* Director November 2, 1999
- ----------------------
Richard H. Francis
/s/Jack W. Fritz* Director November 2, 1999
- -----------------
Jack W. Fritz
/s/Jeffrey E. Garten* Director November 2, 1999
- ---------------------
Jeffrey E. Garten
/s/James S. Pasman, Jr.* Director November 2, 1999
- ------------------------
James S. Pasman, Jr.
/s/Steven N. Rappaport* Director November 2, 1999
- ----------------------
Steven N. Rappaport
/s/Alexander B. Trowbridge* Director November 2, 1999
- ---------------------------
Alexander B. Trowbridge
By: /s/Michael A. Pignataro
- ---------------------------
Michael A. Pignataro as
Attorney-in-Fact
@@
<PAGE>
Exhibit No. Description of Exhibit
- ----------- ----------------------
e Form of Distribution Agreement.
h(2) Form of Co-Administration Agreement with Credit Suisse Asset
Management Securities, Inc.
i(1) Opinion and Consent of Willkie Farr & Gallagher, counsel to the
Fund.
j(1) Consent of PricewaterhouseCoopers LLP, Independent Accountants.
j(2) Powers of Attorney.
m(1) Form of Shareholder Servicing and
Distribution Plan.
m(2) Form of Distribution Plan.
o Rule 18f-3 Plan
<PAGE>
DISTRIBUTION AGREEMENT
____ __, 1999
Credit Suisse Asset Management Securities, Inc.
466 Lexington Avenue
New York, New York 10017-3147
Ladies and Gentlemen:
This is to confirm that, in consideration of the agreements
hereinafter contained, each of the Warburg Pincus Funds (and the portfolios
thereof) listed in Exhibit A hereto (each a "Fund", and together, the "Funds")
have agreed that Credit Suisse Asset Management Securities, Inc. ("CSAMSI")
shall be, for the period of this Agreement, the distributor of shares of common
stock or beneficial interest, as the case may be, of each Fund, par value $.001
per share (the "Shares"). The Fund's classes of Shares shall be designated as in
the Fund's Articles of Incorporation or Declaration of Trust, as applicable.
1. SERVICES AS DISTRIBUTOR
1.1 CSAMSI will be the "principal underwriter" of the Shares (as
defined in the Investment Company Act of 1940, as amended (the "1940 Act")), and
as such, will act as agent for the distribution of all classes of the Shares
covered by each Fund's registration statement on Form N-1A, under the Securities
Act of 1933, as amended (the "1933 Act"), and the 1940 Act (the registration
statement, together with the prospectuses (the "prospectus") and statement of
additional information (the "statement of additional information") included as
part of the registration statement, any amendments to the registration
statement, and any supplements to, or material incorporated by reference into
the prospectus or statement of additional information, being referred to
collectively in this Agreement as the "Registration Statement").
1.2 CSAMSI agrees to use appropriate efforts to solicit orders for
the sale of the Shares at such prices and on the terms and conditions set forth
in the Registration Statement. CSAMSI agrees to file with all necessary
regulatory authorities, such as the National Association of Securities Dealers,
Inc. (the "NASD") and the Securities and Exchange Commission (the "SEC"), such
advertising and sales literature as has been previously approved by the Funds.
CSAMSI agrees that it will have legal responsibility under all applicable laws,
rules and regulations, including the rules and regulations of the SEC and the
NASD, for
<PAGE>
the form and use of all advertising and sales literature for the Funds which
CSAMSI prepares, uses, approves for use and/or files with the SEC and/or the
NASD.
1.3 All activities by CSAMSI as distributor of the Shares shall
comply with all applicable laws, rules and regulations, including, without
limitation, all rules and regulations made or adopted by the SEC or by any
securities association registered under the Securities Exchange Act of 1934, as
amended.
1.4 CSAMSI agrees to (a) provide one or more persons during normal
business hours to respond to telephone questions concerning the Funds and their
respective performance, (b) accept purchase, redemption and exchange orders by
telephone or other appropriate means as agreed to with the Funds in accordance
with the pricing and other terms in each Registration Statement, (c) provide
prospectuses and application forms of other Warburg Pincus Funds upon request,
(d) enter into distribution and service agreements with broker-dealers and other
financial intermediaries, and (e) perform such other services as the parties may
agree from time to time. CSAMSI will act only on its own behalf as principal
should it choose to enter into distribution or service agreements but agrees not
to enter into any such agreements without the prior written consent of a duly
authorized Fund officer.
1.5 CSAMSI acknowledges that, whenever in the judgment of a Fund's
officers such action is warranted for any reason, including, without limitation,
market, economic or political conditions, those officers may direct CSAMSI to
decline to accept any orders for, or make any sales of, any class of the Shares
until such time as those officers deem it advisable to accept such orders and to
make such sales. In addition, CSAMSI acknowledges that, whenever in the judgment
of a Fund's officers any person or group is likely to engage in excessive
trading, those officers may direct CSAMSI to decline to accept any particular
order to purchase shares of the Fund, including purchase by exchange.
1.6 CSAMSI will transmit any orders received by it for purchase,
redemption or exchange of the Shares to State Street Bank and Trust Company
("State Street"), the Funds' transfer and dividend disbursing agent, or its
delegate or successor of which CSAMSI is notified in writing. A Fund will
promptly advise CSAMSI of the determination to cease accepting orders or selling
any class of the Shares or to recommence accepting orders or selling any class
of the Shares. Each Fund (or its agent) will confirm orders for the Shares
placed through CSAMSI, and will make appropriate book entries pursuant to the
instructions of CSAMSI. CSAMSI agrees to cause any payment for Shares received
by it and any instructions as to book entries received by it to be delivered
promptly to the relevant Fund (or its agent).
-2-
<PAGE>
1.7 CSAMSI will prepare and deliver such quarterly reports as
requested by each Fund's governing board of directors or trustees, as the case
may be (the "Board"), and otherwise from time to time as requested by the Fund.
Such reports shall be substantially in the form requested by the Fund. If
requested by the Fund, one or more appropriate CSAMSI representatives shall
attend Board meetings at the expense of CSAMSI.
2. DUTIES OF THE FUND
2.1 Each Fund agrees at its own expense to execute any and all
documents, to furnish any and all information and to take any other actions that
may be reasonably necessary in connection with the sale of the Shares in those
states that CSAMSI may designate.
2.2 Each Fund shall from time to time furnish for use in connection
with the sale of the Shares, such informational reports with respect to the Fund
and the Shares as CSAMSI may reasonably request, all of which shall be signed by
one or more of the Fund's duly authorized officers; and the Fund warrants that
the statements contained in any such reports, when so signed by one or more of
the Fund's officers, shall be true and correct. Each Fund shall also furnish
CSAMSI upon request with: (a) annual audits of the Fund's books and accounts
made by independent public accountants regularly retained by the Fund, (b)
semiannual unaudited financial statements pertaining to the Fund, (c) a monthly
itemized list of the securities held by the Fund, (d) monthly balance sheets and
(e) such additional information regarding the Fund's financial condition as
CSAMSI may from time to time reasonably request.
3. REPRESENTATIONS AND WARRANTIES
3.1 Each Fund represents and warrants to CSAMSI that the Fund's
current Registration Statement (a) includes all statements required to be
contained therein in conformity with the 1933 Act, the 1940 Act and the rules
and regulations of the SEC; (b) only contains statements of fact that will be
true and correct when such Registration Statement becomes effective; and (c)
will not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading. CSAMSI may, but shall not be obligated to, propose from
time to time such amendment or amendments to any Registration Statement and such
supplement or supplements to any prospectus or statement of additional
information as may, in the opinion of CSAMSI's counsel, be necessary or
advisable. If a Fund shall not propose such amendment or amendments and/or
supplement or supplements within fifteen (15) days after receipt by the Fund of
a written request from CSAMSI to do so, CSAMSI may, at its option, terminate
this Agreement. A Fund shall not file any amendment to any Registration
Statement or supplement to any prospectus or statement of additional information
without giving CSAMSI
-3-
<PAGE>
reasonable notice thereof in advance; provided, however, that nothing contained
in this Agreement shall in any way limit a Fund's right to file at any time such
amendments to any Registration Statement and/or supplements to any prospectus or
statement of additional information with respect to any class of the Shares, of
whatever character, as the Fund may deem advisable, such right being in all
respects absolute and unconditional.
4. EFFECTIVENESS OF REGISTRATION
None of the Shares shall be offered by either CSAMSI or a Fund under
any of the provisions of this Agreement and no orders for the purchase or sale
of any class of the Shares shall be accepted by CSAMSI if and so long as the
effectiveness of the Registration Statement shall be suspended under any of the
provisions of the 1933 Act or if and so long as a current prospectus is not on
file with the SEC; provided, however, that nothing contained in this Section 4
shall in any way restrict or have an application to or bearing upon the Fund's
obligation to repurchase its shares from any shareholder in accordance with the
provisions of the Registration Statement.
