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PROSPECTUS
October 26, 1998
WARBURG PINCUS
SELECT ECONOMIC VALUE EQUITY FUND
[WARBURG PINCUS FUNDS LOGO]
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PROSPECTUS October 26, 1998
Warburg Pincus Funds is a family of open-end mutual funds that offer investors a
variety of investment opportunities. One fund is described in this Prospectus:
WARBURG PINCUS SELECT ECONOMIC VALUE EQUITY FUND seeks to provide long term
appreciation of capital. The Fund will invest primarily in U.S. equity
securities that the adviser believes are undervalued.
BEA Associates ("BEA" or the "Adviser") serves as investment adviser to the
Warburg Pincus Select Economic Value Equity Fund.
NO LOAD CLASS OF COMMON SHARES
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Common Shares that are "no load" are offered by this Prospectus (i) directly
from the Fund's distributor, Counsellors Securities Inc., and (ii) through
various brokerage firms including Charles Schwab & Company, Inc. Mutual Fund
OneSource(TM) Program; Fidelity Brokerage Services, Inc. FundsNetwork(TM)
Program; Jack White & Company, Inc.; and Waterhouse Securities, Inc.
LOW MINIMUM INVESTMENT
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The minimum initial investment in the Fund is $2,500 ($500 for an IRA or Uniform
Transfers/Gifts to Minors Act account) and the minimum subsequent investment is
$100. Through the Automatic Monthly Investment Plan, subsequent investment
minimums may be as low as $50. See "How to Purchase Shares."
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Fund has been filed with the Securities and Exchange Commission (the "SEC"). The
SEC maintains a Web site (www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other information regarding
the Fund. The Statement of Additional Information is available to investors
without charge by calling Warburg Pincus Funds at 800-WARBURG (800-927-2874).
Information regarding the status of shareholder accounts may be obtained by
calling Warburg Pincus Funds at the same number. Warburg Pincus Funds maintains
a Web site at www.warburg.com. The Statement of Additional Information, as
amended or supplemented from time to time, bears the same date as this
Prospectus and is incorporated by reference in its entirety into this
Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED OR ENDORSED
BY ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
INVESTMENTS IN SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THE FUND'S EXPENSES
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Although authorized to offer three separate classes of shares (Common Shares,
Institutional Shares and Advisor Shares), the Warburg Pincus Select Economic
Value Equity Fund ("Select Equity Fund" or the "Fund") currently offers two
separate classes of shares: Common Shares and Institutional Shares. For a
description of Institutional Shares and Advisor Shares see "General
Information." Common Shares pay the Fund's distributor a 12b-1 fee. See
"Management of the Fund -- Distributor."
SELECT EQUITY FUND
<TABLE>
<S> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage
of offering price)...................................... 0
Annual Fund Operating Expenses (as a percentage of average
net assets)
Management Fees (after fee waivers)....................... .72%
12b-1 Fees................................................ .25%
Other Expenses (after fee waivers)........................ .28%
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Total Fund Operating Expenses (after fee waivers and
expense reimbursements)+................................ 1.25%
EXAMPLE
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
1 year.................................................... $13
3 years................................................... $40
</TABLE>
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+ The Fund's investment adviser and Counsellors Funds Service, Inc., the Fund's
co-administrator ("Counsellors Service") have undertaken to limit Total Fund
Operating Expenses of the Fund through October 23, 1999 to the percentages
shown above. There is no obligation to continue these waivers after that time.
Absent such waivers and/or reimbursements, Management Fees for the Select
Equity Fund would equal 75%; Other Expenses would equal .73%; and Total Fund
Operating Expenses would equal 1.73%. Other Expenses for the Fund are based on
annualized estimates of expenses for the fiscal year ending August 31, 1999,
net of any fee waivers or expense reimbursements.
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The expense table shows the costs and expenses that an investor will bear
directly or indirectly as a Common Shareholder of the Fund. Certain broker-
dealers and financial institutions also may charge their clients fees in
connection with investments in the Fund's Common Shares, which fees are not
reflected in the table. The Example should not be considered a representation of
past or future expenses; actual Fund expenses may be greater or less than those
shown. Moreover, while the Example assumes a 5% annual return, the Fund's actual
performance will vary and may result in a return greater or less than 5%.
Long-term shareholders of the Fund may pay more than the economic equivalent of
the maximum sales charges permitted by the National Association of Securities
Dealers, Inc.
FINANCIAL HIGHLIGHTS
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Shares of the Fund had not been issued as of August 31, 1998 and, accordingly,
no financial information is provided with respect to such shares. No financial
information is also presented with respect to Advisor Shares of the BEA Select
Economic Value Equity Fund (the "BEA Fund"), the assets and liabilities of which
were acquired by the Fund (see "General Information"
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below), which had not commenced investment operations with respect to such
shares as of August 31, 1998.
INVESTMENT OBJECTIVE AND POLICIES
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The investment objective of the Fund may not be changed without the
affirmative vote of a majority of the Fund's outstanding shares (as defined in
the Investment Company Act of 1940, as amended (the "1940 Act")). As with other
mutual funds, there can be no assurance that the Fund will achieve its
investment objective. Because of its different investment emphases, the Fund
should be considered as a specialized investment portfolio and not as a balanced
investment program by itself. The Statement of Additional Information contains a
more detailed description of various investments and investment techniques used
by the Fund.
The investment objective of the Select Equity Fund is to seek long-term
appreciation of capital. The Fund seeks to achieve its investment objective by
investing primarily in U.S. equity securities that the Adviser believes are
undervalued. The Adviser will apply its Select Equity analysis in assembling and
managing the Fund's portfolio. In the selection of industry sectors to
emphasize, the Adviser searches for sectors with favorable economic profit
trends. Within this framework, the Adviser will select specific securities by
emphasizing, in addition to traditional analyses such as price/earnings ratios,
the economic profit of a company measured by its cash flow relative to its
capital assets. The Fund normally will not emphasize dividend income in choosing
securities, unless BEA believes the income will contribute to the securities'
appreciation potential.
Under normal market conditions, the Fund will invest at least 65% of its total
assets in U.S. equity securities. Equity securities include common stocks,
preferred stocks, convertible securities, and other securities, such as rights
and warrants, which derive their values from common stocks. The Fund may also
invest in fixed income securities and in money market instruments. The Fund may
purchase lower-rated or comparable unrated convertible securities and fixed
income securities.
The Fund may invest without limit in foreign securities, principally through
the purchase of dollar-denominated ADRs of foreign issuers, and engage in
foreign currency transactions. See below, and "Risk Factors and Special
Considerations -- Foreign Securities" and "-- Foreign Currency Transactions."
The Fund may also purchase lower-rated debt securities. See "Certain Investment
Strategies -- Lower-Rated Securities."
PORTFOLIO INVESTMENTS
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TEMPORARY INVESTMENTS. To the extent permitted by its investment objective and
policies, the Fund may hold cash or cash equivalents pending investment or to
meet redemption requests. In addition, for defensive purposes due to abnormal
market or economic situations, as determined by the Fund's Adviser, the Fund may
reduce its holdings in other securities and invest up to 100% of its assets in
cash or certain short-term (less than twelve months to
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maturity) and medium-term (not greater than five years to maturity) interest-
bearing instruments or deposits of United States and foreign issuers. Such
investments may include, but are not limited to, commercial paper, certificates
of deposit, variable or floating rate notes, bankers' acceptances, time
deposits, government securities and money-market deposit accounts. See Statement
of Additional Information, "Common Investment Policies -- Temporary
Investments." To the extent the Fund invests in temporary investments, the Fund
may not achieve its investment objective.
RULE 144A SECURITIES. Rule 144A Securities (as defined below) are securities
which are restricted as to resale to the general public, but which may be resold
to qualified institutional buyers. The Fund may invest in Rule 144A Securities
that the Fund's Adviser has determined are liquid pursuant to guidelines
established by the Fund's Board of Directors.
BORROWING. The Fund may borrow up to 33 1/3 percent of its total assets
without obtaining shareholder approval. The Fund intends to borrow or to engage
in reverse repurchase agreements or dollar roll transactions only for temporary
or emergency purposes. See Statement of Additional Information, "Common
Investment Policies -- All Funds -- Reverse Repurchase Agreements" and
"-- Borrowing."
LENDING OF PORTFOLIO SECURITIES. The Fund may also lend its portfolio
securities to financial institutions against collateral consisting of cash, U.S.
Government securities or irrevocable bank letters of credit, which are equal at
all times to at least 102% of the value of the securities loaned (105% in the
case of foreign securities loaned). 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 loss of rights in the collateral should the borrower
of the securities fail financially. However, loans will be made only to
borrowers deemed by the Fund's Adviser to be of good standing and only when, in
the Adviser's judgment, the income to be earned from the loans justifies the
attendant risks. Any loans of the Fund's securities will be fully collateralized
and marked to market daily. The Fund may not make loans in excess of 50% of its
total assets immediately before such loans.
INVESTMENT COMPANIES. The Fund may invest in securities issued by other
investment companies to the extent permitted by the 1940 Act. As a shareholder
of another investment company, the Fund would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory and
other expenses that the Fund bears directly in connection with its own
operations.
U.S. GOVERNMENT SECURITIES. The obligations issued or guaranteed by the U.S.
government in which the Fund may invest include direct obligations of the U.S.
Treasury and obligations issued by U.S. government agencies and
instrumentalities. Included among direct obligations of the United States are
Treasury Bills, Treasury Notes and Treasury Bonds, which differ principally in
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terms of their maturities. Treasury Bills have maturities of less than one year,
Treasury Notes have maturities of one to 10 years and Treasury Bonds generally
have maturities of greater than 10 years at the date of issuance. Included among
the obligations issued by agencies and instrumentalities of the United States
are: instruments that are supported by the full faith and credit of the United
States (such as certificates issued by the Government National Mortgage
Association ("GNMA")); instruments that are supported by the right of the issuer
to borrow from the U.S. Treasury (such as securities of Federal Home Loan
Banks); and instruments that are supported by the credit of the instrumentality
(such as Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC") bonds).
RISK FACTORS AND SPECIAL CONSIDERATIONS
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For certain additional risks related to the Fund's investments, see "Portfolio
Investments" and "Certain Investment Strategies."
GENERAL. Among the factors that may be considered in deciding whether to
invest in a security are the issuer's financial resources, its sensitivity to
economic conditions and trends, its operating history and the ability of the
issuer's management. Bond prices generally vary inversely in relation to changes
in the level of interest rates, as well as in response to other market factors
and changes in the creditworthiness of the issuers of the securities. U.S.
Government securities are considered to be of the highest credit quality
available. U.S. Government securities, however, will be affected by general
changes in interest rates. The price volatility of the Fund's shares where the
Fund invests in intermediate maturity bonds will be substantially less than that
of long-term bonds. An intermediate maturity bond will generally have a lower
yield than that of a long-term bond. Longer-term securities in which the Fund
may invest generally offer a higher current yield than is offered by shorter-
term securities, but also generally involve greater volatility of price and risk
of capital than shorter-term securities.
FOREIGN SECURITIES. Investing in the securities of non-U.S. issuers involves
opportunities and risks that are different from investing in the securities of
U.S. issuers. The risks associated with investing in securities of non-U.S.
issuers are generally heightened for investments in securities of issuers in
emerging markets.
Because foreign securities generally are denominated and pay dividends or
interest in foreign currencies, and the Fund may hold from time to time various
foreign currencies pending its investment in foreign securities or its
conversion into U.S. dollars, the value of the Fund's assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in exchange rates.
In addition, investors should realize that the value of the Fund's investments
may be adversely affected by changes in political or social conditions,
diplomatic relations, confiscatory taxation, expropriation, limitation on the
removal of funds or assets, or imposition of (or change in) exchange control
regulations in those foreign nations. In addition, changes in government ad-
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ministrations or economic or monetary policies in the U.S. or abroad could
result in appreciation or depreciation of portfolio securities and could
favorably or adversely affect the Fund's operations. Furthermore, the economies
of individual foreign nations may differ from that of the United States, whether
favorably or unfavorably, in areas such as growth of gross national product,
rate of inflation, capital reinvestment, resource self-sufficiency and balance
of payments position. Any foreign investments made by the Fund must be made in
compliance with U.S. and foreign currency restrictions and tax laws restricting
the amounts and types of foreign investments.
In general, less information is publicly available with respect to certain
foreign issuers than is available with respect to U.S. companies. Most foreign
companies are also not subject to the uniform accounting and financial reporting
requirements applicable to issuers in the United States. The Fund's foreign
investments may be less liquid and their prices may be more volatile than
comparable investments in securities in U.S. companies. Expenses relating to
foreign investments are generally higher than those relating to domestic
securities. In addition, there is generally less government supervision and
regulation of securities exchanges, brokers and issuers in foreign countries
than in the United States.
DEPOSITARY RECEIPTS. Certain of the above risks may be involved with American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
International Depositary Receipts ("IDRs"), instruments that evidence ownership
in underlying securities issued by a foreign corporation. ADRs, EDRs and IDRs
may not necessarily be denominated in the same currency as the securities whose
ownership they represent. ADRs are typically issued by a U.S. bank or trust
company. EDRs (sometimes referred to as Continental Depositary Receipts) are
issued in Europe, and IDRs (sometimes referred to as Global Depositary Receipts)
are issued outside the United States, each typically by non-U.S. banks and trust
companies.
FIXED INCOME SECURITIES. The value of the fixed income securities held by the
Fund, and thus the net asset value of the shares of the Fund, generally will
vary inversely in relation to changes in prevailing interest rates. Thus, if
interest rates have increased from the time a debt or other fixed income
security was purchased, such security, if sold, might be sold at a price less
than its cost. Conversely, if interest rates have declined from the time such a
security was purchased, such security, if sold, might be sold at a price greater
than its cost. Also, the value of such securities may be affected by changes in
real or perceived creditworthiness of the issuers. Thus, if creditworthiness is
enhanced, the price may rise. Conversely, if creditworthiness declines, the
price may decline. The Fund is not restricted to any maximum or minimum time to
maturity in purchasing portfolio securities, and the average maturity of the
Fund's assets will vary based upon the Adviser's assessment of economic and
market conditions.
NON-PUBLICLY TRADED SECURITIES; RULE 144A SECURITIES. The Fund may purchase
securities that are not registered under the Securities Act of 1933, as
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amended (the "Securities Act"), but that can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the Securities Act ("Rule 144A
Securities"). A Rule 144A Security will be considered illiquid and therefore
subject to the Fund's limitation on the purchase of illiquid securities, unless
the Fund's Board determines on an ongoing basis that an adequate trading market
exists for the security. In addition to an adequate trading market, the Board
will also consider factors such as trading activity, availability of reliable
price information and other relevant information in determining whether a Rule
144A Security is liquid. This investment practice could have the effect of
increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become uninterested for a time in purchasing Rule 144A
Securities. The Board of the Fund will carefully monitor any investments by the
Fund in Rule 144A Securities. The Board may adopt guidelines and delegate to the
Fund's Adviser the daily function of determining and monitoring the liquidity of
Rule 144A Securities, although the Board will retain ultimate responsibility for
any determination regarding liquidity.
Non-publicly traded securities (including Rule 144A Securities) may involve a
high degree of business and financial risk and may result in substantial losses.
These securities may be less liquid than publicly traded securities, and the
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 price realized from these sales could be less than
those originally paid by the Fund. Further, companies whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements that would be applicable if their securities were
publicly traded. The Fund's investment in illiquid securities is subject to the
risk that should the Fund desire to sell any of these securities when a ready
buyer is not available at a price that is deemed to be representative of their
value, the value of the Fund's net assets could be adversely affected.
NON-DIVERSIFIED STATUS. The Fund is classified as a non-diversified investment
company under the 1940 Act, which means that the Fund is not limited by the 1940
Act in the proportion of its assets that it may invest in the obligations of a
single issuer. The Fund will, however, comply with diversification requirements
imposed by the Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company. As a non-diversified investment
company, the Fund may invest a greater proportion of its assets in the
obligations of a small number of issuers and, as a result, may be subject to
greater risk with respect to portfolio securities. To the extent that the Fund
assumes large positions in the securities of a small number of issuers, its
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.
EMERGING GROWTH AND SMALLER CAPITALIZATION COMPANIES; UNSEASONED
ISSUERS. Investing in securities of companies with continuous operations of less
than three years ("unseasoned issuers") may involve greater risks since
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these securities may have limited marketability and, thus, may be more volatile
than securities of larger, more established companies or the market in general.
Because such companies normally have fewer shares outstanding than larger
companies, it may be more difficult for the Fund to buy or sell significant
amounts of such shares without an unfavorable impact on prevailing prices. These
companies may have limited product lines, markets or financial resources and may
lack management depth. In addition, these companies are typically subject to a
greater degree of changes in earnings and business prospects than are larger,
more established companies. There is typically less publicly available
information concerning these companies than for larger, more established ones.
Although investing in securities of unseasoned issuers offers potential for
above-average returns if the companies are successful, the risk exists that the
companies will not succeed and the prices of the companies' shares could
significantly decline in value. Therefore, an investment in the Fund may involve
a greater degree of risk than an investment in other mutual funds that seek
capital appreciation by investing in more established, larger companies.
YEAR 2000 COMPLIANCE. Many services provided to the Fund and its shareholders
by BEA, Counsellors Securities Inc., the Fund's distributor ("Counsellors
Securities"), certain of the latter's affiliates (collectively, the "Service
Providers") and the Fund's other service providers rely on the functioning of
their respective computer systems. Many computer systems cannot distinguish the
year 2000 from the year 1900, with resulting potential difficulty in performing
various calculations (the "Year 2000 Issue"). The Year 2000 Issue could
potentially have an adverse impact on the handling of security trades, the
payment of interest and dividends, pricing, account services and other Fund
operations.
The Service Providers recognize the importance of the Year 2000 Issue and are
taking appropriate steps necessary in preparation for the year 2000. At this
time, there can be no assurance that these steps will be sufficient to avoid any
adverse impact on the Fund nor can there be any assurance that the Year 2000
Issue will not have an adverse effect on the Fund's investments or on global
markets or economies, generally.
The Service Providers anticipate that their systems and those of the Fund's
other service providers will be adapted in time for the year 2000. To further
this goal, the Service Providers have coordinated a plan to repair, adapt or
replace systems that are not year 2000 compliant, and are seeking to obtain
similar representations from the Fund's other major service providers. The
Service Providers will be monitoring the Year 2000 Issue in an effort to ensure
appropriate preparation.
GENERAL. Investment methods described in this prospectus are among those which
the Fund has the power to utilize. Accordingly, reference to any particular
method or technique carries no implication that it will be utilized or, if it
is, that it will be successful.
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PORTFOLIO TRANSACTIONS AND TURNOVER RATE
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The Fund will attempt to purchase securities with the intent of holding them
for investment but may purchase and sell portfolio securities whenever the
Adviser believes it to be in the best interests of the Fund. The Fund's Adviser
will effect portfolio transactions in the Fund without regard to holding periods
if, in its judgment, such transactions are advisable in light of general market,
economic or financial conditions. Portfolio turnover may vary greatly from year
to year as well as within a particular year. It is not possible to predict the
Fund's portfolio turnover rate. However, it is anticipated that, under normal
market conditions, the annual portfolio turnover rate for the Select Equity Fund
will not exceed 100%. High portfolio turnover rates (100% or more) may result in
higher dealer mark-ups or underwriting commissions as well as other transaction
costs, including correspondingly higher brokerage commissions. In addition,
short-term gains realized from portfolio turnover may be taxable to shareholders
as ordinary income. See "Dividends, Distributions and Taxes -- Taxes" below and
"Investment Policies -- Portfolio Transactions" in the Statement of Additional
Information.
All orders for transactions in securities or options on behalf of the Fund are
placed by the Fund's Adviser with broker-dealers that it selects, including
Counsellors Securities and affiliates of Credit Suisse Group ("Credit Suisse").
The Fund may utilize Counsellors Securities or affiliates of Credit Suisse in
connection with a purchase or sale of securities when the Fund's Adviser
believes that the charge for the transaction does not exceed usual and customary
levels and when doing so is consistent with guidelines adopted by the Board.
CERTAIN INVESTMENT STRATEGIES
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FOREIGN CURRENCY TRANSACTIONS. The Fund may enter into contracts to purchase
and sell forward foreign currency exchange contracts to seek to enhance total
return. A forward foreign currency exchange contract is a negotiated agreement
to exchange currency at a future time at a rate or rates that may be higher or
lower than those available on a "spot" (or cash) basis. The Fund may enter into
these contracts for purposes of increasing exposure to a foreign currency or to
shift exposure to foreign currency fluctuations from one country to another. To
the extent that such contracts are entered into to enhance total return, they
are considered speculative. If the Fund enters into such a contract for any
purpose, the Fund will be required to maintain in a segregated account cash or
liquid assets in an amount equal to the value of the Fund's total assets
committed to the consummation of the contract. The Select Equity Fund will not
invest more than 50% of their respective total assets in such contracts for the
purpose of enhancing total return. There is no limit on the amount of assets
that the Fund may invest in such transactions for hedging purposes.
The over the counter market in forward foreign currency exchange contracts
offers less protection against defaults by the other party to such instruments
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than is available for currency instruments traded on an exchange. Such contracts
are subject to the risk that the counterparty to the contract will default on
its obligations. Since these contracts are not guaranteed by an exchange or
clearinghouse, a default on the contract would deprive the Fund of unrealized
profits, transaction costs or the benefits of a currency hedge or force the Fund
to cover its purchase or sale commitments, if any, at the current market price.
The Fund will not enter into forward foreign currency exchange contracts unless
the credit quality of the unsecured senior debt or the claims-paying ability of
the counterparty is considered to be investment grade by the Fund's Adviser.
Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or perceived changes in interest rates and other complex
factors as seen from an international perspective. Currency exchange rates also
can be affected unpredictably by intervention by U.S. or foreign governments or
central banks, or the failure to intervene, or by currency controls or political
developments in the United States or abroad. The foreign currency market offers
less protection against defaults in the forward trading of currencies than is
available when trading in currencies occurs on an exchange. Since a forward
currency contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive the Fund of unrealized profits or force the Fund
to cover its commitments for purchase or resale, if any, at the current market
price.
MORTGAGE-RELATED PASS-THROUGHS AND DERIVATIVES. The Fund may invest in
mortgage-related securities. Purchasable mortgage-related securities are
represented by pools of mortgage loans assembled for sale to investors by
various governmental agencies such as GNMA and government-related organizations
such as FNMA and FHLMC, as well as by private issuers such as commercial
investment banks, savings and loan institutions, mortgage bankers and private
mortgage insurance companies. As with other interest-bearing securities, the
prices of such securities are inversely affected by changes in interest rates.
However, though the value of a mortgage-related security may decline when
interest rates rise, the converse is not necessarily true because in periods of
declining interest rates, mortgages underlying securities are prone to
prepayment. For this and other reasons, a mortgage-related security's stated
maturity may be shortened by an unscheduled prepayment on underlying mortgages
and, therefore, it is not possible to predict accurately the security's return
to the Fund. Prepayments involve the risk that the funds received upon
prepayment may have to be reinvested at lower interest rates.
Mortgage-related securities acquired by the Fund may include collateralized
mortgage obligations ("CMOs") issued by FNMA, FHLMC or other U.S. Government
agencies or instrumentalities, as well as by private issuers. These securities
may be considered mortgage derivatives. CMOs provide an investor
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with a specified interest in the cash flow of a pool of underlying mortgages or
other mortgage-related securities.
ASSET-BACKED SECURITIES. The Fund may purchase asset-backed securities, which
represent a participation in, or are secured by and payable from, a stream of
payments generated by particular assets, most often a pool of assets similar to
one another. Assets generating such payments will consist of such instruments as
motor vehicle installment purchase obligations, credit card receivables and home
equity loans.
Asset-backed securities may involve certain risks arising primarily from the
nature of the underlying assets (i.e., credit card and automobile loan
receivables as opposed to real estate mortgages). For example, credit card
receivables are generally unsecured and may require the repossession of personal
property upon the default of the debtor which may be difficult or impracticable
in some cases. Asset-backed securities are considered an industry for industry
concentration purposes, and the Fund will therefore not purchase any
asset-backed securities which would cause 25% or more of the Fund's total assets
at the time of purchase to be invested in asset-backed securities.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted, or exchanged. Before conversion, convertible securities
have characteristics similar to nonconvertible debt securities in that they
ordinarily provide a stable stream of income with generally higher yields than
those of common stocks of the same or similar issuers. The Fund will invest in
convertible securities without regard to their credit ratings. See "Certain
Investment Strategies -- Lower-Rated Securities."
LOWER-RATED SECURITIES. The widespread expansion of government, consumer and
corporate debt within the economy has made the corporate sector, especially
cyclically sensitive industries, more vulnerable to economic downturns or
increased interest rates. Because lower-rated debt securities involve issuers
with weaker credit fundamentals (such as debt-to-equity ratios, interest charge
coverage, earnings history and the like), an economic downturn, or increases in
interest rates, could severely disrupt the market for lower-rated debt
securities and adversely affect the value of outstanding debt securities and the
ability of the issuers to repay principal and interest.
Lower-rated debt securities (commonly known as "junk bonds") possess
speculative characteristics and are subject to greater market fluctuations and
risk of lost income and principal than higher-rated debt securities for a
variety of reasons. The markets for and prices of lower-rated debt securities
have been found to be less sensitive to interest rate changes than higher-rated
investments, but more sensitive to adverse economic changes or individual
corporate developments. Also, during an economic downturn or substantial period
11
<PAGE> 13
of rising interest rates, highly leveraged issuers may experience financial
stress which would adversely affect their ability to service their principal and
interest payment obligations, to meet projected business goals and to obtain
additional financing. If the issuer of a debt security owned by the Fund
defaulted, the Fund could incur additional expenses in seeking recovery with no
guaranty of recovery. In addition, periods of economic uncertainty and changes
can be expected to result in increased volatility of market prices of
lower-rated debt securities and the Fund's net asset value. Lower-rated debt
securities also present risks based on payment expectations. For example,
lower-rated debt securities may contain redemption or call provisions. If an
issuer exercises these provisions in a declining interest rate market, the Fund
would have to replace the security with a lower yielding security, resulting in
a decreased return for investors. Conversely, a lower-rated debt security's
value will decrease in a rising interest rate market, as will the value of the
Fund's assets. If the Fund experiences unexpected net redemptions, this may
force it to sell its lower-rated debt securities, without regard to their
investment merits, thereby decreasing the asset base upon which the Fund's
expenses can be spread and possibly reducing the Fund's rate of return.
In addition, to the extent that there is no established retail secondary
market, there may be thin trading of lower-rated debt securities, and this may
have an impact on the ability of the Adviser to both value accurately lower-
rated debt securities and the Fund's assets, and to dispose of the debt
securities. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the value and liquidity of lower-rated debt
securities, especially in a thinly traded market.
INVESTMENT GUIDELINES
- --------------------------------------------------------------------------------
Although there is no current intention of doing so in the coming year, the
Fund is authorized to (i) purchase securities on a when-issued basis and
purchase or sell securities for delayed delivery, (ii) purchase forward
commitments and (iii) purchase stand-by commitments. The Fund may invest up to
15% of its net assets in securities with contractual or other restrictions on
resale and other instruments that are not readily marketable ("illiquid
securities"), including (i) securities issued as part of a privately negotiated
transaction between an issuer and one or more purchasers; (ii) repurchase
agreements with maturities greater than seven days; (iii) time deposits maturing
in more than seven calendar days; and (iv) certain Rule 144A Securities. The
Fund may borrow from banks and enter into reverse repurchase agreements and
dollar rolls for temporary or emergency purposes, such as meeting redemption
requests, provided that reverse repurchase agreements and any other borrowing by
the Fund may not exceed 33 1/3% of total assets, and may pledge its assets to
the extent necessary to secure permitted borrowings. Whenever borrowings
(including reverse repurchase agreements, dollars rolls and borrowings from
banks) exceed 5% of the Fund's assets, the Fund will not make any investments
(including roll-overs). Except for the limitations on borrowing and the
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<PAGE> 14
limitation on further investments when borrowings exceed 5% of Fund assets, the
investment guidelines set forth in this paragraph may be changed at any time
without shareholder consent by vote of the Board of the Fund, subject to the
limitations contained in the 1940 Act. A complete list of investment
restrictions that the Fund has adopted identifying additional restrictions that
cannot be changed without the approval of the majority of the Fund's outstanding
shares is contained in the Statement of Additional Information under "Investment
Limitations."
Any investment policy or limitation which involves a maximum or minimum
percentage of securities shall not be considered to be violated unless an excess
over or a deficiency under the percentage occurs immediately after, and is
caused by, an acquisition or disposition of securities or utilization of assets
by the Fund.
