<PAGE> 1
SUPPLEMENT TO THE PROSPECTUSES
WARBURG PINCUS FUNDS
The following information supersedes certain information in the Funds'
Prospectuses.
New Adviser. Effective today, the Funds' investment adviser, Credit Suisse
Asset Management, became Credit Suisse Asset Management, LLC (CSAM LLC). In
addition, as a result of the closing of the previously announced acquisition of
Warburg Pincus Asset Management, Inc. (Warburg Pincus) by Credit Suisse Group
(Credit Suisse), Warburg Pincus was combined with CSAM LLC. Credit Suisse Asset
Management had changed its name from BEA Associates effective January 1, 1999.
Accordingly, all references in the Prospectuses to BEA Associates are now to
CSAM LLC.
CSAM LLC is an indirect wholly-owned U.S. subsidiary of Credit Suisse. CSAM LLC,
together with its predecessor firms, has been engaged in the investment advisory
business for over 60 years and has assets under management of approximately
$58.7 billion. CSAM LLC's principal business address is 153 East 53rd Street,
New York, New York 10022.
Change of Name of Distributor. Counsellors Securities Inc., the Funds'
distributor, has changed its name to Credit Suisse Asset Management Securities,
Inc. to reflect its ownership by Credit Suisse.
Address Change. The following address replaces the current address provided in
the Prospectus for overnight or courier service: Boston Financial, Attn: Warburg
Pincus Funds, 66 Brooks Drive, Braintree, MA 02184.
Dated: July 6, 1999
<PAGE> 2
STATEMENT OF ADDITIONAL INFORMATION
October 26, 1998
As Revised July 6, 1999
for the
Common and Institutional Shares of the
WARBURG, PINCUS LONG-SHORT MARKET NEUTRAL FUND, INC.
WARBURG, PINCUS LONG-SHORT EQUITY FUND, INC.
P.O. Box 9030, Boston, Massachusetts 02205-9030
For information, call 800-WARBURG
This combined Statement of Additional Information is meant to be
read in conjunction with the Prospectuses for the Common Shares and
Institutional Shares of the Warburg Pincus Long-Short Market Neutral Fund and
the Warburg Pincus Long-Short Equity Fund (collectively, the "Funds"), dated
October 26, 1998, as amended or supplemented from time to time, and is
incorporated by reference in its entirety into those Prospectuses. Because this
Statement of Additional Information is not itself a prospectus, no investment
in shares of a Fund should be made solely upon the information contained
herein. Copies of the Funds' Prospectuses and information regarding each Fund's
current performance may be obtained by calling the Funds at 800-927-2874.
Information regarding the status of shareholder accounts may also be obtained
by calling the Funds at the same number or by writing to the Fund, P.O. Box
9030, Boston, Massachusetts 02205-9030.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION IN
CONNECTION WITH THE OFFERING MADE BY THE COMMON AND INSTITUTIONAL SHARE
PROSPECTUSES AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR THEIR DISTRIBUTOR. THE
STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE AN OFFERING BY THE FUNDS
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
<PAGE> 3
CONTENTS
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Page
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GENERAL......................................................................................1
COMMON INVESTMENT POLICIES -- ALL FUNDS......................................................1
SUPPLEMENTAL INVESTMENT POLICIES -- LONG-SHORT EQUITY FUND...................................8
INVESTMENT LIMITATIONS......................................................................10
RISK FACTORS................................................................................12
DIRECTORS AND OFFICERS......................................................................16
DIRECTORS' ESTIMATED COMPENSATION THROUGH AUGUST 31, 1999...................................21
INVESTMENT ADVISORY AND SERVICING ARRANGEMENTS..............................................21
PORTFOLIO TRANSACTIONS......................................................................28
PURCHASE AND REDEMPTION INFORMATION.........................................................31
VALUATION OF SHARES.........................................................................31
PERFORMANCE INFORMATION.....................................................................33
TAXES.......................................................................................34
ADDITIONAL INFORMATION CONCERNING THE FUNDS' SHARES.........................................43
MISCELLANEOUS...............................................................................43
INDEPENDENT ACCOUNTANTS AND COUNSEL.........................................................44
FINANCIAL STATEMENTS........................................................................44
Appendix A.................................................................................A-1
Appendix B.................................................................................B-1
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GENERAL
The investment objective of the Warburg Pincus Long-Short Market
Neutral Fund ("Long-Short Neutral Fund") is long-term capital appreciation. The
investment objective of the Warburg Pincus Long-Short Equity Fund ("Long-Short
Equity Fund") is to achieve a total return greater than that of the Standard &
Poor's 500 Composite Stock Price Index (the "S&P 500 Index").
Each of the Funds is an open-end management investment company.
Each Fund was organized as a Maryland corporation on July 31, 1998.
Unless otherwise indicated, the following investment policies may
be changed by the Funds' Board of Directors without an affirmative vote of
shareholders. Capitalized terms used herein and not otherwise defined have the
same meanings as are given to such terms in the combined Common Share and
combined Institutional Share Prospectuses.
COMMON INVESTMENT POLICIES -- ALL FUNDS
The following supplements the information contained in the
combined Common Share and combined Institutional Share Prospectuses concerning
the investment objectives and policies of, and techniques used by the Funds.
NON-DIVERSIFIED STATUS. Each Fund is classified as
non-diversified within the meaning of the Investment Company Act of 1940 (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.
Each Fund's investments will be limited, however, in order to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"). See "Taxes." To qualify, each 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 each Fund's 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 each Fund's total assets will be
invested in the securities of a single issuer and each Fund will not own more
than 10% of the outstanding voting securities of a single issuer. To the extent
that each Fund assumes large positions in the securities of a small number of
issuers, each Fund's return may fluctuate to a greater extent than that of a
diversified company as a result of changes in the financial condition or in the
market's assessment of the issuers.
TEMPORARY INVESTMENTS. 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
<PAGE> 5
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. Each Fund may agree to purchase securities
from a bank or recognized securities dealer and simultaneously commit to resell
the securities to the bank or dealer at an agreed-upon date and price reflecting
a market rate of interest unrelated to the coupon rate or maturity of the
purchased securities ("repurchase agreements"). Such Fund would maintain custody
of the underlying securities prior to their repurchase; thus, the obligation of
the bank or dealer to pay the repurchase price on the date agreed to would be,
in effect, secured by such securities. If the value of such securities were less
than the repurchase price, plus interest, the other party to the agreement would
be required to provide additional collateral so that at all times the collateral
is at least equal to the repurchase price plus accrued interest. Default by or
bankruptcy of a seller would expose a Fund to possible loss because of averse
market action, expenses and/or delays in the connection with the disposition of
the underlying obligations. The financial institutions with which a Fund may
enter into repurchase agreements will be banks and non-bank dealers of U.S.
Government securities that are listed on the Federal Reserve Bank of New York's
list of reporting dealers, if such banks and non-bank dealers are deemed
creditworthy by Credit Suisse Asset Management, LLC, each Fund's adviser ("CSAM"
or the "Adviser"). A Fund's Adviser will continue to monitor creditworthiness of
the seller under a repurchase agreement, and will require the seller to maintain
during the term of the agreement the value of the securities subject to the
agreement to equal at least the repurchase price (including accrued interest).
In addition, the Fund's Adviser will require that the value of this collateral,
after transaction costs (including loss of interest) reasonably expected to be
incurred on a default, be equal to or greater than the repurchase price
(including accrued premium) provided in the repurchase agreement or the daily
amortization of the difference between the purchase price and the repurchase
price specified in the repurchase agreement. The Fund's Adviser will
mark-to-market daily the value of the securities. There are no percentage limits
on a Fund's ability to enter into repurchase agreements. Repurchase agreements
are considered to be loans by the Fund under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS. Each Fund may enter into reverse
repurchase agreements with respect to portfolio securities for temporary
purposes (such as to obtain cash to meet redemption requests when the
liquidation of portfolio securities
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is deemed disadvantageous or inconvenient by the Adviser). Reverse repurchase
agreements involve the sale of securities held by a Fund pursuant to such
Fund's agreement to repurchase them at a mutually agreed upon date, price and
rate of interest. At the time a Fund enters into a reverse repurchase
agreement, it will establish and maintain a segregated account with an approved
custodian containing cash or liquid securities having a value not less than the
repurchase price (including accrued interest). The 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 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. Reverse repurchase agreements are considered to be borrowings under
the 1940 Act. The Funds do not presently intend to invest more than 5% of net
assets in reverse repurchase agreements during the coming year.
ILLIQUID SECURITIES. Each Fund does not presently intend to
invest more than 15% of its net assets in illiquid securities (including
repurchase agreements which have a maturity of longer than seven days),
including securities that are illiquid by virtue of the absence of a readily
available market or legal or contractual restrictions on resale. The term
"illiquid securities" for this purpose means securities that cannot be disposed
of within seven days in the ordinary course of business at approximately the
amount at which the Fund has valued the securities. Such securities may include,
among other things, equity swaps, loan participations and assignments, options
purchased in the over-the-counter markets, repurchase agreements maturing in
more than seven days, structured notes and restricted securities other than Rule
144A securities that the Adviser has determined are liquid pursuant to
guidelines established by the Funds' Board of Directors. Because of the absence
of any liquid trading market currently for these investments, a Fund may take
longer to liquidate these positions than would be the case for publicly traded
securities. Although these securities may be resold in privately negotiated
transactions, the prices realized on such sales could be less than those
originally paid by a Fund. Securities that have legal or contractual
restrictions on resale but have a readily available market are not considered
illiquid for purposes of this limitation. With respect to each Fund, repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.
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<PAGE> 7
Mutual funds do not typically hold a significant amount of
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and a mutual fund might be
unable to dispose of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty satisfying redemptions
within seven days. A 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.
If otherwise consistent with their investment objectives and
policies, the Funds may purchase securities that are not registered under the
Securities Act but which may be sold to "qualified institutional buyers" in
accordance with Rule 144A under the Securities Act. These securities will not be
considered illiquid so long as it is determined by the Adviser, under guidelines
approved by the Board of Directors, that an adequate trading market exists for
the securities. This investment practice could have the effect of increasing the
level of illiquidity in a Fund during any period that qualified institutional
buyers become uninterested in purchasing restricted securities.
The Adviser will monitor the liquidity of restricted securities
in a Fund under the supervision of the Board of Directors. In reaching liquidity
decisions, the Adviser may consider, among others, the following factors: (1)
the unregistered nature of the security; (2) the frequency of trades and quotes
for the security; (3) the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; (4) dealer undertakings
to make a market in the security and (5) 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).
Where there are no readily available market quotations, the security shall be
valued at fair value as determined in good faith by the Board of Directors of
the Funds.
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.
LENDING OF PORTFOLIO SECURITIES. To increase income on its
investments, a Fund may lend its portfolio securities with an aggregate value of
up to 33-1/3% of its total assets (including the loan collateral) to
broker/dealers and other institutional investors. Each Fund may lend its
portfolio securities on a
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<PAGE> 8
short or long term basis to broker-dealers or institutional investors that the
Adviser deems qualified, but only when the borrower maintains, with a Fund's
custodian, collateral either in cash or money market instruments, in an amount
at least equal to the market value of the securities loaned, plus accrued
interest and dividends, determined on a daily basis and adjusted accordingly.