5. INDEMNIFICATION
5.1 Each Fund agrees to indemnify, defend and hold CSAMSI, its
several officers and directors, and any person who controls CSAMSI within the
meaning of Section 15 of the 1933 Act (collectively, "CSAMSI Indemnified
Persons"), free and harmless from and against any and all claims, demands,
liabilities and expenses (including the cost of investigating or defending such
claims, demands or liabilities and any counsel fees incurred in connection
therewith) which CSAMSI Indemnified Persons, may incur arising out of or based
upon (a) any untrue statement or alleged untrue statement of a material fact
contained in any Registration Statement relating to such Fund; (b) any omission
or alleged omission to state a material fact required to be stated in any
Registration Statement relating to such Fund or necessary to make the statements
in any Registration Statement relating to such Fund not misleading; provided,
however, that each Fund's agreement to indemnify CSAMSI Indemnified Persons
shall not be deemed to cover any claims, demands, liabilities or expenses
arising out of or based upon any statements or representations made by CSAMSI or
its representatives or agents that are inconsistent with or vary from statements
and representations contained in any Registration Statement relating to such
Fund and in such financial and other statements relating to such Fund as are
furnished to CSAMSI pursuant to Section 2.2 hereof; (c) the breach by a Fund of
this Agreement. A Fund's agreement to indemnify CSAMSI Indemnified Persons and a
Fund's representations and warranties hereinbefore set forth in Section 3.1
shall not be deemed to cover any liability to such Fund or its shareholders to
which CSAMSI Indemnified Persons would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in
-4-
<PAGE>
the performance of their duties, or by reason of CSAMSI's reckless disregard of
its obligations and duties under this Agreement. Each Fund's agreement to
indemnify CSAMSI Indemnified Persons as aforesaid, is expressly conditioned upon
the Fund being notified of any action brought against CSAMSI Indemnified Persons
within ten (10) days after the summons or other first legal process shall have
been served. The failure to so notify a Fund of any such action shall not
relieve the Fund from any liability that the Fund may have to the CSAMSI
Indemnified Person by reason of any such untrue or alleged untrue statement or
omission or alleged omission otherwise than on account of the Fund's indemnity
agreement contained in this Section 5.1. Each Fund's indemnification agreement
contained in this Section 5.1 and each Fund's representations and warranties in
this Agreement shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any CSAMSI Indemnified Person, and
shall survive the delivery of any of the Shares and termination of this
Agreement. This agreement of indemnity will inure exclusively to CSAMSI's
benefit, to the benefit of its several officers and directors, and their
respective estates, and to the benefit of the controlling persons and their
successors.
5.2 CSAMSI agrees to indemnify, defend and hold each Fund, the Funds'
investment adviser(s) (the "Adviser"), their several officers and directors, and
any person who controls a Fund or the Adviser within the meaning of Section 15
of the 1933 Act (collectively, "Fund Indemnified Persons"), free and harmless
from and against any and all claims, demands, liabilities and expenses
(including the costs of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which Fund
Indemnified Persons may incur, but only to the extent that such liability or
expense incurred by the Fund Indemnified Persons resulting from such claims or
demands shall arise out of or be based upon (a) any sales literature,
advertisements, information, statements or representations issued or made by
CSAMSI without the prior written consent of the Fund or its agent, (b) any
untrue or alleged untrue statement of a material fact contained in information
furnished in writing by CSAMSI to a Fund specifically for use in the
Registration Statement relating to such Fund, (c) any omission or alleged
omission to state a material fact in connection with such information required
or necessary to make such information not misleading or (d) the breach by CSAMSI
of this Agreement. CSAMSI's agreement to indemnify a Fund Indemnified Person, as
aforesaid, is expressly conditioned upon CSAMSI's being notified of any action
brought against the Fund Indemnified Person, such notification to be given in
writing by the Fund Indemnified Person against whom such action is brought,
within ten (10) days after the summons or other first legal process shall have
been served. The failure to so notify CSAMSI of any such action shall not
relieve CSAMSI from any liability that CSAMSI may have to the Fund Indemnified
Person by reason of any such untrue or alleged untrue statement or omission or
-5-
<PAGE>
alleged omission otherwise than on account of CSAMSI's indemnity agreement
contained in this Section 5.2.
5.3 In case any action shall be brought against any indemnified party
under Section 5.1 or 5.2, and it shall timely notify the indemnifying party of
the commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall wish to do so, to assume the
defense thereof with counsel satisfactory to such indemnified party. If the
indemnifying party opts to assume the defense of such action, the indemnifying
party will not be liable to the indemnified party for any legal or other
expenses subsequently incurred by the indemnified party in connection with the
defense thereof other than (a) reasonable costs of investigation or the
furnishing of documents or witnesses and (b) all reasonable fees and expenses of
separate counsel to such indemnified party if (i) the indemnifying party and the
indemnified party shall have agreed to the retention of such counsel or (ii) the
indemnified party shall have reasonably concluded that representation of the
indemnifying party and the indemnified party by the same counsel would be
inappropriate due to actual or potential differing interests between them in the
conduct of the defense of such action.
6. NOTICE TO CSAMSI
Each Fund agrees to advise CSAMSI immediately in writing:
(a) of any request by the SEC for amendments to the Registration
Statement relating to such Fund then in effect with respect to any
class of the Shares or for additional information;
(b) in the event of the issuance by the SEC of any stop order
suspending the effectiveness of the Registration Statement relating to
such Fund then in effect with respect to any class of the Shares or the
initiation of any proceeding for that purpose;
(c) of the happening of any event that makes untrue any
statement of a material fact made in the Registration Statement
relating to such Fund then in effect with respect to any class of the
Shares or that requires the making of a change in such Registration
Statement in order to make the statements therein not misleading; and
(d) of the commencement of any litigation or proceedings against
the Fund or any of its officers or Board members in connection with the
issuance and sale of any class of the Shares.
-6-
<PAGE>
7. AMENDMENTS; ASSIGNMENTS
This Agreement may be amended only by written agreement signed by
CSAMSI and each Fund. To the extent that a written amendment pursuant to this
Section is signed by some but not all of the Funds, such amendment shall be
effective only with respect to the Funds that signed such written amendment.
This Agreement may not be assigned by either party without the prior
written consent of the other party. This Agreement will also terminate
automatically in the event of its assignment (as defined in the 1940 Act).
8. TERM OF AGREEMENT
This Agreement shall continue for an initial period of two years and
thereafter shall continue automatically for successive annual periods with
respect to a Fund, provided such continuance is specifically approved at least
annually by (a) a vote of a majority of the Fund's Board or (b) a vote of a
majority (as defined in the 1940 Act) of the Fund's outstanding voting
securities, provided that its continuance is also approved by a vote of a
majority of the Fund's Board members who are not interested persons (as defined
in the 1940 Act) of any party to this Agreement, by vote cast in person at a
meeting called for the purpose of voting on such approval. This Agreement is
terminable by a Fund without penalty (a) on sixty (60) days' written notice, by
a vote of a majority of the Fund's Board or by vote of a majority (as defined in
the 1940 Act) of the Fund's outstanding voting securities, or (b) on one hundred
twenty (120) days' written notice by CSAMSI.
9. NOTICES
All notices required to be given pursuant to this Agreement shall be
in writing, delivered by messenger or express mail or courier service addressed
as follows:
If to CSAMSI:
Credit Suisse Asset Management Securities, Inc.
466 Lexington Avenue
New York, New York 10017-3147
Attn:
------------------
If to a Fund:
c/o Credit Suisse Asset Management, LLC
153 East 53rd Street
New York, New York 10022
Attn: Hal Liebes, Esq.
Any such notice shall be deemed to have been duly given or made when
delivered to the addresses set forth above (a) on the
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<PAGE>
date of delivery if sent by hand or (b) on the designated date of delivery if
sent by express mail or courier service.
10. LIMITATION OF LIABILITY
It is expressly agreed that this Agreement was executed by or on
behalf of each Fund and not by the Board members of the Fund or its officers
individually, and the obligations of the Fund hereunder shall not be binding
upon any of the Board members, shareholders, nominees, officers, agents or
employees of the Fund individually, but bind only the assets and property of the
Fund. The execution and delivery of this Agreement have been authorized by the
Board and signed by an authorized officer of each Fund, acting as such, and
neither such authorization by such Board nor such execution and delivery by such
officer shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the property
of the Fund.
11. CHOICE OF LAW
This Agreement shall be governed by and interpreted and enforced in
accordance with the laws of the State of New York without giving effect to the
choice-of-law provisions thereof.
12. COUNTERPARTS
This Agreement may be executed in counterparts, each of which shall be
deemed an original.
13. HEADINGS
The headings of the Sections of this Agreement are for convenience of
reference only and are not to be considered in construing the terms and
provisions of this Agreement.
-8-
<PAGE>
Please confirm that the foregoing is in accordance with your
understanding by indicating your acceptance hereof at the place below indicated,
whereupon it shall become a binding agreement between us.
Very truly yours,
WARBURG, PINCUS [ ]
FUND, INC.
By:
------------------------------------
Name:
----------------------------
Title:
---------------------------
Accepted:
CREDIT SUISSE ASSET MANAGEMENT SECURITIES, INC.