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
INVESTMENT ADVISER. BEA serves as the Investment Adviser for the Fund pursuant
to an investment advisory agreement (the "Advisory Agreement"). BEA is a general
partnership organized under the laws of the State of New York in December 1990
and, together with its predecessor firms, has been engaged in the investment
advisory business for over 60 years. BEA is a wholly-owned subsidiary of Credit
Suisse and the U.S. arm of Credit Suisse Asset Management. BEA is a registered
investment adviser under the Investment Advisers Act of 1940, as amended. BEA is
a diversified investment adviser managing global equity, fixed-income and
derivative securities accounts for corporate pension and profit-sharing plans,
state pension funds, union funds, endowments and other charitable institutions.
As of September 30, 1998, BEA managed approximately $35.2 billion in assets. BEA
currently acts as investment adviser for twenty-two investment companies
registered under the 1940 Act, and acts as sub-adviser to certain portfolios of
thirteen other registered investment companies. BEA's principal offices are
located at One Citicorp Center, 153 East 53rd Street, New York, New York 10022.
For the advisory services provided and expenses assumed by BEA, the Select
Equity Fund will pay BEA a fee computed at an annual rate of .75%, of the Fund's
average net assets, computed daily and payable quarterly. BEA and each Fund's
co-administrators may, at their discretion, from time to time agree to
voluntarily wave all or any portion of their fees and temporarily limit the
expenses to be borne by the Fund.
The Advisory Agreement provides that BEA shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which the Advisory Agreement relates.
PORTFOLIO MANAGERS. The day-to-day portfolio management of the Select Equity
Fund is the responsibility of the BEA Select Economic Value Equity Management
Team. The Team consists of the following investment professionals: William W.
Priest, Jr. (Chief Executive Officer and Executive Director of BEA), John
Hurford (Executive Director), James Abate (Senior Vice President),
13
<PAGE> 15
Susan Everly (Vice President) and James Mecca (Vice President). Messrs. Priest
and Hurford have, on an individual basis, been engaged as investment
professionals with BEA for more than twenty-five years. Mr. Abate joined BEA in
1995. Previously, he was a managing director for Vert Independent Capital
Research for two years. Prior to joining Vert Independent Capital Research, Mr.
Abate was a manager in Price Waterhouse's Valuation/Corporate Finance Group for
6 years. Ms. Everly joined BEA in 1998. Previously, she was a securities analyst
at Goldman Sachs for two years. Prior to joining Goldman Sachs, she was a
student at Harvard Business School for 2 years. Prior to 1994, she was an
analyst at CS First Boston for 4 years. Mr. Mecca joined BEA in 1998.
Previously, he was a securities analyst at Goldman, Sachs & Co. for 2 years.
Prior to joining Goldman Sachs, he was at Bankers Trust where he was an Emerging
Markets Equity Trader for 3 years.
CO-ADMINISTRATORS. The Fund employs Counsellors Service, a wholly owned
subsidiary of Warburg Pincus Asset Management, Inc. ("Warburg"), as a
co-administrator. As co-administrator, Counsellors Service provides shareholder
liaison services to the Fund including responding to shareholder inquiries and
providing information on shareholder investments. Counsellors Service also
performs a variety of other services, including furnishing certain executive and
administrative services, acting as liaison between the Fund and its various
service providers, furnishing corporate secretarial services, which include
preparing certain materials for meetings of the Board, assisting in the
preparation of proxy statements, annual and semiannual reports and tax returns
and monitoring and developing compliance procedures for the Fund. As
compensation, the Fund pays Counsellors Service a fee calculated at an annual
rate of .05% of the Fund's first $125 million in average daily net assets
attributable to Common Shares and .10% of average daily net assets attributable
to Common Shares over $125 million.
The Fund employs PFPC Inc. ("PFPC"), an indirect, wholly owned subsidiary of
PNC Bank Corp., as a co-administrator. As a co-administrator, PFPC calculates
the Fund's net asset value, provides all accounting services for the Fund and
assists in related aspects of the Fund's operations. As compensation, the Fund
pays PFPC a fee calculated at an annual rate of .125% of the Fund's average
daily net assets, subject in each case to a minimum annual fee and exclusive of
out-of-pocket expenses. PFPC has its principal offices at 400 Bellevue Parkway,
Wilmington, Delaware 19809.
CUSTODIANS. Brown Brothers Harriman & Co. ("BBH") serves as custodian of the
assets of the Select Equity Fund. BBH's principal business address is 40 Water
Street, Boston, Massachusetts 02109.
TRANSFER AGENT. State Street Bank and Trust Company ("State Street") serves as
shareholder servicing agent, transfer agent and dividend disbursing agent for
the Fund. It has delegated to Boston Financial Data Services, Inc., an
affiliated company ("BFDS"), responsibility for most shareholder servicing
functions. State Street's principal business address is 225 Franklin Street,
Bos-
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<PAGE> 16
ton, Massachusetts 02110 and BFDS's principal business address is 2 Heritage
Drive, North Quincy, Massachusetts 02171.
DISTRIBUTOR. Counsellors Securities serves as distributor of the shares of the
Fund. Counsellors Securities is a wholly-owned subsidiary of Warburg and is
located at 466 Lexington Avenue, New York, New York 10017-3147. Counsellors
Securities receives a fee at an annual rate equal to .25% of the average daily
net assets of the Fund's Common Shares for distribution services, pursuant to a
shareholder servicing and distribution plan (the "12b-1 Plan") adopted by the
Fund pursuant to Rule 12b-1 under the 1940 Act. Amounts paid to Counsellors
Securities under a 12b-1 Plan may be used by Counsellors Securities to cover
expenses that are primarily intended to result in, or that are primarily
attributable to, (i) the sale of the Common Shares, (ii) ongoing servicing
and/or maintenance of the accounts of Common Shareholders of the Fund and (iii)
sub-transfer agency services, subaccounting services or administrative services
related to the sale of the Common Shares, all as set forth in the 12b-1 Plan.
Payments under the 12b-1 Plan are not tied exclusively to the distribution
expenses actually incurred by Counsellors Securities and the payments may exceed
distribution expenses actually incurred. The Board of the Fund evaluates the
appropriateness of the 12b-1 Plan on a continuing basis and in doing so consider
all relevant factors, including expenses borne by Counsellors Securities and
amounts received under the 12b-1 Plan.
BEA or its affiliate may, at its own expense, provide promotional incentives
for qualified recipients who support the sale of shares of the Fund, consisting
of securities dealers who have sold Fund shares or others, including banks and
other financial institutions, under special arrangements. Incentives may include
opportunities to attend business meetings, conferences, sales or training
programs for recipients' employees or clients and other programs or events and
may also include opportunities to participate in advertising or sales campaigns
and/or shareholder services and programs regarding one or more Warburg Pincus
Funds. BEA or its affiliate may pay for travel, meals and lodging in connection
with these promotional activities. In some instances, these incentives may be
offered only to certain institutions whose representatives provide services in
connection with the sale or expected sale of Fund shares.
DIRECTORS AND OFFICERS. The officers of the Fund manage its day-to-day
operations and are directly responsible to the Board. The Board sets broad
policies for the Fund and chooses its officers. A list of the Directors and
officers of the Fund and a brief statement of their present positions and
principal occupations during the past five years is set forth in the Statement
of Additional Information.
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<PAGE> 17
HOW TO OPEN AN ACCOUNT
- --------------------------------------------------------------------------------
In order to invest in the Fund, an investor must first complete and sign an
account application. To obtain an application, an investor may telephone Warburg
Pincus Funds at 800-927-2874. An investor may also obtain an account application
by writing to:
Warburg Pincus Funds
P.O. Box 9030
Boston, Massachusetts 02205-9030
OR
Overnight to:
BFDS
Attn: Warburg Pincus Funds
2 Heritage Drive
North Quincy, Massachusetts 02171
Completed and signed account applications should be sent to the above.
RETIREMENT PLANS AND UTMA/UGMA ACCOUNTS. For information (i) about investing
in the Fund through a tax-advantaged retirement plan, such as an Individual
Retirement Account ("IRA"), or (ii) about opening a Uniform Transfers to Minors
Act ("UTMA") account or Uniform Gifts to Minors Act ("UGMA") account, an
investor should telephone Warburg Pincus Funds at 800-927-2874 or write to
Warburg Pincus Funds at an address set forth above. Investors should consult
their own tax advisers about the establishment of retirement plans and UTMA or
UGMA accounts.
CHANGES TO ACCOUNT. For information on how to make changes to an account,
including changes to account registration, address and/or privileges, an
investor should telephone Warburg Pincus Funds at 800-927-2874. Shareholders are
responsible for maintaining current account registration and addresses with the
Fund. No interest will be paid on amounts represented by uncashed distribution
or redemption checks.
HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------
Common Shares of the Fund may be purchased either by mail or, with special
advance instructions, by wire and automated clearing house transactions ("ACH on
Demand").
The minimum initial investment in the Fund is $2,500 and the minimum
subsequent investment is $100, except that subsequent minimum investments can be
as low as $50 under the Automatic Monthly Investment Plan or by ACH on Demand,
as described below. For certain retirement plans (described above) and UTMA/UGMA
accounts, the minimum initial investment is $500. The Fund reserves the right to
change the initial and subsequent investment minimum requirements at any time.
In addition, the Fund may, in its sole discretion, waive the initial and
subsequent investment minimum requirements with respect to investors who are
employees of Warburg, BEA or their affiliates or persons with whom Warburg has
entered into an investment
16
<PAGE> 18
advisory agreement. Existing investors will be given 15 days' notice by mail of
any increase in minimum investment requirements.
After an investor has made his initial investment, additional shares may be
purchased at any time by mail or by wire in the manner outlined below. Wire
payments for initial and subsequent investments should be preceded by an order
placed with the Fund and should clearly indicate the investor's account number
and the name of the Fund in which shares are being purchased. The Fund reserves
the right to suspend the offering of shares for a period of time or to reject
any specific purchase order. In the interest of economy and convenience,
physical certificates representing shares in the Fund are not normally issued.
BY MAIL. If the investor desires to purchase Common Shares by mail, a check or
money order made payable to the Fund or Warburg Pincus Funds (in U.S. currency)
should be sent along with the completed account application to Warburg Pincus
Funds through its distributor, Counsellors Securities at an address set forth
above. Checks payable to the investor and endorsed to the order of the Fund or
Warburg Pincus Funds will not be accepted as payment and will be returned to the
sender. If payment is received in proper form prior to the close of regular
trading on The New York Stock Exchange, Inc. (the "NYSE") (currently 4:00 p.m.,
Eastern time) on a day that the Fund calculates its net asset value (a "business
day"), the purchase will be made at the Fund's net asset value calculated at the
end of that day. If payment is received at or after the close of regular trading
on the NYSE, the purchase will be effected at the Fund's net asset value
determined for the next business day after payment has been received. Checks or
money orders that are not in proper form or that are not accompanied or preceded
by a complete account application will be returned to the sender. Shares
purchased by check or money order are entitled to receive dividends and
distributions beginning on the day your purchase order is executed. Checks or
money orders in payment for shares of more than one Warburg Pincus Fund should
be made payable to Warburg Pincus Funds and should be accompanied by a breakdown
of amounts to be invested in each fund. If a check used for purchase does not
clear, the Fund will cancel the purchase and the investor may be liable for
losses or fees incurred. For a description of the manner of calculating the
Fund's net asset value, see "Net Asset Value" below.
BY WIRE. Investors may also purchase Common Shares in the Fund by wiring funds
from their banks. Telephone orders by wire will not be accepted until a
completed account application in proper form has been received and an account
number has been established. Investors should place an order with
17
<PAGE> 19
the Fund prior to wiring funds by telephoning 800-927-2874. Federal funds may be
wired using the following wire address:
State Street Bank and Trust Company
ABA# 0110 000 28
Attn.: Mutual Funds/Custody Department
[Insert Warburg Pincus Fund name(s) here]
DDA# 9904-649-2
F/F/C: [Account Number and Account Registration]
If a telephone order is received prior to the close of regular trading on the
NYSE and payment by wire is received on the same day in proper form in
accordance with instructions set forth above, the shares will be priced
according to the net asset value of the Fund on that day and are entitled to
dividends and distributions beginning on that day. However, if a wire in proper
form that is not preceded by a telephone order is received at or after the close
of regular trading on the NYSE, the payment will be held uninvested until the
order is effected at the close of business on the next business day. Payment for
orders that are not accepted will be returned to the prospective investor after
prompt inquiry. If a telephone order is placed and payment by wire is not
received on the same day, the Fund will cancel the purchase and the investor may
be liable for losses or fees incurred.
AUTOMATIC MONTHLY INVESTMENT PLAN AND ACH ON DEMAND. The Automatic Monthly
Investment Plan allows shareholders to authorize the Fund or its agent to debit
their bank account monthly ($50 minimum) for the purchase of Fund shares on or
about either the tenth or twentieth calendar day of each month. Shareholders may
also purchase shares by calling Warburg Pincus Funds at 800-927-2874 on any
business day to request direct debit or credit (for redemptions) of their bank
account through an ACH on Demand transaction.
To establish the Automatic Monthly Investment Plan and/or ACH on Demand
option, obtain a separate application or complete the relevant section of the
account application. Only an account maintained at a financial institution which
is an automated clearing house member may be used, and one common name must
appear on both the shareholder's Fund registration and bank account
registration. Shareholders using this service must satisfy the initial
investment minimum for the Fund prior to or concurrent with the start of any
Automatic Monthly Investment Plan or ACH on Demand transaction. Please contact
Warburg Pincus Funds at 800-927-2874 for additional information. Investors
should allow a period of up to 30 days in order to implement an Automatic
Investment Plan. The failure to provide complete information could result in
further delays.
If an ACH on Demand transaction request is received prior to the close of
regular trading on the NYSE, the shares will be priced according to the net
asset value of Fund shares on that day and are entitled to dividends and
distributions beginning on that day. If a request is received at or after the
close of regular trading on the NYSE, the shares will be priced at the Fund's
net asset value on the following business day.
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<PAGE> 20
TELEPHONE TRANSACTIONS. Unless otherwise indicated on the account application
or if the ACH on Demand option is elected, an investor may request transactions
by telephone. Investors should realize that in conducting transactions by
telephone they may be giving up a measure of security that they may have if they
were to conduct such transactions in writing. Neither the Fund nor its agents
will be liable for following instructions communicated by telephone that it
reasonably believes to be genuine. Reasonable procedures will be employed on
behalf of the Fund designed to give reasonable assurance that instructions
communicated by telephone are genuine. Such procedures include providing written
confirmation of telephone transactions, tape recording telephone instructions
and requiring specific personal information prior to acting upon telephone
instructions.
PURCHASES THROUGH INTERMEDIARIES. Common Shares of the Fund are available
through the Charles Schwab & Co., Inc. Mutual Fund OneSource(TM) Program;
Fidelity Brokerage Services, Inc. Funds-Network(TM) Program; Jack White &
Company, Inc.; and Waterhouse Securities, Inc. Generally, these programs require
customers to pay either no or low transaction fees in connection with purchases,
exchanges or redemptions. The Fund is also available through certain
broker-dealers, financial institutions and other industry professionals
(including the brokerage firms offering the programs described above,
collectively, "Service Organizations"), which may impose certain conditions on
their clients or customers that invest in the Fund, which are in addition to or
different than those described in this Prospectus, and may charge their clients
or customers direct fees. Certain features of the Fund, such as the initial and
subsequent investment minimums, redemption fees and certain trading
restrictions, may be modified or waived by Service Organizations. Service
Organizations may impose transaction or administrative charges or other direct
fees, which charges and fees would not be imposed if Fund shares are purchased
directly from the Fund. Therefore, a client or customer should contact the
Service Organization acting on his behalf concerning the fees (if any) charged
in connection with a purchase, exchange or redemption of Fund shares and should
read this Prospectus in light of the terms governing his accounts with the
Service Organization. Service Organizations will be responsible for promptly
transmitting client or customer purchase and redemption orders to the Fund in
accordance with their agreements with the Fund and with clients or customers.
Service Organizations or, if applicable, their designees may enter confirmed
purchase or redemption orders on behalf of clients and customers, with payment
to follow no later than the Fund's pricing on the following business day. If
payment is not received by such time, the Service Organization could be held
liable for resulting fees or losses. The Fund may be deemed to have received a
purchase or redemption order when a Service Organization, or, if applicable, its
authorized designee, accepts the order. Such orders received by the Fund in
proper form will be priced at the Fund's net asset value next
19
<PAGE> 21
computed after they are accepted by the Service Organization or its authorized
designee.
For administration, subaccounting, transfer agency and/or other services,
Counsellors Securities or its affiliates may pay Service Organizations and
certain recordkeeping organizations a fee of up to .35% (the "Service Fee") (or
up to .40% in connection with certain retirement plan programs) of the average
annual value of accounts with the Fund maintained by such Service Organizations
or recordkeepers. A portion of the Service Fee may be borne by the Fund as a
transfer agency fee. In addition, a Service Organization or recordkeeper may
directly or indirectly pay a portion of its Service Fee to the Fund's custodian
or transfer agent for costs related to accounts of its clients or customers. The
Service Fee payable to any one Service Organization is determined based upon a
number of factors, including the nature and quality of services provided, the
operations processing requirements of the relationship and the standardized fee
schedule of the Service Organization or recordkeeper.
GENERAL. The Fund reserves the right to reject any specific purchase order,
including certain purchases made by exchange (see "How to Redeem and Exchange
Shares -- Exchange of Shares" below). Purchase orders may be refused if, in
BEA's judgment, the Fund would be unable to invest the money effectively in
accordance with its investment objective and policies, or would otherwise
potentially be adversely affected. The Fund may discontinue sales of its shares
if management believes that a substantial further increase in assets may
adversely affect the Fund's ability to achieve its investment objective. In such
event, however, it is anticipated that existing shareholders would be permitted
to continue to authorize investment in the Fund and to reinvest any dividends or
capital gains distributions.
HOW TO REDEEM AND EXCHANGE SHARES
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES. An investor in the Fund may redeem (sell) his shares on
any day that the Fund's net asset value is calculated (see "Net Asset Value"
below).
Common Shares of the Fund may either be redeemed by mail or by telephone. If
an investor desires to redeem his shares by mail, a written request for
redemption should be sent to Warburg Pincus Funds at an address indicated above
under "How to Open an Account." An investor should be sure that the redemption
request identifies the Fund, the number of shares to be redeemed and the
investor's account number. Payment of redemption proceeds may be delayed in
connection with account changes. Each mail redemption request must be signed by
the registered owner(s) (or his legal representative(s)) exactly as the shares
are registered. If an investor has applied for the telephone redemption feature
on his account application, he may redeem his shares by calling Warburg Pincus
Funds at 800-927-2874. An investor making a telephone withdrawal should state
(i) the name of the Fund, (ii) the account number of the Fund, (iii) the name of
the investor(s) appearing
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<PAGE> 22
on the Fund's records, (iv) the amount to be withdrawn and (v) the name of the
person requesting the redemption.
After receipt of the redemption request by mail or by telephone, the
redemption proceeds will, at the option of the investor, be paid by check and
mailed to the investor of record or be wired to the investor's bank as indicated
in the account application previously filled out by the investor. The Fund
currently does not impose a service charge for effecting wire transfers but the
Fund reserves the right to do so in the future. During periods of significant
economic or market change, telephone redemptions may be difficult to implement.
If an investor is unable to contact Warburg Pincus Funds by telephone, an
investor may deliver the redemption request to Warburg Pincus Funds by mail at
an address shown above under "How to Open an Account." Although the Fund will
redeem shares purchased by check, through the Automatic Monthly Investment Plan
or by ACH on Demand before the check or funds clear, payments of the redemption
proceeds will be delayed for up to five days (for funds received through the
Automatic Monthly Investment Plan or by ACH on Demand) or up to ten days (for
check purchases) from the date of purchase.
Investors should consider purchasing shares using a certified or bank check,
money order or federal funds wire if they anticipate an immediate need for
redemption proceeds.
If a redemption order is received by the Fund or its agent prior to the close
of regular trading on the NYSE, the redemption order will be effected at the net
asset value per share as determined on that day. If a redemption order is
received at or after the close of regular trading on the NYSE, the redemption
order will be effected at the net asset value as next determined. Except as
noted above, redemption proceeds will normally be mailed or wired to an investor
on the next business day following the date a redemption order is effected. If,
however, in the judgment of BEA, immediate payment would adversely affect the
Fund, the Fund reserves the right to pay the redemption proceeds within seven
days after the redemption order is effected. Furthermore, the Fund may suspend
the right of redemption or postpone the date of payment upon redemption (as well
as suspend or postpone the recordation of an exchange of shares) for such
periods as are permitted under the 1940 Act.
The proceeds paid upon redemption may be more or less than the amount invested
depending upon a share's net asset value at the time of redemption. If an
investor redeems all the shares in his account, all dividends and distributions
declared up to and including the date of redemption are paid along with the
proceeds of the redemption.
If, due to redemptions, the value of an investor's account drops to less than
$2,000, the Fund reserves the right to redeem the shares in that account at net
asset value. Prior to any redemption, the Fund will notify an investor in
writing that this account has a value of less than the minimum. The investor
will then have 60 days to make an additional investment before a redemption will
be processed by the Fund.
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<PAGE> 23
AUTOMATIC CASH WITHDRAWAL PLAN. The Fund offers investors an automatic cash
withdrawal plan under which investors may elect to receive periodic cash
payments of at least $250 monthly or quarterly. To establish this service,
complete the "Automatic Withdrawal Plan" section of the account application and
attach a voided check from the bank account to be credited. For further
information regarding the automatic cash withdrawal plan or to modify or
terminate the plan, investors should contact Warburg Pincus Funds at 800-927-
2874.
EXCHANGE OF SHARES. An investor may exchange Common Shares of the Fund for
Common Shares of another Fund or for Common Shares of another Warburg Pincus
Fund at their respective net asset values. Exchanges may be effected by mail or
by telephone in the manner described under "Redemption of Shares" above. If an
exchange request is received by Warburg Pincus Funds or its agent prior to the
close of regular trading on the NYSE, the exchange will be made at each fund's
net asset value determined at the end of that business day. Exchanges will be
effected without a sales charge but must satisfy the minimum dollar amount
necessary for new purchases. The Fund may refuse exchange purchases at any time
without prior notice.
The exchange privilege is available to shareholders residing in any state in
which the Common Shares being acquired may legally be sold. When an investor
effects an exchange of shares, the exchange is treated for federal income tax
purposes as a redemption. Therefore, the investor may realize a taxable gain or
loss in connection with the exchange. Investors wishing to exchange Common
Shares of the Fund for Common Shares in another Warburg Pincus Fund should
review the prospectus of the other fund prior to making an exchange. For further
information regarding the exchange privilege or to obtain a current prospectus
for another Warburg Pincus Fund, an investor should contact Warburg Pincus Funds
at 800-927-2874.
The Fund reserves the right to refuse exchange purchases by any person or
group if, in BEA's judgment, the Fund would be unable to invest the money
effectively in accordance with its investment objective and policies, or would
otherwise potentially be adversely affected. Examples of when an exchange
purchase could be refused are when the Fund receives or anticipates receiving
large exchange orders at or about the same time and/or when a pattern of
exchanges within a short period of time (often associated with a "market timing"
strategy) is discerned. The Fund reserves the right to terminate or modify the
exchange privilege at any time upon 30 days' notice to shareholders.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. The Fund calculates its dividends from net
investment income. Net investment income includes interest accrued and dividends
earned on the Fund's portfolio securities for the applicable period less
applicable expenses. The Fund will distribute substantially all of its net
realized capital gains, if any, to its shareholders annually. The Fund will
distribute
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<PAGE> 24
net investment income, if any, at least annually. Net investment income earned
on weekends and when the NYSE is not open will be computed as of the next
business day. Unless an investor instructs the Fund to pay dividends or
distributions in cash, dividends and distributions will automatically be
reinvested in additional Common Shares of the Fund at net asset value. The
election to receive dividends in cash may be made on the account application or,
subsequently, by writing to Warburg Pincus Funds at an address set forth under
"How to Open an Account" or by calling Warburg Pincus Funds at 800-927-2874.
The Fund may be required to withhold for U.S. federal income taxes 31% of all
distributions payable to shareholders who fail to provide the Fund with their
correct taxpayer identification number or to make required certifications, or
who have been notified by the U.S. Internal Revenue Service that they are
subject to backup withholding.
TAXES. The Fund intends to qualify each year as a "regulated investment
company" within the meaning of the Code. The Fund, if it qualifies as a
regulated investment company, will be subject to a 4% non-deductible excise tax
measured with respect to certain undistributed amounts of ordinary income and
capital gain. The Fund expects to pay such additional dividends and to make such
additional distributions as are necessary to avoid the application of this tax.
Dividends paid from net investment income and distributions derived from net
realized short-term capital gains are taxable to investors as ordinary income
whether received in cash or reinvested in additional Fund shares. Distributions
derived from net realized long-term capital gains will be taxable to investors
as long-term capital gains, regardless of how long investors have held Fund
shares or whether such distributions are received in cash or reinvested in Fund
shares. As a general rule, an investor's gain or loss on a sale or redemption of
Fund shares will be a long-term capital gain or loss if the investor has held
the shares for more than one year and will be a short-term capital gain or loss
if the investor has held the shares for one year or less. However, any loss
realized upon the sale or redemption of shares within six months from the date
of their purchase will be treated as a long-term capital loss to the extent of
any amounts treated as distributions of long-term capital gain during such
six-month period with respect to such shares.
Investors may be proportionately liable for taxes on income and gains of the
Fund, but investors not subject to tax on their income will not be required to
pay tax on amounts distributed to them. The Fund's investment activities,
including short sales of securities, will not result in unrelated business
taxable income to a tax-exempt investor. The Fund's dividends may qualify for
the dividends received deduction for corporations to the extent they are derived
from dividends attributable to certain types of stock issued by U.S. domestic
corporations.
Dividends and interest received by the Fund may be subject to withholding and
other taxes imposed by foreign countries. However, tax conventions be-
23
<PAGE> 25
tween certain countries and the United States may reduce or eliminate such
taxes. If the Fund qualifies as a regulated investment company, if certain asset
and distribution requirements are satisfied and if more than 50% of the Fund's
total assets at the close of its fiscal year consists of stock or securities of
foreign corporations, the Fund may elect for U.S. income tax purposes to treat
foreign income taxes paid by it as paid by its shareholders. The Fund may
qualify for and make this election in some, but not necessarily all, of its
taxable years. If the Fund were to make an election, shareholders of the Fund
would be required to take into account an amount equal to their pro rata
portions of such foreign taxes in computing their taxable income and then treat
an amount equal to those foreign taxes as a U.S. federal income tax deduction or
as a foreign tax credit against their U.S. federal income taxes. Shortly after
any year for which it makes such an election, the Fund will report to its
shareholders the amount per share of such foreign income tax that must be
included in each shareholder's gross income and the amount which will be
available for the deduction or credit. No deduction for foreign taxes may be
claimed by a shareholder who does not itemize deductions. Certain limitations
will be imposed on the extent to which the credit (but not the deduction) for
foreign taxes may be claimed.
GENERAL. Statements as to the tax status of each investor's dividends and
distributions are mailed annually. Each investor will also receive, if
applicable, various written notices after the close of the Fund's prior taxable
year with respect to certain dividends and distributions which were received
from the Fund during the Fund's prior taxable year. Investors should consult
their own tax advisers with specific reference to their own tax situations,
including their state and local tax liabilities.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund's net asset value per share is calculated as of the close of regular
trading on the NYSE (currently 4:00 p.m., Eastern time) on each business day,
Monday through Friday, except on days when the NYSE is closed. The NYSE is
currently scheduled to be 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 on the preceding Friday or subsequent
Monday when one of these holidays falls on a Saturday or Sunday, respectively.
The net asset value per share of the Fund generally changes each day.
The net asset value per Common Share of the Fund is computed by adding the
Common Shares' pro rata share of the value of the Fund's assets, deducting the
Common Shares' pro rata share of the Fund's liabilities and the liabilities
specifically allocated to Common Shares and then dividing the result by the
total number of outstanding Common Shares.
Securities listed on a U.S. securities exchange (including securities traded
through the Nasdaq National Market System) or foreign securities exchange or
traded in an over-the-counter market will be valued at the most recent sale
24
<PAGE> 26
price when the valuation is made. Options and futures contracts will be valued
similarly. Debt obligations that mature in 60 days or less from the valuation
date are valued on the basis of amortized cost, unless the Board determines that
using this valuation method would not reflect the investments' value.