Collateral for such loans may include cash, securities of the U.S. Government
or its agencies or instrumentalities or an irrevocable letter of credit issued
by a bank which is deemed creditworthy by the Adviser. In determining whether
to lend securities to a particular broker-dealer or institutional investor, the
Adviser will consider, and during the period of the loan will monitor, all
relevant facts and circumstances, including the creditworthiness of the
borrower. Such loans would involve risks of delay in receiving additional
collateral in the event the value of the collateral decreased below the value
of the securities loaned or of delay in recovering the securities loaned or
even the loss of rights in the collateral should the borrower of the securities
fail financially. Default by or bankruptcy of a borrower would expose the Funds
to possible loss because of adverse market action, expenses and/or delays in
connection with the disposition of the underlying securities.
BORROWING. Each Fund may borrow up to 33-1/3 percent of its total
assets. The Adviser intends to borrow only 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 will not be made when borrowings
exceed 5% of a Fund's total assets. Although the principal of such borrowings
will be fixed, a Fund's assets may change in value during the time the borrowing
is outstanding. Each Fund expects that some of its borrowings may be made on a
secured basis. In such situations, either the custodian will segregate the
pledged assets for the benefit of the lender or arrangements will be made with a
suitable subcustodian, which may include the lender.
U.S. GOVERNMENT SECURITIES. The U.S. Government securities in
which a Fund may invest include direct obligations of the U.S. Treasury (such as
Treasury bills, notes and bonds) and obligations issued by U.S. Government
agencies and instrumentalities, including securities that are supported by the
full faith and credit of the United States and securities that are supported
primarily or solely by the creditworthiness of the issuer (such as securities of
the Federal Home Loan Banks, the Student Loan Marketing Association and the
Tennessee Valley Authority).
OPTIONS AND FUTURES CONTRACTS. The Funds may write covered call
options, buy put options, buy call options and write put options, without
limitation except as noted in this paragraph. Such options may relate to
particular securities or
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<PAGE> 9
to various indexes and may or may not be listed on a national securities
exchange and issued by the Options Clearing Corporation. These Funds may also
invest in futures contracts and options on futures contracts (index futures
contracts or interest rate futures contracts, as applicable) for hedging
purposes (including currency hedging) or for other purposes so long as
aggregate initial margins and premiums required for non-hedging positions do
not exceed 5% of its net assets, after taking into account any unrealized
profits and losses on any such contracts it has entered into. See Appendix "B"
for a description of futures contracts and options on futures contracts and the
risks thereof.
Options trading is a highly specialized activity which entails
greater than ordinary investment risks. Options on particular securities may be
more volatile than the underlying securities, and therefore, on a percentage
basis, an investment in the underlying securities themselves. A Fund will write
call options only if they are "covered." In the case of a call option on a
security, the option is "covered" if a Fund owns the security underlying the
call or has an absolute and immediate right to acquire that security without
additional cash consideration (or, if additional cash consideration is required,
liquid assets in such amount as are held in a segregated account by its
custodian) upon conversion or exchange of other securities held by it. For a
call option on an index, the option is covered if a Fund maintains with its
custodian liquid assets equal to the contract value. A call option is also
covered if a Fund holds a call on the same security or index as the call written
where the exercise price of the call held is (i) equal to or less than the
exercise price of the call written, or (ii) greater than the exercise price of
the call written provided the difference is maintained by the Fund in liquid
assets in a segregated account with its custodian.
When a Fund purchases a put option, the premium paid by it is
recorded as an asset of the Fund. When a Fund writes an option, an amount equal
to the net premium (the premium less the commission) received by the Fund is
included in the liability section of the Fund's statement of assets and
liabilities as a deferred credit. The amount of this asset or deferred credit
will be subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the mean between the last bid and asked
prices. If an option purchased by a Fund expires unexercised, the Fund realizes
a loss equal to the premium paid. If a Fund enters into a closing sale
transaction on an option purchased by it, the Fund will realize a gain if the
premium received by the Fund on the closing transaction is more than the premium
paid to purchase the option, or a loss if it is less. If an option written by a
Fund expires on the stipulated expiration date or if the Fund enters into a
closing purchase transaction, it will realize a gain (or loss if the cost of a
closing purchase transaction exceeds the
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<PAGE> 10
net premium received when the option is sold) and the deferred credit related
to such option will be eliminated. If an option written by a Fund is exercised,
the proceeds of the sale will be increased by the net premium originally
received and the Fund will realize a gain or loss.
There are several risks associated with transactions in options
on securities and indexes. For example, there are significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a national securities exchange
("Exchange"), may be absent for reasons which include the following: there may
be insufficient trading interest in certain options; restrictions may be imposed
by an Exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that class
or series of options) would cease to exist, although outstanding options that
had been issued by the Options Clearing Corporation as a result of trades on
that Exchange would continue to be exercisable in accordance with their terms.
SHORT SALES. The Long-Short Neutral Fund will seek, and the
Long-Short Equity Fund may seek, to realize additional gains through short
sales. Short sales are transactions in which a 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, a Fund must
borrow the security to make delivery to the buyer. A 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 a Fund. Until the security is replaced,
a Fund is required to repay the lender any dividends or interest that accrue
during the period of the loan. To borrow the security, a 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. A Fund also will
incur transaction costs in effecting short sales.
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A 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. A 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 a Fund may be required to pay in
connection with a short sale. An increase in the value of a security sold short
by a 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.
Each Fund may engage in short sales if at the time of the short
sale it owns or has the right to obtain, at no additional cost, an equal amount
of the security being sold short. This investment technique is known as a short
sale "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 POLICIES -- LONG-SHORT EQUITY FUND
S&P 500 INDEX FUTURES AND RELATED OPTIONS. An S&P 500 Index
Future contract (an "Index Future") is a contract to buy or sell an integral
number of units of the Standard & Poor's 500 Composite Stock Price Index (the
"S&P 500 Index") at a specified future date at a price agreed upon when the
contract is made. A unit is the value of the S&P 500 Index from time to time.
Entering into a contract to buy units is commonly referred to as buying or
purchasing a contract or holding a long position in the S&P 500 Index.
Index Futures can be traded through all major commodity brokers.
Currently, contracts are expected to expire on the tenth day of March, June,
September and December. The Long-Short Equity Fund will ordinarily be able to
close open positions on the United States futures exchange on which Index
Futures are then traded at any time up to and including the expiration day.
In contrast to purchases of a common stock, no price is paid or
received by the Long-Short Equity Fund upon the purchase
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<PAGE> 12
of a futures contract. Upon entering into a futures contract, the Fund will be
required to deposit with its custodian in a segregated account in the name of
the futures broker a specified amount of cash or securities. This is known by
participants in the market as "initial margin". The type of instruments that
may be deposited as initial margin, and the required amount of initial margin,
are determined by the futures exchange(s) on which the Index Futures are
traded. The nature of initial margin in futures transactions is different from
that of margin in securities transactions in that futures contract margin does
not involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin 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.
Subsequent payments, called "variation margin", to and from the broker, will be
made on a daily basis as the price of the S&P 500 Index fluctuates, making the
position in the futures contract more or less valuable, a process known as
"marking to the market". For example, when the Fund has purchased an Index
Future and the price of the S&P 500 Index has risen, that position will have
increased in value and the Fund will receive from the broker a variation margin
payment equal to that increase in value. Conversely, when the Fund has
purchased an Index Future and the price of the S&P 500 Index has declined, the
position would be less valuable and the Fund would be required to make a
variation margin payment to the broker. When the Fund terminates a position in
a futures contract, a final determination of variation margin is made,
additional cash is paid by or to the Fund, and the Fund realizes a gain or a
loss.
The price of Index Futures may not correlate perfectly with
movement in the underlying index due to certain market distortions. 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
could distort the normal relationship between the S&P 500 Index and futures
markets. Secondly, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market, and as a result the
futures market may attract more speculators than does the securities market.
Increased participation by speculators in the futures market may also cause
temporary price distortions.
Options on index futures contracts give the purchaser the right,
in return for the premium paid, to assume a position in an index futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period of
the option. Upon exercise of the option, the holder would assume the underlying
futures position and would receive a variation margin payment of cash or
securities approximating the increase in the value of the holder's option
position. If an option is exercised on the last
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<PAGE> 13
trading day prior to the expiration date of the option, the settlement will be
made entirely in cash based on the difference between the exercise price of the
option and the closing level of the index on which the futures contract is
based on the expiration date. Purchasers of options who fail to exercise their
options prior to the exercise date suffer a loss of the premium paid.
The ability to establish and close out positions in options on
futures contracts will be subject to the development and maintenance of a liquid
secondary market. It is not certain that such a market will develop. Although
the Long-Short Equity Fund generally will purchase only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange will exist for any particular option or
at any particular time. In the event no such market exists for particular
options, it might not be possible to effect closing transactions in such
options, with the result that the Fund would have to exercise the options in
order to realize any profit.
INVESTMENT LIMITATIONS
The Funds have adopted the following fundamental investment
limitations which may not be changed without the affirmative vote of the holders
of a majority of each Fund's outstanding Shares (as defined in Section 2(a)(42)
of the 1940 Act). Each Fund may not:
1. Borrow money, except from banks, and only if after such
borrowing there is asset coverage of at least 300% for all borrowings of the
Fund; or mortgage, pledge or hypothecate any of its assets except in connection
with any such borrowing and in amounts not in excess of the lesser of the dollar
amounts borrowed or 33 1/3% of the value of the Fund's total assets at the time
of such borrowing, provided 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;
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<PAGE> 14
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
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
-11-
<PAGE> 15
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. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Funds, 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.
Except as required by the 1940 Act with respect to the borrowing
of money, if a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in market
values of portfolio securities or amount of total or net assets will not be
considered a violation of any of the foregoing restrictions.
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.
RISK FACTORS
FOREIGN SECURITIES. Investments in foreign securities are
subject to certain risks, as discussed below.
Political, Economic and Market Factors. Investments in foreign
securities involve risks relating to political and economic developments abroad,
as well as those that result from the differences between the regulations to
which U.S. and foreign
-12-
<PAGE> 16
issuers are subject. These risks may include expropriation, confiscatory
taxation, withholding taxes on dividends and interest, limitations on the use
or transfer of a Fund's assets and political or social instability or
diplomatic developments. Moreover, 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. Securities of many foreign
issuers may be less liquid, and their prices may be more volatile, than those
of securities of comparable U.S. issuers. Brokerage commissions, custodial
services and other costs relating to investment in foreign securities markets
are generally more expensive than in the United States. Such markets have
different clearance and settlement procedures and in certain markets there have
been times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
There is generally less government supervision and regulation of exchanges,
brokers and issuers in foreign securities markets than there is in the United
States.
In addition, substantial limitations may exist in certain
countries with respect to the Funds' ability to repatriate investment income,
capital or the proceeds of sales of securities by foreign investors. The Funds
could be adversely affected by delays in, or a refusal to grant, any required
government approval for repatriation of capital, as well as by the application
to the Funds of any restrictions on investments.
Reporting Standards. Most of the foreign securities held by the
Funds will not be registered with the SEC, nor will the issuers thereof be
subject to SEC or other U.S. reporting requirements. Accordingly, there will be
less publicly available information concerning foreign issuers of securities
held by the Funds than will be available concerning U.S. companies. Foreign
companies, and in particular, companies in emerging markets, are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory requirements comparable to those applicable to U.S. companies.