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
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<PAGE>
EXHIBIT A
WARBURG PINCUS FUNDS
Warburg Pincus Central & Eastern Europe Fund
Warburg Pincus Emerging Markets II Fund
Warburg Pincus European Equity Fund
Warburg Pincus Global Telecommunications Fund
Warburg Pincus High Yield Fund
Warburg Pincus International Growth Fund
Warburg Pincus Long-Short Equity Fund
Warburg Pincus Long-Short Market Neutral Fund
Warburg Pincus Municipal Bond Fund
Warburg Pincus Select Economic Value Equity Fund
Warburg Pincus Strategic Global Fixed Income Fund
Warburg Pincus U.S. Core Equity Fund
Warburg Pincus U.S. Core Fixed Income Fund
Warburg Pincus Balanced Fund
Warburg Pincus Capital Appreciation Fund
Warburg Pincus Emerging Growth Fund
Warburg Pincus Emerging Markets Fund
Warburg Pincus Fixed Income Fund
Warburg Pincus Global Fixed Income Fund
Warburg Pincus Global Post-Venture Capital Fund
Warburg Pincus Growth & Income Fund
Warburg Pincus Health Sciences Fund
Warburg Pincus Institutional Fund
Emerging Markets Portfolio
International Equity Portfolio
Japan Growth Portfolio
Post-Venture Capital Portfolio
Small Company Growth Portfolio
Small Company Value Portfolio
Value Portfolio
Warburg Pincus Intermediate Maturity Government Fund
Warburg Pincus New York Intermediate Municipal Fund
Warburg Pincus International Equity Fund
Warburg Pincus International Small Company Fund
Warburg Pincus Major Foreign Markets Fund
Warburg Pincus Japan Growth Fund
Warburg Pincus Japan Small Company Fund
Warburg Pincus Post-Venture Capital Fund
Warburg Pincus Small Company Growth Fund
Warburg Pincus Small Company Value Fund
Warburg Pincus Cash Reserve Fund
Warburg Pincus New York Tax Exempt Fund
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<PAGE>
Warburg Pincus WorldPerks Money Market Fund
Warburg Pincus WorldPerks Tax Free Money Market Fund
Warburg Pincus Trust
Emerging Growth Portfolio
Emerging Markets Portfolio
Growth & Income Portfolio
International Equity Portfolio
Post-Venture Capital Portfolio
Small Company Growth Portfolio
Warburg Pincus Trust II
Fixed Income Portfolio
Global Fixed Income Portfolio
-11-
<PAGE>
CO-ADMINISTRATION AGREEMENT
____ __, 1999
Credit Suisse Asset Management Securities, Inc.
466 Lexington Avenue
New York, New York 10017-3147
Dear Ladies and Gentlemen:
Each of the Warburg Pincus Funds (and the portfolios thereof) listed
in Exhibit A hereto (each a "Fund", and together the "Funds") confirms its
agreement with Credit Suisse Asset Management Securities, Inc. (the
"Administrator") as follows:
1. INVESTMENT DESCRIPTION; APPOINTMENT
Each Fund desires to employ its capital by investing and reinvesting
in investments of the kind and in accordance with the limitations specified in
its Articles of Incorporation or Declaration of Trust, as applicable, as amended
from time to time (the "Charter"), in its By-Laws, as amended from time to time
(the "By-laws"), in the Fund's prospectus(es) (the "Prospectus") and
Statement(s) of Additional Information (the "Statement of Additional
Information") as in effect from time to time, and in such manner and to the
extent as may from time to time be approved by the Board of Directors or
Trustees, as the case may be, of the Fund (the "Board"). Copies of the
Prospectus, Statement of Additional Information and the Charter and By-laws of
each Fund have been made available to the Administrator. Each Fund employs
Credit Suisse Asset Management, LLC (the "Adviser") as its investment adviser
and desires to employ and hereby appoints the Administrator as its
co-administrator. The Administrator accepts this appointment and agrees to
furnish the services for the compensation set forth below.
2. SERVICES
(a) Subject to the supervision and direction of the Board of each
Fund, the Administrator will provide the following administrative services:
(i) assist in supervising all aspects of each Fund's
operations, except those performed by other parties pursuant to written
agreements with the Fund; provided, that the distribution of Funds' shares shall
be the sole responsibility of the Funds' distributor;
<PAGE>
(ii) provide various shareholder liaison services including,
but not limited to, responding to inquiries of Fund shareholders, providing
information on shareholder investments, assisting shareholders of the Funds in
changing account options and addresses, preparing reports and other
informational materials regarding the Funds, including proxies/proxy statements
and other shareholder communications, reviewing prospectuses, assisting in
transmitting proxy statements and gathering proxies in connection with
shareholder meetings, and similar ministerial activities;
(iii) provide telephone shareholder services through a toll-free
number;
(iv) furnish corporate secretarial services, including
preparation of materials for meetings of the Board, distribute those materials
and prepare minutes of meetings of the Board and any committees thereof and of a
Fund's shareholders; and liasing with the Board and providing additional
information upon request;
(v) assist in and coordinate the preparation and mailing of
reports to the Funds' shareholders of record and filings with the Securities and
Exchange Commission (the "SEC") including, but not limited to, annual and
semiannual reports to shareholders; post-effective amendments to each Fund's
Registration Statement on Form N-1A (the "Registration Statement") and proxy
statements;
(vi) assist in the preparation of each Fund's tax returns and
assist in other regulatory filings as necessary, such as Form N-SAR (other than
filing advertising and sales literature for the Funds with the SEC or the
National Association of Securities Dealers, Inc.);
(vii) assist the Adviser, at the Adviser's request, in
developing and monitoring compliance procedures for the Funds which may include,
among other matters, procedures to assist the Adviser in monitoring compliance
with a Fund's investment objective, policies, restrictions, tax matters and
applicable laws and regulations;
(viii) act as liaison between each Fund and the Fund's
independent public accountants, counsel, custodian or custodians, transfer
agent, co-administrator and service organizations such as broker-dealers,
financial institutions, institutional shareholders or record, retirement plans
and their service providers and other financial intermediaries that render
services to Fund shareholders ("Service Organizations"), and take all reasonable
action in the performance of its obligations under this Agreement to assure that
all necessary and reasonably requested information is made available to each of
them;
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<PAGE>
(ix) provide information to the Adviser and the Funds'
distributor, upon request, concerning performance and administration of the
Fund;
(x) be a party to agreements with Service Organizations with
respect to a Fund's Advisor Class, if any, and, to the extent required in such
agreements, bear the responsibility of paying to such Service Organizations an
amount up to the amount received by the Administrator under the Distribution
Plan with respect to the Advisor Class (the "Distribution Plan");
(xi) review, approve and arrange for the payment of Fund
expenses;
(xii) maintain and preserve certain Fund records, including
financial and corporate records;
(xiii) supply the Funds with office facilities (which may be the
Administrator's own offices), data processing services, clerical, internal
executive, legal, regulatory and administrative services, and stationery and
office supplies; and
(xiv) such other services to be performed by the Administrator
as are described in the Registration Statement relating to each Fund.
(b) Pursuant to the Shareholder Servicing and Distribution Plan , if
any (the "12b-1 Plan"), with respect to the shares of a Fund designated Common
Class (the "Common Class"), adopted by the Fund pursuant to Rule 12b-1 under the
Investment Company Act of 1940, as amended (the "1940 Act")("Rule 12b-1"), the
Administrator may provide, or enter into agreements with other parties to
provide, the following services with respect to the Common Class: (x) ongoing
servicing and/or maintenance of the shareholder accounts ("Shareholder
Services") and (y) services that are primarily intended to result in, or that
are primarily attributable to, the sale of the Common Class ("Selling Services";
together with Shareholder Services, "Services"). These Services include, without
limitation:
(i) responding to Fund shareholder inquiries and providing
services to shareholders not otherwise provided by the Funds' distributor or
transfer agent;
(ii) printing and distributing prospectuses and statements of
additional information describing the Fund;
(iii) the preparation, including printing, and distribution of
sales literature, advertisements and other informational materials relating to
the Common Class;
(iv) providing telephone services relating to the Fund;
-3-
<PAGE>
(v) 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;
provided that the form, use and placement of all advertising and sales
literature will be the responsibility of the Funds' distributor; and
(vi) obtaining whatever information, analyses and reports with
respect to marketing and promotional activities that the Fund may, from time to
time, deem advisable.
(c) Pursuant to the Distribution Plan (with respect to the Advisor
Class), adopted by the Fund pursuant to Rule 12b-1, the Administrator may
compensate Service Organizations to cover certain expenses primarily intended to
result in the sale of a Fund's Advisor Class, including, but not limited to:
(i) costs of payments made to employees that engage in the distribution of the
Advisor Class; (ii) payments made to, and expenses of, persons who provide
support services in connection with the distribution of the Advisor Class,
including, but not limited to, office space and equipment, telephone facilities,
processing shareholder transactions and providing any other shareholder services
not otherwise provided by the Funds' distributor or transfer agent; (iii) costs
relating to the formulation and implementation of marketing and promotional
activities, including, but not limited to, direct mail promotions and
television, radio, newspaper, magazine and other mass media advertising; (iv)
costs of printing and distributing prospectuses, statements of additional
information and reports of the Fund to prospective holders of the Advisor Class;
(v) costs involved in preparing, printing and distributing sales literature
pertaining to the Fund and (vi) costs involved in obtaining whatever
information, analyses and reports with respect to marketing and promotional
activities that the Fund may, from time to time, deem advisable.