Securities, options and futures contracts for which market quotations are not
readily available and other assets will be valued at their fair value as
determined in good faith pursuant to consistently applied procedures established
by the Board. Further information regarding valuation policies is contained in
the Statement of Additional Information.
PERFORMANCE
- --------------------------------------------------------------------------------
The Fund quotes the performance of Common Shares separately from Institutional
Shares and Advisor Shares. The net asset value of Common Shares is listed in The
Wall Street Journal each business day under the heading "Warburg Pincus Funds."
From time to time, the Fund may advertise yield and average annual total return
of its Common Shares over various periods of time. The yield refers to net
investment income generated by the Common Shares over a specified thirty-day
period, which is then annualized. That is, the amount of net investment income
generated by the Common Shares during that thirty-day period is assumed to be
generated over a 12-month period and is shown as a percentage of the investment.
The tax equivalent yield demonstrates the yield on a taxable investment
necessary to produce an after-tax yield equal to the Common Shares' tax-free
yield. It is calculated by increasing the yield shown for the Common Shares to
the extent necessary to reflect the payment of specified tax rates. Thus, the
tax equivalent yield will always exceed the Fund's Common Shares' yield. Total
return figures show the average percentage change in value of an investment in
the Common Shares from the beginning of the measuring period to the end of the
measuring period. The figures reflect changes in the price of the Common Shares
assuming that any income dividends and/or capital gain distributions made by the
Fund during the period were reinvested in Common Shares of the Fund. Total
return will be shown for recent one-, five- and ten-year periods, and may be
shown for other periods as well (such as from commencement of the Fund's
operations or on a year-by-year, quarterly or current year-to-date basis).
When considering average total return figures for periods longer than one
year, it is important to note that the annual total return for one year in the
period might have been greater or less than the average for the entire period.
When considering total return figures for periods shorter than one year,
investors should bear in mind that the Fund seeks long-term appreciation and
that such return may not be representative of the Fund's return over a longer
market cycle. The Fund may also advertise aggregate total return figures of its
Common Shares for various periods, representing the cumulative change in value
of an investment in the Common Shares for the specific period (again reflecting
changes in share prices and assuming reinvestment of dividends and
distributions). Aggregate and average total returns may be shown by
25
<PAGE> 27
means of schedules, charts or graphs and may indicate various components of
total return (i.e., change in value of initial investment, income dividends and
capital gain distributions).
Investors should note that yield, tax equivalent yield and total return
figures are based on historical earnings and are not intended to indicate future
performance. The Fund's Statement of Additional Information describes the method
used to determine the yield and total return. Current performance figures may be
obtained by calling Warburg Pincus Funds at 800-927-2874.
The Fund's total return or expense ratio may be compared with data published
by Lipper Analytical Services, Inc., CDA/Weisenberger Investment Technologies,
Inc., Mutual Fund Forecaster or Morningstar, Inc., or with the performance of
the Standard & Poor's 500 Stock Index, Standard & Poor's MidCap 400 Index,
Moody's Bond Survey Bond Index, Wilshire 5000 Index, Lehman Brothers Bond
Indexes, Morgan Stanley Composite Index EAFE, Morgan Stanley Composite
Index-Free Emerging Markets, JP Morgan Global Government Bond Index (Unhedged),
First Boston High Yield Index, Consumer Price Index, Bond Buyer's 20-Bond Index,
Dow Jones Industrial Average, Salomon Smith Barney U.S. 1-Month Treasury Bill
Index (TM), national publications such as Money, Forbes, Barron's, The Wall
Street Journal or the New York Times or publications of a local or regional
nature, and other industry publications.
In reports or other communications to investors or in advertising, the Fund
may also describe the general biography or work experience of the portfolio
managers of the Fund and may include quotations attributable to the portfolio
managers describing approaches taken in managing the Fund's investments,
research methodology underlying stock selection or the Fund's investment
objective. In addition, the Fund and its portfolio managers may render periodic
updates of Fund activity, which may include a discussion of significant
portfolio holdings; analysis of holdings by industry, country, credit quality
and other characteristics; and comparison and analysis of the Fund with respect
to relevant market and industry benchmarks. The Fund may also discuss measures
of risk, the continuum of risk and return relating to different investments and
the potential impact of foreign stocks on a portfolio otherwise composed of
domestic securities.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
ORGANIZATION. The Select Equity Fund was incorporated on July 31, 1998 under
the laws of the State of Maryland under the name "Warburg, Pincus Select Equity
Fund, Inc." On October 23, 1998, the Fund acquired all of the assets and
liabilities of the corresponding investment portfolio of the RBB Fund.
The Fund's charter authorizes its Board to issue three billion full and
fractional shares of capital stock, $.001 par value per share, of which one
billion shares are designated Common Shares, one billion shares are designated
Institutional Shares and one billion shares are designated Advisor Shares. Under
26
<PAGE> 28
the Fund's charter documents, the Board has the power to classify or reclassify
any unissued shares of the Fund into one or more additional classes by setting
or changing in any one or more respects their relative rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption. The Board may similarly classify or reclassify any
class of its shares into one or more series and, without shareholder approval,
may increase the number of authorized shares of the Fund.
MULTI-CLASS STRUCTURE. The Fund currently offers another class of shares, the
Institutional Shares, pursuant to a separate prospectus. Individual investors
may only purchase Institutional Shares and, if and when offered, Advisor Shares,
through institutional shareholders of record, broker-dealers, financial
institutions, depository institutions, retirement plans and financial
intermediaries. Shares of each class represent equal pro rata interests in the
Fund and accrue dividends and calculate net asset value and performance
quotations in the same manner. Because of the higher fees paid by Common Shares
and Advisor Shares, the total return on Common Shares can be expected to be
lower than the total return on Institutional Shares and the total return of
Advisor Shares can be expected to be lower than the total return on Common
Shares and Institutional Shares. Investors may obtain information concerning the
Institutional Shares and, if and when offered, the Advisor Shares from their
investment professional or by calling Counsellors Securities at 800-369-2728.
Unless the context clearly suggests otherwise, references to the Fund in this
Prospectus are to the Fund as a whole and not to any particular class of the
Fund's shares.
VOTING RIGHTS. Investors in the Fund are entitled to one vote for each full
share held and fractional votes for fractional shares held. Shareholders of the
Fund will vote in the aggregate except where otherwise required by law and
except that each class will vote separately on certain matters pertaining to its
distribution and shareholder servicing arrangements. There will normally be no
meetings of investors for the purpose of electing members of the Board unless
and until such time as less than a majority of the members holding office have
been elected by investors. Any Director of the Fund may be removed from office
upon the vote of shareholders holding at least a majority of the Fund's
outstanding shares, at a meeting called for that purpose. A meeting will be
called for the purpose of voting on the removal of a Board member at the written
request of holders of 10% of the outstanding shares of the Fund.
SHAREHOLDER COMMUNICATIONS. Each investor will receive a quarterly statement
of his account, as well as a statement of his account after any transaction that
affects his share balance or share registration (other than the reinvestment of
dividends or distributions or investment made through the Automatic Monthly
Investment Plan). The Fund will also send to its investors a semiannual report
and an audited annual report, each of which includes a list of the investment
securities held by the Fund and a statement of the performance of the Fund.
Periodic listings of the investment securities held by the Fund, as
27
<PAGE> 29
well as certain statistical characteristics of the Fund, may be obtained by
calling Warburg Pincus Funds at 800-927-2874 or on the Warburg Pincus Funds Web
site at www.warburg.com.
------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE FUND'S
STATEMENT OF ADDITIONAL INFORMATION OR THE FUND'S OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF SHARES OF THE FUND, AND IF GIVEN OR MADE, SUCH
OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF THE
COMMON SHARES OF THE FUND IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH
OFFER MAY NOT LAWFULLY BE MADE.
28
<PAGE> 30
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Fund's Expenses...................................... 2
Financial Highlights..................................... 2
Investment Objective and Policies........................ 3
Portfolio Investments.................................... 3
Risk Factors and Special Considerations.................. 5
Portfolio Transactions and Turnover Rate................. 9
Certain Investment Strategies............................ 9
Investment Guidelines.................................... 12
Management of the Fund................................... 13
How to Open an Account................................... 16
How to Purchase Shares................................... 16
How to Redeem and Exchange Shares........................ 20
Dividends, Distributions and Taxes....................... 22
Net Asset Value.......................................... 24
Performance.............................................. 25
General Information...................................... 26
</TABLE>
[WARBURG PINCUS FUNDS LOGO]
P.O. BOX 9030, BOSTON, MA 02205-9030
800-WARBURG (800-927-2874) - www.warburg.com
COUNSELLORS SECURITIES INC., DISTRIBUTOR. WPSEV-1-1098
<PAGE> 31
BEA INSTITUTIONAL FUNDS
PROSPECTUS
October 26, 1998
EMERGING MARKETS II FUND
---------------
HIGH YIELD FUND
---------------
INTERNATIONAL GROWTH FUND
---------------
MUNICIPAL BOND FUND
---------------
SELECT ECONOMIC VALUE EQUITY FUND
---------------
STRATEGIC GLOBAL FIXED INCOME FUND
---------------
U.S. CORE EQUITY FUND
---------------
U.S. CORE FIXED INCOME FUND
<PAGE> 32
October 26, 1998
BEA Institutional Funds is the name under which the Institutional class of
shares of certain Warburg Pincus Funds are offered. Eight BEA Institutional
Funds are described in this Prospectus:
EMERGING MARKETS II FUND seeks to provide long-term appreciation of capital. The
Fund will invest primarily in equity securities in emerging country markets.
HIGH YIELD FUND seeks to provide high total return. The Fund will invest
primarily in high yield high risk fixed income securities issued by
corporations, governments and agencies, both domestic and foreign.
INTERNATIONAL GROWTH FUND seeks to provide long-term appreciation of capital.
The Fund will invest primarily in equity securities of non-U.S. issuers.
MUNICIPAL BOND FUND seeks to provide high total return. The Fund will invest
primarily in municipal bonds issued by state and local authorities.
SELECT ECONOMIC VALUE EQUITY FUND seeks to provide long term appreciation of
capital. The Fund will invest primarily in U.S. equity securities that the
adviser believes are undervalued.
STRATEGIC GLOBAL FIXED INCOME FUND seeks to provide high total return. The Fund
will invest primarily in foreign and domestic fixed income securities.
U.S. CORE EQUITY FUND seeks to provide long-term appreciation of capital. The
Fund will invest primarily in U.S. equity securities.
U.S. CORE FIXED INCOME FUND seeks to provide high total return. The Fund will
invest primarily in domestic fixed-income securities consistent with comparable
broad market fixed-income indices, such as the Lehman Brothers Aggregate Bond
Index.
International investing entails special risk considerations, including currency
fluctuations, lower liquidity, economic instability, political uncertainty and
differences in accounting methods.
The High Yield Fund may invest its assets without limitation in securities which
are below investment-grade quality. Investments of this type are subject to
greater risks, including the risk of loss of principal and interest, than those
involved with investment-grade securities. Purchasers should carefully assess
the risks associated with an investment in this Fund.
See "Risk Factors and Special Considerations."
BEA Associates ("BEA") serves as investment adviser to each of the Funds.
This Prospectus briefly sets forth certain information about the Funds that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about each
Fund has been filed with the Securities and Exchange Commission (the "SEC"). The
SEC maintains a Web site (www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other information regarding
the Funds. The Statement of Additional Information is available to investors
without charge by calling BEA Institutional Funds at 800-401-2230. Information
regarding the status of shareholder accounts may be obtained by calling BEA
Institutional Funds at the same number. BEA Institutional Funds maintains a Web
site at www.beafunds.com. The Statement of Additional Information, as amended or
supplemented from time to time, bears the same date as this Prospectus and is
incorporated by reference in its entirety into this Prospectus.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED OR ENDORSED
BY ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
INVESTMENTS IN SHARES OF THE FUNDS INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE> 33
THE FUNDS' EXPENSES
Although authorized to offer three separate classes of shares (Common
Shares, Institutional Shares and Advisor Shares), each of the Emerging Markets
II Fund ("Emerging Markets Fund"), High Yield Fund ("High Yield
Fund"), International Growth Fund ("International Growth Fund"), Municipal Bond
Fund ("Municipal Bond Fund"), Select Economic Value Equity Fund ("Select Equity
Fund"), Strategic Global Fixed Income Fund ("Global Income Fund"), U.S. Core
Equity Fund ("U.S. Equity Fund") and U.S. Core Fixed Income Fund ("U.S. Fixed
Income Fund") (each, a "Fund") currently offers two separate classes of shares:
Common Shares and Institutional Shares. For a description of Common Shares and
Advisor Shares see "General Information."
<TABLE>
<CAPTION>
INTERNA- MUNI- U.S.
EMERGING HIGH TIONAL CIPAL SELECT GLOBAL U.S. FIXED
MARKETS YIELD GROWTH BOND EQUITY INCOME EQUITY INCOME
FUND FUND FUND FUND FUND FUND FUND FUND
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 0 0 0 0 0 0 0 0
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees (after fee waivers)............ .62% .43% .80% .45% .72% .24% .71% .25%
Rule 12b-1 fees................................ 0 0 0 0 0 0 0 0
Other Expenses (after fee waivers)............. .88% .27% .35% .55% .28% .51% .29% .20%
------- ------- ------- ------- ------- ------- ------- -------
Total Fund Operating Expenses (after
fee waivers and expense
reimbursements)+ 1.50% .70% 1.15% 1.00% 1.00% .75% 1.00% .45%
======= ======= ======= ======= ======= ======= ======= =======
EXAMPLE
You would pay the following expenses
on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption
at the end of each time period:
1 year........................................ $ 15 $ 7 $ 12 $ 10 $ 10 $ 8 $ 10 $ 5
3 years....................................... $ 47 $ 22 $ 37 $ 32 $ 32 $ 24 $ 32 $ 14
5 years....................................... $ 82 $ 39 $ 63 $ 55 - $ 42 $ 55 $ 25
10 years...................................... $ 179 $ 87 $ 140 $ 122 - $ 93 $ 122 $ 57
</TABLE>
+ The Funds' investment adviser has undertaken to limit Total Fund Operating
Expenses of each of the Funds through October 23, 1999 to the percentages
shown above. There is no obligation to continue these waivers after that
time. Absent such waivers and/or reimbursements, Management Fees for the
Emerging Markets Fund, High Yield Fund, International Growth Fund, Municipal
Bond Fund, Select Equity Fund, Global Income Fund, U.S. Equity Fund and U.S.
Fixed Income Fund would equal 1.00%, .70%, .80%, .70% , .75%, .50%, .75% and
.375%, respectively; Other Expenses would equal .67%, .44%, .43%, .69%,
1.24%, .67%, .43% and .365%, respectively; and Total Fund Operating Expenses
would equal 2.33%, 1.39%, 1.48%, 1.64%, 1.30%, 1.42%, 1.43% and .98%,
respectively. Other Expenses for the Funds are based on annualized estimates
of expenses for the fiscal year ending August 31, 1999, net of any fee
waivers or expense reimbursements.
---------------
The expense table shows the costs and expenses that an investor will
bear directly or indirectly as an Institutional shareholder of each Fund.
Certain broker-dealers and financial institutions also may charge their clients
fees in connection with investments in a Fund's Institutional Shares, which fees
are not reflected in the table. The Example should not be considered a
representation of past or future expenses; actual Fund expenses may be greater
or less than those shown. Moreover, while the Example assumes a 5% annual
return, each Fund's actual performance will vary and may result in a return
greater or less than 5%.
-2-
<PAGE> 34
FINANCIAL HIGHLIGHTS
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The tables below set forth certain information concerning the
investment results of shares of the Funds (each formerly an investment
portfolio of The RBB Fund, Inc. (the "RBB Fund")) for the periods indicated.
The financial data for each of the years ended August 31, 1998 are a part of
the relevant RBB Fund's financial statements, which have been audited by
PricewaterhouseCoopers L.L.P., the RBB Fund's independent accountants, whose
report thereon is incorporated by reference in the Statement of Additional
Information along with the financial statements. The financial data included in
these tables should be read in conjunction with the financial statements and
related notes included in the Statement of Additional Information. Further
information about the performance of the Funds is contained in the Funds'
annual report, dated August 31, 1998, copies of which may be obtained without
charge by calling Warburg Pincus Funds at 800-927-2874.
EMERGING MARKETS FUND#
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED AUGUST 31, FEBRUARY 1, 1993*
------------------------------------------------------------------------ TO AUGUST 31,
1998 1997 1996 1995 1994 1993
-------------- ----------- ------------- ------------- ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $19.64 $18.20 $17.67 $24.58 $18.38 $ 15.00
------ ------ ------ ------ ------ -----------
Income from investment operations:
Net investment income............. 0.12 0.21 0.10 0.02 (0.03) 0.02
Net realized and unrealized gains
on securities and foreign
currency transactions......... (8.08) 1.30 0.48 (5.94) 6.64 3.36
------ ------ ------ ------ ------ -----------
Total from investment operations.. (7.96) 1.51 0.58 (5.92) 6.61 3.38
------ ------ ------ ------ -----------
Less Dividends and Distributions:
Dividends from net
investment income............. (0.20) (0.07) (0.05) (0.07) (0.09) --
Distributions from capitalized
gains........................ (0.17) -- 0.00 (0.92) (0.32) --
Return of Capital................. (0.87) -- -- -- -- --
------ ----- ------ ------ ------ -----------
Total Dividends and
Distributions................. (1.24) (0.07) (0.05) (0.99) (0.41) --
------ ------ ------ ------ ------ -----------
Net asset value, end of period.... $10.44 $19.64 $18.20 $17.67 $24.58 $ 18.38
====== ====== ====== ====== ====== ===========
Total return........................ (42.96)% 8.31% 3.33%(d) (24.42)%(d) 35.99%(d) 22.53%(c)(d)
Ratios/Supplemental Data:
Net assets, end of period
(000's omitted)............... $24,217 $83,012 $114,691 $128,323 $140,675 $21,988
Ratio of expenses to average
net assets:................... 1.50%(a) 1.49%(a) 1.49%(a) 1.50%(a) 1.50%(a) 1.50%(a)(b)
Ratio of net investment income
to average net assets......... 0.61% 0.99% 0.63% 0.02% (0.02)% 0.28%(b)
Portfolio turnover rate........... 179% 147% 79% 79% 54% 38%(c)
</TABLE>
- --------------------------------------------------------------------------------
(a) Without the voluntary waiver of advisory fees and administration fees
and without the reimbursement of operating expenses, the ratios of
expenses to average net assets for the Fund's Institutional Class would
have been 2.01%, 1.63%, 1.62%, 1.61%, and 2.01% for the years ended
August 31, 1998, 1997, 1996, 1995, and 1994, respectively.
(b) Annualized.
(c) Not annualized.
(d) Redemption fees not reflected in total return.
* Commencement of operations.
# Financial Highlights relates solely to the Institutional Shares of the
BEA Emerging Markets Equity Fund investment portfolio of the RBB Fund.
-3-
<PAGE> 35
HIGH YIELD FUND#
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED AUGUST 31, MARCH 31, 1993*
------------------------------------------------------------------------- TO AUGUST 31,
1998 1997 1996 1995 1994 1993
------------ ----------- ------------ ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD... $ 17.08 $ 16.09 $ 15.72 $ 15.94 $ 16.94 $ 15.00
--------- -------- -------- -------- -------- --------
Income from Investment Operations:
Net Investment Income (Loss)....... 1.43 1.37 1.47 1.42 1.20 0.52
Net Gain (Loss) from Securities
and Foreign Currency
Related Items (both realized
and unrealized)................ (0.49) 0.96 0.40 (0.30) (0.77) 1.42
--------- -------- -------- -------- -------- --------
Total from Investment Operations... 0.94 2.33 1.87 1.12 0.43 1.94
--------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment
Income......................... (1.42) (1.34) (1.50) (1.34) (1.43) -
Distributions from Realized Gains.. -- - - - - -
--------- -------- -------- -------- -------- --------
Total Distributions................ (1.42) (1.34) (1.50) (1.34) (1.43) -
---------
NET ASSET VALUE, END OF PERIOD......... $ 16.60 $ 17.08 $ 16.09 $ 15.72 $ 15.94 $ 16.94
========= ======== ======== ======== ======== ========
Total Return........................... 5.48% 15.17% 12.42% 7.79%(d) 2.24%(d) 12.93%(c)(d)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000's
omitted)....................... $ 94,044 $ 92,630 $ 75,849 $153,621 $143,517 $ 98,357
Ratios to Average Daily Net Assets:
Operating Expenses................. 0.70%(a) .70%(a) 0.88%(a) 1.00%(a) 1.00%(a) 1.00%(a)(b)
Net Investment Income (Loss)....... 8.12% 8.44% 8.92% 9.37% 7.73% 7.56%(b)
Decrease reflected in above
operating expense ratios
due to waivers/reimbursements.. .44%(a) .43%(a) .23%(a) .08%(a) .13%(a) .17%(a)
Portfolio Turnover Rate................ 60% 84% 143% 70% 121% 72%(c)
</TABLE>
- --------------------------------------------------------------------------------
(a) Without the voluntary waiver of advisory fees and administration fees,
the ratios of expenses to average net assets for the Fund's
Institutional Class would have been 1.14%, 1.13%, 1.11%, 1.08%, and
1.13% for the years ended August 31, 1998, 1997, 1996, 1995 and 1994,
respectively.
(b) Annualized.
(c) Not annualized.
(d) Redemption fees not reflected in total return.
* Commencement of operations
# Financial Highlights relates solely to the Institutional Shares of the
BEA High Yield Fund investment portfolio of the RBB Fund.
-4-
<PAGE> 36
INTERNATIONAL EQUITY FUND#
<TABLE>
<CAPTION>
FOR THE PERIOD
OCTOBER 1, 1992*
FOR THE YEAR ENDED AUGUST 31, TO
------------------------------------------------------------------------- AUGUST 31,
1998 1997 1996 1995 1994 1993
---------------- ------------ ------------ ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $ 22.22 $ 19.41 $ 18.24 $ 20.73 $ 18.73 $ 15.00
--------- -------- -------- -------- -------- ----------
Income from investment operations:
Net investment income.............. 0.15 0.18 0.19 0.06 0.05 0.04
Net realized and unrealized gains
on securities and foreign
currency transactions........ 3.26 2.89 1.05 (1.75) 2.60 3.69
--------- -------- -------- -------- -------- ----------
Total from investment operations... 3.41 3.07 1.24 (1.69) 2.65 3.73
--------- -------- -------- -------- -------- ----------
Less Dividends and Distributions:
Dividends from net investment
income....................... - (0.26) (0.07) - (0.05) -
Distributions from capitalized
gains........................ (2.93) - - (0.80) (0.60) -
--------- -------- -------- -------- -------- ----------
Total Dividends and Distributions.. (2.93) (0.26) (0.07) (0.80) (0.65) -
--------- -------- -------- -------- -------- ----------
Net asset value, end of period..... $ 22.70 $ 22.22 $ 19.41 $ 18.24 $ 20.73 $ 18.73
========= ======== ======== ======== ======== ==========
Total return......................... 16.74% 15.93% 6.81%(d) (8.06)%(d) 14.23%(d) 24.87%(c)(d)
Ratios/Supplemental Data:
Net assets, end of period
(000's omitted).............. $ 623,482 $568,510 $682,271 $773,255 $767,190 $ 268,404
Ratio of expenses to average net
assets....................... 1.14%(a) 1.16%(a) 1.19%(a) 1.25%(a) 1.25%(a) 1.25%(a)(b)
Ratio of net investment income
to average net assets........ 0.72% 0.71% 0.84% 0.35% 0.33% 0.41%(b)
Portfolio turnover rate............ 141% 126% 86% 78% 104% 106%(c)
</TABLE>
- --------------------------------------------------------------------------------
(a) Without the voluntary waiver of advisory fees and administration fees,
the ratios of expenses to average net assets for the Fund's
Institutional Class would have been 1.23%, 1.25%, 1.22%, 1.26% and 1.30%
for the years ended August 31, 1998, 1997, 1996, 1995 and 1994,
respectively.
(b) Annualized.
(c) Not annualized.
(d) Redemption fees not reflected in total return.
* Commencement of operations.
# Financial Highlights relates solely to the Institutional Shares of the
BEA International Equity Fund investment portfolio of the RBB Fund.
-5-
<PAGE> 37
MUNICIPAL BOND FUND#
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED AUGUST 31, JUNE 20, 1994*
------------------------------------------------------------ TO AUGUST 31,
1998 1997 1996 1995 1994
------------- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........... $ 14.84 $ 14.65 $ 15.46 $ 15.06 $ 15.00
-------- -------- -------- -------- --------
Income from investment operations
Net investment income...................... 0.70 0.72 0.73 0.71 0.09
Net realized and unrealized gains
(losses) on securities and
foreign currency transactions.......... 0.40 0.65 (0.37) 0.50 (0.03)
-------- -------- -------- -------- --------
Total from investment operations........... 1.10 1.37 0.36 1.21 0.06
-------- -------- -------- -------- --------
Less Dividends and Distributions
Dividends from net investment
income................................. (0.71) (0.72) (0.74) (0.76) -
Distributions from capital gains........... (0.11) (0.46) (0.43) (0.05) -
--------- --------- --------- -------- --------
Total Dividends and Distributions.......... (0.82) (1.18) (1.17) (0.81) -
--------- --------- --------- --------- --------
NET ASSET VALUE, END OF PERIOD................. $ 15.12 $ 14.84 $ 14.65 $ 15.46 $ 15.06
======== ======== ======== ======== ========
Total return................................... 7.62% 9.74% 2.27% 8.42% 0.40%(c)
Ratio/Supplemental Data
Net assets, end of period
(000's omitted)........................ $22,229 $19,810 $19,581 $48,978 $42,310
Ratio of expenses to average net
assets................................. 1.00%(a) 1.00%(a) 1.00%(a) 1.00%(a) 1.00%(a)(b)
Ratio of net investment income
(loss) to average net assets........... 4.72% 4.88% 4.62% 4.76% 3.27%(b)
Portfolio turnover rate.................... 57% 43% 34% 25% 9%(c)
</TABLE>
- --------------------------------------------------------------------------------
(a) Without the voluntary waiver of advisory fees and administration fees,
the ratios of expenses to average net assets for the Fund's
Institutional Shares would have been 1.39%, 1.37%, 1.42% and 1.19% for
the years ended August 31, 1998, 1997, 1996 and 1995, respectively, and
1.34% annualized for the period ended August 31, 1994.
(b) Annualized.
(c) Not annualized.
* Commencement of operations.
# Financial Highlights relates solely to the Institutional Shares of the
BEA Municipal Bond Fund investment portfolio of the RBB Fund.
-6-
<PAGE> 38
GLOBAL INCOME FUND#
<TABLE>
<CAPTION>
FOR THE YEAR ENDED AUGUST 31, FOR THE PERIOD
------------------------------------------------------------ JUNE 28, 1994* TO
1998 1997 1996 1995 AUGUST 31, 1994
--------------- ------------ ----------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD....... $ 15.41 $ 15.75 $ 15.67 $ 15.00 $ 15.00
-------- -------- -------- -------- --------
Income from investment operations
Net investment income.................. 0.87 0.85 0.87 1.06 0.15
Net realized and unrealized
gains(losses) on securities
and foreign currency
transactions........................ (0.25) (0.16) 0.58 0.49 (0.15)
-------- -------- -------- -------- --------
Total from investment operations....... 0.62 0.69 1.45 1.55 --
-------- -------- -------- --------
Less Dividends and Distributions
Dividends from net investment income... (0.45) (0.71) (1.22) (0.88) --
Distributions from capital gains....... (0.48) (0.32) (0.15) -- --
--------- -------- -------- -------- --------
Total Dividends and Distributions...... (0.93) (1.03) (1.37) (0.88) --
---------
NET ASSET VALUE, END OF PERIOD............. $ 15.10 $ 15.41 $ 15.75 $ 15.67 $ 15.00
======== ======== ======== ======== ========
Total return............................... 4.19% 4.48% 9.65% 10.72% 0.00%(c)
RATIO/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted)..................... $ 28,483 $ 44,285 $ 38,348 $ 19,565 $ 6,300
Ratio of expenses to average
net assets.......................... 0.75%(a) 0.75%(a) 0.75%(a) 0.75%(a) 0.75%(a)(b)
Ratio of net investment
income(loss) to average net
assets.............................. 5.30% 5.31% 7.37% 7.26% 5.64%(b)
Portfolio turnover rate................ 283% 98% 87% 91% 0%(c)
</TABLE>
- --------------------------------------------------------------------------------
(a) Without the voluntary waiver of advisory fees and administration fees
and without the reimbursement of operating expenses, the ratios of
expenses to average net assets for the Fund's Institutional Shares would
have been 1.17%, 0.98%, 1.07% and 1.29% for the years ended August 31,
1998, 1997, 1996 and 1995, respectively, and 1.92% annualized for the
period ended August 31, 1994.