Exchange Rate Fluctuations. Because foreign securities ordinarily
will be denominated in currencies other than the U.S. dollar, changes in foreign
currency exchange rates will affect a Fund's net asset value, the value of
interest and dividends earned, gains and losses realized on the sale of
securities and net investment income and capital gain, if any, to be distributed
to shareholders by a Fund. If the value of a foreign currency rises against the
U.S. dollar, the value of a Fund's assets denominated in that currency will
increase; conversely, if the value of a foreign currency declines against the
U.S. dollar, the value of a Fund's assets denominated in that currency will
decrease. The exchange rates between the U.S. dollar and other currencies are
determined by supply and demand in the currency exchange markets, international
balances of payments, government
-13-
<PAGE> 17
intervention, speculation and other economic and political conditions.
Investment Controls. In certain countries that currently prohibit
direct foreign investment in the securities of their companies, indirect foreign
investment in the securities of companies listed and traded on the stock
exchanges in these countries is permitted through investment funds which have
been specifically authorized. The Funds may invest in these investment funds and
registered investment companies subject to the provisions of the 1940 Act. If
these Funds invest in such investment companies, they will each bear their
proportionate share of the costs incurred by such companies, including
investment advisory fees.
Clearance and Settlement Procedures. Delays in clearance and
settlement could result in temporary periods when assets of a Fund are
uninvested and no return is earned thereon. The inability of a Fund to make
intended security purchases due to settlement problems could cause a Fund to
miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could result either in losses to a Fund due
to subsequent declines in the value of such portfolio security or, if a Fund has
entered into a contract to sell the security, could result in possible liability
to the purchaser.
Operating Expenses. The costs attributable to foreign investing
that a Fund must bear frequently are higher than those attributable to domestic
investing. For example, the cost of maintaining custody of foreign securities
exceeds custodian costs for domestic securities. Investment income on certain
foreign securities in which a Fund may invest may be subject to foreign
withholding or other taxes that could reduce the return on those securities. Tax
treaties between the United States and foreign countries however, may reduce or
eliminate the amount of foreign tax to which a Fund would be subject.
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 the 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
-14-
<PAGE> 18
sovereign debt in the event of default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal
and pay interest in a timely manner may be affected by, among other factors, its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which a
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local government
or agency.
The occurrence of political, social or diplomatic changes in one
or more of the countries issuing sovereign debt could adversely affect a Fund's
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their sovereign debt. While the Adviser intends to manage the Funds in a manner
that will minimize the exposure to such risks, there can be no assurance that
adverse political changes will not cause a Fund to suffer a loss of interest or
principal on any of its holdings.
Investors should also be aware that certain sovereign debt
instruments in which a Fund may invest involve great risk. Sovereign debt issued
by issuers in many emerging markets generally is deemed to be the equivalent in
terms of quality to securities rated below investment grade by Moody's and S&P.
Such securities are regarded as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligations and involve major risk exposure to adverse conditions.
Some of such sovereign debt, which may not be paying interest currently or may
be in payment default, may be comparable to securities rated "D" by S&P or "C"
by Moody's. A Fund may have difficulty disposing of certain sovereign debt
obligations because there may be a limited 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
-15-
<PAGE> 19
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.
DIRECTORS AND OFFICERS
The names (and ages) of each Fund's Directors and officers, their
addresses, present positions and principal occupations during the past five
years and other affiliations are set forth below.
<TABLE>
<S> <C>
Richard H. Francis (67) Director
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,
Wilson, Wyoming 83014 Inc. and Fritz Communications
(developers and operators of
radio stations); Director of
Advo, Inc. (direct mail
advertising); Director/Trustee
of other Warburg Pincus Funds.
Jeffrey E. Garten (52) Director
Box 208200 Dean of Yale School of Management
New Haven, Connecticut 06520-8200 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;
Director/Trustee of other Warburg
Pincus Funds.
</TABLE>
-16-
<PAGE> 20
<TABLE>
<S> <C>
James S. Pasman, Jr. (68) Director
29 The Trillium Currently retired; President
Pittsburgh, Pennsylvania 15238 and Chief Operating Officer of
National InterGroup, Inc. from
April 1989 to March 1991;
Chairman of Permian Oil Co. from
April 1989 to March 1991;
Director of Education Management
Corp., Tyco International Ltd.;
Trustee, BT Insurance Funds
Trust; Director/Trustee of other
Warburg Pincus Funds and other
CSAM-advised investment
companies.
William W. Priest* (57) Chairman of the Board
153 East 53rd Street Chairman- Management Committee,
New York, New York 10022 Chief 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 (50) Director
c/o Loanet, Inc. President of Loanet, Inc. since
153 East 53rd Street, 1997; Executive Vice President of
Suite 5500 Loanet, Inc. from 1994 to 1997;
New York, New York 10022 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.
</TABLE>
- -------------------------
* Indicates a Director who is an "interested person" of the Fund as defined in
the 1940 Act.
-17-
<PAGE> 21
<TABLE>
<S> <C>
Arnold M. Reichman* (51) Vice Chairman of the Board
466 Lexington Avenue Managing Director and Chief
New York, New York 10017-3147 Operating Officer of CSAM;
Associated with CSAM since CSAM
acquired the Funds' predecessor
adviser in July 1999; with the
predecessor adviser since 1984;
Officer of CSAMSI; Director of
The RBB Fund, Inc.;
Director/Trustee of other Warburg
Pincus Funds.
Alexander B. Trowbridge (69) Director
1317 F Street, N.W., Currently retired; President of
5th Floor Trowbridge Partners, Inc.
Washington, DC 20004 (business consulting) from
January 1990 to November 1996;
Director or Trustee of New
England Mutual Life Insurance
Co., ICOS Corporation
(biopharmaceuticals), IRI
International (energy services),
The Rouse Company (real estate
development), Harris Corp.
(electronics and communications
equipment), The Gillette Co.
(personal care products) and
Sunoco, Inc. (petroleum refining and
marketing); Director/Trustee of other
Warburg Pincus Funds.
Eugene L. Podsiadlo (42) President
466 Lexington Avenue Managing Director of CSAM;
New York, New York 10017-3147 Associated 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.
</TABLE>
- ------------------------------
* Indicates a Director who is an "interested person" of the Fund as defined in
the 1940 Act.
-18-
<PAGE> 22
<TABLE>
<S> <C>
Hal Liebes, Esq. (35) Vice President and Secretary
153 East 53rd Street Director and General Counsel of
New York, New York 10022 CSAM; Associated with CSAM since
1995; Associated with CS First
Boston Investment Management from
1994 to 1995; Associated with
Division of Enforcement, U.S.
Securities and Exchange
Commission from 1991 to 1994;
Officer of CSAMSI and other
Warburg Pincus Funds.
Michael A. Pignataro (39) Treasurer and Chief Financial
153 East 53rd Street Officer
New York, New York 10022 Vice President and Director of
Fund Administration of CSAM;
Associated with CSAM since 1986;
Officer of other Warburg Pincus
Funds.
Janna Manes, Esq. (31) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel
New York, New York 10017-3147 of CSAM; Associated with CSAM
since CSAM acquired the Funds'
predecessor adviser in July 1999;
with the predecessor adviser
since 1996; Associated with the
law firm of Willkie Farr &
Gallagher from 1993 to 1996;
Officer of other Warburg Pincus
Funds.
Stuart J. Cohen, Esq. (30) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel
New York, New York 10017-3147 of 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.
</TABLE>
-19-
<PAGE> 23
<TABLE>
<S> <C>
Rocco A. DelGuercio (36) Assistant Treasurer
153 East 53rd Street Assistant Vice President and
March 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 1994;
Officer of other Warburg Pincus
Funds.
</TABLE>
No employee of CSAM, PFPC Inc. and Counsellors Funds Service,
Inc., the Funds' co-administrators ("PFPC" and "Counsellors Service,"
respectively), or any of their affiliates, receives any compensation from the
Funds for acting as an officer or director of a Fund. Each Director who is not a
director, trustee, officer or employee of CSAM, PFPC, Counsellors Service or any
of their affiliates receives an annual fee of $500 and $250 for each meeting of
the Boards attended by him for his services as Director, and is reimbursed for
expenses incurred in connection with his attendance at Board meetings. Each
member of the Audit Committee receives an annual fee of $250, and the chairman
of the Audit Committee receives an annual fee of $325.
-20-
<PAGE> 24
DIRECTORS' ESTIMATED COMPENSATION THROUGH AUGUST 31, 1999
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Name of Director Long-Short Neutral Fund Long-Short Equity
Fund
- -------------------------------------------------------------------------------------------
<S> <C> <C>
William W. Priest** None None
- -------------------------------------------------------------------------------------------
Arnold M. Reichman** None None
- -------------------------------------------------------------------------------------------
Richard N. Cooper*** 1,750 1,750
- -------------------------------------------------------------------------------------------
Richard H. Francis**** 375 375
- -------------------------------------------------------------------------------------------
Jack W. Fritz 1,750 1,750
- -------------------------------------------------------------------------------------------
Jeffrey E. Garten 1,750 1,750
- -------------------------------------------------------------------------------------------
James S. Pasman, Jr.**** 375 375
- -------------------------------------------------------------------------------------------
Steven N. Rappaport**** 375 375
- -------------------------------------------------------------------------------------------
Alexander B. Trowbridge 1,825 1,825
- -------------------------------------------------------------------------------------------
</TABLE>
- -----------------------
As of September 30, 1998, 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 ADVISORY AND SERVICING ARRANGEMENTS
ADVISORY AGREEMENTS. CSAM renders advisory and administrative
services to each of the Funds pursuant to Investment Advisory Agreements, (the
"Advisory Agreements"). 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, located at 153 East 53rd Street, New York, New York 10022,
is an indirect wholly-owned U.S. subsidiary of Credit Suisse ("Credit Suisse").
Credit Suisse is a global financial services company, providing a comprehensive
range of banking and
- -----------------------
** Mr. Priest and Mr. Reichman receive compensation as affiliates of CSAM,
and, accordingly, receive no compensation from any Fund or any other
investment company advised by CSAM.
*** Mr. Cooper resigned as a Director of each Fund effective July 6, 1999.
**** Messrs. Francis, Pasman and Rappaport became Directors of the Funds
effective July 6, 1999.
-21-
<PAGE> 25
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.
Credit Suisse Asset Management, together with its predecessor
firms, has been engaged in the investment advisory business for over 60 years.
As an investment adviser, CSAM emphasizes a global investment
strategy. CSAM currently acts as investment adviser for twenty-two other
investment companies registered under the 1940 Act. They are: BEA Strategic
Global Income Fund, Inc., BEA Income Fund, Inc., The Brazilian Equity Fund,
Inc., The Chile Fund, Inc., The Emerging Markets Infrastructure Fund, Inc., The
Emerging Markets Telecommunications Fund, Inc., The First Israel Fund, Inc., The
Indonesia Fund, Inc., The Latin America Equity Fund, Inc., The Latin America
Investment Fund, Inc., and The Portugal Fund, Inc. In addition, CSAM acts as
sub-adviser to certain portfolios of twelve other registered investment
companies: Frank Russell Investment Company (Fixed Income III Fund and
Multi-strategy Bond Fund), Oppenheimer (LifeSpan Balanced Fund, LifeSpan Income
Fund and LifeSpan Growth Fund), Panorama (LifeSpan Balanced Account, LifeSpan
Capital Appreciation Account and LifeSpan Diversified Income Account), SEI
Institutional Managed Trust (High Yield Bond Fund), WNL Series Trust (BEA Growth
and Income Fund), Touchstone International Equity Fund and Touchstone Variable
Annuity International Equity Fund.