(d) Pursuant to the Distribution Plan (with respect to the Advisor
Class) the Administrator may also compensate Service Organizations for
administrative and accounting services provided to their customers or clients
who are the record and/or beneficial owners of the Advisor Class of a Fund
("Customers"), including, but not limited to: (i) accepting orders from
Customers for the purchase, exchange and redemption of the Advisor Class and
aggregating and communicating orders as instructed by the Funds' distributor;
(ii) disbursing Fund dividends and distributions to Customers and/or providing
for their reinvestment in the Advisor Class; (iii) preparing and distributing
account statements and Advisor Class transaction confirmations to Customers;
(iv) arranging for settlement of Customer transactions, including arranging for
bank wires in accordance with the Fund's prospectus; (v) providing
sub-accounting services with respect to shares of the Advisor Class beneficially
owned by Customers, including maintaining records of dates and prices for all
Advisor Class transactions and Advisor
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<PAGE>
Class balances; (vi) forwarding shareholder communications from the Fund (for
example, proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to Customers, if required
by law and (vii) providing other appropriate or necessary services as may be
incidental, normal and customary for service providers performing substantially
similar services.
(e) In performing all services under this Agreement, the
Administrator shall act in conformity with applicable law, the Charter and
By-laws of each Fund, and the investment objective, investment policies and
other practices and policies set forth in the Registration Statement relating to
each Fund, as such Registration Statement and practices and policies may be
amended from time to time.
3. COMPENSATION
(a) For services provided pursuant to Section 2(a) of this Agreement,
each Fund will pay the Administrator a monthly fee in arrears at an annual rate
set forth in Exhibit B hereto. The Administrator shall provide co-administration
services with respect to a Fund's Institutional Shares without compensation. If
this Agreement is in effect for any period less than a full calendar month, the
fee shall be prorated according to the proportion that such period of
effectiveness bears to the full monthly period. For the purpose of determining
fees payable to the Administrator, the value of a Fund's net assets shall be
computed at the times and in the manner specified in the Prospectus and
Statement of Additional Information as from time to time in effect.
(b) Pursuant to the 12b-1 Plan, each relevant Fund will pay the
Administrator a monthly fee in arrears at an annual rate of .25% of the average
daily net assets of the Fund's Common Class. Amounts paid to the Administrator
under the 12b-1 Plan may be used by the Administrator to cover expenses related
to providing the Services set forth in Section 2(b) of this Agreement.
(c) Pursuant to the Distribution Plan, each relevant Fund will pay
the Administrator a monthly fee in arrears at an annual rate of .50% of the
average daily net assets of the Fund's Advisor Class. The Administrator will
receive payments pursuant to the Distribution Plan only as payment agent of the
Fund to compensate Service Organizations pursuant to their agreements with the
Administrator and the Funds' distributor. Amounts paid to the Administrator
under the Distribution Plan will be used by the Administrator exclusively to
compensate Service Organizations as described in Sections 2(c) and 2(d) of this
Agreement.
(d) Of the amount paid pursuant to Section 3(c), up to .25% of the
average daily net assets of the Fund's Advisor Class may be used by the
Administrator to compensate Service
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<PAGE>
Organizations for personal service and/or the maintenance of Customer accounts,
including but not limited to (i) responding to Customer inquiries, (ii)
providing information on Customer investments and (iii) providing other
shareholder liaison services.
(e) The Administrator will prepare and deliver reports to the Board
of each Fund on a regular, at least quarterly, basis, showing the amounts
expended by the Fund pursuant to the 12b-1 Plan and the Distribution Plan and
the purposes for which such expenditures were made, as well as any supplemental
reports as the Board from time to time may reasonably request.
4. EXPENSES
The Administrator will bear all expenses in connection with the
performance of its services under this Agreement; PROVIDED, HOWEVER, that each
Fund will reimburse the Administrator for the reasonable out-of-pocket expenses
incurred by it on behalf of the Fund upon presentation of appropriate
documentation. Such reimbursable expenses shall include, but not be limited to,
postage, telephone, facsimile, photocopying and commercial courier charges.
Each Fund will bear certain other expenses to be incurred in its
operation, including: taxes, interest, brokerage fees and commissions, if any;
fees of members of the Fund's Board who are not officers, directors, or
employees of the Adviser or the Administrator or any of their affiliates; SEC
fees and state blue sky qualification fees; charges of custodians and transfer
and dividend disbursing agents; certain insurance premiums; outside auditing and
legal expenses; costs of maintenance of corporate existence; except as otherwise
provided herein, costs attributable to investor services, including without
limitation, telephone and personnel expenses; costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of shareholders' reports
and meetings, and meetings of the officers of the Board; costs of any pricing
services; and any extraordinary expenses.
5. STANDARD OF CARE
The Administrator shall exercise its best judgment in rendering the
services listed in Section 2 above. The Administrator shall not be liable for
any error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the matters to which this Agreement relates; provided, however,
that nothing in this Agreement shall be deemed to protect or purport to protect
the Administrator against liability to the Fund or its shareholders to which the
Administrator would otherwise be subject by reason of willful misfeasance, bad
faith or negligence on its part in the performance of its duties or by
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<PAGE>
reason of the Administrator's reckless disregard of its obligations and duties
under this Agreement.
6. TERM OF AGREEMENT
This Agreement shall continue for an initial period of one year and
thereafter shall continue automatically (unless terminated as provided herein)
for successive annual periods with respect to a Fund, provided that such
continuance is specifically approved at least annually by (a) a vote of a
majority of the Board and (b) a vote of a majority of the Board members who are
not interested persons (as defined in the 1940 Act) of the Fund and who have no
direct or indirect financial interest in the operation of the 12b-1 Plan or the
Distribution Plan, in this Agreement or in any agreement related to the 12b-1
Plan or the Distribution Plan ("Independent Board Members"), by vote cast in
person at a meeting called for the purpose of voting on such approval. This
Agreement is terminable with respect to either the Common Class or the Advisor
Class of a Fund without penalty (a) on sixty (60) days' written notice, by a
vote of a majority of the Fund's Independent Board Members or by vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Common Class or Advisor Class, as applicable, or (b) on ninety (90) days'
written notice by the Administrator. This Agreement will also terminate
automatically in the event of its assignment (as defined in the 1940 Act).
7. AMENDMENTS
This Agreement may be amended only by written agreement signed by the
Administrator and the Fund. To the extent that a written amendment pursuant to
this Section is signed by some but not all of the Funds, such amendment shall be
effective only with respect to the Funds that signed such written amendment.
8. SERVICE TO OTHER COMPANIES OR ACCOUNTS
Each Fund understands that the Administrator now acts, will continue
to act and may act in the future as administrator, co-administrator or
administrative services agent to one or more other investment companies, and the
Fund has no objection to the Administrator's so acting. Each Fund understands
that the persons employed by the Administrator to assist in the performance of
the Administrator's duties hereunder will not devote their full time to such
service and nothing contained in this Agreement shall be deemed to limit or
restrict the right of the Administrator or any affiliate of the Administrator to
engage in and devote time and attention to other businesses or to render
services of whatever kind or nature.
-7-
<PAGE>
9. LIMITATION OF LIABILITY
It is expressly agreed that this Agreement was executed by or on
behalf of each Fund and not by the Board members of the Fund or its officers
individually, and the obligations of the Fund hereunder shall not be binding
upon any of the Board members, shareholders, nominees, officers, agents or
employees of the Fund individually, but bind only the assets and property of the
Fund. The execution and delivery of this Agreement have been authorized by the
Board and signed by an authorized officer of each Fund, acting as such, and
neither such authorization by such Board nor such execution and delivery by such
officer shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the property
of the Fund.
10. CHOICE OF LAW
This Agreement shall be governed by and interpreted and enforced in
accordance with the laws of the State of New York without giving effect to the
choice-of-law provisions thereof.
11. COUNTERPARTS
This Agreement may be executed in counterparts, each of which shall be
deemed an original.
12. HEADINGS
The headings of the Sections of this Agreement are for convenience of
reference only and are not to be considered in construing the terms and
provisions of this Agreement.
-8-
<PAGE>
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance hereof by signing and returning to us the enclosed copy
hereof.
Very truly yours,
WARBURG, PINCUS [ ] FUND, INC.
By:
-----------------------------
Name:
-----------------------
Title:
----------------------
Accepted:
CREDIT SUISSE ASSET MANAGEMENT
SECURITIES, INC.