(b) Annualized.
(c) Not annualized.
* Commencement of operations.
# Financial Highlights relates solely to the Institutional Shares of the
BEA Strategic Global Fixed Income Fund investment portfolio of the
RBB Fund.
-7-
<PAGE> 39
U.S. CORE EQUITY FUND#
<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 31, SEPTEMBER 1, 1994*
---------------------------------------------------- THROUGH
1998 1997 1996 AUGUST 31, 1995
------------- ------------- ------------- -------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD........................................ $ 24.40 $ 19.05 $ 17.86 $ 15.00
--------- ------- ------- -------
Income from Investment
Operations:
Net Investment Income (Loss).................. 0.01 0.14 0.20 0.22
Net Gain (Loss) from Securities and
Foreign Currency Related Items
(both realized and unrealized).............. 0.88 6.82 2.81 2.72
--------- ------- ------- -------
Total from Investment Operations.............. 0.89 6.96 3.01 2.94
--------- ------- ------- -------
Less Distributions:
Dividends from Net Investment
Income...................................... (0.13) (0.20) (0.21) (0.08)
Distributions from Realized Gains............. (3.43) (1.41) (1.61) 0.00
--------- ------- ------- -------
Total Distributions........................... (3.56) (1.61) (1.82) (0.08)
--------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD........................................ $ 21.73 $ 24.40 $ 19.05 $ 17.86
========= ======= ======= =======
Total Return.................................... 3.18% 38.32% 17.59% 19.75%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)....... $ 63,514 $86,182 $59,015 $31,644
Ratios to Average Daily Net Assets:
Operating Expenses............................ 1.00%(a) 1.00%(a) 1.00%(a) 1.00%(a)
Net Investment Income (Loss).................. .23% .67% 1.25% 1.59%
Decrease reflected in above
operating expense ratios due to
waivers/reimbursements...................... .18% .18% .34% .51%
Portfolio Turnover Rate......................... 164% 93% 127% 123%
</TABLE>
- --------------------------------------------------------------------------------
(a) Without the voluntary waiver of advisory fees and administration fees,
the ratios of expenses to average net assets for the Fund's
Institutional Shares would have been 1.18%, 1.18% and 1.34%, for the
years ended August 31, 1998, 1997 and 1996, respectively, and 1.51%
annualized for the period ended August 31, 1995.
(b) Annualized.
(c) Not annualized.
* Commencement of operations.
# Financial Highlights relates solely to the Institutional Shares of the
BEA U.S. Core Equity Fund investment portfolio of the RBB Fund.
-8-
<PAGE> 40
U.S. CORE FIXED INCOME FUND#
<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 31, APRIL 1, 1994*
--------------------------------------------------------------- THROUGH
1998 1997 1996 1995 AUGUST 31, 1994
-------------- ---------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD................................... $ 15.65 $ 15.06 $ 15.42 $ 14.77 $ 15.00
------------ -------- -------- --------- -------
Income from Investment
Operations:
Net Investment Income (Loss)............. 0.84 0.92 0.95 0.88 0.42
Net Gain (Loss) from Securities and
Foreign Currency Related Items
(both realized and unrealized)......... 0.33 0.76 (0.16) 0.61 (0.40)
----------- -------- -------- --------- -------
Total from Investment
Operations.............................. 1.17 1.68 0.79 1.49 0.02
------------ -------- -------- --------- -------
Less Distributions:
Dividends from Net Investment
Income................................. (0.87) (0.97) (0.93) (0.84) (0.25)
Distributions from Realized Gains........ (0.23) (0.12) (0.22) (0.00) 0.00
----------- -------- -------- ---------- -------
Total Distributions...................... (1.10) (1.09) (1.15) (0.84) (0.25)
------------ -------- -------- --------- -------
NET ASSET VALUE, END OF
PERIOD................................... $ 15.72 $ 15.65 $ 15.06 $ 15.42 $ 14.77
============ ======== ======== ========= =======
Total Return............................... 7.77% 11.53% 5.23% 10.60% 0.17%(c)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000's omitted)..
$ 393,533 $177,219 $118,596 $ 99,250 $30,016
Ratios to Average Daily Net
Assets:
Operating Expenses....................... 0.47%(a) 0.50%(a) 0.50%(a) 0.50%(a) 0.50%(a)(b)
Net Investment Income (Loss)............. 5.87%(b) 6.31% 6.43% 6.47% 6.04%(b)
Decrease reflected in above
operating expense ratios due to
waivers/reimbursements................. .24% .28% .28% .34% .44%
Portfolio Turnover Rate.................... 372% 372% 201% 304% 186%(c)
</TABLE>
- --------------------------------------------------------------------------------
(a) Without the voluntary waiver of advisory fees and administration fees,
the ratios of expenses to average net assets for the Fund's
Institutional Shares would have been .74%, .78%, .78% and .84%,
annualized for the years ended August 31, 1998, 1997, 1996 and 1995,
respectively, and .99% annualized for the period ended August 31, 1994.
(b) Annualized.
(c) Not annualized.
* Commencement of operations.
# Financial Highlights relates solely to the Institutional Shares of the
BEA U.S. Core Fixed Income Fund investment portfolio of the RBB Fund.
-9-
<PAGE> 41
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
The investment objective of each Fund may not be changed without the
affirmative vote of a majority of the Fund's outstanding shares (as defined in
the Investment Company Act of 1940, as amended (the "1940 Act")). As with other
mutual funds, there can be no assurance that any Fund will achieve its
investment objective. Because of their different investment emphases, each Fund
should be considered as a specialized investment portfolio and not as a balanced
investment program by itself. The Statement of Additional Information contains a
more detailed description of the various investments and investment techniques
used by the Funds.
EMERGING MARKETS FUND
The investment objective of the Emerging Markets Fund is to provide
long-term appreciation of capital. The Fund seeks to achieve this objective by
investing primarily in equity securities of issuers in "Emerging Markets." As
used in this Prospectus, an Emerging Market is any country which is generally
considered to be an emerging or developing country by the World Bank and the
International Finance Corporation, as well as countries that are classified by
the United Nations as emerging or developing, at the time of the Fund's
investment. The countries that currently will not be considered Emerging Markets
include: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany,
Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway,
Portugal, Spain, Switzerland, the United Kingdom and the United States. Under
normal market conditions, the Fund will invest a minimum of 80% of its total
assets in equity securities of issuers in Emerging Markets. The Fund will not
necessarily seek to allocate investments on a geographical basis or on the basis
of the level of economic development of any particular country. The Fund will at
all times, except during temporary defensive periods, maintain investments in at
least three Emerging Market countries.
The Fund normally will not select portfolio securities on the basis of
their dividend or income potential unless BEA or Credit Suisse Asset Management
Limited, sub-investment adviser to the Emerging Markets Fund ("CSAM" and
collectively with BEA, as applicable, the "Adviser"), believes the income will
contribute to the securities' capital appreciation potential.
An equity security of an issuer in an Emerging Market is defined as
common stock and preferred stock (including convertible preferred stock); bonds,
notes and debentures convertible into common or preferred stock; stock purchase
warrants and rights; equity interests in trusts and partnerships; and depository
receipts of companies: (i) the principal securities trading market for which is
in an Emerging Market; (ii) whose principal trading market is in any country,
provided that, alone or on a consolidated basis, they derive 50% or more of
their annual revenue from either goods produced, sales made or services
performed in Emerging Markets; or (iii) that are organized under the laws of,
and with a principal office in, an Emerging Market. Determinations as to
eligibility will be made by BEA based on publicly available information and
inquiries made to the companies.
To the extent that the Fund's assets are not invested as described
above, the remainder of the assets may be invested in government or corporate
debt securities of Emerging Market or developed countries, although the Fund
does not presently intend to invest more than 5% of its net assets in debt
securities. Debt securities, including convertible debt securities, may include
lower-rated or comparable unrated debt securities. See "Risk Factors and Special
Considerations -- Lower-Rated Securities."
HIGH YIELD FUND
The investment objective of the High Yield Fund is to provide high total
return. The Fund seeks to achieve this objective by investing primarily in high
yield high risk fixed-income securities issued by corporations, governments and
agencies, both U.S. and foreign. Under normal market conditions, the Fund will
invest at least 65% of its total assets in such high yield fixed-income
securities. The Fund may also invest in fixed-income securities which may have
equity characteristics, such as convertible bonds and equity securities such as
warrants and options. The Fund is not limited in the extent to which it can
invest in securities rated below BBB, the fourth highest bond rating of Standard
& Poor's Rating Services ("S&P"), or in comparable unrated securities.
(Securities rated BBB or better by S&P are commonly referred to as "investment
grade.") See "Risk Factors and Special Considerations -- Lower-Rated
Securities." The portion of the Fund's assets invested in various countries will
vary from time to time depending on the assessment of market opportunities by
BEA.
-10-
<PAGE> 42
The value of the securities held by the Fund and thus the net asset
value of the Fund, generally will vary inversely in relation to changes in
prevailing interest rates. Also, the value of such securities may be affected by
changes in real or perceived creditworthiness of the issuers. The Fund may
purchase debt securities of any maturity, and the average maturity of the Fund's
assets will vary based upon BEA's assessment of economic and market conditions.
INTERNATIONAL GROWTH FUND
The International Growth Fund's investment objective is to provide
long-term appreciation of capital. The Fund will pursue its objective by
investing primarily in equity securities of non-U.S. issuers. The Fund defines
equity securities of non-U.S. issuers as securities of issuers whose principal
activities are outside the United States. The Fund expects that its investments
will be concentrated in, but not limited to, Argentina, Australia, Austria,
Brazil, Canada, Chile, Columbia, Denmark, Finland, France, Germany, Greece,
Hungary, Israel, Italy, Japan, Malaysia, Mexico, the Netherlands, New Zealand,
Norway, Portugal, Singapore, South Africa, South Korea, Spain, Sweden,
Switzerland, Thailand, the United Kingdom and Venezuela. The Fund may invest in
securities of issuers in Emerging Markets, as defined above under "Investment
Objectives and Policies -- Emerging Markets Fund," but does not expect to invest
more than 40% of its total assets (at the time of purchase) in securities of
issuers in Emerging Markets. The Fund will invest in securities of issuers from
at least three countries outside the United States.
Under normal market conditions, the Fund will invest a minimum of 80% of
its total assets in equity securities of non-U.S. issuers. Such equity
securities may include common stock and preferred stock (including convertible
preferred stock); bonds, notes and debentures convertible into common or
preferred stock; stock purchase warrants and rights; equity interests in trusts
and partnerships; and depository receipts of companies. In choosing investments,
the Adviser looks for companies that present attractive opportunities for
capital growth.
The Fund may invest up to 20% of its total assets in debt securities
issued by U.S. or foreign governments or corporations, although it does not
currently intend to invest more than 5% of its net assets in debt securities.
The Fund has no limitation on the maturity or the credit quality of the debt
securities in which it invests, which may include lower-rated or comparable
unrated debt securities. See "Risk Factors and Special Considerations --
Lower-Rated Securities."
MUNICIPAL BOND FUND
The investment objective of the Municipal Bond Fund is to provide high
total return. The Fund seeks to achieve this objective by investing at least 80%
of its total assets in fixed-income securities issued by state and local
governments ("Municipal Obligations"), although the Fund may invest its assets
without limitation in securities of below investment-grade quality. See "Risk
Factors and Special Considerations -- Lower-Rated Securities." The Fund may
invest up to 40% of its assets (at the time of purchase) in municipal
obligations the interest on which constitutes an item of tax preference for
purposes of the federal alternative minimum tax ("Alternative Minimum Tax
Securities").
The two principal classifications of Municipal Obligations are "general
obligation" securities and "revenue" securities. General obligation securities
are secured by the issuer's pledge of its full faith, credit and taxing power
for the payment of principal and interest. Revenue securities are payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
revenue source such as the user of the facility being financed. Revenue
securities include private activity bonds which are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of private
activity bonds is usually directly related to the credit standing of the
corporate user of the facility involved. Municipal Obligations may also include
"moral obligation" bonds, which are normally issued by special purpose public
authorities. If the issuer of moral obligation bonds is unable to meet its debt
service obligations from current revenues, it may draw on a reserve fund, the
restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
Eligible Municipal Obligations include debt obligations issued by
governmental entities to obtain funds for various public purposes, including the
construction of a wide range of public facilities, the refunding of outstanding
obligations, the payment of general operating expenses and the extension of
loans to public institutions and facilities. Private activity bonds issued by or
on behalf of public authorities to finance various privately operated facilities
are considered Municipal Obligations.
-11-
<PAGE> 43
Also included within the general category of Municipal Obligations are
participation certificates in a lease, an installment purchase contract, or a
conditional sales contract ("lease obligations") entered into by a state or
political subdivision to finance the acquisition or construction of equipment,
land, or facilities. Although lease obligations do not constitute general
obligations of the issuer for which the lessee's unlimited taxing power is
pledged, certain lease obligations are backed by the lessee's covenant to
appropriate money to make the lease obligation payments. However, under certain
lease obligations, the lessee has no obligation to make these payments in future
years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that is not yet as
marketable as more conventional securities. Moreover, certain investments in
lease obligations may be illiquid and subject to the investment limitations
described in the Statement of Additional Information under "Common Investment
Policies -- All Funds -- Illiquid Securities."
SELECT EQUITY FUND
The investment objective of the Select Equity Fund is to seek long-term
appreciation of capital. The Fund seeks to achieve its investment objective by
investing primarily in U.S. equity securities that the Adviser believes are
undervalued. The Adviser will apply its Select Equity analysis in assembling and
managing the Fund's portfolio. In the selection of industry sectors to
emphasize, the Adviser searches for sectors with favorable economic profit
trends. Within this framework, the Adviser will select specific securities by
emphasizing, in addition to traditional analyses such as price/earnings ratios,
the economic profit of a company measured by its cash flow relative to its
capital assets. The Fund normally will not emphasize dividend income in choosing
securities, unless BEA believes the income will contribute to the securities'
appreciation potential.
Under normal market conditions, the Fund will invest at least 65% of its
total assets in U.S. equity securities. Equity securities include common stocks,
preferred stocks, convertible securities, and other securities, such as rights
and warrants, which derive their values from common stocks. The Fund may also
invest in fixed income securities and in money market instruments. The Fund may
purchase lower-rated or comparable unrated convertible securities and fixed
income securities.
The Fund may invest without limit in foreign securities, principally
through the purchase of dollar-denominated ADRs of foreign issuers, and engage
in foreign currency transactions. See below, and "Risk Factors and Special
Considerations -- Foreign Securities" and "-- Foreign Currency Transactions."
The Fund may also purchase lower-rated debt securities. See "Risk Factors and
Special Considerations -- Lower-Rated Securities."
GLOBAL INCOME FUND
The investment objective of the Global Income Fund is to provide high
total return. The Fund seeks to achieve this objective by investing at least 65%
of its total assets in fixed income securities issued by foreign and domestic
corporations, governments and agencies. Under normal market conditions, the Fund
will seek to maintain an average weighted quality not lower BBB, the fourth
highest bond rating of S&P, or in comparable unrated securities. (Securities
rated BBB or better by S&P are commonly referred to as "investment grade."). The
Fund may invest in fixed-income securities which may have equity
characteristics, such as convertible bonds. The Fund will not limit its
investments in securities rated below investment grade by recognized rating
agencies or in comparable unrated securities. The Fund's investments in fixed
income securities may include securities rated D by S&P, which are in default.
See "APPENDIX" for further information concerning the ratings of Moody's and S&P
and their significance. The portion of the Fund's assets invested in various
countries will vary from time to time depending the assessment of market
opportunities by BEA or CSAM, the Fund's sub-investment adviser. There is no
limit on investments in any region, country or currency, although the Fund will
normally invest in at least three different countries. See "Risk Factors and
Special Considerations -- Lower-Rated Securities."
In addition to fixed income securities issued by foreign and domestic
corporations, the Fund may also invest in foreign government securities
("sovereign bonds"), U.S. Government securities including government agencies'
securities, debt obligations of supranational entities, Brady Bonds, loan
participations and assignments, convertible securities, mortgage-backed
securities, asset-backed securities, zero-coupon securities, when-issued
securities, repurchase and reverse repurchase agreements and dollar rolls.
-12-
<PAGE> 44
U.S. EQUITY FUND
The investment objective of the U.S. Equity Fund is to provide long-term
appreciation of capital. The Fund seeks to achieve this objective by investing,
under normal market conditions, at least 65% of its total assets in U.S. equity
securities. Equity securities include common stocks, preferred stocks, and
securities which are convertible into common stock and readily marketable
securities, such as rights and warrants, which derive their value from common
stock. The Fund may also invest up to 35% of its assets in dollar-denominated
ADRs of foreign issuers and similar securities and in lower-rated or comparable
unrated convertible securities. For defensive purposes, the Fund may invest up
to 35% of its total assets in fixed income securities. The Fund normally will
not emphasize dividend or interest income in choosing securities, unless BEA
believes the income will contribute to the securities' appreciation potential.
See "Risk Factors and Special Considerations -- Lower-Rated Securities."
U.S. FIXED INCOME FUND
The investment objective of the U.S. Fixed Income Fund is to provide high
total return. The Fund seeks to achieve this objective by investing, under
normal market conditions, at least 65% of its total assets in domestic fixed
income securities. Debt securities may include, without limitation, bonds,
debentures, notes, equipment lease and trust certificates, mortgage-related
securities of corporate issuers, and obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities. The Fund may invest up to
35% of its total assets in debt securities of foreign issuers, including
emerging market debt. With respect to 35% of the Fund's total assets, the Fund
may also invest in other securities, including, but not limited to, equity
securities such as preferred stock and equity-related securities. Under normal
market conditions, the Fund will seek to maintain an average dollar-weighted
credit rating comparable to the AA rating of S&P. Subject to this condition,
however, the Fund may invest in lower-rated debt securities. See "Risk Factors
and Special Considerations -- Lower-Rated Securities" below. The Adviser
estimates that the average weighted maturity of the Fund will range between 5
and 15 years.
Depending on prevailing market conditions, the Fund may purchase debt
securities at a discount from face value, which produces a yield greater than
the coupon rate. Conversely, if debt securities are purchased at a premium over
face value, the yield will be lower than the coupon rate. An increase in
interest rates will generally reduce the value of the fixed income investments
in the Fund and a decline in interest rates will generally increase the value of
those investments. Also, the value of such securities may be affected by changes
in real or perceived creditworthiness of the issuers.
PORTFOLIO INVESTMENTS
TEMPORARY INVESTMENTS. To the extent permitted by its investment
objective and policies, each of the Funds may hold cash or cash equivalents
pending investment or to meet redemption requests. In addition, for defensive
purposes due to abnormal market or economic situations, as determined by the
Fund's Adviser, each Fund may reduce its holdings in other securities and invest
up to 100% of its assets in cash or certain short-term (less than twelve months
to maturity) and medium-term (not greater than five years to maturity)
interest-bearing instruments or deposits of United States and foreign issuers.
Such investments may include, but are not limited to, commercial paper,
certificates of deposit, variable or floating rate notes, bankers' acceptances,
time deposits, government securities and money market deposit accounts. See
Statement of Additional Information, "Common Investment Policies -- Temporary
Investments." To the extent a Fund invests in temporary investments, the Fund
may not achieve its investment objective.
RULE 144A SECURITIES. Rule 144A Securities (as defined below) are
securities which are restricted as to resale to the general public, but which
may be resold to "qualified institutional buyers." Each Fund may invest in Rule
144A Securities that the Fund's Adviser has determined are liquid pursuant to
guidelines established by the Fund's Board of Directors.
BORROWING. Each Fund may borrow up to 33-1/3 percent of its total assets
without obtaining shareholder approval. The Funds intend to borrow or to engage
in reverse repurchase agreements or dollar roll transactions only for temporary
or emergency purposes. See Statement of Additional Information, "Common
Investment Policies -- All Funds -- Reverse Repurchase Agreements" and
"-- Borrowing."
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LENDING OF PORTFOLIO SECURITIES. Each Fund may also lend its portfolio
securities to financial institutions against collateral consisting of cash, U.S.
Government securities or irrevocable bank letters of credit, which are equal at
all times to at least 102% of the value of the securities loaned (105% in the
case of foreign securities loaned). 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 loss of rights in the collateral should the borrower
of the securities fail financially. However, loans will be made only to
borrowers deemed by the Fund's Adviser to be of good standing and only when, in
the Adviser's judgment, the income to be earned from the loans justifies the
attendant risks. Any loans of a Fund's securities will be fully collateralized
and marked to market daily. A Fund may not make loans in excess of 50% of its
total assets immediately before such loans.
INVESTMENT COMPANIES. Each Fund may invest in securities issued by other
investment companies to the extent permitted by the 1940 Act. As a shareholder
of another investment company, each Fund would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory and
other expenses that a Fund bears directly in connection with its own operations.
U.S. GOVERNMENT SECURITIES. The obligations issued or guaranteed by the
U.S. government in which each Fund may invest include direct obligations of the
U.S. Treasury and obligations issued by U.S. government agencies and
instrumentalities. Included among direct obligations of the United States are
Treasury Bills, Treasury Notes and Treasury Bonds, which differ principally in
terms of their maturities. Treasury Bills have maturities of less than one year,
Treasury Notes have maturities of one to 10 years and Treasury Bonds generally
have maturities of greater than 10 years at the date of issuance. Included among
the obligations issued by agencies and instrumentalities of the United States
are: instruments that are supported by the full faith and credit of the United
States (such as certificates issued by the Government National Mortgage
Association ("GNMA")); instruments that are supported by the right of the issuer
to borrow from the U.S. Treasury (such as securities of Federal Home Loan
Banks); and instruments that are supported by the credit of the instrumentality
(such as Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC") bonds).
RISK FACTORS AND SPECIAL CONSIDERATIONS
For certain additional risks related to each Fund's investments, see
"Portfolio Investments" and "Certain Investment Strategies."
GENERAL. Among the factors that may be considered in deciding whether to
invest in a security are the issuer's financial resources, its sensitivity to
economic conditions and trends, its operating history and the ability of the
issuer's management. Bond prices generally vary inversely in relation to changes
in the level of interest rates, as well as in response to other market factors
and changes in the creditworthiness of the issuers of the securities. U.S.
Government securities are considered to be of the highest credit quality
available. U.S. Government securities, however, will be affected by general
changes in interest rates. The price volatility of a Fund's shares where the
Fund invests in intermediate maturity bonds will be substantially less than that
of long-term bonds. An intermediate maturity bond will generally have a lower
yield than that of a long-term bond. Longer-term securities in which the Funds
may invest generally offer a higher current yield than is offered by
shorter-term securities, but also generally involve greater volatility of price
and risk of capital than shorter-term securities.
FOREIGN SECURITIES. Investing in the securities of non-U.S. issuers
involves opportunities and risks that are different from investing in the
securities of U.S. issuers. The risks associated with investing in securities of
non-U.S. issuers are generally heightened for investments in securities of
issuers in emerging markets.
Because foreign securities generally are denominated and pay dividends
or interest in foreign currencies, and the Funds may hold from time to time
various foreign currencies pending their investment in foreign securities or
their conversion into U.S. dollars, the value of the Funds' assets as measured
in U.S. dollars may be affected favorably or unfavorably by changes in exchange
rates. In addition, investors should realize that the value of the Funds'
investments may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
limitation on the removal of funds or assets, or imposition of (or change in)
exchange control regulations in those foreign nations. In addition, changes in
government administrations or economic or monetary policies in the U.S. or
abroad could result in appreciation or depreciation of portfolio securities and
could favorably or adversely affect the Funds' operations. Furthermore, the
economies of individual
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foreign nations may differ from that of the United States, whether favorably or
unfavorably, in areas such as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position. Any foreign investments made by the Funds must be made in
compliance with U.S. and foreign currency restrictions and tax laws restricting
the amounts and types of foreign investments.
In general, less information is publicly available with respect to
certain foreign issuers than is available with respect to U.S. companies. Most
foreign companies are also not subject to the uniform accounting and financial
reporting requirements applicable to issuers in the United States. The Funds'
foreign investments may be less liquid and their prices may be more volatile
than comparable investments in securities in U.S. companies. Expenses relating
to foreign investments are generally higher than those relating to domestic
securities. In addition, there is generally less government supervision and
regulation of securities exchanges, brokers and issuers in foreign countries
than in the United States.
DEPOSITARY RECEIPTS. Certain of the above risks may be involved with
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
International Depositary Receipts ("IDRs"), instruments that evidence ownership
in underlying securities issued by a foreign corporation. ADRs, EDRs and IDRs
may not necessarily be denominated in the same currency as the securities whose
ownership they represent. ADRs are typically issued by a U.S. bank or trust
company. EDRs (sometimes referred to as Continental Depositary Receipts) are
issued in Europe, and IDRs (sometimes referred to as Global Depositary Receipts)
are issued outside the United States, each typically by non-U.S. banks and trust
companies.
FOREIGN CURRENCY TRANSACTIONS. The over the counter market in forward
foreign currency exchange contracts offers less protection against defaults by
the other party to such instruments than is available for currency instruments
traded on an exchange. Such contracts are subject to the risk that the
counterparty to the contract will default on its obligations. Since these
contracts are not guaranteed by an exchange or clearinghouse, a default on the
contract would deprive a Fund of unrealized profits, transaction costs or the
benefits of a currency hedge or force a Fund to cover its purchase or sale
commitments, if any, at the current market price. A Fund will not enter into
forward foreign currency exchange contracts unless the credit quality of the
unsecured senior debt or the claims-paying ability of the counterparty is
considered to be investment grade by the Fund's Adviser.
Currency exchange rates may fluctuate significantly over short periods
of time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or perceived changes in interest rates and other complex
factors as seen from an international perspective. Currency exchange rates also
can be affected unpredictably by intervention by U.S. or foreign governments or
central banks, or the failure to intervene, or by currency controls or political
developments in the United States or abroad. The foreign currency market offers
less protection against defaults in the forward trading of currencies than is
available when trading in currencies occurs on an exchange. Since a forward
currency contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive a Fund of unrealized profits or force such Fund to
cover its commitments for purchase or resale, if any, at the current market
price.
EMERGING MARKETS. (Emerging Markets Fund, Global Telecommunications
Fund, International Growth Fund and U.S. Fixed Income Fund only) Investing in
securities of issuers located in emerging markets involves not only the risks
described below with respect to investing in foreign securities, but also other
risks, including exposure to economic structures that are generally less diverse
and mature than, and to political systems that can be expected to have less
stability than, those of developed countries. For example, many investments in
emerging markets experienced significant declines in value due to political and
currency volatility in emerging market countries during the latter part of 1997.
Other characteristics of emerging markets that may affect investment there
include certain national policies that may restrict investment by foreigners in
issuers or industries deemed sensitive to relevant national interests and the
absence of developed legal structures governing private and foreign investments
and private property. The typically small size of the markets for securities of
issuers located in emerging markets and the possibility of a low or nonexistent
volume of trading in those securities may also result in a lack of liquidity and
in price volatility of those securities.
LOWER-RATED SECURITIES. The widespread expansion of government, consumer
and corporate debt within the economy has made the corporate sector, especially
cyclically sensitive industries, more vulnerable to economic downturns or
increased interest rates. Because lower-rated debt securities involve issuers
with weaker credit fundamentals (such as debt-to-equity ratios, interest
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charge coverage, earnings history and the like), an economic downturn, or
increases in interest rates, could severely disrupt the market for lower-rated
debt securities and adversely affect the value of outstanding debt securities
and the ability of the issuers to repay principal and interest.
Lower-rated debt securities (commonly known as "junk bonds") possess
speculative characteristics and are subject to greater market fluctuations and
risk of lost income and principal than higher-rated debt securities for a
variety of reasons. The markets for and prices of lower-rated debt securities
have been found to be less sensitive to interest rate changes than higher-rated
investments, but more sensitive to adverse economic changes or individual
corporate developments. Also, during an economic downturn or substantial period
of rising interest rates, highly leveraged issuers may experience financial
stress which would adversely affect their ability to service their principal and
interest payment obligations, to meet projected business goals and to obtain
additional financing. If the issuer of a debt security owned by a Fund
defaulted, the Fund could incur additional expenses in seeking recovery with no
guaranty of recovery. In addition, periods of economic uncertainty and changes
can be expected to result in increased volatility of market prices of
lower-rated debt securities and a Fund's net asset value. Lower-rated debt
securities also present risks based on payment expectations. For example,
lower-rated debt securities may contain redemption or call provisions. If an
issuer exercises these provisions in a declining interest rate market, a Fund
would have to replace the security with a lower yielding security, resulting in
a decreased return for investors. Conversely, a lower-rated debt security's
value will decrease in a rising interest rate market, as will the value of a
Fund's assets. If a Fund experiences unexpected net redemptions, this may force
it to sell its lower-rated debt securities, without regard to their investment
merits, thereby decreasing the asset base upon which a Fund's expenses can be
spread and possibly reducing a Fund's rate of return.