CSAM has sole 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. CSAM will
select investments for the Funds and will place purchase and sale orders on
behalf of the Funds.
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.
-22-
<PAGE> 26
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:
<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
</TABLE>
-23-
<PAGE> 27
<TABLE>
<CAPTION>
PERFORMANCE
TOTAL MANAGEMENT BASIC RATE ADJUSTMENT FEE RATE
- ---------------- ------------ ------------- -----------
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
percentage points 1.50 .20 1.0
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
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>
-24-
<PAGE> 28
The Long-Short Equity Fund pays CSAM a management fee, computed
daily and payable quarterly, at the annual rate of 0.10% of the average net
assets of the Fund.
CSAM and, with respect to the Common Shares of the Funds,
Counsellors Service have voluntarily undertaken to limit the total annual
operating expenses of each Fund (including the management fee but not including
nonrecurring account fees, extraordinary expenses and dividends and interest
paid on securities sold short) applicable to each class to the percentage of
each Fund's average daily net assets attributable to that class as set forth in
the Prospectuses, plus the Performance Adjustment applicable to the Long-Short
Neutral Fund. The Performance Adjustment would be determined without regard to
any waivers of the basic management fee.
For the period from commencement of operations (August 3, 1998)
and ending August 31, 1998, the BEA Long-Short Market Neutral Fund has paid BEA
Associates, the predecessor to CSAM, $4,661 (after fee waivers) in advisory fees
and BEA Associates has waived fees and/or reimbursed expenses in the amount of
$2,758.
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 Fund
are allocated among all Funds by or under the direction of the Funds' Board of
Directors in such manner as the Board determines fair and equitable. 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 management and
custodial fees) if those expenses are actually incurred in a different amount by
such class or if a class receives different services.
Under the Advisory Agreements, CSAM will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Funds in
connection with the performance of the Advisory Agreements.
The Advisory Agreements for the Funds were approved on October
22, 1998 by vote of the Funds' Board of Directors, including a majority of those
directors who are not parties to the Advisory Agreements or interested persons
(as defined in the 1940 Act) of such parties. The Advisory Agreements were
approved by each Fund's initial shareholder. Each Advisory Agreement is
terminable by vote of the Funds' Board of Directors or by the holders of a
majority of the outstanding voting securities of the relevant Fund, at any time
without penalty, on 60 days' written notice to CSAM. Each of the Advisory
Agreements may also be terminated by CSAM on 60 days' written notice to the
Fund. Each of the Advisory Agreements terminates automatically in the event of
assignment thereof.
-25-
<PAGE> 29
CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. Custodial Trust Company
("CTC") acts as the custodian for the Funds and also acts as the custodian for
the Fund's foreign securities pursuant to a Custodian Agreement (the "Custodian
Agreement"). Under the Custodian Agreement, CTC (a) maintains a separate account
or accounts in the name of each Fund, (b) holds and transfers portfolio
securities on account of each Fund, (c) accepts receipts and makes disbursements
of money on behalf of each Fund, (d) collects and receives all income and other
payments and distributions on account of each Fund's portfolio securities, and
(e) makes periodic reports to the Funds' Board of Directors concerning each
Fund's operations. CTC is authorized to select one or more banks or trust
companies to serve as sub-custodian on behalf of the Funds, provided that CTC
remains responsible for the performance of all its duties under the Custodian
Agreement and holds the Funds harmless from the negligent acts and omissions of
any sub-custodian. For its services to the Funds under the Custodian Agreement,
CTC receives a fee which is calculated based upon each Fund's average daily
gross assets, exclusive of transaction charges and out-of-pocket expenses, which
are also charged to the Funds.
State Street Bank and Trust Company ("State Street") serves as
the transfer agent for the Funds. It has delegated to Boston Financial Data
Services, Inc. ("BFDS"), a subsidiary, responsibility for most transfer agent
servicing functions. State Street serves as the transfer and dividend disbursing
agent for the Funds pursuant to a Transfer Agency Agreement, as supplemented
(collectively, the "Transfer Agency Agreement"), under which it (a) issues and
redeems shares of each of the Funds, (b) addresses and mails all communications
by each Fund to record owners of shares of each such Fund, including reports to
shareholders, dividend and distribution notices and proxy materials for its
meetings of shareholders, (c) maintains shareholder accounts and, if requested,
sub-accounts and (d) makes periodic reports to the Funds' Board of Directors
concerning the operations of each Fund. For its services to the Funds under the
Transfer Agency Agreement, State Street receives a fee on a per transaction
basis.
ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENTS. PFPC, an
indirect, wholly-owned subsidiary of PNC Bank Corp., and Counsellors Service,
Inc. both serve as co-administrators to each of the Common and Institutional
Class of the Funds pursuant to separate written agreements (the "PFPC
Co-Administration Agreements" and the "Counsellors Service Co-Administration and
Accounting Services Agreements," respectively). BEA Associates, the predecessor
of CSAM, and PFPC, had served as administrator and co-administrators to the
Institutional Class and Advisor Class of the BEA Funds, respectively. The
services provided by, and the fees payable by the Funds to Counsellors Service
under the Counsellors Service Co-Administration Agreements and PFPC under the
PFPC Co-Administration Agreements are described in the Prospectuses of the
Funds. Each class of shares of the Funds
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bears its proportionate share of fees payable to Counsellors Service and PFPC
in the proportion that its assets bear to the aggregate assets of the Funds at
the time of calculation. See the Prospectuses, "Management of the Funds."
The PFPC Co-Administration Agreements provide that PFPC shall not
be liable for any loss suffered by the Funds in connection with the performance
of services under the PFPC Co-Administration Agreements, except a loss resulting
from willful misfeasance, gross negligence, or reckless disregard of its duties
and obligations under the PFPC Co-Administration Agreements. The Counsellors
Service Co-Administration Agreements provide that Counsellors Service shall not
be liable for any error of judgment or mistake of law or any loss suffered by
the Funds in connection with the performance of the agreement, except a loss
resulting from willful misfeasance, bad faith or negligence, or reckless
disregard of its duties and obligations thereunder.
For the period from commencement of operations (August 3, 1998)
and ending August 31, 1998, the BEA Long-Short Market Neutral Fund has paid PFPC
and Counsellors Service, with respect to the Institutional Shares,
administration fees of $0 and $148, respectively, and PFPC and Counsellors
Service has waived fees and/or reimbursed expenses in the amounts of $618 and
$594, respectively.
DISTRIBUTION AND SHAREHOLDER SERVICING. The Funds have each
entered into a Shareholder Servicing and Distribution Plan (the "12b-1 Plan"),
pursuant to Rule 12b-1 under the 1940 Act, pursuant to which the Fund will pay
Credit Suisse Asset Management Securities, Inc. ("CSAMSI"), in consideration for
services (as defined below), a fee calculated at an annual rate of .25% of the
average daily net assets of Common Shares of the Fund. Services performed by
CSAMSI include (i) the sale of the Common Shares, as set forth in the 12b-1 Plan
("Selling Services"), (ii) ongoing servicing and/or maintenance of the accounts
of the Common Shareholders of the Fund, as set forth in the 12b-1 Plan
("Shareholder Services"), and (iii) sub-transfer agency services, subaccounting
services or administrative services related to the sale of the Common Shares, as
set forth in the 12b-1 Plan ("Administrative Services" and collectively with
Selling Services and Administrative Service, "Services") including, without
limitation, (a) payments reflecting an allocation of overhead and other office
expenses of CSAMSI related to providing Services; (b) payments made to, and
reimbursement of expenses of, persons who provide support services in connection
with the distribution of the Common Shares including, but not limited to, office
space and equipment, telephone facilities, answering routine inquiries regarding
the Fund, and providing any other Shareholder Services; (c) payments made to
compensate selected dealers or other authorized persons for providing any
Services; (d) costs relating to the formulation and implementation of marketing
and promotional activities for
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the Common Shares, including, but not limited to, direct mail promotions and
television, radio, newspaper, magazine and other mass media advertising, and
related travel and entertainment expenses; (e) costs of printing and
distributing prospectuses, statements of additional information and reports of
the Fund to prospective shareholders of the 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.
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 in
the Fund and who have no direct or indirect financial interest in the operation
of the 12b-1 Plan ("Independent Directors/Trustees"). Any material amendment of
the 12b-1 Plan would require the approval of the Board in the manner described
above. The 12b-1 Plan 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 the majority of the
outstanding voting securities of the Common Shares of a Fund.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors, CSAM
is responsible for the execution of portfolio transactions and the allocation of
brokerage transactions for the Funds. In executing portfolio transactions, CSAM
seeks to obtain the best net results for a Fund, taking into account such
factors as the price (including the applicable brokerage commission or dealer
spread), size of the order, difficulty of execution and operational facilities
of the firm involved. While CSAM generally seeks reasonably competitive
commission rates, payment of the lowest commission or spread is not necessarily
consistent with obtaining the best results in particular transactions.
Portfolio transactions for the Funds shall be effected on
domestic securities exchanges. In transactions for securities not actively
traded on a securities exchange, a Fund will deal directly with the dealers who
make a market in the securities involved, except in those circumstances where
better prices and execution are available elsewhere. Such dealers usually are
acting as principal for their own account. On occasion, securities may be
purchased directly from the issuer. Such portfolio securities are generally
traded on a net basis and do not normally involve brokerage commissions.
Securities firms may receive brokerage commissions on certain portfolio
transactions,
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including options, futures and options on futures transactions and the purchase
and sale of underlying securities upon exercise of options. The Funds have no
obligation to deal with any broker in the execution of transactions in
portfolio securities. The Funds may use affiliates of Credit Suisse Group,
CSAM's parent company, in connection with the purchase or sale of securities in
accordance with rules or exemptive orders adopted by the Securities and
Exchange Commission (the "SEC") when CSAM believes that the charge for the
transaction does not exceed usual and customary levels.
Commission rates for brokerage transactions on foreign stock
exchanges are generally fixed. The reasonableness of any negotiated commission
paid by the Funds will be evaluated on the basis of the difficulty involved in
execution, the time taken to conclude the transaction, the extent of the
broker's commitment, if any, of its own capital and the amount involved in the
transaction. It should be noted that commission rates in U.S. markets are
negotiated.
In the case of over-the-counter issues, there is generally no
stated commission, but the price usually includes an undisclosed commission or
markup, and the Fund will normally deal with the principal market makers unless
it can obtain better terms elsewhere.
For the fiscal year ended August 31, 1998, the BEA Long-Short
Market Neutral Fund has paid $3,790 in brokerage commissions.