By:
-----------------------------
Name:
-----------------------
Title:
----------------------
-9-
<PAGE>
EXHIBIT A
WARBURG PINCUS FUNDS
Warburg Pincus Central & Eastern Europe Fund
Warburg Pincus Emerging Markets II Fund
Warburg Pincus European Equity Fund
Warburg Pincus Global Telecommunications Fund
Warburg Pincus High Yield Fund
Warburg Pincus International Growth Fund
Warburg Pincus Long-Short Equity Fund
Warburg Pincus Long-Short Market Neutral Fund
Warburg Pincus Municipal Bond Fund
Warburg Pincus Select Economic Value Equity Fund
Warburg Pincus Strategic Global Fixed Income Fund
Warburg Pincus U.S. Core Equity Fund
Warburg Pincus U.S. Core Fixed Income Fund
Warburg Pincus Balanced Fund
Warburg Pincus Capital Appreciation Fund
Warburg Pincus Emerging Growth Fund
Warburg Pincus Emerging Markets Fund
Warburg Pincus Fixed Income Fund
Warburg Pincus Global Fixed Income Fund
Warburg Pincus Global Post-Venture Capital Fund
Warburg Pincus Growth & Income Fund
Warburg Pincus Health Sciences Fund
Warburg Pincus Institutional Fund
Emerging Markets Portfolio
International Equity Portfolio
Japan Growth Portfolio
Post-Venture Capital Portfolio
Small Company Growth Portfolio
Small Company Value Portfolio
Value Portfolio
Warburg Pincus Intermediate Maturity Government Fund
Warburg Pincus New York Intermediate Municipal Fund
Warburg Pincus International Equity Fund
Warburg Pincus International Small Company Fund
Warburg Pincus Major Foreign Markets Fund
Warburg Pincus Japan Growth Fund
Warburg Pincus Japan Small Company Fund
Warburg Pincus Post-Venture Capital Fund
Warburg Pincus Small Company Growth Fund
Warburg Pincus Small Company Value Fund
Warburg Pincus Cash Reserve Fund
Warburg Pincus New York Tax Exempt Fund
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<PAGE>
Warburg Pincus WorldPerks Money Market Fund
Warburg Pincus WorldPerks Tax Free Money Market Fund
Warburg Pincus Trust
Emerging Growth Portfolio
Emerging Markets Portfolio
Growth & Income Portfolio
International Equity Portfolio
Post-Venture Capital Portfolio
Small Company Growth Portfolio
Warburg Pincus Trust II
Fixed Income Portfolio
Global Fixed Income Portfolio
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<PAGE>
EXHIBIT B
(1) Each of the following Funds will pay the Administrator a fee calculated
at an annual rate of .05% of the Fund's first $125 million in average
daily net assets attributable to the Common Shares and .10% of average
daily net assets in excess of $25 million attributable to the Common
Shares:
Warburg Pincus Central & Eastern Europe Fund
Warburg Pincus Emerging Markets II Fund
Warburg Pincus European Equity Fund
Warburg Pincus Global Telecommunications Fund
Warburg Pincus High Yield Fund
Warburg Pincus International Growth Fund
Warburg Pincus Long-Short Equity Fund
Warburg Pincus Long-Short Market Neutral Fund
Warburg Pincus Municipal Bond Fund
Warburg Pincus Select Economic Value Equity Fund
Warburg Pincus Strategic Global Fixed Income Fund
Warburg Pincus U.S. Core Equity Fund
Warburg Pincus U.S. Core Fixed Income Fund
(2) Each Fund not listed in (1) above will pay the Administrator a fee
calculated at an annual rate of .10% of average daily net assets
attributable to Common Shares and Advisor Shares.
<PAGE>
November 2, 1999
Warburg, Pincus Long-Short Market Neutral Fund, Inc.
466 Lexington Avenue
New York, New York 10017-3147
Re: Post-Effective Amendment No. 2 to Registration Statement
(Securities Act File No. 333-60687; Investment Company Act
File No. 811-08925) (the "Registration Statement")
--------------------------------------------------------------
Ladies and Gentlemen:
You have requested us, as counsel to Warburg, Pincus Long-Short Market Neutral
Fund, Inc. (the "Fund"), a corporation organized under the laws of the State of
Maryland, to furnish you with this opinion in connection with the Fund's filing
of Post-Effective Amendment No. 2 to its Registration Statement on Form N-1A
(the "Amendment").
We have examined copies of the Fund's Articles of Incorporation, as amended or
supplemented (the "Articles"), the Fund's By-Laws, as amended (the "By-Laws"),
and the Amendment. We have also examined such other records, documents, papers,
statutes and authorities as we have deemed necessary to form a basis for the
opinion hereinafter expressed.
In our examination of material, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity to original documents of all copies submitted to us. As to
various questions of fact material to our opinion, we have relied upon
statements and certificates of officers and representatives of the Fund and
others.
Based upon the foregoing, we are of the opinion that the shares of common stock
of the Fund, par value $.001 per share (the "Shares"), when duly sold, issued
and paid for in accordance with the laws of applicable jurisdictions and the
terms of the Articles, the By-Laws and the Prospectuses and Statement of
Additional Information ("SAI") included as part of the Amendment, and assuming
that at the time of sale such Shares will be sold at a sales price in each case
in excess of the par value, will be valid, legally issued, fully paid and
non-assessable.
<PAGE>
Warburg, Pincus Long-Short Market Neutral Fund, Inc.
November 2, 1999
Page 2
We hereby consent to the filing of this opinion as an exhibit to the Amendment,
to the reference to our name under the heading "Independent Accountants and
Counsel" in the SAI included as part of the Amendment, and to the filing of this
opinion as an exhibit to any application made by or on behalf of the Fund or any
distributor or dealer in connection with the registration or qualification of
the Fund or the Shares under the securities laws of any state or other
jurisdiction.
We are members of the Bar of the State of New York only and do not opine as to
the laws of any jurisdiction other than the laws of the State of New York and
the laws of the United States, and the opinions set forth above are,
accordingly, limited to the laws of those jurisdictions.
Very truly yours,
/s/ Willkie Farr & Gallagher
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Post-Effective
Amendment No. 2 to the Registration Statement under the Securities Act of
1933 and Post-Effective Amendment No. 3 to the Registration Statement under
the Investment Company Act of 1940 on Form N-1A (File Nos. 333-60687 and
811-08925, respectively) of our report dated October 7, 1999 on our audit of
the financial statements and financial highlights of Warburg, Pincus
Long-Short Market Neutral Fund, Inc., which report is included in the Annual
Report to Shareholders for the year ended August 31, 1999 and for the
respective periods then ended. We also consent to the reference of our firm
under the headings "Financial Highlights" in the Prospectus and under the
headings "Independent Accountants and Counsel" and "Financial Statements" in
the Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
October 29, 1999
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, William W. Priest, hereby make,
constitute and appoint each of Eugene L. Podsiadlo and Michael A. Pignataro,
with full power to act without the other, as my agent and attorney-in-fact for
the purpose of executing in my name, in my capacity as a Director/Trustee of one
or more Warburg Pincus Funds, all registration statements on Form N-1A
(including amendments thereto) to be filed with the United States Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, and the rules and regulations
promulgated thereunder.
All past acts of an attorney-in-fact in furtherance of the foregoing are hereby
ratified and confirmed.
This power of attorney shall be valid from the date hereof until revoked by me.
IN WITNESS WHEREOF, I have executed this instrument as of the 26th day of
October, 1999.
/s/William W. Priest
--------------------
William W. Priest
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Jack W. Fritz, hereby make, constitute
and appoint each of Eugene L. Podsiadlo and Michael A. Pignataro, with full
power to act without the other, as my agent and attorney-in-fact for the purpose
of executing in my name, in my capacity as a Director/Trustee of one or more
Warburg Pincus Funds, all registration statements on Form N-1A (including
amendments thereto) to be filed with the United States Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, and the rules and regulations
promulgated thereunder.
All past acts of an attorney-in-fact in furtherance of the foregoing are hereby
ratified and confirmed.
This power of attorney shall be valid from the date hereof until revoked by me.
IN WITNESS WHEREOF, I have executed this instrument as of the 26th day of
October, 1999.
/s/Jack W. Fritz
----------------
Jack W. Fritz
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Richard H. Francis, hereby make,
constitute and appoint each of Eugene L. Podsiadlo and Michael A. Pignataro,
with full power to act without the other, as my agent and attorney-in-fact for
the purpose of executing in my name, in my capacity as a Director/Trustee of one
or more Warburg Pincus Funds, all registration statements on Form N-1A
(including amendments thereto) to be filed with the United States Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, and the rules and regulations
promulgated thereunder.
All past acts of an attorney-in-fact in furtherance of the foregoing are hereby
ratified and confirmed.
This power of attorney shall be valid from the date hereof until revoked by me.
IN WITNESS WHEREOF, I have executed this instrument as of the 26th day of
October, 1999.
/s/Richard H. Francis
---------------------
Richard H. Francis
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Jeffrey E. Garten, hereby make,
constitute and appoint each of Eugene L. Podsiadlo and Michael A. Pignataro,
with full power to act without the other, as my agent and attorney-in-fact for
the purpose of executing in my name, in my capacity as a Director/Trustee of one
or more Warburg Pincus Funds, all registration statements on Form N-1A
(including amendments thereto) to be filed with the United States Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, and the rules and regulations
promulgated thereunder.