In addition, to the extent that there is no established retail secondary
market, there may be thin trading of lower-rated debt securities, and this may
have an impact on the ability of the Fund's Adviser to both value accurately
lower-rated debt securities and the Fund's assets, and to dispose of the debt
securities. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the value and liquidity of lower-rated debt
securities, especially in a thinly traded market.
FIXED INCOME SECURITIES. The value of the fixed income securities held
by a Fund, and thus the net asset value of the shares of a Fund, generally will
vary inversely in relation to changes in prevailing interest rates. Thus, if
interest rates have increased from the time a debt or other fixed income
security was purchased, such security, if sold, might be sold at a price less
than its cost. Conversely, if interest rates have declined from the time such a
security was purchased, such security, if sold, might be sold at a price greater
than its cost. Also, the value of such securities may be affected by changes in
real or perceived creditworthiness of the issuers. Thus, if creditworthiness is
enhanced, the price may rise. Conversely, if creditworthiness declines, the
price may decline. A Fund is not restricted to any maximum or minimum time to
maturity in purchasing portfolio securities, and the average maturity of the
Fund's assets will vary based upon the Adviser's assessment of economic and
market conditions.
NON-PUBLICLY TRADED SECURITIES; RULE 144A SECURITIES. Each Fund may
purchase securities that are not registered under the Securities Act of 1933, as
amended (the "Securities Act"), but that can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the Securities Act ("Rule 144A
Securities"). A Rule 144A Security will be considered illiquid and therefore
subject to each Fund's limitation on the purchase of illiquid securities, unless
the Fund's Board determines on an ongoing basis that an adequate trading market
exists for the security. In addition to an adequate trading market, the Board
will also consider factors such as trading activity, availability of reliable
price information and other relevant information in determining whether a Rule
144A Security is liquid. This investment practice could have the effect of
increasing the level of illiquidity in the Funds to the extent that qualified
institutional buyers become uninterested for a time in purchasing Rule 144A
Securities. The Board of each Fund will carefully monitor any investments by the
Fund in Rule 144A Securities. The Boards may adopt guidelines and delegate to
the relevant Fund's Adviser the daily function of determining and monitoring the
liquidity of Rule 144A Securities, although each Board will retain ultimate
responsibility for any determination regarding liquidity.
Non-publicly traded securities (including Rule 144A Securities) may
involve a high degree of business and financial risk and may result in
substantial losses. These securities may be less liquid than publicly traded
securities, and 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 price realized from these sales
could be less than those originally paid by the Fund. Further, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements that would be applicable if their
securities were publicly traded. A Fund's investment in illiquid securities is
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subject to the risk that should the Fund desire to sell any of these securities
when a ready buyer is not available at a price that is deemed to be
representative of their value, the value of the Fund's net assets could be
adversely affected.
NON-DIVERSIFIED STATUS. Each Fund is classified as a non-diversified
investment company under the 1940 Act, which means that each Fund is not limited
by the 1940 Act in the proportion of its assets that it may invest in the
obligations of a single issuer. Each Fund will, however, comply with
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company. As a
non-diversified investment company, each Fund may invest a greater proportion of
its assets in the obligations of a small number of issuers and, as a result, may
be subject to greater risk with respect to portfolio securities. To the extent
that a Fund assumes large positions in the securities of a small number of
issuers, its 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.
EMERGING GROWTH AND SMALLER CAPITALIZATION COMPANIES; UNSEASONED ISSUERS.
Investing in securities of companies with continuous operations of less than
three years ("unseasoned issuers") may involve greater risks since these
securities may have limited marketability and, thus, may be more volatile than
securities of larger, more established companies or the market in general.
Because such companies normally have fewer shares outstanding than larger
companies, it may be more difficult for a Fund to buy or sell significant
amounts of such shares without an unfavorable impact on prevailing prices. These
companies may have limited product lines, markets or financial resources and may
lack management depth. In addition, these companies are typically subject to a
greater degree of changes in earnings and business prospects than are larger,
more established companies. There is typically less publicly available
information concerning these companies than for larger, more established ones.
Although investing in securities of unseasoned issuers offers potential for
above-average returns if the companies are successful, the risk exists that the
companies will not succeed and the prices of the companies' shares could
significantly decline in value. Therefore, an investment in a Fund may involve a
greater degree of risk than an investment in other mutual funds that seek
capital appreciation by investing in more established, larger companies.
YEAR 2000 COMPLIANCE. Many services provided to a Fund and their
shareholders by BEA, CSAM, Counsellors Securities Inc., the Funds' distributor
("Counsellors Securities"), certain of the latter's affiliates (collectively,
the "Service Providers"), and the Funds' other service providers rely on the
functioning of their respective computer systems. Many computer systems cannot
distinguish the year 2000 from the year 1900, with resulting potential
difficulty in performing various calculations (the "Year 2000 Issue"). The Year
2000 Issue could potentially have an adverse impact on the handling of security
trades, the payment of interest and dividends, pricing, account services and
other Fund operations.
The Service Providers recognize the importance of the Year 2000 Issue
and are taking appropriate steps necessary in preparation for the year 2000. At
this time, there can be no assurance that these steps will be sufficient to
avoid any adverse impact on the Funds nor can there be any assurance that the
Year 2000 Issue will not have an adverse effect on the Funds' investments or on
global markets or economies, generally.
The Service Providers anticipate that their systems and those of the
Funds' other service providers will be adapted in time for the year 2000. To
further this goal, the Service Providers have coordinated a plan to repair,
adapt or replace systems that are not year 2000 compliant, and are seeking to
obtain similar representations from the Funds' other major service providers.
The Service Providers will be monitoring the Year 2000 Issue in an effort to
ensure appropriate preparation.
GENERAL. Investment methods described in this prospectus are among those
which the Funds have the power to utilize. Accordingly, reference to any
particular method or technique carries no implication that it will be utilized
or, if it is, that it will be successful.
PORTFOLIO TRANSACTIONS AND TURNOVER RATE
A Fund will attempt to purchase securities with the intent of holding
them for investment but may purchase and sell portfolio securities whenever the
Fund's Adviser believes it to be in the best interests of the relevant Fund. The
Fund's Adviser will effect portfolio transactions in each Fund without regard to
holding periods if, in its judgment, such transactions are advisable in light of
general market, economic or financial conditions. Portfolio turnover may vary
greatly from year to year as well as within a particular year. It is not
possible to predict each Fund's portfolio turnover rate. However, it is
anticipated that,
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under normal market conditions, each Fund's annual turnover rate should not
exceed 100%. High portfolio turnover rates (100% or more) may result in higher
dealer mark-ups or underwriting commissions as well as other transaction costs,
including correspondingly higher brokerage commissions. In addition, short-term
gains realized from portfolio turnover may be taxable to shareholders as
ordinary income. See "Dividends, Distributions and Taxes -- Taxes" below and
Portfolio Transactions" in the Statement of Additional Information.
All orders for transactions in securities or options on behalf of a Fund
are placed by the Fund's Adviser with broker-dealers that it selects, including
Counsellors Securities and affiliates of Credit Suisse Group ("Credit Suisse").
A Fund may utilize Counsellors Securities or affiliates of Credit Suisse in
connection with a purchase or sale of securities when the Fund's Adviser
believes that the charge for the transaction does not exceed usual and customary
levels and when doing so is consistent with guidelines adopted by the Board.
CERTAIN INVESTMENT STRATEGIES
STRATEGY AVAILABLE TO ALL FUNDS
FOREIGN CURRENCY TRANSACTIONS. The Funds may also enter into contracts
to purchase and sell forward foreign currency exchange contracts to seek to
enhance total return. A forward foreign currency exchange contract is a
negotiated agreement to exchange currency at a future time at a rate or rates
that may be higher or lower than those available on a "spot" (or cash) basis. A
Fund may enter into these contracts for purposes of increasing exposure to a
foreign currency or to shift exposure to foreign currency fluctuations from one
country to another. To the extent that such contracts are entered into to
enhance total return, they are considered speculative. If a Fund enters into
such a contract for any purpose, the Fund will be required to maintain in a
segregated account cash or liquid assets in an amount equal to the value of the
Fund's total assets committed to the consummation of the contract. The Funds
will not invest more than 50% of their respective total assets in such contracts
for the purpose of enhancing total return. There is no limit on the amount of
assets that the Funds may invest in such transactions for hedging purposes.
STRATEGIES AVAILABLE TO ALL FUNDS -- EXCEPT THE MUNICIPAL BOND FUND
MORTGAGE-RELATED PASS-THROUGHS AND DERIVATIVES. The Funds may invest in
mortgage-related securities. Purchasable mortgage-related securities are
represented by pools of mortgage loans assembled for sale to investors by
various governmental agencies such as the GNMA and government-related
organizations such as the FNMA and the FHLMC, as well as by private issuers such
as commercial investment banks, savings and loan institutions, mortgage bankers
and private mortgage insurance companies. As with other interest-bearing
securities, the prices of such securities are inversely affected by changes in
interest rates. However, though the value of a mortgage-related security may
decline when interest rates rise, the converse is not necessarily true because
in periods of declining interest rates mortgages underlying securities are prone
to prepayment. For this and other reasons, a mortgage-related security's stated
maturity may be shortened by an unscheduled prepayment on underlying mortgages
and, therefore, it is not possible to predict accurately the security's return
to these Funds. Prepayments involve the risk that funds received upon prepayment
may have to be reinvested at lower interest rates.
Mortgage-related securities acquired by these Funds may include
collateralized mortgage obligations ("CMOs") issued by FNMA, FHLMC or other U.S.
Government agencies or instrumentalities, as well as by private issuers. These
securities may be considered mortgage derivatives. CMOs provide an investor with
a specified interest in the cash flow of a pool of underlying mortgages or other
mortgage-related securities.
ASSET-BACKED SECURITIES. The Funds may purchase asset-backed securities,
which represent a participation in, or are secured by and payable from, a stream
of payments generated by particular assets, most often a pool of assets similar
to one another. Assets generating such payments will consist of such instruments
as motor vehicle installment purchase obligations, credit card receivables and
home equity loans.
Asset-backed securities may involve certain risks arising primarily from
the nature of the underlying assets (i.e., credit card and automobile loan
receivables as opposed to real estate mortgages). For example, credit card
receivables are generally unsecured and may require the repossession of personal
property upon the default of the debtor which may be difficult or
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impracticable in some cases. Asset-backed securities are considered an industry
for industry concentration purposes, and the Funds will therefore not purchase
any asset-backed securities which would cause 25% or more of a Fund's total
assets at the time of purchase to be invested in asset-backed securities.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture,
note, preferred stock or other security that may be converted into or exchanged
for a prescribed amount of common stock of the same or a different issuer within
a particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Before conversion, convertible securities have
characteristics similar to nonconvertible debt securities in that they
ordinarily provide a stable stream of income with generally higher yields than
those of common stocks of the same or similar issuers. The Funds will invest in
convertible securities without regard to their credit ratings. See "Risk Factors
and Special Considerations -- Lower-Rated Securities".
STRATEGIES AVAILABLE TO THE MUNICIPAL BOND FUND
TAX-EXEMPT DERIVATIVES AND OTHER MUNICIPAL OBLIGATIONS. The Fund may
invest in tax-exempt derivative securities relating to Municipal Obligations,
including tender option bonds, participations, beneficial interests in trusts
and partnership interests. A typical tax-exempt derivative security involves the
purchase of an interest in a pool of Municipal Obligations which interest
includes a tender option, demand or other feature allowing the Fund to tender
the underlying Municipal Obligation to a third party at periodic intervals and
to receive the principal amount thereof. A participation interest gives the Fund
an undivided interest in a Municipal Obligation in the proportion the Fund's
participation bears to the total principal amount of the Municipal Obligation,
and typically provides for a repurchase feature for all or any part of the full
principal amount of the participation interest, plus accrued interest. Trusts
and partnerships are typically used to convert long-term fixed rate high quality
bonds of a single state or municipal issuer into variable or floating rate
demand instruments.
During normal market conditions, up to 20% of the Fund's net assets may
be invested in securities which are not Municipal Obligations; at least 80% of
the Fund's net assets will be invested in Municipal Obligations the interest on
which is exempt from regular federal income tax. During temporary defensive
periods, the Fund may invest without limitation in obligations which are not
Municipal Obligations and may hold without limitation uninvested cash reserves.
Such securities may include, without limitation, bonds, notes, variable rate
demand notes and commercial paper, provided such securities are rated within the
relevant categories, applicable to Municipal Obligations set forth above, or if
unrated, are of comparable quality as determined by the Adviser, and may also
include, without limitation, other debt obligations, such as bank obligations.
The Fund may acquire "stand-by commitments" with respect to Municipal
Obligations held by it. Under a stand-by commitment, a dealer agrees to purchase
at the Fund's option specified Municipal Obligations at a specified price. The
acquisition of a stand-by commitment may increase the cost, and thereby reduce
the yield, of the Municipal Obligation to which such commitment relates. The
Fund will acquire stand-by commitments solely to facilitate portfolio liquidity
and does not intend to exercise its rights thereunder for trading purposes.
The amount of information regarding the financial condition of issuers
of Municipal Obligations may not be as extensive as that which is made available
by public corporations and the secondary market for Municipal Obligations may be
less liquid than that for taxable fixed-income securities. Accordingly, the
ability of the Fund to buy and sell tax-exempt securities may, at any particular
time and with respect to any particular securities, be limited.
ALTERNATIVE MINIMUM TAX SECURITIES. The Fund may invest up to 40% of its
assets (at the time of purchase) in Alternative Minimum Tax Securities, which
are certain securities issued after August 7, 1986 to finance certain
non-governmental activities. While the income from Alternative Minimum Tax
Securities is exempt from regular federal income tax, it is a tax preference
item for purposes of the federal individual and corporate "alternative minimum
tax." The alternative minimum tax is a special tax that applies to a limited
number of taxpayers who have certain adjustments or tax preference items.
Available returns on Alternative Minimum Tax Securities acquired by the Fund may
be lower than those from other Municipal Obligations acquired by the Fund due to
the possibility of federal, state and local alternative minimum or minimum
income tax liability on Alternative Minimum Tax Securities.
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INVESTMENT GUIDELINES
Although there is no current intention of doing so in the coming year,
each Fund is authorized to (i) purchase securities on a when-issued basis and
purchase or sell securities for delayed delivery, (ii) purchase forward
commitments and (iii) (except in the case of the Municipal Bond Fund) purchase
stand-by commitments. Each Fund may invest up to 15% of its net assets in
securities with contractual or other restrictions on resale and other
instruments that are not readily marketable ("illiquid securities"), including
(i) securities issued as part of a privately negotiated transaction between an
issuer and one or more purchasers; (ii) repurchase agreements with maturities
greater than seven days; (iii) time deposits maturing in more than seven
calendar days; and (iv) certain Rule 144A Securities. Each Fund may borrow from
banks and enter into reverse repurchase agreements and dollar rolls for
temporary or emergency purposes, such as meeting redemption requests, provided
that reverse repurchase agreements and any other borrowing by the Fund may not
exceed 33-1/3% of total assets, and may pledge its assets to the extent
necessary to secure permitted borrowings. Whenever borrowings (including reverse
repurchase agreements, dollar rolls and borrowings from banks) exceed 5% of a
Fund's assets, the Fund will not make any investments (including roll-overs).
Except for the limitations on borrowing and the limitation on further
investments when borrowings exceed 5% of Fund assets, the investment guidelines
set forth in this paragraph may be changed at any time without shareholder
consent by vote of the Board of each Fund, subject to the limitations contained
in the 1940 Act. A complete list of investment restrictions that each Fund has
adopted identifying additional restrictions that cannot be changed without the
approval of the majority of the Fund's outstanding shares is contained in the
Statement of Additional Information under "Investment Limitations".
Any investment policy or limitation which involves a maximum or minimum
percentage of securities shall not be considered to be violated unless an excess
over or a deficiency under the percentage occurs immediately after, and is
caused by, an acquisition or disposition of securities or utilization of assets
by a Fund.
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISER AND SUB-INVESTMENT ADVISER. BEA serves as the
Investment Adviser for each of the Funds pursuant to investment advisory
agreements and CSAM serves as sub-investment adviser to each of the Emerging
Markets Fund and the Global Income Fund pursuant to a sub-investment advisory
agreement (collectively, the "Advisory Agreements"). BEA is a general
partnership organized under the laws of the State of New York in December 1990
and, together with its predecessor firms, has been engaged in the investment
advisory business for over 60 years. BEA is a wholly-owned subsidiary of Credit
Suisse and the U.S. arm of Credit Suisse Asset Management. BEA is a registered
investment adviser under the Investment Advisers Act of 1940, as amended. BEA is
a diversified investment adviser managing global equity, fixed-income and
derivative securities accounts for corporate pension and profit-sharing plans,
state pension funds, union funds, endowments and other charitable institutions.
As of September 30, 1998, BEA managed approximately $35.2 billion in assets. BEA
currently acts as investment adviser for twenty-two investment companies
registered under the 1940 Act, and acts as sub-adviser to certain portfolios of
thirteen other registered investment companies. BEA's principal offices are
located at One Citicorp Center, 153 East 53rd Street, New York, New York 10022.
CSAM is a wholly-owned subsidiary of Credit Suisse. Credit Suisse had
identified BEA and CSAM as its leading institutional international asset
management product centers. As of June 30, 1998, CSAM managed $35 billion in
discretionary assets. CSAM Limited is a registered investment adviser under the
Investment Advisers Act of 1940, as amended. CSAM's principal offices are
located at Beaufort House, 1 St. Botolph Street, GB-London EC3A 7JJ.
For the advisory services provided and expenses assumed by BEA, the
Global Telecommunications Fund, the High Yield Fund, the International Growth
Fund, the Long-Short Neutral Fund, the Long-Short Equity Fund, the Municipal
Bond Fund, the Select Equity Fund, U.S. Equity Fund and U.S. Fixed Income Fund
each pay BEA a fee computed at an annual rate of 1.00%, .70%, .80%, .70%, .75% ,
.75% and .375% of the Fund's average net assets, computed daily and payable
quarterly. For the advisory services provided and expenses assumed by BEA, the
Emerging Markets Fund and the Global Income Fund each pay BEA a fee computed at
an annual rate of 1.00% and .50%, respectively, of the Fund's average net
assets, computed daily and payable quarterly, out of which BEA pays CSAM for
sub-investment advisory services.
BEA, CSAM and each Fund's co-administrators may, at their discretion,
from time to time agree to voluntarily waive all or any portion of their fees
and temporarily limit the expenses to be borne by the Funds.
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The Advisory Agreements provide that the Adviser shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the Funds in
connection with the matters to which the Advisory Agreements relate.
PORTFOLIO MANAGERS. Emerging Markets Fund and International Growth Fund.
The day-to-day portfolio management of the Emerging Markets Fund and
International Growth Fund is the responsibility of the BEA International Equity
Management Team. The Team consists of the following investment professionals:
William P. Sterling (Executive Director), Steven D. Bleiberg (Managing
Director), Richard Watt (Managing Director), Susan Boland (Senior Vice
President), Emily Alejos (Vice President) and Robert B. Hrabchak (Vice
President). Mr. Sterling joined BEA in 1995, prior to which time he was the head
of International Economics at Merrill Lynch & Company. Mr. Watt joined BEA in
1995, prior to which time he was the head of emerging markets investments and
research at Gartmore Investment Limited in London. Mr. Bleiberg has been engaged
as an investment professional with BEA for more than five years. Ms. Boland
joined BEA in 1996, prior to which time she was a director and portfolio manager
for Barran & Partners Limited where she managed a hedge fund that invested in
European equities. Prior to 1995, she was a partner and European portfolio
manager for Teton Partners. Ms. Alejos joined BEA in 1997, prior to which time
she was a vice president and an emerging markets portfolio manager with Bankers
Trust. Mr. Hrabchak joined BEA in 1997, prior to which time he was a senior
portfolio manager at Merrill Lynch Asset Management in Hong Kong, where he
chaired the Asia Pacific Investment Strategy Committee and managed institutional
portfolios. Prior to 1995, he was an associate in investment banking at Salomon
Brothers.
Global Telecommunications Fund. The day-to-day portfolio management of
the Global Telecommunications Fund is the responsibility of the BEA Global
Telecommunications Management Team. The Team consists of the following
investment professionals: William P. Sterling (Executive Director), Steven D.
Bleiberg (Managing Director), Richard Watt (Managing Director), James Abate
(Senior Vice President), Stephen Waite (Vice President), Emily Alejos (Vice
President) and Robert Hrabchak (Vice President). Mr. Abate joined BEA in 1995;
previously, he was a Managing Director for Vert Independent Capital Research.
Prior to joining Vert, Mr. Abate was a manager in Price Waterhouse's
Valuation/Corporate Finance Group. Mr. Waite joined BEA in 1995, prior to which
he was vice president and senior European economist for Merrill Lynch & Company
in London.
High Yield Fund. The day-to-day portfolio management of the High Yield
Fund is the responsibility of the BEA High Yield Management Team. The Team
consists of the following investment professionals: Richard Lindquist (Executive
Director), Misia Dudley (Senior Vice President), Marianne Rossi (Senior Vice
President), John Tobin (Senior Vice President) and Mary Ann Thomas (Vice
President). Mr. Lindquist, Ms. Dudley, Ms. Rossi and Mr. Tobin joined BEA in
1995 as a result of BEA's acquisition of CS First Boston Investment Management.
Prior to joining CS First Boston, Mr. Lindquist and Ms. Rossi were with
Prudential Insurance Company of America. Prior to joining CS First Boston, Ms.
Dudley was with Stockbridge Partners, and prior to that had spent five years
with E.F. Hutton. Prior to joining CS First Boston, Mr. Tobin managed portfolios
for Integrated Resources and prior to that was vice president and industry
analyst with Bankers Trust Company. Ms. Thomas joined BEA in 1997, prior to
which time she was a vice president and high yield bond analyst in the Capital
Management Group of the Prudential Insurance Company of America where she
specialized in analyzing high yield bonds for insurance funds. Prior to 1994,
she was an equity analyst at Lieber and Company.
Municipal Bond Fund and Global Income Fund. The day-to-day portfolio
management of the Municipal Bond and Global Income Funds is the responsibility
of the BEA Fixed Income Management Team. The Team consists of the following
investment professionals: Robert J. Moore (Executive Director), William P.
Sterling (Executive Director), Gregg Diliberto (Managing Director), Robert
Justich (Senior Vice President), Ira Edelblum (Senior Vice President), Jo Ann
Corkran (Senior Vice President) and Diane Damskey (Vice President). Messrs.
Moore, Diliberto and Edelblum have, on an individual basis, been engaged as
investment professionals with BEA for more than five years. Mr. Justich joined
BEA in 1995, prior to which he worked at Merrill Lynch and as a manager of
Financial Services with Arthur Young & Company. Ms. Corkran joined BEA in 1997,
prior to which time she was a director of mortgage-backed securities at Morgan
Stanley. Prior to 1994, she was a vice president at Greenwich Capital. Ms.
Damskey joined BEA in 1997, prior to which time she managed fixed income
portfolios at Global Emerging Markets Advisors. Prior to 1996, she was a senior
vice president and portfolio manager for the First National Bank of Chicago.
Select Equity Fund. The day-to-day portfolio management of the Select
Equity Fund is the responsibility of the BEA Select Economic Value Equity
Management Team. The Team consists of the following investment professionals:
William W. Priest,
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Jr. (Chief Executive Officer and Executive Director of BEA), John Hurford
(Executive Director), James Abate (Senior Vice President), Susan Everly (Vice
President) and James Mecca (Vice President). Messrs. Priest and Hurford have, on
an individual basis, been engaged as investment professionals with BEA for more
than twenty-five years. Ms. Everly joined BEA in 1998. Previously, she was a
securities analyst at Goldman Sachs for two years. Prior to joining Goldman
Sachs, she was a student at Harvard Business School for 2 years. Prior to 1994,
she was an analyst at CS First Boston for 4 years. Mr. Mecca joined BEA in 1998.
Previously, he was a securities analyst at Goldman, Sachs & Co. for 2 years.
Prior to joining Goldman Sachs, he was at Bankers Trust where he was an Emerging
Markets Equity Trader for 3 years.
U.S. Equity Fund. The day-to day portfolio management of the U.S. Equity
Fund is the responsibility of the BEA Domestic Equity Management Team. The Team
consists of the following investment professionals: William W. Priest, Jr.
(Chief Executive Officer and Executive Director of BEA), John B. Hurford
(Executive Director), Eric N. Remole (Managing Director), James A. Abate (Senior
Vice President), Marc Bothwell (Vice President) and Michael Welhoelter (Vice
President).
U.S. Fixed Income Fund. The day-to-day portfolio management of the U.S.
Fixed Income Fund is the responsibility of the BEA Fixed Income Management Team.
The Team consists of the following investment professionals: Robert J. Moore
(Executive Director), William P. Sterling (Executive Director), Gregg Diliberto
(Managing Director), Robert Justich (Senior Vice President), Ira Edelblum
(Senior Vice President), Jo Ann Corkran (Senior Vice President) and Diane
Damskey (Vice President).
CO-ADMINISTRATORS. The Funds employ Counsellors Funds Service, Inc.
("Counsellors Service"), a wholly owned subsidiary of Warburg Pincus Asset
Management, Inc. ("Warburg"), as a co-administrator. As co-administrator,
Counsellors Service provides shareholder liaison services to the Funds including
responding to shareholder inquiries and providing information on shareholder
investments. Counsellors Service also performs a variety of other services,
including furnishing certain executive and administrative services, acting as
liaison between the Funds and their various service providers, furnishing
corporate secretarial services, which include preparing certain materials for
meetings of the Board, assisting in the preparation of proxy statements, annual
and semiannual reports and tax returns and monitoring and developing compliance
procedures for the Funds. No compensation is payable by the Funds to Counsellors
Service for co-administration services for the Institutional Shares.
Each Fund also employs PFPC Inc. ("PFPC"), an indirect, wholly owned
subsidiary of PNC Bank Corp., as a co-administrator. As a co-administrator, PFPC
calculates the Fund's net asset value, provides all accounting services for the
Fund and assists in related aspects of the Fund's operations. As compensation,
the Funds each pay PFPC a fee calculated at an annual rate of .125% of each
Fund's average daily net assets attributable to the Institutional Shares,
subject in each case to a minimum annual fee and exclusive of out-of-pocket
expenses. PFPC has its principal offices at 400 Bellevue Parkway, Wilmington,
Delaware 19809.
CUSTODIAN. Brown Brothers Harriman & Co. ("BBH") serves as custodian of
the assets of each Fund. BBH's principal business address is 40 Water Street,
Boston, Massachusetts 02109.
TRANSFER AGENT. State Street Bank and Trust Company ("State Street")
serves as shareholder servicing agent, transfer agent and dividend disbursing
agent for the Funds. It has delegated to Boston Financial Data Services, Inc.,
an affiliated company ("BFDS"), responsibility for most shareholder servicing
functions. State Street's principal business address is 225 Franklin Street,
Boston, Massachusetts 02110. BFDS's principal business address is 2 Heritage
Drive, North Quincy, Massachusetts 02171.
DISTRIBUTOR. Counsellors Securities serves as distributor of the shares
of the Funds. Counsellors Securities is a wholly owned subsidiary of Warburg and
is located at 466 Lexington Avenue, New York, New York 10017-3147. No
compensation is payable by any Fund to Counsellors Securities for its
distribution services for Institutional Shares.
BEA, CSAM or an affiliate of either may, at its own expense, provide
promotional incentives for qualified recipients who support the sale of shares
of a Fund, consisting of securities dealers who have sold Fund shares or others,
including banks and other financial institutions, under special arrangements.
Incentives may include opportunities to attend business meetings, conferences,
sales or training programs for recipients' employees or clients and other
programs or events and may also include
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opportunities to participate in advertising or sales campaigns and/or
shareholder services and programs regarding one or more BEA Institutional Funds.
BEA, CSAM or an affiliate of either may pay for travel, meals and lodging in
connection with these promotional activities. In some instances, these
incentives may be offered only to certain institutions whose representatives
provide services in connection with the sale or expected sale of Fund shares.