No Fund has any obligation to deal with any broker or group of
brokers in the execution of portfolio transactions. CSAM may, consistent with
the interests of a Fund and subject to the approval of the Board of Directors,
select brokers on the basis of the research, statistical and pricing services
they provide to a Fund and other clients of CSAM. Information and research
received from such brokers will be in addition to, and not in lieu of, the
services required to be performed by CSAM under its respective contracts. A
commission paid to such brokers may be higher than that which another qualified
broker would have charged for effecting the same transaction, provided that
CSAM, as applicable, determines in good faith that such commission is reasonable
in terms either of the transaction or the overall responsibility of CSAM to a
Fund and its other clients and that the total commissions paid by a Fund will be
reasonable in relation to the benefits to a Fund over the long-term.
Corporate debt and U.S. Government securities are generally
traded on the over-the-counter market on a "net" basis without a stated
commission, through dealers acting for their own account and not as brokers. The
Funds will primarily engage in transactions with these dealers or deal directly
with the issuer unless a better price or execution could be obtained by using a
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<PAGE> 33
broker. Prices paid to a dealer in debt securities will generally include a
"spread," which is the difference between the prices at which the dealer is
willing to purchase and sell the specific security at the time, and includes the
dealer's normal profit.
CSAM may seek to obtain an undertaking from issuers of commercial
paper or dealers selling commercial paper to consider the repurchase of such
securities from a Fund prior to their maturity at their original cost plus
interest (sometimes adjusted to reflect the actual maturity of the securities),
if it believes that a Fund's anticipated need for liquidity makes such action
desirable. Any such repurchase prior to maturity reduces the possibility that a
Fund would incur a capital loss in liquidating commercial paper (for which there
is no established market), especially if interest rates have risen since
acquisition of the particular commercial paper.
Investment decisions for each Fund and for other investment
accounts managed by CSAM are made independently of each other in light of
differing conditions. However, the same investment decision may be made for two
or more of such accounts. In such cases, simultaneous transactions are
inevitable. Purchases or sales are then averaged as to price and allocated as to
amount according to a formula deemed equitable to each such account. While in
some cases this practice could have a detrimental effect upon the price or value
of the security as far as a Fund is concerned, in other cases it is believed to
be beneficial to a Fund. A Fund will not purchase securities during the
existence of any underwriting or selling group relating to such security of
which CSAM or any affiliated person (as defined in the 1940 Act) thereof is a
member except pursuant to procedures adopted by the Funds' Board of Directors
pursuant to Rule 10f-3 under the 1940 Act.
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 the foregoing entities except as permitted by SEC exemptive
order or by applicable law.
It is anticipated that, under normal market conditions, the
annual portfolio turnover rate for the Long-Short Neutral Fund and the
Long-Short Equity Fund will not exceed 150% and 50%, respectively. A high rate
of portfolio turnover (100% or more) involves correspondingly greater brokerage
commission expenses and other transaction costs, which must be borne directly by
a Fund. Each of the Funds anticipates that its annual portfolio turnover rate
will vary from year to year. The portfolio turnover rate is calculated by
dividing the lesser of a Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the Fund during the year.
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<PAGE> 34
PURCHASE AND REDEMPTION INFORMATION
The Funds reserve the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption of a Fund's shares by
making payment in whole or in part in securities chosen by the Funds and valued
in the same way as they would be valued for purposes of computing a Fund's net
asset value. If payment is made in securities, a shareholder may incur
transaction costs in converting these securities into cash. Investors may also
be required to bear certain transaction costs associated with redemptions in
kind. The Funds have elected, however, to be governed by Rule 18f-1 under the
1940 Act so that a Fund is obligated to redeem its shares solely in cash up to
the lesser of $250,000 or 1% of its net asset value during any 90-day period for
any one shareholder of a 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.)
VALUATION OF SHARES
The net asset values per share of each class of the Funds are
calculated separately from each other class as of the close of regular trading
of the NYSE on each Business Day. The net asset value per share, the value of an
individual share in a Fund, is computed by adding the value of the proportionate
interest of each class of a Fund in the Fund's securities, cash and other
assets, subtracting the actual and accrued liabilities of the class and dividing
the result by the number of outstanding shares of such class. "Business Day"
means each weekday when the NYSE is open. Currently, the NYSE is closed on New
Year's Day, Dr. Martin Luther King Jr., Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day
and the preceding Friday or subsequent Monday when one of these holidays falls
on a Saturday or Sunday. Although the Fund does not invest directly in foreign
securities, it invests in American Depository Receipts, the value of which
depends on the underlying foreign security. Securities which are listed on stock
exchanges, whether U.S. or foreign are valued at the last sale price on the day
the securities are valued or, lacking any sales on such day, at the mean of the
bid and asked prices available prior to the valuation. Fund securities primarily
traded in foreign markets may be traded in such markets on days which are not
Business Days. Because net asset value per share of each Fund is determined only
on Business Days, the net
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<PAGE> 35
asset value of shares of a Fund may be significantly affected on days when an
investor does not have access to the Fund. If on any Business Day, a foreign
securities exchange or foreign market is closed, the securities traded on such
exchange or in such market will be valued at the last sale price reported on
the previous business day of such foreign exchange or market. In cases where
securities are traded on more than one exchange, the securities are generally
valued on the exchange designated by the Board of Directors or its delegates as
the primary market. Securities traded in the over-the-counter market and listed
on the National Association of Securities Dealers Automatic Quotation System
("NASDAQ") are valued at the last trade price listed on the NASDAQ at the close
of regular trading (generally 4:00 p.m. Eastern Time); securities listed on
NASDAQ for which there were no sales on that day and other over-the-counter
securities are valued at the mean of the bid and asked prices available prior
to valuation. Securities for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of the Funds' Board of Directors. The amortized cost method of valuation may
also be used with respect to debt obligations with sixty days or less remaining
to maturity. Any assets which are denominated in a foreign currency are
converted into U.S. dollars at the prevailing market rates for purposes of
calculating net asset value.
Foreign currency exchange rates are generally determined prior to
the close of the NYSE. Occasionally, events affecting the value of foreign
securities and such exchange rates occur between the time at which they are
determined and the close of the NYSE, which events will not be reflected in a
computation of the Fund's net asset value. If events materially affecting the
value of such securities or assets or currency exchange rates occurred during
such time period, the securities or assets would be valued at their fair value
as determined in good faith by or under the direction of the Board of Directors.
The foreign currency exchange transactions of a Fund conducted on a spot basis
will be valued at the spot rate for purchasing or selling currency prevailing on
the foreign exchange market. Under normal market conditions this rate differs
from the prevailing exchange rate by an amount generally less than one-tenth of
one percent due to the costs of converting from one currency to another.
In determining the approximate market value of portfolio
investments, the Funds may employ outside organizations, which may use a matrix
or formula method that takes into consideration market indices, matrices, yield
curves and other specific adjustments. This may result in the securities being
valued at a price different from the price that would have been determined had
the matrix or formula method not been used. All cash, receivables and current
payables are carried on the Funds' books at their face value. Other assets, if
any, are valued at fair value as determined in good faith by the Funds' Board of
Directors.
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<PAGE> 36
PERFORMANCE INFORMATION
TOTAL RETURN. 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:
ERV 1/n
T = [(______) - 1]
P
Where: T = average annual total return;
ERA = ending redeemable value of a hypothetical $1,00
payment made at the beginning of the 1, 5 or 10
year (or other) periods at the end of the
applicable period (or a fractional portion
thereof);
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed in
years.
Each Fund that advertises its "aggregate total return" computes
such returns separately for each class of shares by determining the aggregate
compounded rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
Aggregate Total Return = [(-----) - 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.
The total return of the Institutional Shares of the Long-Short
Neutral Fund for the period beginning August 3, 1998 (inception date) to August
31, 1998 was 1.80% (unannualized). Such performance information is the
performance of the Institutional Shares of the BEA Long-Short Market Neutral
Fund (the predecessor of the Long-Short Neutral Fund). Because shares of the
Long-Short Equity Fund, as well as the Common Shares of the Long-Short Neutral
Fund, had not been issued as of August 31,
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<PAGE> 37
1998, no performance information is provided with respect to such shares.
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., CAD Investment Technologies, Inc. or Weisenberger Investment
Company Service, or with the performance of the Salomon Smith Barney 1-Month
Treasury Bill Index,-TM- 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. The Long-Short Market Neutral Fund may from time to time compare the daily
volatility of its net asset value to the daily volatility of the S&P 500 Index.
The S&P 500 Index is an unmanaged index with no defined investment objective,
and is a registered trademark of McGraw-Hill Co., Inc.
TAXES
GENERAL TAX CONSEQUENCES TO THE FUNDS AND ITS SHAREHOLDERS. The
following is only a summary of certain additional tax considerations generally
affecting the Funds and their shareholders that are not described in the Funds'
Prospectuses. No attempt is made to present a detailed explanation of the tax
treatment of the Funds or their shareholders, and the discussion in this
Statement of Additional Information and in the Prospectuses is not intended as a
substitute for careful tax planning. Investors are urged to consult their tax
advisers with specific reference to their own tax situation.
Each Fund has elected to be taxed as a regulated investment
company under Part I of Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). As a regulated investment company, each Fund is exempt
from federal income tax
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<PAGE> 38
on its net investment income and realized capital gains which it distributes to
shareholders, provided that it (a) distributes an amount equal to the sum of
(i) at least 90% of its investment company taxable income (net taxable
investment income and the excess of net short-term capital gain over net
long-term capital loss, if any, for the year) and (ii) at least 90% of its net
tax-exempt interest income, if any, for the year (the "Distribution
Requirement"), and (b) satisfies certain other requirements of the Code that
are described below. Distributions of investment company taxable income and net
tax-exempt interest income made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year will
satisfy the Distribution Requirement. The Distribution Requirement for any year
may be waived if a regulated investment company establishes to the satisfaction
of the Internal Revenue Service that it is unable to satisfy the Distribution
Requirement by reason of distributions previously made for the purpose of
avoiding liability for federal excise tax (discussed below).
In addition to satisfaction of the Distribution Requirement, each
Fund must derive at least 90% of its gross income from dividends, interest,
certain payments with respect to securities loans and gains from the sale or
other disposition of stock or securities or foreign currencies, or from other
income derived with respect to its business of investing in such stock,
securities, or currencies (the "Income Requirement").
Future Treasury regulations may provide that currency gains that
are not "directly related" to a Fund's principal business of investing in stock
or securities (or in options or futures with respect to stock or securities)
will not satisfy the Income Requirement. Income derived by a regulated
investment company from a partnership or trust (including a foreign entity that
is classified as a partnership or trust for U.S. federal income tax purposes)
will satisfy the Income Requirement only to the extent such income is
attributable to items of income of the partnership or trust that would satisfy
the Income Requirement if they were realized by a regulated investment company
in the same manner as realized by the partnership or trust.
In addition to the foregoing requirements, at the close of each
quarter of its taxable year, at least 50% of the value of each Fund's assets
must consist of cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and securities of other issuers (as to
which the Fund has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which the Fund does not hold more than 10%
of the outstanding voting securities of such issuer), and no more than 25% of
the value of each Fund's total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which such Fund
controls and which are engaged in the same or similar trades or businesses (the
"Asset Diversification Requirement").
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<PAGE> 39
The Internal Revenue Service has taken the position, in informal
rulings issued to other taxpayers, that the issuer of a repurchase agreement is
the bank or dealer from which securities are purchased. A Fund will not enter
into repurchase agreements with any one bank or dealer if entering into such
agreements would, under the informal position expressed by the Internal Revenue
Service, cause it to fail to satisfy the Asset Diversification Requirement.