All past acts of an attorney-in-fact in furtherance of the foregoing are hereby
ratified and confirmed.
This power of attorney shall be valid from the date hereof until revoked by me.
IN WITNESS WHEREOF, I have executed this instrument as of the 26th day of
October, 1999.
/s/Jeffrey E. Garten
--------------------
Jeffrey E. Garten
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Alexander B. Trowbridge, hereby make,
constitute and appoint each of Eugene L. Podsiadlo and Michael A. Pignataro,
with full power to act without the other, as my agent and attorney-in-fact for
the purpose of executing in my name, in my capacity as a Director/Trustee of one
or more Warburg Pincus Funds, all registration statements on Form N-1A
(including amendments thereto) to be filed with the United States Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, and the rules and regulations
promulgated thereunder.
All past acts of an attorney-in-fact in furtherance of the foregoing are hereby
ratified and confirmed.
This power of attorney shall be valid from the date hereof until revoked by me.
IN WITNESS WHEREOF, I have executed this instrument as of the 26th day of
October, 1999.
/s/Alexander B. Trowbridge
--------------------------
Alexander B. Trowbridge
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, James S. Pasman, Jr., hereby make,
constitute and appoint each of Eugene L. Podsiadlo and Michael A. Pignataro,
with full power to act without the other, as my agent and attorney-in-fact for
the purpose of executing in my name, in my capacity as a Director/Trustee of one
or more Warburg Pincus Funds, all registration statements on Form N-1A
(including amendments thereto) to be filed with the United States Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, and the rules and regulations
promulgated thereunder.
All past acts of an attorney-in-fact in furtherance of the foregoing are hereby
ratified and confirmed.
This power of attorney shall be valid from the date hereof until revoked by me.
IN WITNESS WHEREOF, I have executed this instrument as of the 26th day of
October, 1999.
/s/James S. Pasman, Jr.
-----------------------
James S. Pasman, Jr.
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Steven N. Rappaport, hereby make,
constitute and appoint each of Eugene L. Podsiadlo and Michael A. Pignataro,
with full power to act without the other, as my agent and attorney-in-fact for
the purpose of executing in my name, in my capacity as a Director/Trustee of one
or more Warburg Pincus Funds, all registration statements on Form N-1A
(including amendments thereto) to be filed with the United States Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, and the rules and regulations
promulgated thereunder.
All past acts of an attorney-in-fact in furtherance of the foregoing are hereby
ratified and confirmed.
This power of attorney shall be valid from the date hereof until revoked by me.
IN WITNESS WHEREOF, I have executed this instrument as of the 26th day of
October, 1999.
/s/Steven N. Rappaport
----------------------
Steven N. Rappaport
<PAGE>
SHAREHOLDER SERVICING AND DISTRIBUTION PLAN
This Shareholder Servicing and Distribution Plan ("Plan") is adopted
pursuant to Rule 12b-1 (the "Rule") under the Investment Company Act of 1940, as
amended (the "1940 Act"), by each of the Warburg Pincus Funds (and the
portfolios thereof) listed in Exhibit A hereto (each a "Fund", and together the
"Funds"), with respect to the common stock or shares of beneficial interest, as
the case may be, par value $.001 per share, of each Fund designated Common Class
(the "Common Class") subject to the following terms and conditions:
SECTION 1. AMOUNT OF PAYMENTS
Each Fund will pay Credit Suisse Asset Management Securities, Inc.
("CSAMSI"), a corporation organized under the laws of the State of New York, for
shareholder servicing and distribution services provided to the Common Class,
fees of up to .25% of the value of the average daily net assets of the Common
Class. Fees to be paid with respect to the Fund under this Plan will be
calculated daily and paid quarterly in arrears by each Fund.
SECTION 2. SERVICES PAYABLE UNDER THE PLAN
(a) The fees described above payable with respect to each Fund's
Common Class are intended to compensate CSAMSI, or enable CSAMSI to compensate
other persons ("Service Providers") for providing (i) ongoing servicing and/or
maintenance of the accounts of holders of the Common Class ("Shareholder
Services"); (ii) services that are primarily intended to result in, or that are
primarily attributable to, the sale of the Common Class ("Selling Services",
together with Shareholder Services, "Services"). Shareholder Services may
include, among other things, responding to Fund shareholder inquiries and
providing services to shareholders not otherwise provided by the Fund's
distributor or transfer agent. Selling Services may include, but are not limited
to: the printing and distribution to prospective investors in the Common Class
of prospectuses and statements of additional information describing a Fund; the
preparation, including printing, and distribution of sales literature,
advertisements and other informational materials relating to the Common Class;
providing telephone services relating to a Fund, including responding to
inquiries of prospective Fund investors; 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 Fund may, from time to
time, deem advisable. In providing
<PAGE>
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.
(b) Payments under this Plan are not tied exclusively to the expenses
for Services actually incurred by CSAMSI or any Service Provider, and such
payments may exceed expenses actually incurred. Furthermore, any portion of any
fee paid to CSAMSI or to any of its affiliates by a Fund, or any of their past
profits or other revenue, may be used in their sole discretion to provide
services to shareholders of a Fund or to foster distribution of the Common
Class.
SECTION 3. ADDITIONAL PAYMENTS
CSAMSI, the Fund's investment adviser (the "Investment Adviser") or an
affiliate of either may from any such entity's own resources, which may include
a fee it received from the Fund, pay a fee (the "Service Fee") to certain
broker-dealers, financial institutions, recordkeeping organizations and other
financial intermediaries ("Service Organizations") for providing administration,
subaccounting, transfer agency and/or other services with respect to holders of
the Common Class. A portion of the Service Fee may be borne by the Funds. The
Service Fee payable to any one Service Organization is determined based upon a
number of factors, including the nature and quality of service provided, the
operations processing requirements of the relationship and the standardized fee
schedule of the Service Organization.
SECTION 4. SELECTION OF CERTAIN DIRECTORS
While this Plan is in effect with respect to the Fund, the selection
and nomination of members of each Fund's Board of Directors or Trustees, as the
case may be (the "Board") who are not interested persons of the Fund and who
have no direct or indirect financial interest in the operation of this Plan or
in any agreements related to it (the "Independent Board members") will be
committed to the discretion of the Independent Board members then in office.
SECTION 5. APPROVAL AND AMENDMENT OF PLAN
Neither this Plan nor any related agreements will take effect with
respect to a Fund until approved by a majority of (a) the outstanding voting
securities of the Common Class of the Fund, (b) the full Board of the Fund and
(c) the Independent Directors, cast in person at a meeting called for the
purpose of voting on this Plan and the related agreements.
-2-
<PAGE>
This Plan may not be amended to increase materially the amount of the
fees described in Section 1 above with respect to the Common Class without
approval of at least a majority of the outstanding voting securities of the
Common Class. In addition, all material amendments to this Plan must be approved
in the manner described in Section 5(b) and 5(c) above.
SECTION 6. CONTINUANCE OF PLAN; REPORTING OBLIGATIONS
This Plan will continue in effect with respect to the Common Class
from year to year so long as its continuance is specifically approved annually
by vote of each Fund's Board in the manner described in Section 5(b) and 5(c)
above. The Fund's Board will evaluate the appropriateness of this Plan and its
payment terms on a continuing basis and in doing so will consider all relevant
factors, including the types and extent of Services provided by CSAMSI and/or
Service Providers and amounts CSAMSI and/or Service Providers receive under this
Plan.
Any person authorized to direct the disposition of monies paid or
payable by a Fund pursuant to this Plan or any related agreement will prepare
and furnish to the Fund's Board, and the Board will review, at least quarterly,
written reports, complying with the requirements of the Rule, which set out the
amounts expended under this Plan and the purposes for which those expenditures
were made.
SECTION 7. TERMINATION
This Plan may be terminated at any time with respect to the Common
Class of a Fund by vote of a majority of the Independent Board members or by a
vote of a majority of the outstanding voting securities of the Common Class of
the Fund.
SECTION 8. PRESERVATION OF MATERIALS
Each Fund will preserve copies of this Plan, any agreement relating to
this Plan and any report made pursuant to Section 5 above, for a period of not
less than six years (the first two years in an easily accessible place) from the
date of this Plan, the agreement or the report.
SECTION 9. MEANING OF CERTAIN TERMS
As used in this Plan, the terms "interested person" and "majority of
the outstanding voting securities " will be deemed to have the same meanings
that those terms have under the 1940 Act and the rules and regulations under the
1940 Act, subject to any exemption that may be granted to the Fund under the
1940 Act by the Securities and Exchange Commission.
-3-
<PAGE>
IN WITNESS WHEREOF, each Fund has executed this Plan as of the _st day
of ____, 1999.