DIRECTORS AND OFFICERS. The officers of each Fund manage its day-to-day
operations and are directly responsible to the Board. The Boards set broad
policies for each Fund and choose its officers. A list of the Directors and
officers of each Fund and a brief statement of their present positions and
principal occupations during the past five years is set forth in the Statement
of Additional Information.
HOW TO OPEN AN ACCOUNT
In order to invest in a Fund, an investor must first complete and sign
an account application. To obtain an application, an investor may telephone BEA
Institutional Funds at 800-401-2230. An investor may also obtain an account
application by writing to:
BEA Institutional Funds
P.O. Box 8500
Boston, Massachusetts 02266-8500
OR
Overnight to:
BFDS
Attn.: BEA
Institutional Funds
66 Brooks Drive
Braintree, Massachusetts 02184
Completed and signed account applications should be sent to the above.
References in this Prospectus to shareholders or investors also include
Institutions which may act as record holder of Institutional Shares.
CHANGES TO ACCOUNT. For information on how to make changes to an
account, including changes to account registration, address and/or privileges,
an investor should telephone BEA Institutional Funds at 800-401-2230.
Institutions and their customers are responsible for maintaining current account
registration and addresses with a Fund. No interest will be paid on amounts
represented by uncashed distribution or redemption checks.
HOW TO PURCHASE SHARES
GENERAL. Shares representing interests in the Funds are offered
continuously for sale by the Funds' distributor. Except as described below, the
Institutional Shares are currently available for purchase only by investors who
have entered into an investment management agreement with BEA or its affiliates.
Shares may be purchased initially by completing the application and forwarding
the application to the address set forth above. Initial investments in any Fund
must be at least $3,000,000, except Shares may be purchased by existing clients
of BEA or its affiliates or by officers of such existing clients (or those
holding similar positions) with an initial investment of at least $100,000; all
subsequent investments for such persons must be at least $1,000. Subsequent
initial investments in any other Fund must be at least $100,000. In addition, a
Fund may, in its sole discretion, waive the initial and subsequent investment
minimum requirements with respect to investors who are employees of Warburg, BEA
or their affiliates or persons with whom Warburg has entered into an investment
advisory agreement. Existing investors will be given 15 days' notice by mail of
any increase in minimum investment requirements.
After an investor has made his initial investment, additional shares may
be purchased at any time by mail or by wire in the manner outlined below. Wire
payments for initial and subsequent investments should be preceded by an order
placed with the Fund and should clearly indicate the investor's account number
and the name of the Fund in which shares are being purchased.
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The Fund reserves the right to suspend the offering of shares for a period of
time or to reject any specific purchase order. In the interest of economy and
convenience, physical certificates representing shares in the Funds are not
normally issued.
BY MAIL. If the investor desires to purchase Institutional Shares by
mail, a check or Federal Reserve Draft made payable to the Fund or BEA
Institutional Funds (in U.S. currency) should be sent along with the completed
account application to BEA Institutional Funds at an address set forth above.
Checks payable to the investor and endorsed to the order of the Fund or BEA
Institutional Funds will not be accepted as payment and will be returned to the
sender. If payment is received in proper form prior to the close of regular
trading on The New York Stock Exchange, Inc. (the "NYSE") (currently 4:00 p.m.,
Eastern time) on a day that the Fund calculates its net asset value (a "business
day"), the purchase will be made at the Fund's net asset value calculated at the
end of that day. If payment is received at or after the close of regular trading
on the NYSE, the purchase will be effected at the Fund's net asset value
determined for the next business day after payment has been received. Checks or
Federal Reserve Drafts that are not in proper form or that are not accompanied
or preceded by a complete account application will be returned to the sender.
Shares purchased by check or Federal Reserve Drafts are entitled to receive
dividends and distributions beginning on the day your purchase order is
executed. Checks or Federal Reserve Drafts in payment for shares of more than
one BEA Institutional Fund should be made payable to BEA Institutional Funds and
should be accompanied by a breakdown of amounts to be invested in each fund. If
a check used for purchase does not clear, the Fund will cancel the purchase and
the investor may be liable for losses or fees incurred. For a description of the
manner of calculating the Fund's net asset value, see "Net Asset Value" below.
BY WIRE. Investors may also purchase Institutional Shares in a Fund
by wiring funds from their banks. Federal funds may be wired using the following
wire address:
State Street Bank and Trust Company
ABA# 0110 000 28
Attn.: Mutual Funds/Custody Department
BEA Institutional Funds
DDA# 9905-227-6
F/F/C: [Account # and Registration]
If payment by wire is received prior to the close of regular trading on
the NYSE in proper form in accordance with instructions set forth above, the
shares will be priced according to the net asset value of the Fund on that day
and are entitled to dividends and distributions beginning on that day. However,
if a wire in proper form is received at or after the close of regular trading on
the NYSE, the payment will be held uninvested until the order is effected at the
close of business on the next business day. Payment for orders that are not
accepted will be returned to the prospective investor after prompt inquiry.
PURCHASES IN-KIND. Subject to the approval of the Adviser, investors may
acquire shares of any of the Funds in exchange for portfolio securities that are
eligible for investment by the relevant Fund or Funds. Such portfolio securities
must (a) meet the investment objectives and policies of the Funds, (b) be
acquired for investment and not for resale, (c) be liquid securities which are
not restricted as to transfer either by law or liquidity of market, and (d) have
a value which is readily ascertainable. Generally an investor will recognize for
federal income tax purposes any gain or loss realized on an exchange of property
for shares. Under certain circumstances, initial investors may not recognize
gain or loss on such an exchange. Investors, particularly initial investors, are
urged to consult their tax advisers in determining the particular federal income
tax consequences of their purchase in-kind. Such exchanges will be subject to
each Fund's minimum investment requirement. Shareholders may be required to bear
certain administrative or custodial costs in effecting purchases in-kind.
GENERAL. Each Fund reserves the right to reject any specific purchase
order, including certain purchases made by exchange (see "How to Redeem and
Exchange Shares -- Exchange of Shares" below). Purchase orders may be refused
if, in BEA's judgment, a Fund would be unable to invest the money effectively in
accordance with its investment objective and policies, or would otherwise
potentially be adversely affected. A Fund may discontinue sales of its shares if
management believes that a substantial further increase in assets may adversely
affect that Fund's ability to achieve its investment objective. In such event,
however, it is anticipated that existing shareholders would be permitted to
continue to authorize investment in such Fund and to reinvest any dividends or
capital gains distributions.
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HOW TO REDEEM AND EXCHANGE SHARES
REDEMPTION OF SHARES. An investor in a Fund may redeem (sell) his shares
on any day that the Fund's net asset value is calculated (see "Net Asset Value"
below).
Institutional Shares of the Funds may be redeemed by mail. If an
investor desires to redeem his shares, a written request for redemption should
be sent to BEA Institutional Funds at an address indicated above under "How to
Open an Account." An investor should be sure that the redemption request
identifies the Fund, the number of shares to be redeemed and the investor's
account number. Payment of redemption proceeds may be delayed in connection with
account changes. Each mail redemption request must be signed by the registered
owner(s) (or his legal representative(s)) exactly as the shares are registered.
After receipt of the redemption request by mail, the redemption proceeds
will, at the option of the investor, be paid by check and mailed to the investor
of record or be wired to the investor's bank as indicated in the account
application previously filled out by the investor. No Fund currently imposes a
service charge for effecting wire transfers but each Fund reserves the right to
do so in the future. Payment of redemption proceeds may be delayed for up to 15
days pending a determination that the check has cleared.
If a redemption order is received by a Fund or its agent prior to the
close of regular trading on the NYSE, the redemption order will be effected at
the net asset value per share as determined on that day. If a redemption order
is received at or after the close of regular trading on the NYSE, the redemption
order will be effected at the net asset value as next determined. Except as
noted above, redemption proceeds will normally be mailed or wired to an investor
on the next business day following the date a redemption order is effected. If,
however, in the judgment of BEA, immediate payment would adversely affect a
Fund, each Fund reserves the right to pay the redemption proceeds within seven
days after the redemption order is effected. Furthermore, each Fund may suspend
the right of redemption or postpone the date of payment upon redemption (as well
as suspend or postpone the recordation of an exchange of shares) for such
periods as are permitted under the 1940 Act.
The proceeds paid upon redemption may be more or less than the amount
invested depending upon a share's net asset value at the time of redemption. If
an investor redeems all the shares in his account, all dividends and
distributions declared up to and including the date of redemption are paid along
with the proceeds of the redemption.
If, due to redemptions, the value of an investor's account drops to less
than $500, each Fund reserves the right to redeem the shares in that account at
net asset value. Prior to any redemption, the Fund will notify an investor in
writing that this account has a value of less than the minimum. The investor
will then have 30 days to make an additional investment before a redemption will
be processed by the Fund.
REDEMPTION IN-KIND. The Funds reserve the right, at their discretion, to
honor any request for redemption of a Fund's shares by making payment in whole
or in part in securities chosen by the Fund 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 after they have redeemed their shares. 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. Redeeming shareholders will be required to bear certain administrative or
custodial costs in effecting redemptions in-kind.
EXCHANGE OF SHARES. An investor may exchange Institutional Shares of a
Fund for Institutional Shares of another Fund at their respective net asset
values. Exchanges may be effected in the manner described under "Redemption of
Shares" above. If an exchange request is received by BEA Institutional Funds or
its agent prior to the close of regular trading on the NYSE, the exchange will
be made at each fund's net asset value determined at the end of that business
day. Exchanges will be effected without a sales charge but must satisfy the
minimum dollar amount necessary for new purchases. A Fund may refuse exchange
purchases at any time without prior notice.
The exchange privilege is available to shareholders residing in any
state in which the Institutional Shares being acquired may legally be sold. When
an investor effects an exchange of shares, the exchange is treated for federal
income tax purposes as a
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redemption. Therefore, the investor may realize a taxable gain or loss in
connection with the exchange. For further information regarding the exchange
privilege, an investor should contact BEA Institutional Funds at 800-401-2230.
Each Fund reserves the right to refuse exchange purchases by any person
or group if, in the Adviser's judgment, the Fund would be unable to invest the
money effectively in accordance with its investment objective and policies, or
would otherwise potentially be adversely affected. Examples of when an exchange
purchase could be refused are when a Fund receives or anticipates receiving
large exchange orders at or about the same time and/or when a pattern of
exchanges within a short period of time (often associated with a "market timing"
strategy) is discerned. Each Fund reserves the right to terminate or modify the
exchange privilege at any time upon 60 days' notice to shareholders.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. Each Fund calculates its dividends from net
investment income. Net investment income includes interest accrued and dividends
earned on the Fund's portfolio securities for the applicable period less
applicable expenses. Each of the Emerging Markets Fund, International Growth
Fund, Select Equity Fund and U.S. Equity Fund will distribute substantially all
of its net realized capital gains and all net investment income, if any, to its
shareholders annually. Each of the High Yield Fund, Global Income Fund and U.S.
Fixed income Fund will distribute substantially all of its net realized capital
gains, if any, to its shareholders annually and will distribute net investment
income at least quarterly. The Municipal Bond Fund will distribute substantially
all of its net realized capital gains, if any, annually and all net investment
income monthly. Net investment income earned on weekends and when the NYSE is
not open will be computed as of the next business day. Unless an investor
instructs a Fund to pay dividends or distributions in cash, dividends and
distributions will automatically be reinvested in additional Institutional
Shares of the relevant Fund at net asset value. The election to receive
dividends in cash may be made on the account application or, subsequently, by
writing to BEA Institutional Funds at an address set forth under "How to Open an
Account" or by calling BEA Institutional Funds at 800-401-2230.
Special Distribution Matters Relating to the Municipal Bond Fund. If,
for any full fiscal year, the Municipal Bond Fund's total distributions exceed
net investment income and net realized capital gains, the excess distributions
may be treated as a taxable dividend or a tax-free return of capital (up to the
amount of the shareholder's tax basis in his shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his
shares. Pursuant to the requirements of the 1940 Act and other applicable laws,
a notice will accompany any distribution paid from sources other than net
investment income. In the event the Fund distributes amounts in excess of its
net investment income and net realized capital gains, such distributions may
have the effect of decreasing the Fund's total assets, which may increase the
Fund's expense ratio.
A Fund may be required to withhold for U.S. federal income taxes 31% of
all distributions payable to shareholders who fail to provide the Fund with
their correct taxpayer identification number or to make required certifications,
or who have been notified by the U.S. Internal Revenue Service that they are
subject to backup withholding.
TAXES. Each Fund intends to qualify each year as a "regulated investment
company" within the meaning of the Code. Each Fund, if it qualifies as a
regulated investment company, will be subject to a 4% non-deductible excise tax
measured with respect to certain undistributed amounts of ordinary income and
capital gain. Each Fund expects to pay such additional dividends and to make
such additional distributions as are necessary to avoid the application of this
tax.
Investments in zero coupon securities may create special tax
consequences. Zero coupon securities do not make interest payments, although a
portion of the difference between a zero coupon security's maturity value and
its purchase price is imputed as income to the Funds each year even though the
Funds receive no cash distribution until maturity. Under the U.S. federal tax
laws applicable to mutual funds, the Funds will not be subject to tax on this
income if they pay dividends to their shareholders substantially equal to all
the income received from, or imputed with respect to, their investments during
the year, including their zero coupon securities. These dividends ordinarily
will constitute taxable income to the shareholders of the Funds.
Dividends paid from net investment income and distributions derived from
net realized short-term capital gains are taxable to investors as ordinary
income whether received in cash or reinvested in additional Fund shares.
Distributions derived from net realized long-term capital gains will be taxable
to investors as long-term capital gains, regardless of how long investors have
held Fund shares or whether such distributions are received in cash or
reinvested in Fund shares. As a general rule, an investor's
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gain or loss on a sale or redemption of Fund shares will be a long-term capital
gain or loss if the investor has held the shares for more than one year and will
be a short-term capital gain or loss if the investor has held the shares for one
year or less. However, any loss realized upon the sale or redemption of shares
within six months from the date of their purchase will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain during such six-month period with respect to such shares.
Investors may be proportionately liable for taxes on income and gains of
the Funds, but investors not subject to tax on their income will not be required
to pay tax on amounts distributed to them. A Fund's investment activities,
including short sales of securities, will not result in unrelated business
taxable income to a tax-exempt investor. A Fund's dividends may qualify for the
dividends received deduction for corporations to the extent they are derived
from dividends attributable to certain types of stock issued by U.S. domestic
corporations.
Dividends and interest received by the Funds may be subject to
withholding and other taxes imposed by foreign countries. However, tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. If a Fund qualifies as a regulated investment company, if
certain asset and distribution requirements are satisfied and if more than 50%
of the Fund's total assets at the close of its fiscal year consists of stock or
securities of foreign corporations, the Fund may elect for U.S. income tax
purposes to treat foreign income taxes paid by it as paid by its shareholders. A
Fund may qualify for and make this election in some, but not necessarily all, of
its taxable years. If a Fund were to make an election, shareholders of the Fund
would be required to take into account an amount equal to their pro rata
portions of such foreign taxes in computing their taxable income and then treat
an amount equal to those foreign taxes as a U.S. federal income tax deduction or
as a foreign tax credit against their U.S. federal income taxes. Shortly after
any year for which it makes such an election, each Fund will report to its
shareholders the amount per share of such foreign income tax that must be
included in each shareholder's gross income and the amount which will be
available for the deduction or credit. No deduction for foreign taxes may be
claimed by a shareholder who does not itemize deductions.
Certain limitations will be imposed on the extent to which the credit (but not
the deduction) for foreign taxes may be claimed.
Special Tax Matters Relating to the Municipal Bond Fund. As a regulated
investment company, the Municipal Bond Fund will designate and pay
exempt-interest dividends derived from interest earned on qualifying Municipal
Obligations. Such exempt-interest dividends may be excluded by investors of the
Fund from their gross income for federal income tax purposes although (i) all or
a portion of such exempt-interest dividends will be a specific tax-preference
item for purposes of the federal individual and corporate alternative minimum
taxes to the extent they are derived from certain types of private activity
bonds issued after August 7, 1996 and (ii) all exempt-interest dividends will be
a component of the "current earnings" adjustment item for purposes of the
federal corporate alternative minimum tax. Moreover, dividends paid by the Fund
will be subject to a branch profits tax of up to 30% when received by certain
foreign corporate investors.
GENERAL. Statements as to the tax status of each investor's dividends
and distributions are mailed annually. Each investor will also receive, if
applicable, various written notices after the close of a Fund's prior taxable
year with respect to certain dividends and distributions which were received
from the Fund during the Fund's prior taxable year. Investors should consult
their own tax advisers with specific reference to their own tax situations,
including their state and local tax liabilities.
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<PAGE> 59
NET ASSET VALUE
Each Fund's net asset value per share is calculated as of the close of
regular trading on the NYSE (currently 4:00 p.m., Eastern time) on each business
day, Monday through Friday, except on days when the NYSE is closed. The NYSE is
currently scheduled to be 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 on the preceding Friday or subsequent
Monday when one of these holidays falls on a Saturday or Sunday, respectively.
The net asset value per share of each Fund generally changes each day.
The net asset value per Institutional Share of each Fund is computed by
adding the Institutional Shares' pro rata share of the value of the Fund's
assets, deducting the Institutional Shares' pro rata share of the Fund's
liabilities and the liabilities specifically allocated to Institutional Shares
and then dividing the result by the total number of outstanding Institutional
Shares.
Securities listed on a U.S. securities exchange (including securities
traded through the Nasdaq National Market System) or foreign securities exchange
or traded in an over-the-counter market will be valued at the most recent sale
price when the valuation is made. Options and futures contracts will be valued
similarly. Debt obligations that mature in 60 days or less from the valuation
date are valued on the basis of amortized cost, unless the Board determines that
using this valuation method would not reflect the investments' value.
Securities, options and futures contracts for which market quotations are not
readily available and other assets will be valued at their fair value as
determined in good faith pursuant to consistently applied procedures established
by the Board. Further information regarding valuation policies is contained in
the Statement of Additional Information.
PERFORMANCE
The Funds quote the performance of Institutional Shares separately from
Common Shares and Advisor Shares. The net asset value of Institutional Shares is
listed in The Wall Street Journal each business day under the heading "BEA
Institutional Funds." From time to time, each Fund may advertise yield and
average annual total return of its Institutional Shares over various periods of
time. The yield refers to net investment income generated by the Institutional
Shares over a specified thirty-day period, which is then annualized. That is,
the amount of net investment income generated by the Institutional Shares during
that thirty-day period is assumed to be generated over a 12-month period and is
shown as a percentage of the investment. In addition, advertisements concerning
the Municipal Bond Fund may describe a tax equivalent yield. The tax equivalent
yield demonstrates the yield on a taxable investment necessary to produce an
after-tax yield equal to the Institutional Shares' tax-free yield. It is
calculated by increasing the yield shown for the Institutional Shares to the
extent necessary to reflect the payment of specified tax rates. Thus, the tax
equivalent yield will always exceed a Fund's Institutional Shares' yield. Total
return figures show the average percentage change in value of an investment in
the Institutional Shares from the beginning of the measuring period to the end
of the measuring period. The figures reflect changes in the price of the
Institutional Shares assuming that any income dividends and/or capital gain
distributions made by a Fund during the period were reinvested in Institutional
Shares of the Fund. Total return will be shown for recent one-, five- and
ten-year periods, and may be shown for other periods as well (such as from
commencement of the Fund's operations or on a year-by-year, quarterly or current
year-to-date basis).
When considering average total return figures for periods longer than
one year, it is important to note that the annual total return for one year in
the period might have been greater or less than the average for the entire
period. When considering total return figures for periods shorter than one year,
investors should bear in mind that each Fund seeks long-term appreciation and
that such return may not be representative of any Fund's return over a longer
market cycle. Each Fund may also advertise aggregate total return figures of its
Institutional Shares for various periods, representing the cumulative change in
value of an investment in the Institutional Shares for the specific period
(again reflecting changes in share prices and assuming reinvestment of dividends
and distributions). Aggregate and average total returns may be shown by means of
schedules, charts or graphs and may indicate various components of total return
(i.e., change in value of initial investment, income dividends and capital gain
distributions).
Investors should note that yield, tax equivalent yield and total return
figures are based on historical earnings and are not intended to indicate future
performance. The Funds' Statements of Additional Information describes the
method used to
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<PAGE> 60
determine the yield and total return. Current performance figures may be
obtained by calling BEA Institutional Funds at 800-401-2230.
A Fund's total return or expense ratio may be compared with data
published by Lipper Analytical Services, Inc., CDA/Weisenberger Investment
Technologies, Inc., Mutual Fund Forecaster or Morningstar, Inc., or with the
performance of the Standard & Poor's 500 Stock Index, Standard & Poor's MidCap
400 Index, Moody's Bond Survey Bond Index, Wilshire 5000 Index, Lehman Brothers
Bond Indexes, Morgan Stanley Composite Index EAFE, Morgan Stanley Composite
Index-Free Emerging Markets, JP Morgan Global Government Bond Index (Unhedged),
First Boston High Yield Index, Consumer Price Index, Bond Buyer's 20-Bond Index,
Dow Jones Industrial Average, Salomon Smith Barney U.S. 1-Month Treasury Bill
Index(TM), national publications such as Money, Forbes, Barron's, The Wall
Street Journal or the New York Times or publications of a local or regional
nature, and other industry publications.
In reports or other communications to investors or in advertising, each
Fund may also describe the general biography or work experience of the portfolio
managers of the Fund and may include quotations attributable to the portfolio
managers describing approaches taken in managing the Fund's investments,
research methodology underlying stock selection or the Fund's investment
objective. In addition, a Fund and its portfolio managers may render periodic
updates of Fund activity, which may include a discussion of significant
portfolio holdings; analysis of holdings by industry, country, credit quality
and other characteristics; and comparison and analysis of the Fund with respect
to relevant market and industry benchmarks. Each Fund may also discuss measures
of risk, the continuum of risk and return relating to different investments and
the potential impact of foreign stocks on a portfolio otherwise composed of
domestic securities.
GENERAL INFORMATION
ORGANIZATION. On July 31, 1998, the Emerging Markets Fund, International
Growth Fund, High Yield Fund, Municipal Bond Fund, Global Income Fund, the
Select Equity Fund, U.S. Equity Fund and U.S. Fixed Income Fund were each
incorporated under the laws of the State of Maryland under the name "Warburg,
Pincus Emerging Markets II Fund, Inc.," "Warburg, Pincus International Growth
Fund, Inc.," "Warburg, Pincus High Yield Fund, Inc.," "Warburg, Pincus Municipal
Bond Fund, Inc.," "Warburg, Pincus Strategic Global Fixed Income Fund, Inc.,"
"Warburg, Pincus Select Economic Value Equity Fund, Inc.," "Warburg, Pincus U.S.
Core Equity Fund, Inc." and "Warburg, Pincus U.S. Core Fixed Income Fund, Inc.,"
respectively. Each Warburg Pincus Fund is an open-end mutual fund. On October
23, 1998, each Fund acquired all of the assets and liabilities of the
corresponding investment portfolio of the RBB Fund.
Each Fund's charter authorizes its Board to issue three billion full and
fractional shares of capital stock, $.001 par value per share, of which one
billion shares are designated Common Shares, one billion shares are designated
Institutional Shares and one billion shares are designated Advisor Shares. Under
each Fund's charter documents, the Board has the power to classify or reclassify
any unissued shares of the Fund into one or more additional classes by setting
or changing in any one or more respects their relative rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption. A Board may similarly classify or reclassify any class
of its shares into one or more series and, without shareholder approval, may
increase the number of authorized shares of the Fund.
MULTI-CLASS STRUCTURE. Each Fund currently offers another class of
shares, the Common Shares, pursuant to a separate prospectus. Individual
investors may purchase Common Shares and, if and when offered, individual
investors may only purchase Advisor Shares, through institutional shareholders
of record, broker-dealers, financial institutions, depository institutions,
retirement plans and financial intermediaries. Shares of each class represent
equal pro rata interests in the respective Fund and accrue dividends and
calculate net asset value and performance quotations in the same manner. Because
of the higher fees paid
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<PAGE> 61
by Common Shares and Advisor Shares, the total return on Common Shares can be
expected to be lower than the total return on Institutional Shares and the total
return of Advisor Shares can be expected to be lower than the total return on
Common Shares and Institutional Shares. Investors may obtain information
concerning the Common Shares and, if and when offered, the Advisor Shares from
their investment professional or by calling Counsellors Securities at
800-369-2728. Unless the context clearly suggests otherwise, references to a
Fund in this Prospectus are to the Fund as a whole and not to any particular
class of the Fund's shares.
VOTING RIGHTS. Investors in a Fund are entitled to one vote for each
full share held and fractional votes for fractional shares held. Shareholders of
a Fund will vote in the aggregate except where otherwise required by law and
except that each class will vote separately on certain matters pertaining to its
distribution and shareholder servicing arrangements. There will normally be no
meetings of investors for the purpose of electing members of the Board unless
and until such time as less than a majority of the members holding office have
been elected by investors. Any Director of a Fund may be removed from office
upon the vote of shareholders holding at least a majority of the relevant Fund's
outstanding shares, at a meeting called for that purpose. A meeting will be
called for the purpose of voting on the removal of a Board member at the written
request of holders of 10% of the outstanding shares of a Fund.
SHAREHOLDER COMMUNICATIONS. Each investor will receive a quarterly
statement of his account, as well as a statement of his account after any
transaction that affects his share balance or share registration (other than the
reinvestment of dividends or distributions or investment made through the
Automatic Monthly Investment Plan). Each Fund will also send to its investors a
semiannual report and an audited annual report, each of which includes a list of
the investment securities held by the Fund and a statement of the performance of
the Fund. Periodic listings of the investment securities held by the Fund, as
well as certain statistical characteristics of the Fund, may be obtained by
calling BEA Institutional Funds at 800-401-2230 or on the BEA Institutional
Funds Web site at www.beafunds.com.
The Institutional Share prospectuses of the Funds are combined in this
Prospectus. Each Fund offers only its own shares, yet it is possible that a Fund
might become liable for a misstatement, inaccuracy or omission in this
Prospectus with regard to another Fund.
-----------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE FUNDS'
STATEMENT OF ADDITIONAL INFORMATION OR THE FUNDS' OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF SHARES OF THE FUNDS, AND IF GIVEN OR MADE, SUCH
OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY EACH FUND. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF THE
INSTITUTIONAL SHARES OF THE FUNDS IN ANY STATE IN WHICH, OR TO ANY PERSON TO
WHOM, SUCH OFFER MAY NOT LAWFULLY BE MADE.
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<PAGE> 62
TABLE OF CONTENTS
The Funds' Expenses............................................................2
Financial Highlights...........................................................3
Investment Objectives and Policies............................................10
Portfolio Investments.........................................................13
Risk Factors and Special Considerations.......................................14
Portfolio Transactions and Turnover Rate......................................17
Certain Investment Strategies.................................................18
Investment Guidelines.........................................................20
Management of the Funds.......................................................20
How to Open an Account........................................................23
How to Purchase Shares........................................................23
How to Redeem and Exchange Shares.............................................25
Dividends, Distributions and Taxes............................................26
Net Asset Value...............................................................28
Performance...................................................................28
General Information...........................................................29
P.O. Box 8500, Boston, MA 02266-8500
800-401-2230
www.beafunds.com
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<PAGE> 63
APPENDIX
DESCRIPTION OF RATINGS
Commercial Paper Ratings
Commercial paper rated A-1 by Standard & Poor's Rating Services ("S&P")
indicates that the degree of safety regarding timely payment is strong. Those
issues determined to possess extremely strong safety characteristics are denoted
with a plus sign designation. Capacity for timely payment on commercial paper
rated A-2 is satisfactory, but the relative degree of safety is not as high as
for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's Investors Service, Inc. ("Moody's"). Issuers rated Prime-1 (or related
supporting institutions) are considered to have a superior capacity for
repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics of issuers rated Prime-1 but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
Corporate Bond Ratings
The following summarizes the ratings used by S&P for corporate bonds:
AAA - This is the highest rating assigned by S&P to a debt obligation
and indicates an extremely strong capacity to pay interest and repay principal.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB - This is the lowest investment grade. Debt rated BBB has an
adequate capacity to pay interest and repay principal. Although it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for bonds in this category than for bonds in higher rated
categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominately speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
represents a lower degree of speculation than B and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which could
lead to inadequate capacity to meet timely interest and principal payments. The
BB rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B - Debt rated B has a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of
A-1
<PAGE> 64
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
Additionally, the rating CI is reserved for income bonds on which no
interest is being paid. Such debt is rated between debt rated C and debt rated
D.