Distributions of investment company taxable income will be
taxable (subject to the possible allowance of the dividend received deduction
described below) to shareholders as ordinary income, regardless of whether such
distributions are paid in cash or are reinvested in shares. Shareholders
receiving any distribution from the Funds in the form of additional shares will
be treated as receiving a taxable distribution in an amount equal to the fair
market value of the shares received, determined as of the reinvestment date.
Each Fund intends to distribute to shareholders its excess of net
long-term capital gain over net short-term capital loss ("net capital gain"), if
any, for each taxable year. Such gain is distributed as a capital gain dividend
and is taxable to shareholders as long-term capital gain (20% or 28%, as
applicable), regardless of the length of time the shareholder has held his
shares, whether such gain was recognized by the Fund prior to the date on which
a shareholder acquired shares of the Fund and whether the distribution was paid
in cash or reinvested in shares. The aggregate amount of distributions
designated by any Fund as capital gain dividends may not exceed the net capital
gain of such Fund for any taxable year, determined by excluding any net
long-term capital loss attributable to transactions occurring after October 31
of such year and by treating any such loss as if it arose on the first day of
the following taxable year. Such distributions will be designated as capital
gain dividends in a written notice mailed by the Funds to shareholders not later
than 60 days after the close of each Fund's respective taxable year.
In the case of corporate shareholders, distributions (other than
capital gain dividends) of a Fund for any taxable year will qualify for the 70%
dividends received deduction, only to the extent of the gross amount of
"qualifying dividends" received by such Fund for the year. Generally, a dividend
will be treated as a "qualifying dividend" only if it has been received from a
domestic corporation. However, if a Fund owns at least 10 percent of the stock
(by vote and value) of certain foreign corporations with U.S. source income,
then a portion of the dividends paid by such foreign corporations may constitute
"qualifying dividends." A dividend received by a taxpayer will not be treated as
a "qualifying dividend" if (1) it has been received with respect to any share of
stock that the taxpayer has held for 45 days (90 days in the case of certain
preferred stock) or less (excluding any day more than 45 days (or 90 days in the
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<PAGE> 40
case of certain preferred stock) after the date on which the stock becomes
ex-dividend), or (2) to the extent that the taxpayer is under an obligation
(pursuant to a short sale or otherwise) to make related payments with respect to
positions in substantially similar or related property. The Funds will designate
the portion, if any, of the distribution made by a Fund that qualifies for the
dividends received deduction in a written notice mailed by the Funds to
shareholders not later than 60 days after the close of the Fund's taxable year.
Investors should be aware that any loss realized upon the sale,
exchange or redemption of shares held for six months or less will be treated as
a long-term capital loss to the extent any capital gain dividends have been paid
with respect to such shares.
Corporate taxpayers may be liable for alternative minimum tax,
which is imposed at the rate of 20% of "alternative minimum taxable income"
(less, in the case of corporate shareholders with "alternative minimum taxable
income" of less than $310,000, the applicable "exemption amount"), in lieu of
the regular corporate income tax. "Alternative minimum taxable income," is equal
to "taxable income", (as determined for corporate income regular tax purposes)
with certain adjustments.
Although corporate taxpayers in determining "alternative minimum
taxable income" are allowed to exclude exempt interest dividends (other than
exempt interest dividends derived from certain private activity bonds ("AMT
Preference Dividends"), as explained in the Prospectuses) and to utilize the 70%
dividends received deduction at the first level of computation, the Code
requires (as a second computational step) that "alternative minimum taxable
income" be increased by 75% of the excess of "adjusted current earnings" over
other "alternative minimum taxable income."
Corporate shareholders will have to take into account (1) all
exempt interest dividends, if any, and (2) the full amount of all dividends from
a Fund that are treated as "qualifying dividends" for purposes of the dividends
received deduction in determining their "adjusted current earnings." As much as
75% of any exempt interest dividend and 82.5% of any "qualifying dividend"
received by a corporate shareholder could, as a consequence, be subject to
alternative minimum tax. Exempt interest dividends received by such a corporate
shareholder may accordingly be subject to alternative minimum tax at an
effective rate of 15%.
"Constructive sale" provisions apply to activities by a 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
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<PAGE> 41
contract or a future or forward contract relating to an appreciated direct
position in any stock or debt instrument, or the acquisition of 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 a Fund to recognize taxable income from
these offsetting transactions in excess of the cash generated by such
activities.
If for any taxable year any Fund does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and all
distributions will be taxable as ordinary dividends to the extent of such Fund's
current and accumulated earnings and profits. Such distributions will be
eligible for the dividends received deduction in the case of corporate
shareholders. Investors should be aware that any loss realized on a sale of
shares of a Fund will be disallowed to the extent an investor repurchases shares
of the same Fund within a period of 61 days (beginning 30 days before and ending
30 days after the day of disposition of the shares). Dividends paid by a Fund in
the form of shares within the 61-day period would be treated as a purchase for
this purpose.
The Code imposes a non-deductible 4% excise tax on regulated
investment companies that do not distribute with respect to each calendar year
an amount equal to 98% of their ordinary income for the calendar year plus 98%
of their capital gain net income for the one-year period ending on October 31 of
such calendar year. The balance of such income must be distributed during the
next calendar year. For the foregoing purposes, a company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year. Because each Fund intends to distribute all of its
taxable income currently, no Fund anticipates incurring any liability for this
excise tax. However, investors should note that a Fund may in certain
circumstances be required to liquidate investments in order to make sufficient
distributions to avoid excise tax liability.
The Funds will be required in certain cases to withhold and remit
to the United States Treasury 31% of dividends paid to any shareholder (1) who
has provided either an incorrect tax identification number or no number at all,
(2) who is subject to backup withholding by the Internal Revenue Service for
prior failure to report the receipt of interest or dividend income properly, or
(3) who has failed to certify to the Funds that he is not subject to backup
withholding or that he is an "exempt recipient."
Transactions in foreign currencies, forward contracts, options
and futures contracts (including options and futures contracts on foreign
currencies) will be subject to special
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<PAGE> 42
provisions of the Code that, among other things, may affect the character
(i.e., ordinary or capital) of gains or losses realized by a Fund, accelerate
the recognition of income by a Fund and defer a Fund's losses. Exchange control
regulations may restrict repatriations of investment income and capital or of
the proceeds of sales of securities by investors such as the Funds. In
addition, certain investments (such as zero coupon securities and shares of
so-called "passive foreign investment companies" or "PFICs") may cause a Fund
to recognize income without the receipt of cash. Each of these circumstances,
whether separately or in combination, may limit a Fund's ability to pay
sufficient dividends and to make sufficient distributions to satisfy the
Subchapter M and excise tax distributions requirements.
The foregoing general discussion of federal income tax
consequences is based on the Code and the regulations issued thereunder as in
effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
Although each Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, each Fund
may be subject to the tax laws of such states or localities.
Certain states exempt from state income taxation dividends paid
by a regulated investment company that are derived from interest on U.S.
Government obligations. Each Fund will accordingly inform its shareholders
annually of the percentage, if any, of its ordinary dividends that is derived
from interest on U.S. Government obligations. Shareholders should consult with
their tax advisers as to the availability and extent of any applicable state
income tax exemption.
SPECIAL TAX CONSIDERATIONS. The following discussion relates to
the particular federal income tax consequences of the investment policies of the
Funds. The ability of the Funds to engage in options, short sale and futures
activities will be somewhat limited by the requirements for their continued
qualification as regulated investment companies under the Code, in particular
the Distribution Requirement and the Asset Diversification Requirement.
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
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<PAGE> 43
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.
Because only a few regulations implementing the straddle rules
have been promulgated by the U.S. Treasury, the tax consequences to the Funds of
engaging in options transactions are not entirely clear. Nevertheless, it is
evident that application of the straddle rules may substantially increase or
decrease the amount which must be distributed to shareholders in satisfaction of
the Distribution Requirement (or to avoid federal excise tax liability) for any
taxable year in comparison to a fund that did not engage in options
transactions.
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 that the Funds enter into, as well as futures
transactions and transactions in forward foreign currency contracts that are
traded in the interbank market entered into by the Funds, 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
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<PAGE> 44
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. A Fund may request a
private letter ruling from the Internal Revenue Service for guidance on some or
all of these issues.
Under Code Section 988, special rules are provided for certain
transactions in a foreign currency other than the taxpayer's functional currency
(I.E., unless certain special rules apply, currencies other than the U.S.
dollar). In general, foreign currency gains or losses from certain forward
contracts, from futures contracts that are not "regulated futures contracts",
and from unlisted options will be treated as ordinary income or loss. In certain
circumstances where the transaction is not undertaken as part of a straddle, a
Fund may elect capital gain or loss treatment for such transactions.
Alternatively, a Fund may elect ordinary income or loss treatment for
transactions in futures contracts and options on foreign currency that would
otherwise produce capital gain or loss. In general, gains or losses from a
foreign currency transaction subject to Code Section 988 will increase or
decrease the amount of the Fund's investment company taxable income available to
be distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. Additionally, if losses
from a foreign currency transaction subject to Code Section 988 exceed other
investment company taxable income during a taxable year, a Fund will not be able
to make any ordinary dividend distributions, and any distributions made before
the losses were realized but in the same taxable year
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<PAGE> 45
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 "deferred" federal income tax
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.
The Code permits a Fund to 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 is deemed to realize as
ordinary income. A Fund generally is not 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 are 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
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<PAGE> 46
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.
ADDITIONAL INFORMATION CONCERNING THE FUNDS' SHARES
The Funds do not currently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Funds' By-Laws provide that shareholders collectively owning at least ten
percent of the outstanding shares of all classes of Common Stock of the Funds
have the right to call for a meeting of shareholders to consider the removal of
one or more directors. To the extent required by law, the Funds will assist in
shareholder communication in such matters.
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.
CONTROL PERSONS. As of October 16, 1998, 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 16, 1998
---- ---------------- -----------------
<S> <C> <C>
Long-Short Neutral Fund Michael A. Wall TTE 75.00%
(Institutional Shares) Michael A. Wall Trust
U/A DTD 12/29/1997
P.O. Box 4579
Jackson, WY 83001-4579
CS First Boston Inc 16.60%
c/o Nancy Faiese
55 E. 52nd St. 27th
Floor
New York, NY 10055-0002
</TABLE>
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<PAGE> 47
<TABLE>
<S> <C> <C>
C. Richard Wilson 5.55%
2876 Parkview Cir
Emmaus, PA 18049-1217
Long-Short Equity Fund William W. Priest 100.00%
(Institutional Shares) 2 East 70th Street #5
New York, NY 10021-4913
</TABLE>
INDEPENDENT ACCOUNTANTS AND COUNSEL
PricewaterhouseCoopers LLP ("PWC"), with principal offices at
2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as independent
accountants for each Fund.
The law firm of Willkie Farr & Gallagher, 787 Seventh Avenue, New
York, New York 10019-6099, serves as counsel to the Funds and provides legal
services from time to time for CSAM, Counsellors Service, and CSAMSI.