WARBURG, PINCUS [ ]
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
-4-
<PAGE>
EXHIBIT A
WARBURG PINCUS FUNDS
[DELETE FUNDS WITH NO 12B-1]
Warburg Pincus Central & Eastern Europe Fund
Warburg Pincus Emerging Markets II Fund
Warburg Pincus European Equity Fund
Warburg Pincus Global Telecommunications Fund
Warburg Pincus High Yield Fund
Warburg Pincus International Growth Fund
Warburg Pincus Long-Short Equity Fund
Warburg Pincus Long-Short Market Neutral Fund
Warburg Pincus Municipal Bond Fund
Warburg Pincus Select Economic Value Equity Fund
Warburg Pincus Strategic Global Fixed Income Fund
Warburg Pincus U.S. Core Equity Fund
Warburg Pincus U.S. Core Fixed Income Fund
Warburg Pincus Balanced Fund
Warburg Pincus Capital Appreciation Fund
Warburg Pincus Emerging Growth Fund
Warburg Pincus Emerging Markets Fund
Warburg Pincus Fixed Income Fund
Warburg Pincus Global Fixed Income Fund
Warburg Pincus Global Post-Venture Capital Fund
Warburg Pincus Growth & Income Fund
Warburg Pincus Health Sciences Fund
Warburg Pincus Institutional Fund
Emerging Markets Portfolio
International Equity Portfolio
Japan Growth Portfolio
Post-Venture Capital Portfolio
Small Company Growth Portfolio
Small Company Value Portfolio
Value Portfolio
Warburg Pincus Intermediate Maturity Government Fund
Warburg Pincus New York Intermediate Municipal Fund
Warburg Pincus International Equity Fund
Warburg Pincus International Small Company Fund
Warburg Pincus Major Foreign Markets Fund
Warburg Pincus Japan Growth Fund
Warburg Pincus Japan Small Company Fund
Warburg Pincus Post-Venture Capital Fund
Warburg Pincus Small Company Growth Fund
Warburg Pincus Small Company Value Fund
Warburg Pincus Cash Reserve Fund
Warburg Pincus New York Tax Exempt Fund
Warburg Pincus WorldPerks Money Market Fund
Warburg Pincus WorldPerks Tax Free Money Market Fund
-5-
<PAGE>
Warburg Pincus Trust
Emerging Growth Portfolio
Emerging Markets Portfolio
Growth & Income Portfolio
International Equity Portfolio
Post-Venture Capital Portfolio
Small Company Growth Portfolio
Warburg Pincus Trust II
Fixed Income Portfolio
Global Fixed Income Portfolio
-6-
<PAGE>
DISTRIBUTION PLAN
This Distribution Plan (the "Plan") is adopted in accordance with Rule
12b-1 under the Investment Company Act of 1940, as amended (the "1940 Act"), by
each of the Warburg Pincus Funds (and the portfolios thereof) listed in Exhibit
A hereto (each a "Fund", and together the "Funds"), subject to the following
terms and conditions:
SECTION 1. DISTRIBUTION AGREEMENTS; ANNUAL FEE
Credit Suisse Asset Management, LLC, each Fund's investment adviser
("CSAM"), is authorized to execute and deliver written agreements ("Agreements")
in any form duly approved by the Board of Directors or Trustees, as the case may
be, of the Fund (the "Board") with broker-dealers, financial institutions,
institutional shareholders of record, retirement plans and service providers and
other financial intermediaries ("Service Organizations") relating to each Fund's
common stock or shares of beneficial interest, as the case may be, par value
$.001 per share, designated Advisor Class (the "Advisor Class"). Pursuant to an
Agreement, Service Organizations will be paid fees out of the assets of a Fund
by the Fund directly or by Credit Suisse Asset Management Securities, Inc.
("CSAMSI") on behalf of the Fund for providing (a) services primarily intended
to result in, or that are primarily attributable to, the sale of the Advisor
Class ("Distribution Services"), (b) shareholder servicing to their customers or
clients who are the record and/or the beneficial owners of the Advisor Class
("Customers") ("Shareholder Services") and/or (c) subtransfer agency,
subaccounting and administrative and accounting services to Customers
("Administrative Services"). A Service Organization will be paid fees under the
Plan calculated daily and paid monthly in arrears at an annual rate of up to
.50% of the average daily net assets of the Advisor Class held by or on behalf
of its Customers ("Customers' Shares") with respect to Distribution Services
and/or Administrative Services and may be paid fees calculated daily and paid
monthly in arrears at an annual rate of up to .25% of the average daily net
assets of Customers' Shares with respect to Shareholder Services.
SECTION 2. SERVICES
The fees paid to Service Organizations under Section 1 of this Plan
with respect to Distribution Services, if any, will compensate Service
Organizations to cover certain expenses primarily intended to result in the sale
of the Advisor Class, including, but not limited to: (a) costs of payments made
to employees that engage in the distribution of Advisor Class; (b) payments made
to, and expenses of, persons who provide support services in connection with the
distribution of Advisor Class, including, but not limited to, office space and
equipment,
<PAGE>
telephone facilities, processing shareholder transactions and providing any
other shareholder services not otherwise provided by the Fund's distributor or
transfer agent; (c) costs relating to the formulation and implementation of
marketing and promotional activities, including, but not limited to, direct mail
promotions and television, radio, newspaper, magazine and other mass media
advertising and related travel and entertainment expenses; (d) costs of printing
and distributing prospectuses, statements of additional information and reports
of the Fund to prospective holders of the Advisor Class; (e) costs involved in
preparing, printing and distributing sales literature , advertisements and other
informational materials pertaining to a Fund and (f) costs involved in obtaining
whatever information, analyses and reports with respect to marketing and
promotional activities that the Fund may, from time to time, deem advisable.
The fees paid to Service Organizations under Section 1 of this Plan
with respect to Shareholder Services, if any, will compensate Service
Organizations for personal service and/or the maintenance of Customer accounts,
including but not limited to (a) responding to Customer inquiries, (b) providing
information on Customer investments and (c) providing other shareholder liaison
services.
The fees paid to Service Organizations under Section 1 of this Plan
with respect to Administrative Services, if any, will compensate Service
Organizations for administrative and accounting services provided to their
Customers, including, but not limited to: (a) accepting orders from Customers
for the purchase, exchange and redemption of the Advisor Class and aggregating
and communicating orders as instructed by the Fund's distributor; (b) disbursing
Fund dividends and distributions to Customers and/or providing for their
reinvestment in the Advisor Class; (c) preparing and distributing account
statements and Advisor Class transaction confirmations to Customers; (d)
arranging for settlement of Customer transactions, including arranging for bank
wires in accordance with each Fund's prospectus; (e) providing sub-accounting
services with respect to shares of the Advisor Class beneficially owned by
Customers, including maintaining records of dates and prices for all Advisor
Class transactions and Advisor Class balances; (f) forwarding shareholder
communications from each Fund (for example, proxies, shareholder reports, annual
and semi-annual financial statements and dividend, distribution and tax notices)
to Customers, if required by law and (g) providing other appropriate or
necessary services as may be incidental, normal and customary for service
providers performing substantially similar services.
Payments under this Plan are not tied exclusively to the expenses for
Shareholder Services, Distribution Services or Administrative Services actually
incurred by any Service Organization, and such payments may exceed expenses
actually incurred. Furthermore, any portion of any fee paid to CSAMSI or to any
of its affiliates by the Fund, or any of their past
-2-
<PAGE>
profits or other revenue, may be used in their sole discretion to provide
services to shareholders of the Fund or to foster distribution of the Advisor
Shares. CSAM or its affiliates may, from such entity's own resources, which may
include a fee it receives from a Fund, pay Service Organizations a fee (the
"Service Fee") for additional services provided or expenses incurred by the
Service Organization. The Service Fee payable to any particular 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.
Payments by a Fund under this Plan shall not be made to a Service Organization
with respect to services for which the Service Organization is otherwise
compensated by CSAM or its affiliates.
SECTION 3. MONITORING
CSAMSI shall monitor the arrangements pertaining to the Funds'
Agreements with Service Organizations.
SECTION 4. SELECTION OF CERTAIN DIRECTORS
While the Plan is in effect, the selection and nomination of each
Fund's Board members who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the Plan or in any
agreements related to it (the "Independent Board members") will be committed to
the discretion of the Independent Board members then in office who are not
interested persons of the Fund.
SECTION 5. APPROVAL BY SHAREHOLDERS
The Plan is effective with respect to a Fund, and fees are payable in
accordance with Section 1 of the Plan pursuant to the approval of the Plan by a
vote of at least a majority of the outstanding voting securities of the Advisor
Class of the Fund.
SECTION 6. APPROVAL AND AMENDMENT OF PLAN
The Plan is effective with respect to a Fund, and payments under any
related agreement may be made pursuant to the approval of the Plan and such
agreement by a majority vote of both (a) the full Board of the Fund and (b) the
Independent Board members, cast in person at a meeting called for the purpose of
voting on the related agreement.
The Plan may not be amended to increase materially the amount of the
fees described in Section 1 above with respect to the Advisor Class without
approval of at least a majority of the outstanding voting securities of the
Advisor Class. In addition, all material amendments to the Plan must be approved
by the Fund's Board in the manner described in this Section.