To provide more detailed indications of credit quality, the ratings from
"AA" to "CCC" may be modified by the addition of a plus or minus sign to show
relative standing within this major rating category.
D - Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The following summarizes the ratings used by Moody's for corporate
bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of Igreater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Moody's applies numerical modifiers (1, 2 and 3) with respect to the
bonds rated "Aa" through "B". The modifier 1 indicates that the bond being rated
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the bond ranks in the
lower end of its generic rating category.
A-2
<PAGE> 65
Caa - Bonds that are rated Caa are of poor standing. These issues may be
in default or present elements of danger may exist with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Short-Term Note Ratings
The following summarizes the two highest ratings used by S&P for
short-term notes:
SP-1 - Loans bearing this designation evidence a very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics will be given a plus sign designation.
SP-2 - Loans bearing this designation evidence a satisfactory capacity
to pay principal and interest.
The following summarizes the two highest ratings used by Moody's for
short-term notes and variable rate demand obligations:
MIG-1/VMIG-1 - Obligations bearing these designations are of the best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established and broad-based access to the market for
refinancing, or both.
MIG-2/VMIG-2 - Obligations bearing these designations are of high
quality with margins of protection ample although not so large as in the
preceding group.
Municipal Obligations Ratings
The following summarizes the ratings used by S&P for Municipal
Obligations:
AAA - This is the highest rating assigned by S&P to a debt obligation
and indicates an extremely strong capacity to pay interest and repay principal.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB - This is the lowest investment grade. Debt rated BBB has an
adequate capacity to pay interest and repay principal. Although adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than in
higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominately speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
represents a lower degree of speculation than B and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which could
lead to inadequate capacity to meet timely interest and principal payments. The
BB rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
A-3
<PAGE> 66
B - Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
Additionally, the rating CI is reserved for income bonds on which no
interest is being paid. Such debt is rated between debt rated C and debt rated
D.
To provide more detailed indications of credit quality, the ratings from
"AA" to "CCC" may be modified by the addition of a plus or minus sign to show
relative standing within this major rating category.
D - Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The following summarizes the highest four municipal ratings used by
Moody's:
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated as are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
A-4
<PAGE> 67
B - Bonds which are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
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.
Caa - Bonds that are rated Caa are of poor standing. These issues may be
in default or present elements of danger may exist with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-5
<PAGE> 68
STATEMENT OF ADDITIONAL INFORMATION
October 26, 1998
Common Shares of the
WARBURG, PINCUS INTERNATIONAL GROWTH FUND, INC.
WARBURG, PINCUS EMERGING MARKETS II FUND, INC.
WARBURG, PINCUS U.S. CORE EQUITY FUND, INC.
WARBURG, PINCUS U.S. CORE FIXED INCOME FUND, INC.
WARBURG, PINCUS STRATEGIC GLOBAL FIXED INCOME FUND, INC.
WARBURG, PINCUS GLOBAL TELECOMMUNICATIONS FUND, INC.
WARBURG, PINCUS HIGH YIELD FUND, INC.
WARBURG, PINCUS MUNICIPAL BOND FUND, INC.
WARBURG, PINCUS SELECT ECONOMIC VALUE 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 of Warburg
Pincus International Growth, Warburg Pincus Emerging Markets II, Warburg
Pincus U.S. Core Equity, Warburg Pincus U.S. Core Fixed Income, Warburg Pincus
Strategic Global Fixed Income, Warburg Pincus Global Telecommunications,
Warburg Pincus High Yield, Warburg Pincus Municipal Bond and Warburg Pincus
Select Economic Value Equity Funds (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 Fund 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 PROSPECTUS 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> 69
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
GENERAL...........................................................................................................1
COMMON INVESTMENT POLICIES -- ALL FUNDS...........................................................................1
COMMON INVESTMENT OBJECTIVES AND POLICIES -- WARBURG PINCUS INTERNATIONAL
GROWTH, WARBURG PINCUS EMERGING MARKETS II, WARBURG PINCUS U.S. CORE
EQUITY, WARBURG PINCUS U.S. CORE FIXED INCOME, WARBURG PINCUS GLOBAL
TELECOMMUNICATIONS, WARBURG PINCUS HIGH YIELD, WARBURG PINCUS STRATEGIC GLOBAL
FIXED INCOME AND WARBURG PINCUS SELECT ECONOMIC VALUE EQUITY FUNDS ...............................................8
SUPPLEMENTAL INVESTMENT OBJECTIVES AND POLICIES -- WARBURG PINCUS INTERNATIONAL
GROWTH, WARBURG PINCUS EMERGING MARKETS II, WARBURG PINCUS U.S. CORE
EQUITY, WARBURG PINCUS GLOBAL TELECOMMUNICATIONS AND WARBURG PINCUS
SELECT ECONOMIC VALUE EQUITY FUNDS ..............................................................................22
SUPPLEMENTAL INVESTMENT OBJECTIVES AND POLICIES -- WARBURG PINCUS GLOBAL
TELECOMMUNICATIONS FUND .........................................................................................22
SUPPLEMENTAL INVESTMENT POLICIES -- WARBURG PINCUS MUNICIPAL BOND FUND ..........................................23
INVESTMENT LIMITATIONS...........................................................................................24
RISK FACTORS.....................................................................................................26
DIRECTORS AND OFFICERS...........................................................................................31
DIRECTORS' ESTIMATED COMPENSATION THROUGH AUGUST 31, 1999........................................................35
INVESTMENT ADVISORY AND SERVICING ARRANGEMENTS...................................................................35
PORTFOLIO TRANSACTIONS AND TURNOVER RATE.........................................................................41
PURCHASE AND REDEMPTION INFORMATION..............................................................................45
VALUATION OF SHARES..............................................................................................45
PERFORMANCE AND YIELD INFORMATION................................................................................47
TAXES............................................................................................................50
ADDITIONAL INFORMATION CONCERNING THE FUNDS' SHARES..............................................................59
MISCELLANEOUS....................................................................................................59
INDEPENDENT ACCOUNTANTS AND COUNSEL..............................................................................60
FINANCIAL STATEMENTS.............................................................................................60
APPENDIX A......................................................................................................A-1
APPENDIX B......................................................................................................B-1
</TABLE>
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GENERAL
The investment objective of the Warburg Pincus International
Growth ("International Growth"), Warburg Pincus Emerging Markets II ("Emerging
Markets"), Warburg Pincus Global Telecommunications ("Global
Telecommunications"), Warburg Pincus Select Economic Value Equity ("Select
Equity") and Warburg Pincus U.S. Core Equity ("U.S. Equity") Funds is to provide
long-term appreciation of capital.
The investment objective of the Warburg Pincus High Yield
("High Yield"), Warburg Pincus Municipal Bond ("Municipal Bond"), Warburg
Pincus Strategic Global Fixed Income ("Global Income") and Warburg Pincus U.S.
Core Fixed Income (U.S. Fixed Income") Funds is to provide high total return.
Each of the Funds is an open-end management investment
company. Each Fund was organized as a Maryland corporation on July 31, 1988.
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 Funds' combined Prospectuses.
COMMON INVESTMENT POLICIES -- ALL FUNDS
The following supplements the information contained in the
Prospectus 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
<PAGE> 71
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 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 adverse market action, expenses and/or delays in connection with
the disposition of the underlying obligations. The financial institutions with
which a Fund may enter into repurchase agreements will be banks and non-bank
dealers of U.S. Government securities that are listed on the Federal Reserve
Bank of New York's list of reporting dealers, if such banks and non-bank dealers
are deemed creditworthy by BEA Associates ("BEA") or, if applicable, Credit
Suisse Asset Management Limited ("CSAM"), the Fund's adviser or sub-investment
adviser, as the case may be (each, an "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
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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 AND DOLLAR ROLLS. 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 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. Each Fund also may enter into "dollar rolls," in which it sells fixed
income securities for delivery in the current month and simultaneously contracts
to repurchase substantially similar (same type, coupon and maturity) securities
on a specified future date. During the roll period, a Fund would forgo principal
and interest paid on such securities. A Fund would be compensated by the
difference between the current sales price and the forward price for the future
purchase, as well as by the interest earned on the cash proceeds of the initial
sale. The Funds do not presently intend to invest more than 5% of net assets in
reverse repurchase agreements or dollar rolls during the coming year.
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WHEN-ISSUED SECURITIES, DELAYED DELIVERY TRANSACTIONS AND
FORWARD COMMITMENTS. Each Fund may purchase securities on a when-issued basis or
on a forward commitment basis, and it may purchase or sell securities for
delayed delivery. These transactions occur when securities are purchased or sold
by a Fund with payment and delivery taking place in the future to secure what is
considered an advantageous yield and price to a Fund at the time of entering
into the transaction. Although the Funds have not established a limit on the
percentage of their assets that may be committed in connection with such
transactions, they will maintain segregated accounts with their custodian
consisting of cash or liquid securities denominated in U.S. dollars or non-U.S.
currencies in an aggregate amount equal to the amount of their commitment in
connection with such purchase transactions. The assets contained in the
segregated account will be marked-to-market daily and additional assets will be
placed in such account on any day in which assets fall below the amount of its
commitment. Each Fund's liquidity and ability to manage its assets might be
affected when it sets aside cash or portfolio fund securities to cover such
commitments. When a Fund engages in when-issued transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in the
Fund incurring a loss or missing an opportunity to obtain a price considered to
be advantageous. When-issued and forward commitment transactions involve the
risk that the price or yield obtained in a transaction may be less favorable
than the price or yield available in the market when the securities delivery
takes place. Each Fund currently anticipates that when-issued securities will
not exceed 25% of its net assets. Each Fund does not intend to engage in
when-issued purchases and forward commitments for speculative purposes but only
in furtherance of its investment objectives.
STAND-BY COMMITMENT AGREEMENTS. Each Fund may from time to
time enter into stand-by commitment agreements. Such agreements commit a Fund,
for a stated period of time, to purchase a stated amount of a fixed income
securities which may be issued and sold to the Fund at the option of the issuer.
The price and coupon of the security is fixed at the time of the commitment. At
the time of entering into the agreement, a Fund is paid a commitment fee,
regardless of whether or not the security is ultimately issued. A Fund will
enter into such agreements only for the purpose of investing in the security
underlying the commitment at a yield and price that is considered advantageous
to a Fund. Each Fund will not enter into a stand-by commitment with a remaining
term in excess of 45 days and it will limit its investment in such commitments
so that the aggregate purchase price of the securities subject to such
commitments, together with the value of portfolio securities subject to legal
restrictions on resale, will not exceed 10% of its assets taken at the time of
acquisition of such commitment or security. Each Fund will at all times maintain
a segregated account with its custodian consisting of cash or liquid securities
denominated in U.S. dollars or non-U.S. currencies in an aggregate amount equal
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to the purchase price of the securities underlying the commitment. The assets
contained in the segregated account will be marked-to-market daily and
additional assets will be placed in such account on any day in which assets fall
below the amount of the purchase price. A Fund's liquidity and ability to manage
its assets might be affected when it sets aside cash or portfolio securities to
cover such commitments.
There can be no assurance that the securities subject to a
stand-by commitment will be issued and the value of the security, if issued, on
the delivery date may be more or less than its purchase price. Because the
issuance of the security underlying the commitment is at the option of the
issuer, a Fund may bear the risk of a decline in the value of such security and
may not benefit from an appreciation in the value of the security during the
commitment period.
The purchase of a security subject to a stand-by commitment
agreement and the related commitment fee will be recorded on the date on which
the security can reasonably be expected to be issued, and the value of the
security will be adjusted by the amount of the commitment fee. In the event the
security is not issued, the commitment fee will be recorded as income on the
expiration date of the stand-by commitment. The Funds do not presently intend to
invest more than 5% of net assets in stand-by commitment 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, 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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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 can 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. A Fund's investment in Rule 144A securities could increase the level
of illiquidity during any period that qualified institutional buyers become
uninterested in purchasing these 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.
EMERGING GROWTH AND SMALLER CAPITALIZATION COMPANIES;
UNSEASONED ISSUERS. Each Fund will not invest in securities of unseasoned
issuers, including equity securities of unseasoned issuers which are not readily
marketable, if the aggregate investment in such securities would exceed 5% of
such Fund's net assets. The term "unseasoned" refers to issuers which, together
with their predecessors, have been in operation for less than three years.
LENDING OF PORTFOLIO SECURITIES. To increase income on its
investments, a Fund may lend its portfolio securities with an aggregate value of
up to 50% of its total assets (in the case of the Select Equity Fund, up to
33-1/3% of its total assets, including the loan collateral) to broker/dealers
and other
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institutional investors. Each Fund may lend its portfolio securities on a 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 (for the Select Equity Fund,
at least equal to 102% of 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 Fund 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.
COMMON INVESTMENT OBJECTIVES AND POLICIES -- INTERNATIONAL GROWTH, EMERGING
MARKETS, U.S. EQUITY, U.S. FIXED INCOME, GLOBAL TELECOMMUNICATIONS, HIGH
YIELD, GLOBAL INCOME AND SELECT EQUITY FUNDS
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
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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).
FOREIGN DEBT SECURITIES. The returns on foreign debt
securities reflect interest rates and other market conditions prevailing in
those countries and the effect of gains and losses in the denominated currencies
against the U.S. dollar, which have had a substantial impact on investment in
foreign fixed-income securities. The relative performance of various countries'
fixed-income markets historically has reflected wide variations relating to the
unique characteristics of each country's economy. Year-to-year fluctuations in
certain markets have been significant, and negative returns have been
experienced in various markets from time to time.
The foreign government securities in which the Funds may
invest generally consist of obligations issued or backed by national, state or
provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt obligations
of supranational entities, which include international organizations designated,
or backed by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples include the International Bank for Reconstruction and Development (the
"World Bank"), the European Coal and Steel Community, the Asian Development Bank
and the InterAmerican Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt securities
of quasi-governmental agencies are issued by entities owned by either a
national, state or equivalent government or are obligations of a political unit
that is not backed by the national government's full faith and credit and
general taxing powers. An example of a multinational currency unit is the
European Currency Unit ("ECU"). An ECU represents specified amounts of the
currencies of certain member states of the European Economic Community. The
specific amounts of currencies comprising the ECU may be adjusted by the Council
of Ministers of the European Community to reflect changes in relative values of
the underlying currencies.
BRADY BONDS. Each Fund may invest in so-called "Brady Bonds,"
which are securities created through the exchange of existing commercial bank
loans to Latin American public and private entities for new bonds in connection
with debt restructurings under a debt restructuring plan announced by former
U.S. Secretary of the Treasury Nicholas F. Brady (the "Brady Plan"). Brady Bonds
may be collateralized or uncollateralized, are issued in various currencies
(primarily the
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U.S. dollar) and are currently actively traded in the over-the-counter secondary
market for Latin American debt instruments.
Dollar-denominated, collateralized Brady Bonds, which may be
fixed rate par bonds or floating rate discount bonds, are collateralized in full
as to principal by U.S. Treasury zero coupon bonds having the same maturity as
the bonds. Interest payments on these Brady Bonds generally are collateralized
by cash or securities in an amount that, in the case of fixed rate bonds, is
equal to at least one year of rolling interest payments or, in the case of
floating rate bonds, initially is equal to at least one year's rolling interest
payments based on the applicable interest rate at that time and is adjusted at
regular intervals thereafter.
All Mexican Brady Bonds issued to date, except New Money
Bonds, have principal repayments at final maturity fully collateralized by U.S.
Treasury zero coupon bonds (or comparable collateral in other currencies) and
interest coupon payments collateralized on an 18-month rolling-forward basis by
funds held in escrow by an agent for the bondholders. Approximately half of the
Venezuelan Brady Bonds issued to date have principal repayments at final
maturity collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral in other currencies), while slightly more than half have interest
coupon payments collateralized on a 14-month rolling-forward basis by securities
held by the Federal Reserve Bank of New York as collateral agent.
Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk").
LOAN PARTICIPATIONS AND ASSIGNMENTS. Each Fund may invest in
fixed and floating rate loans ("Loans") arranged through private negotiations
between a foreign government and one or more financial institutions ("Lenders").
The majority of the Funds' investments in Loans in Latin America are expected to
be in the form of participations in Loans ("Participations") and assignments of
portions of Loans from third parties ("Assignments"). Participations typically
will result in a Fund having a contractual relationship only with the Lender,
not with the borrower. A participating Fund will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participation and only upon receipt by the Lender of the
payments from the borrower. In connection with purchasing Participations, a Fund
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the Loan ("Loan Agreement"), nor any
rights of set-off against the borrower, and a Fund may not directly benefit from
any collateral supporting the Loan in which it has purchased the Participation.
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As a result, participating Funds will assume the credit risk of both the
borrower and the Lender that is selling the Participation. In the event of the
insolvency of the Lender selling a Participation, a Fund may be treated as a
general creditor of the Lender and may not benefit from any set-off between the
Lender and the borrower. The Funds will acquire Participations only if the
Lender interpositioned between the Funds and the borrower is determined by the
Adviser to be creditworthy. Each Fund currently anticipates that it will not
invest more than 5% of its net assets in Loan Participations and Assignments.
CONVERTIBLE SECURITIES. A convertible security is a bond,
debenture, note, preferred stock or other security that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion, convertible
securities have characteristics similar to nonconvertible debt securities in
that they ordinarily provide a stable stream of income with generally higher
yields than those of common stocks of the same or similar issuers. Convertible
securities rank senior to common stock in a corporation's capital structure but
are usually subordinated to comparable nonconvertible securities. While no
securities investment is completely without risk, investments in convertible
securities generally entail less risk than the corporation's common stock,
although the extent to which such risk is reduced depends in large measure upon
the degree to which the convertible security sells above its value as a
fixed-income security. Convertible securities have unique investment
characteristics in that they generally (1) have higher yields than common
stocks, but lower yields than comparable non-convertible securities, (2) are
less subject to fluctuation in value than the underlying stock since they have
fixed-income characteristics and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases. Most
convertible securities currently are issued by U.S. companies, although a
substantial Eurodollar convertible securities market has developed, and the
markets for convertible securities denominated in local currencies are
increasing.
The value of a convertible security is a function of its
"investment value" (determined by its yield in comparison with the yields of
other securities of comparable maturity and quality that do not have a
conversion privilege) and its "conversion value" (the security's worth, at
market value, if converted into the underlying common stock). The investment
value of a convertible security is influenced by changes in interest rates, with
investment value declining as interest rates increase and increasing as interest
rates decline. The credit standing of the issuer and other factors also may have
an effect
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on the convertible security's investment value. The conversion value
of a convertible security is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment value,
the price of the convertible security is governed principally by its investment
value. Generally the conversion value decreases as the convertible security
approaches maturity. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. A convertible
security generally will sell at a premium over its conversion value by the
extent to which investors place value on the right to acquire the underlying
common stock while holding a fixed-income security.
The Funds have no current intention of converting any
convertible securities they may own into equity securities or holding them as
equity securities upon conversion, although they may do so for temporary
purposes. A convertible security might be subject to redemption at the option of
the issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Fund is called for redemption,
the Fund will be required to permit the issuer to redeem the security, convert
it into the underlying common stock or sell it to a third party. The Funds will
invest in convertible securities without regard to their credit rating. See
"Risk Factors and Special Considerations -- Lower-Rated Securities" in the
Prospectus.
MORTGAGE-BACKED SECURITIES. The Funds may invest in
mortgage-backed securities, such as those issued by the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage Association
("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or certain
foreign issuers, as well as by private issuers such as commercial investment
banks, savings and loan institutions, mortgage bankers and private mortgage
insurance companies. Mortgage-backed securities represent direct or indirect
participations in, or are secured by and payable from, mortgage loans secured by
real property. The mortgages backing these securities include, among other
mortgage instruments, conventional 30-year fixed rate mortgages, 15-year fixed
rate mortgages, graduated payment mortgages and adjustable rate mortgages. The
government or the issuing agency typically guarantees the payment of interest
and principal of these securities. However, the guarantees do not extend to the
securities' yield or value, which are likely to vary inversely with fluctuations
in interest rates, nor do the guarantees extend to the yield or value of the
Fund's shares. These securities generally are "pass-through" instruments,
through which the holders receive a share of all interest and principal payments
from the mortgages underlying the securities, net of certain fees.
Yields on pass-through securities are typically quoted by
investment dealers and vendors based on the maturity of the
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underlying instruments and the associated average life assumption. The average
life of pass-through pools varies with the maturities of the underlying mortgage
loans. A pool's term may be shortened by unscheduled or early payments of
principal on the underlying mortgages. The occurrence of mortgage prepayments is
affected by various factors, including the level of interest rates, general
economic conditions, the location, scheduled maturity and age of the mortgage
and other social and demographic conditions. Because prepayment rates of
individual pools vary widely, it is not possible to predict accurately the
average life of a particular pool. For pools of fixed rate 30-year mortgages, a
common industry practice in the U.S. has been to assume that prepayments will
result in a 12-year average life. At present, pools, particularly those with
loans with other maturities or different characteristics, are priced on an
assumption of average life determined for each pool.
Although certain mortgage-related securities are guaranteed by
a third party or are otherwise similarly secured, the market value of the
security, which may fluctuate, is not so secured. If a Fund purchases a
mortgage-related security at a premium, that portion may be lost if there is a
decline in the market value of the security whether resulting from increases in
interest rates or prepayment of the underlying mortgage collateral. As with
other interest-bearing securities, the prices of such securities are inversely
affected by changes in interest rates. However, though the value of a
mortgage-related security may decline when interest rates rise, the converse is
not necessarily true because in periods of declining interest rates mortgages
underlying securities are prone to prepayment. In periods of falling interest
rates, the rate of prepayment tends to increase, thereby shortening the actual
average life of a pool of mortgage-related securities. Conversely, in periods of
rising rates the rate of prepayment tends to decrease, thereby lengthening the
actual average life of the pool. However, these effects may not be present, or
may differ in degree, if the mortgage loans in the pools have adjustable
interest rates or other special payment terms, such as a prepayment charge.
Actual prepayment experience may cause the yield of mortgage-backed securities
to differ from the assumed average life yield. Reinvestment of prepayments may
occur at higher or lower interest rates than the original investment, thus
affecting a Fund's yield. For this and other reasons, a mortgage-related
security's stated maturity may be shortened by an unscheduled prepayment on
underlying mortgages and, therefore, it is not possible to predict accurately
the security's return to a Fund. Mortgage-related securities provide regular
payments consisting of interest and principal. No assurance can be given as to
the return a Fund will receive when these amounts are reinvested.
The rate of interest on mortgage-backed securities is lower
than the interest rates paid on the mortgages included in the underlying pool
due to the annual fees paid to the servicer of the mortgage pool for passing
through monthly payments to
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certificate holders and to any guarantor, such as GNMA, and due to any yield
retained by the issuer. Actual yield to the holder may vary from the coupon
rate, even if adjustable, if the mortgage-backed securities are purchased or
traded in the secondary market at a premium or discount. In addition, there is
normally some delay between the time the issuer receives mortgage payments from
the servicer and the time the issuer makes the payments on the mortgage-backed
securities, and this delay reduces the effective yield to the holder of such
securities.
COLLATERALIZED MORTGAGE OBLIGATIONS. The Funds may also
purchase collateralized mortgage obligations ("CMOs") issued by a U.S.
Government instrumentality which are backed by a portfolio of mortgages or
mortgage-backed securities. The issuer's obligations to make interest and
principal payments is secured by the underlying portfolio of mortgages or
mortgage-backed securities. Generally, CMOs are partitioned into several classes
with a ranked priority by which the classes of obligations are redeemed. These
securities may be considered mortgage derivatives. The Funds may only invest in
CMOs issued by FHLMC, FNMA or other agencies of the U.S. Government or
instrumentalities established or sponsored by the U.S. Government.
CMOs provide an investor with a specified interest in the cash
flow of a pool of underlying mortgages or other mortgage-related securities.
Issuers of CMOs frequently elect to be taxed as pass-through entities known as
real estate mortgage investment conduits ("REMICs"). CMOs are issued in multiple
classes, each with a specified fixed or floating interest rate and a final
distribution date. Coupons can be fixed or variable. If variable, they can move
with or in the reverse direction of interest rates. The coupon changes could be
a multiple of the actual rate change and there may be limitations on what the
coupon can be. Cash flows of pools can also be divided into a principal only
class and an interest only class. In this case the principal only class will
only receive principal cash flows from the pool. All interest cash flows go to
the interest only class. The relative payment rights of the various CMO classes
may be structured in many ways, either sequentially or by other rules of
priority. Generally, payments of principal are applied to the CMO classes in the
order of their respective stated maturities, so that no principal payments will
be made on a CMO class until all other classes having an earlier stated maturity
date are paid in full. Sometimes, however, CMO classes are "parallel pay," i.e.
payments of principal are made to two or more classes concurrently. CMOs may
exhibit more or less price volatility and interest rate risk than other types of
mortgaged-related obligations.
The CMO structure returns principal to investors sequentially,
rather than according to the pro rata method of a pass-through. In the
traditional CMO structure, all classes (called tranches) receive interest at a
stated rate, but only one
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class at a time receives principal. All principal payments received on the
underlying mortgages or securities are first paid to the "fastest pay" tranche.
After this tranche is retired, the next tranche in the sequence becomes the
exclusive recipient of principal payments. This sequential process continues
until the last tranche is retired. In the event of sufficient early repayments
on the underlying mortgages, the "fastest-pay" tranche generally will be retired
prior to its maturity. Thus the early retirement of a particular tranche of a
CMO held by a Fund would have the same effect as the prepayment of mortgages
underlying a mortgage-backed pass-through security as described above.
ASSET-BACKED SECURITIES. Each Fund may invest in asset-backed
securities, which represent participations in, or are secured by and payable
from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property and receivables
from revolving credit (credit card) agreements. The Funds may also invest in
other types of asset-backed securities that may be available in the future. Such
assets are securitized through the use of trusts and special purpose
corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the trust or corporation. The estimated life of an asset-backed security
varies with the prepayment experience with respect to the underlying debt
instruments. The rate of such prepayments, and hence the life of the
asset-backed security, will be primarily a function of current market rates,
although other economic and demographic factors will be involved. In certain
circumstances, asset-backed securities may be considered illiquid securities
subject to the percentage limitations described above. Asset-backed securities
are considered an industry for industry concentration purposes, and a Fund will
therefore not purchase any asset-backed securities which would cause 25% or more
of a Fund's net assets at the time of purchase to be invested in asset-backed
securities.
Asset-backed securities present certain risks that are not
presented by other securities in which a Fund may invest. Automobile receivables
generally are secured by automobiles. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations. If
the servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the holders of
the asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in the underlying automobiles. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities. Credit card receivables
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are generally unsecured, and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due.
ZERO COUPON SECURITIES. Each Fund may invest in "zero coupon"
U.S. Treasury, foreign government and U.S. and foreign corporate debt
securities, which are bills, notes and bonds that have been stripped of their
unmatured interest coupons and receipts or certificates representing interests
in such stripped debt obligations and coupons. Each Fund currently anticipates
that zero coupon securities will not exceed 5% of its net assets. A zero coupon
security pays no interest to its holder prior to maturity. Accordingly, such
securities usually trade at a deep discount from their face or par value and
will be subject to greater fluctuations of market value in response to changing
interest rates than debt obligations of comparable maturities that make current
distributions of interest. The Funds anticipate that they will not normally hold
zero coupon securities to maturity. Federal tax law requires that a holder of a
zero coupon security accrue a portion of the discount at which the security was
purchased as income each year, even though the holder receives no interest
payment on the security during the year.
STRUCTURED NOTES. The Funds may invest in structured notes.
The distinguishing feature of a structured note is that the amount of interest
and/or principal payable on the notes is based on the performance of a benchmark
asset or market other than fixed-income securities or interest rates. Examples
of a benchmark include stock prices, currency exchange rates and physical
commodity prices. Investing in a structured note allows a Fund to gain exposure
to the benchmark market while fixing the maximum loss that the Fund may
experience in the event that the market does not perform as expected. The
performance tie can be a straight relationship or leveraged, although the
Adviser generally will not use leverage in its structured note strategies.
Normally, these bonds are issued by U.S. Government Agencies and investment
banks arrange the structuring. Depending on the terms of the note, a Fund may
forego all or part of the interest and principal that would be payable on a
comparable conventional note; a Fund's loss cannot exceed this foregone interest
and/or principal. An investment in a structured note involves risks similar to
those associated with a direct investment in the benchmark asset. Structured
notes will be treated as illiquid securities for investment limitation purposes.
ADDITIONAL INVESTMENT CONSIDERATIONS AND RISKS--NON-INVESTMENT
GRADE FIXED-INCOME SECURITIES. When and if available, fixed-income securities
may be purchased by a Fund at a discount from face value. From time to time, a
Fund may purchase securities in default with respect to the paying of principal
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and/or interest at the time acquired if, in the opinion of the Adviser, such
securities have the potential for future capital appreciation.