FINANCIAL STATEMENTS
Common and Institutional Shares of each of the Funds had not been issued
as of August 31, 1998 and, accordingly, no financial information is provided
with respect to such shares. Financial information with respect to Institutional
Shares of the corresponding BEA Funds has been derived from financial statements
audited by PWC. The audited financial statements and notes thereto in the BEA
Funds' Annual Report to Shareholders for the fiscal year ended August 31, 1998
(the "1998 Annual Report") and in the BEA Long-Short Equity Fund's financial
statement for the period September 11, 1998 (commencement of operations) and
ending October 20, 1998 (collectively, the "Reports") are incorporated by
reference into this Statement of Additional Information and attached hereto,
respectively. No other parts of the Reports are incorporated by reference herein
or attached hereto. The financial statements included in the Reports have been
audited by PWC. The reports of PWC are incorporated herein by reference or
attached hereto given upon their authority as experts in accounting and
auditing. Copies of the Reports may be obtained at no charge by telephoning the
Distributor at the telephone number appearing on the front page of this
Statement of Additional Information. Shareholders of the Long-Short Equity Fund
may also obtain the BEA Long-Short Market Neutral Fund's Annual Report by
calling the same number.
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<PAGE> 48
APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's Ratings Services ("S&P") commercial paper
rating is a current assessment of the likelihood of timely payment of debt
having an original maturity of no more than 365 days. The following summarizes
the rating categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating
that the obligor's capacity to meet its financial commitment is strong. Within
this category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations
rated "A-1". However, the obligor's capacity to meet its financial commitment on
the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are in payment default. The "D" rating category
is used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period. The "D" rating will also be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Moody's Investors Service, Inc. ("Moody's") commercial paper
ratings are opinions of the ability of issuers to repay punctually senior debt
obligations not having an original maturity in excess of one year, unless
explicitly noted. The following summarizes the rating categories used by Moody's
for commercial paper:
A-1
<PAGE> 49
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
A-2
<PAGE> 50
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify issues as investment grade. Risk factors are larger
and subject to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch IBCA short-term ratings apply to debt obligations that have
time horizons of less than 12 months for most obligations, or up to three years
for U.S. public finance securities. The following summarizes the rating
categories used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of securities rated
"F1".
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
"B" - Securities possess speculative credit quality. This
designation indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C" - Securities possess high default risk. This designation
indicates that the capacity for meeting financial commitments is solely reliant
upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
A-3
<PAGE> 51
Thomson BankWatch short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
"TBW-2" - This designation represents Thomson BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's lowest
rating category and indicates that the obligation is regarded as non-investment
grade and therefore speculative.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned
by Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
A-4
<PAGE> 52
"BB," "B," "CCC," "CC" and "C" - Debt is regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - Debt is less vulnerable to non-payment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - Debt is more vulnerable to non-payment than obligations
rated "BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial or economic conditions
will likely impair the obligor's capacity or willingness to meet its financial
commitment on the obligation.
"CCC" - Debt is currently vulnerable to non-payment, and is
dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial or economic conditions, the obligor is not likely to
have the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
non-payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. This rating
is used when payments on an obligation 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. "D" rating is also used upon the
filing of a bankruptcy petition or the taking of similar action if payments on
an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may
be modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The
A-5
<PAGE> 53
absence of an "r" symbol should not be taken as an indication that an
obligation will exhibit no volatility or variability in total return.
The following summarizes the ratings used by Moody's for
corporate and municipal long-term debt:
"Aaa" - Bonds 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 by an 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 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 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 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," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when
A-6
<PAGE> 54
facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by Duff
& Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality.
The risk factors are negligible, being only slightly more than for risk-free
U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade.
Although below investment grade, debt rated "BB" is deemed likely
to meet obligations when due. Debt rated "B" possesses the risk that obligations
will not be met when due. Debt rated "CCC" is well below investment grade and
has considerable uncertainty as to timely payment of principal, interest or
preferred dividends. Debt rated "DD" is a defaulted debt obligation, and the
rating "DP" represents preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA,"
"A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. These ratings denote the lowest expectation of
investment risk and are assigned only in case of
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exceptionally strong capacity for timely payment of financial commitments. This
capacity is very unlikely to be adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high
credit quality. These ratings denote a very low expectation of investment risk
and indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of investment risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to adverse changes in circumstances or in
economic conditions than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of good
credit quality. These ratings denote that there is currently a low expectation
of investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse circumstances and in economic conditions are more likely
to impair this category.
"BB" - Bonds considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. these ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.
"CCC", "CC", "C" - Bonds have high default risk. Capacity for
meeting financial commitments is reliant upon sustained, favorable business or
economic developments. "CC" ratings indicate that default of some kind appears
probable, and "C" ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the highest
potential for recovery on these securities, and "D" represents the lowest
potential for recovery.
To provide more detailed indications of credit quality, the Fitch
IBCA ratings from and including "AA" to "B" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
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Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category assigned
by Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A S&P 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
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determined to possess very strong characteristics are given a plus (+)
designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the ratings by Moody's Investors
Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality,
enjoying strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with
margins of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality,
carrying specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack of
margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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APPENDIX B
As stated in the Prospectuses, the Funds may enter into certain
futures transactions. Such transactions are described in this Appendix.
I. INTEREST RATE FUTURES CONTRACTS
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are
established in both the cash market and the futures market. In the cash market,
bonds are purchased and sold with payment for the full purchase price of the
bond being made in cash, generally within five business days after the trade. In
the futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes. As
described below, this would include the use of futures contract sales to protect
against expected increases in interest rates and futures contract purchases to
offset the impact of interest rate declines.
A Fund could accomplish a similar result to that which it hopes
to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market, the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Fund, by using futures contracts.
DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS. An interest rate
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by a Fund
entering into a
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futures contract purchase for the same aggregate amount of the specific type of
financial instrument and the same delivery date. If the price of the sale
exceeds the price of the offsetting purchase, the Fund is immediately paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly,
the closing out of a futures contract purchase is effected by the Fund entering
into a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges -- principally, the Chicago Board
of Trade, the Chicago Mercantile Exchange and the New York Futures Exchange.
Each exchange guarantees performance under contract provisions through a
clearing corporation, a nonprofit organization managed by the exchange
membership.
A public market now exists in futures contracts covering various
financial instruments including long-term U.S. Treasury Bonds and Notes;
Government National Mortgage Association (GNMA) modified pass-through mortgage
backed securities; three-month U.S. Treasury Bills; and ninety-day commercial
paper. The Funds may trade in any interest rate futures contracts for which
there exists a public market, including, without limitation, the foregoing
instruments.
With regard to each Fund, the Adviser also anticipates engaging
in transactions, from time to time, in foreign stock index futures such as the
ALL-ORDS (Australia), CAC-40 (France), TOPIX (Japan) and the FTSE-100 (United
Kingdom).
II. INDEX FUTURES CONTRACTS
GENERAL. A stock or bond index assigns relative values to the
stocks or bonds included in the index, which fluctuates with changes in the
market values of the stocks or bonds included. Some stock index futures
contracts are based on broad market indexes, such as Standard & Poor's 500 or
the New York Stock Exchange Composite Index. In contrast, certain exchanges
offer futures contracts on narrower market indexes, such as the Standard &
Poor's 100 or indexes based on an industry or market indexes, such as Standard &
Poor's 100 or indexes based on an industry or market segment, such as oil and
gas stocks. Futures contracts are traded on organized exchanges regulated by the
Commodity Futures Trading Commission. Transactions on such exchanges are cleared
through a clearing corporation, which guarantees the performance of the parties
to each contract. With regard to each Fund, to the extent consistent with its
investment objective, the Adviser anticipates engaging in transactions, from
time to time, in foreign stock index futures such as the ALL-ORDS
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(Australia), CAC-40 (France), TOPIX (Japan) and the FTSE-100 (United Kingdom).
A Fund might sell index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise result
from a market decline. A Fund might do so either to hedge the value of its
portfolio as a whole, or to protect against declines, occurring prior to sales
of securities, in the value of the securities to be sold. Conversely, a Fund
might purchase index futures contracts in anticipation of purchases of
securities. A long futures position may be terminated without a corresponding
purchase of securities.
In addition, a Fund might utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that a Fund expects to narrow the range of industry groups
represented in its holdings it may, prior to making purchases of the actual
securities, establish a long futures position based on a more restricted index,
such as an index comprised of securities of a particular industry group. A Fund
may also sell futures contracts in connection with this strategy, in order to
protect against the possibility that the value of the securities to be sold as
part of the restructuring of the portfolio will decline prior to the time of
sale.
III. FUTURES CONTRACTS ON FOREIGN CURRENCIES
A futures contract on foreign currency creates a binding
obligation on one party to deliver, and a corresponding obligation on another
party to accept delivery of, a stated quantity of foreign currency, for an
amount fixed in U.S. dollars (or another currency). Foreign currency futures may
be used by a Fund to hedge against exposure to fluctuations in exchange rates
between different currencies arising from multinational transactions.
IV. MARGIN PAYMENTS
Unlike purchase or sales of portfolio securities, no price is
paid or received by a Fund upon the purchase or sale of a futures contract.
Initially, a Fund will be required to deposit with the broker or in a segregated
account with a custodian an amount of liquid assets known as initial margin,
based on the value of the contract. The nature of initial margin in futures
transactions is different from that of margin in security transactions in that
futures contract margin does not involve the borrowing of funds by the customer
to finance the transactions. Rather, the initial margin 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. Subsequent payments, called variation margin,
to and from the
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broker, will be made on a daily basis as the price of the underlying
instruments fluctuates making the long and short positions in the futures
contract more or less valuable, a process known as marking-to-the-market. For
example, when a particular Fund has purchased a futures contract and the price
of the contract has risen in response to a rise in the underlying instruments,
that position will have increased in value and the Fund will be entitled to
receive from the broker a variation margin payment equal to that increase in
value. Conversely, where the Fund has purchased a futures contract and the
price of the future contract has declined in response to a decrease in the
underlying instruments, the position would be less valuable and the Fund would
be required to make a variation margin payment to the broker. Prior to
expiration of the futures contract, the Adviser may elect to close the position
by taking an opposite position, subject to the availability of a secondary
market, which will operate to terminate the Fund's position in the futures
contract. A final determination of variation margin is then made, additional
cash is required to be paid by or released to the Fund, and the Fund realizes a
loss or gain.
V. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures by
a Fund. One risk arises because of the imperfect correlation between movements
in the price of the futures and movements in the price of any instruments which
are the subject of a hedge. The price of the futures may move more than or less
than the price of the instruments being hedged. If the price of the futures
moves less than the price of the instruments which are the subject of the hedge,
the hedge will not be fully effective but, if the price of the instruments being
hedged has moved in an unfavorable direction, the Fund would be in a better
position than if it had not hedged at all. If the price of the instruments being
hedged has moved in a favorable direction, this advantage will be partially
offset by the loss on the futures. If the price of the futures moves more than
the price of the hedged instruments, the Fund involved will experience either a
loss or gain on the futures which will not be completely offset by movements in
the price of the instruments which are the subject of the hedge. To compensate
for the imperfect correlation of movements in the price of instruments being
hedged and movements in the price of futures contracts, a Fund may buy or sell
futures contracts in a greater dollar amount than the dollar amount of
instruments being hedged if the volatility over a particular time period of the
prices of such instruments has been greater than the volatility over such time
period of the future, or if otherwise deemed to be appropriate by the Adviser.