-3-
<PAGE>
SECTION 7. CONTINUANCE OF PLAN; REPORTING OBLIGATIONS
The Plan will continue in effect with respect to a Fund for so long as
its continuance is specifically approved at least annually by the Fund's Board
in the manner described in Section 6 above.
In each year during which the Plan remains in effect, CSAMSI will
furnish to each Fund's Board, and the Board will review, at least quarterly,
written reports, which set out the amounts expended under the Plan and the
purposes for which those expenditures were made.
SECTION 8. TERMINATION
The Plan may be terminated with respect to a Fund at any time by a
majority vote of the Independent Board members or by a majority of the
outstanding voting securities of the Advisor Class of the Fund.
SECTION 9. PRESERVATION OF MATERIALS
Each Fund will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 7 above, for a period of not
less than six years (the first two years in an easily accessible place) from the
date of the Plan, agreement or report.
SECTION 10. MEANINGS OF CERTAIN TERMS
As used in the Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meanings that
those terms have under the 1940 Act and the rules and regulations thereunder,
subject to any exemption that may be granted to the Fund under the 1940 Act by
the Securities and Exchange Commission.
-4-
<PAGE>
IN WITNESS WHEREOF, the Fund has executed the Plan as of _____ __,
1999.
WARBURG, PINCUS [ ] FUND, INC.
By:
-----------------------------
Name:
-----------------------
Title:
----------------------
Acknowledged this
_____ day of ________, 1999
CREDIT SUISSE ASSET MANAGEMENT
SECURITIES, INC.
By:
-----------------------------
Name:
-----------------------
Title:
----------------------
-5-
<PAGE>
EXHIBIT A
WARBURG PINCUS FUNDS
Warburg Pincus Central & Eastern Europe Fund
Warburg Pincus Emerging Markets II Fund
Warburg Pincus European Equity Fund
Warburg Pincus Global Telecommunications Fund
Warburg Pincus High Yield Fund
Warburg Pincus International Growth Fund
Warburg Pincus Long-Short Equity Fund
Warburg Pincus Long-Short Market Neutral Fund
Warburg Pincus Municipal Bond Fund
Warburg Pincus Select Economic Value Equity Fund
Warburg Pincus Strategic Global Fixed Income Fund
Warburg Pincus U.S. Core Equity Fund
Warburg Pincus U.S. Core Fixed Income Fund
Warburg Pincus Balanced Fund
Warburg Pincus Capital Appreciation Fund
Warburg Pincus Emerging Growth Fund
Warburg Pincus Emerging Markets Fund
Warburg Pincus Fixed Income Fund
Warburg Pincus Global Fixed Income Fund
Warburg Pincus Global Post-Venture Capital Fund
Warburg Pincus Growth & Income Fund
Warburg Pincus Health Sciences Fund
Warburg Pincus Institutional Fund
Emerging Markets Portfolio
International Equity Portfolio
Japan Growth Portfolio
Post-Venture Capital Portfolio
Small Company Growth Portfolio
Small Company Value Portfolio
Value Portfolio
Warburg Pincus Intermediate Maturity Government Fund
Warburg Pincus New York Intermediate Municipal Fund
Warburg Pincus International Equity Fund
Warburg Pincus International Small Company Fund
Warburg Pincus Major Foreign Markets Fund
Warburg Pincus Japan Growth Fund
Warburg Pincus Japan Small Company Fund
Warburg Pincus Post-Venture Capital Fund
Warburg Pincus Small Company Growth Fund
Warburg Pincus Small Company Value Fund
Warburg Pincus Cash Reserve Fund
Warburg Pincus New York Tax Exempt Fund
Warburg Pincus WorldPerks Money Market Fund
Warburg Pincus WorldPerks Tax Free Money Market Fund
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Warburg Pincus Trust
Emerging Growth Portfolio
Emerging Markets Portfolio
Growth & Income Portfolio
International Equity Portfolio
Post-Venture Capital Portfolio
Small Company Growth Portfolio
Warburg Pincus Trust II
Fixed Income Portfolio
Global Fixed Income Portfolio
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WARBURG PINCUS FUNDS
RULE 18f-3 PLAN
Rule 18f-3 (the "Rule") under the Investment Company Act of 1940, as
amended (the "1940 Act"), requires that the Board of an investment company
desiring to offer multiple classes pursuant to the Rule adopt a plan setting
forth the separate arrangement and expense allocation of each class (a "Class"),
and any related conversion features or exchange privileges. The differences in
distribution arrangements and expenses among these classes of shares, and the
exchange features of each class, are set forth below in this Plan, which is
subject to change, to the extent permitted by law and by the governing documents
of each fund that adopts this Plan (the "Fund" and together the "Funds"), by
action of the governing Board of the Fund.
The governing Board, including a majority of the non-interested Board
members, of each Fund, or series thereof, which desires to offer multiple
classes has determined that the following Plan is in the best interests of each
class individually and the Fund as a whole:
1. CLASS DESIGNATION. Shares of a Fund or series of a Fund may be divided
into Common Shares and Advisor Shares.
2. DIFFERENCES IN SERVICES. Credit Suisse Asset Management Securities,
Inc. ("CSAMSI") will provide administrative services with respect to holders of
Common Shares and Advisor Shares of each Fund. CSAMSI will also provide, or
enter into agreements with other parties to provide, shareholder servicing
and/or distribution services to holders of Common Shares. CSAMSI may compensate
financial-services firms such as banks, brokers and financial advisers
("Institutions") that provide distribution services, shareholder services and/or
administrative and accounting services to or on behalf of their clients or
customers who beneficially own Advisor Shares.
3. DIFFERENCES IN DISTRIBUTION ARRANGEMENTS.
COMMON SHARES. Common Shares are sold to the general public and are
subject to distribution fees in accordance with a Shareholder Servicing and
Distribution Plan adopted pursuant to Rule 12b-1 under the 1940 Act, under which
Funds pay CSAMSI .25% per annum for services under that Plan. Specified minimum
initial and subsequent purchase amounts are applicable to the Common Shares.
Common Shares are also available through certain Institutions that may or may
not charge their customers
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transaction or other fees in connection with investing in Common Shares. Certain
features of a fund, such as the minimum initial or subsequent investment
amounts, may be modified for investments through Institutions. CSAMSI may pay
certain Institutions a fee based on the value of accounts maintained by such
Institutions in Common Shares of a Fund.
ADVISOR SHARES. Advisor Shares are available for purchase through
Institutions. Advisor Shares may be charged a shareholder service fee (the
"Shareholder Service Fee") payable at an annual rate of up to .25%, and a
distribution and/or administrative services fee (the "Distribution Service Fee")
payable at an annual rate of up to .50%, of the average daily net assets of such
Class under a Distribution Plan adopted pursuant to Rule 12b-1 under the 1940
Act. Payments may be made to an Institution directly out of the assets of the
Fund or by CSAMSI on the Fund's behalf. Additional payments may be made by
CSAMSI, a Fund's investment adviser (the "Adviser") or an affiliate of either
from time to time to Institutions for providing distribution, administrative,
accounting and/or other services with respect to Advisor Shares. Payments by the
Fund shall not be made to an Institution pursuant to the Plan with respect to
services for which Institutions are otherwise compensated by CSAMSI or an
affiliate thereof. There is no minimum amount of initial or subsequent purchases
of Advisor Shares.
GENERAL. Payments may be made to organizations, the customers or clients
of which invest in a Fund's Common Shares or Advisor Shares, by CSAMSI, the
Adviser or an affiliate of either from such entity's own resources, which may
include a fee it receives from the Fund.
4. EXPENSE ALLOCATION. The following expenses shall be allocated, to the
extent practicable, on a Class-by-Class basis: (a) fees under the Shareholder
Servicing and Distribution Plan or Distribution Plan, as applicable; and (b)
expenses incurred in connection with shareholders' meetings as a result of
issues relating to a specific Class.
The distribution, administrative and shareholder servicing fees and other
expenses listed above which are attributable to a particular Class are charged
directly to the net assets of the particular Class and, thus, are borne on a pro
rata basis by the outstanding shares of that Class; PROVIDED, HOWEVER, that
money market funds and other funds making daily distributions of their net
investment income may allocate these items to each share regardless of class or
on the basis of relative net assets (settled shares), applied in each case
consistently.
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5. CONVERSION FEATURES. No Class shall be subject to any automatic
conversion feature.
6. EXCHANGE PRIVILEGES. Shares of a Class shall be exchangeable only for
(a) shares of the same Class of other investment companies that hold themselves
out to investors as part of the Warburg Pincus family of funds and (b) shares of
certain other investment companies specified from time to time.
7. ADDITIONAL INFORMATION. This Plan is qualified by and subject to the
terms of the then current prospectus for the applicable Class; PROVIDED,
HOWEVER, that none of the terms set forth in any such prospectus shall be
inconsistent with the terms of the Classes contained in this Plan. The
prospectus for each Class contains additional information about that Class and
the applicable Fund's multiple class structure.
Dated: October 26, 1999