Conversely, a Fund may buy or sell fewer futures contracts if the volatility
over a particular time period of the prices of the instruments being hedged is
less than the volatility over such time period of the futures contract being
used, or if otherwise deemed to be appropriate by the Adviser. It is also
possible
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that, where a Fund has sold futures to hedge its portfolio against a decline in
the market, the market may advance and the value of instruments held in the
Fund may decline. If this occurred, the Fund would lose money on the futures
and also experience a decline in value in its portfolio securities.
When futures are purchased to hedge against a possible increase
in the price of securities or a currency before a Fund is able to invest its
cash (or cash equivalents) in an orderly fashion, it is possible that the market
may decline instead; if the Fund then concludes not to invest its cash at that
time because of concern as to possible further market decline or for other
reasons, the Fund will realize a loss on the futures contract that is not offset
by a reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and any
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, 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 may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the Adviser may still not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although the
Funds intend to purchase or sell futures only on exchanges or boards of trade
where there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, a Fund would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not
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be sold until the futures contract can be terminated. In such circumstances, an
increase in the price of the securities, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the price of the securities will in fact correlate with the
price movements in the futures contract and thus provide an offset on a futures
contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by a Fund is also subject to the
Adviser's ability to predict correctly movements in the direction of the market.
For example, if a particular Fund has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Fund will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. A Fund may
have to sell securities at a time when it may be disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies
can be substantial, due both to the low margin deposits required, and the
extremely high degree of leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit, before any
deduction for the transaction costs, if the contract were closed out. Thus, a
purchase or sale of a futures contract may
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result in losses in excess of the amount invested in the contract.
VI. OPTIONS ON FUTURES CONTRACTS
A Fund may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. A Fund will be required to deposit initial margin and variation
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements similar to those described above. Net option
premiums received will be included as initial margin deposits. As an example, in
anticipation of a decline in interest rates, a Portfolio may purchase call
options on futures contracts as a substitute for the purchase of futures
contracts to hedge against a possible increase in the price of securities which
the Fund intends to purchase. Similarly, if the value of the securities held by
a Fund is expected to decline as a result of an increase in interest rates, the
Fund might purchase put options or sell call options on futures contracts rather
than sell futures contracts.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase or sale of an option also entails the risk that changes
in the value of the underlying futures contract will not correspond to changes
in the value of the option purchased. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the underlying securities or currencies, an option may or may not be
less risky than ownership of the futures contract or such securities or
currencies. In general, the market prices of options can be expected to be more
volatile than the market prices on the underlying futures contract. Compared to
the purchase or sale of futures contracts, however, the purchase of call or put
options on futures contracts may frequently involve less potential risk to a
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). The writing of an option on a futures contract
involves risks similar to those risks relating to the sale of futures contracts.
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VII. OTHER MATTERS
Accounting for futures contracts will be in accordance with
generally accepted accounting principles.
The Funds intend to comply with the regulations of the Commodity
Futures Trading Commission exempting the Funds from registration as a "commodity
pool operator."
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BEA LONG-SHORT EQUITY FUND
OF THE RBB FUND, INC.
STATEMENT OF ASSETS OF LIABILITIES
OCTOBER 20, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments at value (Cost $94,164) $ 93,316
Investments of futures contracts at value (Cost $16) 32
Deferred offering costs 43,248
Investments sold receivable 10,637
Margin deposits with brokers for future contracts 6,000
Receivable from advisor 14,572
Margin receivable 400
Dividends receivable 35
Interest receivable 1
--------
Total Assets 168,241
LIABILITIES
Payable for deferred offering costs 48,570
Accrued expenses payable 9,276
--------
Total Liabilities 57,846
NET ASSETS (APPLICABLE TO 7,168 BEA INSTITUTIONAL
SHARES) $110,395
========
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE
PER BEA INSTITUTIONAL SHARE ($110,395/ 7,168) $15.40
========
</TABLE>
See Accompanying Notes to Financial Statements.
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The BEA Long-Short Equity Fund of The RBB Fund, Inc. Notes to Financial
Statements
Note 1. Summary of Significant Accounting Policies
The RBB Fund, Inc. (the "Fund") is registered under the Investment Company Act
of 1940, as amended, as an open-end management investment company. The Fund was
incorporated in Maryland on February 29, 1988, and currently has twenty-seven
investment Portfolios, one of which is included in these financial statements.
The Fund has authorized capital of thirty billion shares of common stock of
which 16.27 billion are currently classified into ninety-seven classes. Each
class represents an interest in one of twenty-seven investment portfolios of
RBB. The classes have been grouped into fifteen separate "families", nine of
which have begun investment operations. The BEA Family includes the BEA
Long-Short Equity Fund which is covered by this report.
The BEA Long-Short Equity Fund may invest in the securities of other investment
companies, and intends to principally invest in Institutional shares of the BEA
Long-Short Market Neutral Fund, a portfolio of the RBB Fund, Inc. Because the
BEA Long-Short Equity Fund may invest up to 100% of its assets in shares of the
BEA Long-Short Market Neutral Fund and other investment companies, the expenses
associated with investing in the Fund may be higher than those associated with a
portfolio that directly invests in securities that are not themselves investment
companies.
A) SECURITY VALUATION-Fund securities for which market quotations are readily
available are valued at market value, which is currently determined using the
last reported sales price. If no sales are reported, as in the case of some
securities traded over-the-counter, Fund securities are valued at the mean
between the last reported bid and asked prices. All other securities and assets
are valued as determined in good faith by the Board of Directors. Short-term
obligations with maturities of 60 days or less are valued at amortized cost
which approximates market value. Investment companies are valued at the
calculated daily net asset value.
B) SECURITY TRANSACTIONS AND INVESTMENT INCOME-Security transactions are
accounted for on the trade date. The cost of investments sold is determined by
use of the specific identification method for both financial reporting and
income tax purposes. Interest income is recorded on the accrual basis. Dividends
are recorded on the ex-dividend date. Certain expenses, principally printing,
are class specific expenses and vary by class. Expenses not directly
attributable to a specific Fund or class are allocated based on relative net
assets of each Fund and class, respectively.
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C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS-Dividends from net investment
income and net realized capital gains will be declared and paid at least
annually. The character of distributions made during the year for net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes due to GAAP/tax differences in the character of
income and expense recognition. These differences are primarily due to differing
treatments for net operating losses, mortgage-backed securities, passive foreign
investment companies, and forward foreign currency contracts.
D) FEDERAL INCOME TAXES-No provision is made for Federal taxes as it is the
Fund's intention to have each Fund qualify for and elect the tax treatment
applicable to regulated investment companies under the Internal Revenue Code and
make the requisite distributions to its shareholders which will be sufficient to
relieve it from Federal income and excise taxes.
E) USE OF ESTIMATES-The preparation of financial statements in conformity with
generally accepted accounting principals requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F) REPURCHASE AGREEMENTS-Money market instruments may be purchased from banks
and non-bank dealers subject to the seller's agreement to repurchase them at an
agreed upon date and price. Collateral for repurchase agreements may have longer
maturities that the maximum permissible remaining maturity of portfolio
investments. The Seller will be required on a daily basis to maintain the value
of the securities subject to the agreement to equal at least 102% of the
repurchase price including accrued interest. The agreements are conditional upon
the collateral being deposited under the Federal Reserve book-entry system or
held in a separate account by the Fund's custodian or an authorized securities
depository.
G) FUTURES TRANSACTIONS-The Fund invests in financial futures contracts solely
for the purpose of hedging its existing portfolio securities, or securities that
the Fund intends to purchase, against fluctuations in fair value caused by
changes in prevailing market interest rates. Certain portfolio's of the Fund may
enter into futures contracts subject to certain limitations. Upon entering into
a futures contract, the Fund is required to deposit cash or pledge U.S.
Government securities of an initial margin. Subsequent payments, which are
dependent on the daily fluctuations in the value of the underlying security or
securities, are made or received by the Fund each day (daily variations margin)
and are recorded as unrealized gains or losses until the contracts are closed.
When the contracts are closed, the Fund records a realized gain or loss equal to
the difference
B-11
<PAGE> 69
between the proceeds from (or cost of) the closing transaction and the Funds
basis in the contracts. Risks of entering into futures contracts include the
possibility that there will be an imperfect price correlation between the
futures contracts and the underlying securities. Second, it is possible that a
lack of liquidity for futures contracts could exist in the secondary market,
resulting in an inability to close a futures position prior to its maturity
date. Third, the purchase of a futures contract involves the risk that a Fund
could lose more than the original margin deposit required to initiate a futures
transaction.
As of October 20, 1998, BEA Long-Short Equity Fund held the following futures
contracts:
<TABLE>
<CAPTION>
FUTURES EXPIRATION CONTRACT CONTRACT UNREALIZED
CONTRACTS DATE AMOUNT VALUE GAIN/LOSS
------------ ------------- ------------- ---------------
<S> <C> <C> <C> <C>
S&P 500 E-Mini 12/15/98 107,000 107,400 400
</TABLE>
H) OFFERING COSTS-Offering costs including initial registration costs have been
deferred and will be charged to expense during the Fund's first year of
operation.
Note 2. Transactions with Affiliates and Related Parties
Pursuant to Investment Advisory Agreements, BEA Associates ("BEA"), an indirect,
wholly-owned subsidiary of Credit Suisse Group, serves as investment advisor for
BEA Long-Short Equity Fund.
For its advisory services, BEA is entitled to receive the following fees,
computed daily and payable quarterly on a Fund's average daily net assets:
<TABLE>
<CAPTION>
Fund Annual Rate
---- -----------
<S> <C>
BEA Long-Short Equity Fund 0.10% of average daily net assets
</TABLE>
BEA may, at its discretion, voluntarily waive all or any portion of its
advisory fee for any of the Funds. For the period ended October 20, 1998,
advisory fees and waivers for each of the Fund were as follows:
<TABLE>
<CAPTION>
Gross Net
Advisory Advisory
Fee Waiver Fee
--------- ------ --------
<S> <C> <C> <C>
BEA Long-Short Equity Fund $1.00 (1.00) 0
</TABLE>
Boston Financial Data Services, Inc. (BFDS), a 50% owned subsidiary of State
Street Bank and Trust Company, serves as each Fund's transfer and dividend
disbursing agent.
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<PAGE> 70
PFPC Inc. (PFPC), an indirect, wholly-owned subsidiary of PNC Bank Corp., serves
as administrator for the Fund. PFPC's administration fee is computed daily and
payable quarterly at an annual rate of .125% of each Fund's average daily net
assets. PFPC may, at its discretion, voluntarily waive all or any portion of its
administration fee for any of the Funds. For the period ended October 20, 1998,
administration fees for the Fund were as follows:
<TABLE>
<CAPTION>
Gross Net
Administration Administration
Fee Waiver Fee
-------------- ------ --------------
<S> <C> <C> <C>
BEA Long-Short Equity Fund $1.00 -- $1.00
</TABLE>
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<PAGE> 71
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of The RBB Fund, Inc.:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, of the BEA Long-Short Equity Fund and the related
statement of operations and changes in net assets, and the financial highlights
present fairly, in all material respects, the financial position of the BEA
Long-Short Equity Fund at October 20, 1998, the results of its operations,
changes in its net assets and the financial highlights for the period September
11, 1998 (commencement of operations) to October 20, 1998, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities owned at October 20, 1998 by
correspondence with the custodian and brokers, provides a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
October 22, 1998
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