Debt securities purchased by the Funds may bear fixed, fixed
and contingent or variable rates of interest and may involve equity features
such as conversion or exchange rights or warrants for the acquisition of stock
of the same or a different issuer; participations based on revenues, sales or
profits, or the purchase of common stock in a unit transaction (where corporate
debt securities and common stock are offered as a unit). Conversion of certain
debt securities may reduce net income per share and net asset value per share.
The occurrence of any income dilution of previously outstanding shares of common
stock when debt securities are converted will depend upon whether a Fund can,
from the investments made with the proceeds of the debt securities, earn an
amount per share issuable upon conversion at least equal to the amount earned
with respect to shares of common stock outstanding prior to conversion. If debt
securities are converted at a time when the net asset value per share of common
stock is greater than the conversion price, the conversion will result in a
decrease or dilution in then current net asset value per share of common stock.
The value of the lower rated fixed income securities that the
Funds purchase may fluctuate more than the value of higher rated debt
securities. These lower rated fixed income securities generally tend to reflect
short-term corporate and market developments to a greater extent than higher
rated securities which react primarily to fluctuations in the general level of
interest rates. Changes in the value of securities subsequent to their
acquisition will not affect cash income or yields to maturity to a Fund but will
be reflected in the net asset value of a Fund's shares. The Funds attempt to
reduce risk through credit analysis and attention to current developments and
trends in both the economy and financial markets. There can be no assurance that
such attempts will be successful.
Lower-rated debt securities may include zero coupon securities
or pay-in-kind securities. A zero coupon security bears no interest but is
issued at a discount from its value at maturity. When held to maturity, its
entire return equals the difference between its issue price and its maturity
value. Pay-in-kind securities typically do not provide for cash interest
payments but instead provide for the issuance of additional debt securities of
the issuer in the face amount of the interest payment amount due in lieu of a
cash payment. The market prices of both of these securities are affected to a
greater extent by interest rate changes and thereby tend to be more volatile
than securities which pay interest periodically and in cash.
There are also special considerations associated with
investing in lower-rated debt securities structured as zero coupon or
pay-in-kind securities. For example, a Fund must
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include the interest ("original issue discount") on these securities in
determining the amount of its required distributions to shareholders for federal
income tax and federal excise tax purposes, even though it receives no cash
interest until the security's maturity or payment date. Therefore, in order to
satisfy these distribution requirements, a Fund may have to sell some of its
assets without regard to their investment merit to obtain cash to distribute to
shareholders. These actions may occur under disadvantageous circumstances and
are likely to reduce a Fund's assets and may thereby increase its expense ratio
and decrease its rate of return. For additional information concerning these tax
considerations, see "Taxes" below. From time to time, a Fund may also purchase
securities not paying interest at the time acquired if, in the opinion of the
Fund's Adviser, such securities have the potential for future income or capital
appreciation.
HEDGING. Each of the Funds may engage in various hedging
strategies. See "Certain Investment Strategies -- Foreign Currency Transactions"
in the Prospectus.
FORWARD CURRENCY CONTRACTS. Each Fund may use forward currency
contracts to protect against uncertainty in the level of future exchange rates
and to enhance total return. The Funds may also enter into forward currency
contracts with respect to specific transactions. For example, when a Fund
anticipates the receipt in a foreign currency of interest payments on a security
that it holds, a Fund may desire to "lock-in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such payment, as the case may be, by
entering into a forward contract for the purchase or sale, for a fixed amount of
U.S. dollars, of the amount of foreign currency involved in the underlying
transaction. A Fund will thereby be able to protect itself against a possible
loss resulting from an adverse change in the relationship between the currency
exchange rates during the period between the date on which the security is
purchased or sold, or on which the payment is declared, and the date on which
such payments are made or received.
The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible because the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. Accordingly,
it may be necessary for a Fund to purchase additional foreign currency on the
spot (i.e., cash) market (and bear the expense of such purchase) if the market
value of the security is less than the amount of foreign currency the Fund is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency. Conversely, it may be necessary to sell on the
spot market some of the foreign currency received upon the sale of a Fund
security if its market value exceeds the amount of foreign currency a Fund is
obligated to deliver. The projection
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of short-term currency market movements is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain.
Forward contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing a Fund to sustain losses on
these contracts and transaction costs. A Fund may enter into a forward contract
and maintain a net exposure on such contract only if (1) the consummation of the
contract would not obligate a Fund to deliver an amount of foreign currency in
excess of the value of a Fund's portfolio securities or other assets denominated
in that currency or (2) a Fund maintains cash or liquid securities in a
segregated account with its custodian in the amount prescribed. Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, the Adviser believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of a Fund will be served.
At or before the maturity date of a forward contract requiring
a Fund to sell a currency, the Funds may either sell a portfolio security and
use the sale proceeds to make delivery of the currency or retain the security
and offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Fund will obtain, on the same maturity
date, the same amount of the currency that it is obligated to deliver.
Similarly, the Funds may close out a forward contract requiring them to purchase
a specified currency by entering into a second contract entitling them to sell
the same amount of the same currency on the maturity date of the first contract.
A Fund would realize a gain or loss as a result of entering into such an
offsetting forward currency contract under either circumstance to the extent the
exchange rate or rates between the currencies involved moved between the
execution dates of the first contract and the offsetting contract.
The cost to a Fund of engaging in forward currency contracts
will vary with factors such as the currencies involved, the length of the
contract period and the market conditions then prevailing. Because forward
currency contracts are usually entered into on a principal basis, no fees or
commissions are involved. The use of forward currency contracts will not
eliminate fluctuations in the prices of the underlying securities a Fund owns or
intends to acquire, but it will fix a rate of exchange in advance. In addition,
although forward currency contracts limit the risk of loss due to a decline in
the value of the hedged currencies, at the same time they limit any potential
gain that might result should the value of the currencies increase. Moreover,
investors should be aware that dollar-denominated securities may not be
available in some or all foreign countries, that the forward currency market for
the purchase of U.S. dollars in many foreign countries is not highly
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developed and that in certain countries no forward market for foreign currencies
currently exists or that such market may be closed to investment by a Fund.
Although a Fund will value its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. The Funds may convert foreign currency from time
to time, and investors should be aware of the costs of currency conversion.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to a Fund at one rate, while offering a lesser rate of exchange
should a Fund desire to resell that currency to the dealer.
OPTIONS AND FUTURES CONTRACTS. The Funds, except the Municipal
Bond Fund, 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 to various indexes and may or may
not be listed on a national securities exchange and issued by the Options
Clearing Corporation. The 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.
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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 the 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 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 "AGAINST THE BOX." In a short sale, a Fund sells a
borrowed security and has a corresponding obligation to the lender to return the
identical security. Each Fund may
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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." In
a short sale, a seller does not immediately deliver the securities sold and is
said to have a short position in those securities until delivery occurs. If a
Fund engages in a short sale, the collateral for the short position will be
maintained by the Fund's custodian or a qualified sub-custodian. While the short
sale is open, the Fund will maintain in a segregated account an amount of
securities equal in kind and amount to the securities sold short or securities
convertible into or exchangeable for such equivalent securities. These
securities constitute the Fund's long position. A Fund may, however, make a
short sale as a hedge, when it believes that the price of a security may
decline, causing a decline in the value of a security owned by the Fund (or a
security convertible or exchangeable for such security), or when the Fund wants
to sell the security at an attractive current price, but also wishes possibly to
defer recognition of gain or loss for federal income tax purposes. (A short sale
against the box will defer recognition of gain for federal income tax purposes
only if the Fund subsequently closes the short position by making a purchase of
the relevant securities no later than 30 days after the end of the taxable
year.) In such case, any future losses in the Fund's long position should be
reduced by a gain in the short position. Conversely, any gain in the long
position should be reduced by a loss in the short position. The extent to which
such gains or losses are reduced will depend upon the amount of the security
sold short relative to the amount the Fund owns. There will be certain
additional transaction costs associated with short sales against the box, but
the Fund will endeavor to offset these costs with the income from the investment
of the cash proceeds of short sales. The Funds do not presently intend to invest
more than 5% of net assets in short sales against the box.
SECTION 4(2) PAPER. "Section 4(2) paper" is commercial paper
which is issued in reliance on the "private placement" exemption from
registration which is afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) paper is restricted as to disposition under the federal securities
laws and is generally sold to institutional investors such as the Funds which
agree that they are purchasing the paper for investment and not with a view to
public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) paper normally is resold to other institutional
investors through or with the assistance of investment dealers who make a market
in the Section 4(2) paper, thereby providing liquidity. See "Illiquid
Securities" above. See Appendix "A" for a list of commercial paper ratings.
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SUPPLEMENTAL INVESTMENT OBJECTIVES AND POLICIES --
INTERNATIONAL GROWTH, EMERGING MARKETS, U.S. EQUITY,
GLOBAL TELECOMMUNICATIONS AND SELECT EQUITY FUNDS
RIGHTS OFFERINGS AND PURCHASE WARRANTS. Rights offerings and
purchase warrants are privileges issued by a corporation which enable the owner
to subscribe to and purchase a specified number of shares of the corporation at
a specified price during a specified period of time. Subscription rights
normally have a short lifespan to expiration. The purchase of rights or warrants
involves the risk that a Fund could lose the purchase value of a right or
warrant if the right to subscribe to additional shares is not executed prior to
the rights and warrants expiration. Also, the purchase of rights and/or warrants
involves the risk that the effective price paid for the right and/or warrant
added to the subscription price of the related security may exceed the value of
the subscribed security's market price such as when there is no movement in the
level of the underlying security.
SUPPLEMENTAL INVESTMENT OBJECTIVES AND POLICIES --
GLOBAL TELECOMMUNICATIONS FUND
Telecommunications companies in both developed and emerging
countries are undergoing significant change due to varying and evolving levels
of governmental regulation or deregulation and other factors. As a result,
competitive pressures are intense and the securities of such companies may be
subject to rapid price volatility. Telecommunications regulation typically
limits rates charged, returns earned, providers of services, types of services,
ownership, areas served and terms for dealing with competitors and customers.
Telecommunications regulation generally has tended to be less stringent for
newer services than for traditional telephone service, although there can be no
assurances that such newer services will not be heavily regulated in the future.
Regulation may also limit the use of new technologies and hamper efficient
depreciation of existing assets. If regulation limits the use of new
technologies by established carriers or forces cross-subsidies, large private
networks may emerge. Service providers may also be subject to regulations
regarding ownership and control, providers of services, subscription rates and
technical standards.
Companies offering telephone services are experiencing
increasing competition from cellular telephones, and the cellular telephone
industry, because it has a limited operating history, faces uncertainty
concerning the future of the industry and demand for cellular telephones. All
telecommunications companies in both developed and emerging countries are
subject to the additional risk that technological innovations will make their
products and services obsolete. While telephone companies in developed countries
and certain emerging countries may pay an above average dividend, the Fund's
investment decisions are based
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upon capital appreciation potential rather than income considerations.
SUPPLEMENTAL INVESTMENT POLICIES --
MUNICIPAL BOND FUND
Opinions relating to the validity of Municipal Obligations and
to the exemption of interest thereon from federal income tax are rendered by
bond counsel to the respective issuers at the time of issuance, and opinions
relating to the validity of and the tax-exempt status of payments received by
the Fund from tax-exempt derivative securities are rendered by counsel to the
respective sponsors of such securities. The Fund and the Adviser will rely on
such opinions and will not review independently the underlying proceedings
relating to the issuance of Municipal Obligations, the creation of any
tax-exempt derivative securities, or the basis for such opinions.
The Tax Reform Act of 1986 substantially revised provisions of
prior law affecting the issuance and use of proceeds of certain Municipal
Obligations. A new definition of private activity bonds applies to many types of
bonds, including those which were industrial development bonds under prior law.
Interest on private activity bonds issued after August 15, 1986 is tax-exempt
only if the bonds fall within certain defined categories of qualified private
activity bonds and meet the requirements specified in those respective
categories. In addition, interest on certain private activity bonds issued after
August 7, 1986 that is received by taxpayers subject to federal alternative
minimum tax is taxable. The Act has generally not changed the tax treatment of
bonds issued to finance governmental operations. As used in this Statement of
Additional Information, the term "private activity bonds" also includes
industrial development revenue bonds issued prior to the effective date of the
provisions of the Tax Reform Act of 1986. Investors should also be aware of the
possibility of state and local alternative minimum or minimum income tax
liability on interest from Alternative Minimum Tax Securities.
Although the Municipal Bond Fund may invest 25% or more of its
net assets in Municipal Obligations the interest on which is paid solely from
revenues of similar projects, and may invest up to 40% of its total assets in
private activity bonds when added together with any taxable investments held by
the Municipal Bond Fund, it does not presently intend to do so unless in the
opinion of the Adviser the investment is warranted. To the extent the Municipal
Bond Fund's assets are invested in Municipal Obligations payable from the
revenues of similar projects or are invested in private activity bonds, the
Municipal Bond Fund will be subject to the peculiar risks presented by the laws
and economic conditions relating to such projects and bonds to a greater extent
than it would be if its assets were not so invested.
-23-
<PAGE> 93
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 the 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;
2. Issue any senior securities, except as permitted under the
1940 Act;
3. Act as an underwriter of securities within the meaning of
the Securities Act, except insofar as it might be deemed to be an underwriter
upon disposition of certain portfolio securities acquired within the limitation
on purchases of restricted securities;
4. Purchase or sell real estate (including real estate limited
partnership interests), provided that a Fund may invest in securities secured by
real estate or interests therein or issued by companies that invest in real
estate or interests therein;
5. Purchase or sell commodities or commodity contracts, except
that a Fund may deal in forward foreign exchange transactions between currencies
of the different countries in which it may invest and purchase and sell stock
index and currency options, stock index futures, financial futures and currency
futures contracts and related options on such futures;
6. Make loans, except through loans of portfolio instruments
and repurchase agreements, provided that for purposes of this restriction the
acquisition of bonds, debentures or other debt instruments or interests therein
and investment in government obligations, Loan Participations and Assignments,
short-term commercial paper, certificates of deposit and bankers' acceptances
shall not be deemed to be the making of a loan; and
7. Except for the Global Telecommunications Fund, purchase any
securities, which would cause 25% or more of the value of the Fund's total
assets at the time of purchase to be invested in the securities of one or more
issuers conducting their principal business activities in the same industry,
provided that (a) there is no limitation with respect to (i) instruments issued
or guaranteed by the United States, any state,
-24-
<PAGE> 94
territory or possession of the United States, the District of Columbia or any of
their authorities, agencies, instrumentalities or political subdivisions, and
(ii) repurchase agreements secured by the instruments described in clause (i);
(b) wholly-owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents; and (c) utilities will be divided according to their
services, for example, gas, gas transmission, electric and gas, electric and
telephone will each be considered a separate industry. The Telecommunications
Fund will concentrate in the telecommunications industry.
For purposes of Investment Limitation No. 1, collateral
arrangements with respect to, if applicable, the writing of options, futures
contracts, options on futures contracts, forward currency contracts and
collateral arrangements with respect to initial and variation margin are not
deemed to be a pledge of assets and neither such arrangements nor the purchase
or sale of futures or related options are deemed to be the issuance of a senior
security for purposes of Investment Limitation No. 2.
In addition to the fundamental investment limitations
specified above, a Fund may not:
1. Make investments for the purpose of exercising control or
management, but investments by a Fund in wholly-owned investment
entities created under the laws of certain countries will not be deemed
the making of investments for the purpose of exercising control or
management;
2. Purchase securities on margin, except for short-term
credits necessary for clearance of portfolio transactions, and except
that a Fund may make margin deposits in connection with its use of
options, futures contracts, options on futures contracts and forward
contracts;
3. Purchase or sell interests in mineral leases, oil, gas or
other mineral exploration or development programs, except that a Fund
may invest in securities issued by companies that engage in oil, gas or
other mineral exploration or development activities; and
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.
-25-
<PAGE> 95
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 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
-26-
<PAGE> 96
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 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.
-27-
<PAGE> 97
LOWER-RATED OR NON-RATED CRITERIA FOR DEBT SECURITIES. The
High Yield, U.S. Fixed Income, Global Income, and the Municipal Bond Funds have
established no rating criteria for the debt securities in which they may invest.
Issuers of low rated or non-rated securities ("high yield" securities, commonly
known as "junk bonds") may be highly leveraged and may not have available to
them more traditional methods of financing. Therefore, the risks associated with
acquiring the securities of such issuers generally are greater than is the case
with higher rated securities. For example, during an economic downturn or a
sustained period of rising interest rates, issuers of high yield securities may
be more likely to experience financial stress, especially if such issuers are
highly leveraged. During such periods, such issuers may not have sufficient
revenues to meet their interest payment obligations. The issuer's ability to
service its debt obligations also may be adversely affected by specific issuer
developments, or the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer is significantly greater for the holders of lower-rated
securities because such securities may be unsecured and may be subordinated to
other creditors of the issuer.
Lower-rated securities frequently have call or redemption
features which would permit an issuer to repurchase the security from a Fund. If
a call were exercised by the issuer during a period of declining interest rates,
a Fund likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to a Fund and dividends to
shareholders.
A Fund may have difficulty disposing of certain lower-rated
securities because there may be a thin trading market for such securities. The
secondary trading market for high yield securities is generally not as liquid as
the secondary market for higher rated securities. Reduced secondary market
liquidity may have an adverse impact on market price 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.
Adverse publicity and investor perceptions, which may not be
based on fundamental analysis, also may decrease the value and liquidity of
lower-rated securities, particularly in a thinly traded market. Factors
adversely affecting the market value of lower-rated securities are likely to
adversely affect a Fund's net asset value. In addition, a Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
on a portfolio holding or participate in the restructuring of the obligation.
Finally, there are risks involved in applying credit ratings
as a method for evaluating lower-rated debt securities. For example, credit
ratings evaluate the safety of principal and
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<PAGE> 98
interest payments, not the market risks involved in lower-rated debt securities.
Since credit rating agencies may fail to change the credit ratings in a timely
manner to reflect subsequent events, the Adviser will monitor the issuers of
lower-rated debt securities in the Funds to determine if the issuers will have
sufficient cash flow and profits to meet required principal and interest
payments, and to assure the debt securities' liquidity so the Funds can meet
redemption requests. The Adviser will not necessarily dispose of a portfolio
security when its ratings have been changed.
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 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.
-29-
<PAGE> 99
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 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 directors and executive officers of the Funds, their ages,
business addresses and principal occupations during the past five years are:
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<PAGE> 100
<TABLE>
<S> <C>
Richard N. Cooper* (64) Director
Harvard University Professor at Harvard University; National Intelligence
1737 Cambridge Street Council from June 1995 until January 1997; Director or
Cambridge, Massachusetts 02138 Trustee of Circuit City Stores, Inc. (retail electronics
and appliances) and Phoenix Home Life Mutual Insurance
Company; Director/Trustee of other investment companies
advised by Warburg.
Jack W. Fritz (71) Director
2425 North Fish Creek Road Private investor; Consultant and Director of Fritz
P.O. Box 483 Broadcasting, Inc. and Fritz Communications (developers
Wilson, Wyoming 83014 and operators of radio stations); Director of Advo, Inc.
(direct mail advertising); Director/Trustee of other
investment companies advised by Warburg.
John L. Furth* (67) Chairman of the Board
466 Lexington Avenue Vice Chairman, Managing Director and Director of
New York, New York 10017-3147 Warburg; Associated with Warburg since 1970; Director of
Counsellors Securities; Chairman of the Board of other
investment companies advised by Warburg.
</TABLE>
- ----------------------
* Indicates a Director who is an "interested person" of the Funds as
defined in the 1940 Act.
-31-
<PAGE> 101
<TABLE>
<S> <C>
Jeffrey E. Garten (51) Director
Box 208200 Dean of Yale School of Management and William S.
New Haven, Connecticut 06520-8200 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 investment
companies advised by Warburg.
Arnold M. Reichman* (50) Director
466 Lexington Avenue Managing Director, Chief Operating Officer and Assistant
New York, New York 10017-3147 Secretary of Warburg; Director of The RBB Fund, Inc.;
Associated with Warburg since 1984; Director and officer
of Counsellors Securities; Director/Trustee of other
investment companies advised by Warburg.
</TABLE>
- --------
* Indicates a Director who is an "interested person" of the Funds as
defined in the 1940 Act.
-32-
<PAGE> 102
<TABLE>
<S> <C>
Alexander B. Trowbridge (68) Director
1317 F Street President of Trowbridge Partners, Inc. (business
5th Floor consulting) from January 1990 to November 1996; Director
Washington, DC 20004 or Trustee of New England Mutual Life Insurance Co.,
ICOS Corporation (biopharmaceuticals), Waste Management,
Inc. (solid and hazardous waste collection and
disposal), IRI International (energy services), The
Rouse Company (real estate development), Harris Corp.
(electronics and communications equipment), The Gillette
Co. (personal care products) and Sun Company Inc.
(petroleum refining and marketing); Director/Trustee of
other investment companies advised by Warburg.
Eugene L. Podsiadlo (41) President
466 Lexington Avenue Managing Director of Warburg; Associated with Warburg
New York, New York 10017-3147 since 1991; Officer of Counsellors Securities and other
investment companies advised by Warburg.
Stephen Distler (45) Vice President
466 Lexington Avenue Managing Director of Warburg; Associated with Warburg
New York, New York 10017-3147 since 1984; Treasurer of Counsellors Securities; Officer
of other investment companies advised by Warburg.
</TABLE>
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<PAGE> 103
<TABLE>
<S> <C>
Eugene P. Grace (47) Vice President and Secretary
466 Lexington Avenue Senior Vice President of Warburg; Associated with
New York, New York 10017-3147 Warburg since April 1994; Attorney-at-law from September
1989-April 1994; Life insurance agent, New York Life
Insurance Company from 1993 to 1994; Officer of
Counsellors Securities and other investment companies
advised by Warburg.
Howard Conroy, CPA (44) Vice President and Chief Financial Officer
466 Lexington Avenue Vice President of Warburg; Associated with Warburg since
New York, New York 10017-3147 1992; Officer of other investment companies advised by
Warburg.
Daniel S. Madden, CPA (32) Treasurer and Chief Accounting Officer
466 Lexington Avenue Vice President of Warburg; Associated with Warburg
New York, New York 10017-3147 since 1995; Associated with BlackRock Financial
Management, Inc. from September 1994 to October 1995; Associated
with BEA from April 1993 to September 1994; Associated with Ernst
& Young LLP from 1990 to 1993; Officer of other investment
companies advised by Warburg.
Janna Manes, Esq. (31) Assistant Secretary
466 Lexington Avenue Vice President of Warburg; Associated with Warburg since
New York, New York 10017-3147 1996; Associated with the law firm of Willkie Farr &
Gallagher from 1993 to 1996; Officer of other investment
companies advised by Warburg.
Hal Liebes (34) Assistant Secretary
153 East 53rd Street Senior Vice President and General Counsel of BEA from
New York, New York 10022 March 1997 to present; Vice President and Legal Counsel for
BEA from June 1995 to March 1997; Chief Compliance Officer,
CS First Boston Investment Management from 1994 to 1995; Staff
Attorney, Division of Enforcement, U.S. Securities and Exchange
Commission from 1991 to 1994; Associate, Morgan, Lewis & Bockius
from 1989 to 1991; Officer of other investment companies advised
by BEA.
Michael A. Pignataro (38) Assistant Secretary
153 East 53rd Street Vice President of BEA from December 1995 to present; Assistant
New York, New York 10022 Vice President and Chief Administrative Officer for Investment
Companies of BEA from 1989 to December 1995; Officer of other
investment companies advised by BEA.
Rocco A. Del Guercio (35) Assistant Treasurer
153 East 53rd Street Administrative Officer for BEA-advised investment companies from
New York, New York 1002 June 1996 to the present; Assistant Treasurer, Bankers Trust Corp.
-- Fund Administration from March 1994 to June 1996; Mutual Fund
Accounting Supervisor, Dreyfus Corporation from April 1987 to
March 1994; Officer of other investment companies advised by BEA.
Wendy S. Setnicka (33) Assistant Treasurer
153 East 53rd Street Assistant Vice President of BEA from January 1997 to the present;
New York, New York 10022 Administrative Officer for Investment Companies of BEA from November
1993 to the present; Supervisor of Fund Accounting and Administration
at Reich & Tang LP from June 1989 to November 1993; Officer of other
investment companies advised by BEA.
</TABLE>
No employee of Warburg, 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 Warburg, PFPC, Counsellors Service or
any of their affiliates receives an
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<PAGE> 104
annual fee of $500 and $250 for each meeting of the Boards attended by him for
his services as Director, and is reimbursed for expenses incurred in connection
with his attendance at Board meetings. Each member of the Audit Committee
receives an annual fee of $250, and the chairman of the Audit Committee receives
an annual fee of $325.
DIRECTORS' ESTIMATED COMPENSATION THROUGH AUGUST 31, 1999
<TABLE>
<CAPTION>
All
Interna- Emerging U.S. Equity U.S. Global Global High Yield Munici- Investment
tional Markets Growth Fund Fixed Income Telecommuni- Fund pal Companies
Name of Growth Fund Income Fund cations Bond Fund Managed by
Director Fund Fund Fund Warburg+
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
John L. Furth* None None None None None None None None None
- ------------------------------------------------------------------------------------------------------------------------------
Arnold M.
Reichman* None None None None None None None None None
- ------------------------------------------------------------------------------------------------------------------------------
Richard N.
Cooper $1,750 $1,750 $1,750 $1,750 $1,750 $1,750 $1,750 $1,750 $73,250
- ------------------------------------------------------------------------------------------------------------------------------
Jack W.
Fritz $1,750 $1,750 $1,750 $1,750 $1,750 $1,750 $1,750 $1,750 $73,250
- ------------------------------------------------------------------------------------------------------------------------------
Alexander B.
Trowbridge $1,825 $1,825 $1,825 $1,825 $1,825 $1,825 $1,825 $1,825 $76,025
- ------------------------------------------------------------------------------------------------------------------------------
Jeffrey E. $1,750 $1,750 $1,750 $1,750 $1,750 $1,750 $1,750 $1,750 $73,250
Garten
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------
+ Each Director serves as a Director or Trustee of 39 investment
companies advised by Warburg.
* Mr. Furth and Mr. Reichman receive compensation as affiliates of
Warburg and, accordingly, receive no compensation from the Funds or any
other investment company advised by Warburg.
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. BEA renders advisory and administrative
services to each of the Funds pursuant to Investment Advisory Agreements and
CSAM serves as sub-investment adviser to the Global Income and Emerging Markets
II Funds pursuant to Sub-investment Advisory Agreements (collectively, the
"Advisory Agreements"). BEA 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 had not
provided sub-investment advisory services to the BEA Funds.
-35-
<PAGE> 105
BEA is a diversified investment adviser, managing global
equity, fixed income and derivative securities accounts for private individuals,
as well as corporate pension and profit-sharing plans, state pension funds,
union funds, endowments and other charitable institutions. As of September 30,
1998, BEA managed approximately $36.2 billion in assets. BEA is a wholly-owned
subsidiary of Credit Suisse, the second largest Swiss bank, which in turn is a
subsidiary of CS Holding, a Swiss corporation. Active employees of BEA have a
long-term equity incentive plan. BEA is a registered investment adviser under
the Investment Advisors Act of 1940, as amended.
As an investment adviser, BEA emphasizes a global investment
strategy. BEA currently acts as investment adviser for twenty-two 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, BEA 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 is a wholly-owned subsidiary of Credit Suisse. Credit
Suisse had identified BEA and CSAM as its leading institutional international
asset management product centers. As of May 31, 1998, CSAM managed $143 billion
in discretionary assets. CSAM Limited is a registered investment adviser under
the Investment Advisers Act of 1940, as amended. CSAM's principal offices are
located at Beaufort House, 15 St. Botolph Street, GB - London EC3A 7JJ.
BEA and, with respect to the Global Income and Emerging
Markets Funds, CSAM have investment discretion for the Funds and will make
all decisions affecting assets in the Funds under the
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<PAGE> 106
supervision of the Funds' Board of Directors and in accordance with each Fund's
stated policies. The Adviser will select investments for the Funds and will
place purchase and sale orders on behalf of the Funds. For its services to the
International Growth, Emerging Markets II, U.S. Equity, U.S. Fixed Income,
Global Income, Global Telecommunications, High Yield, Municipal Bond and Select
Equity Funds, BEA will be paid (before any voluntary waivers or reimbursements)
a monthly fee computed at an annual rate of .80%, 1.00%, .75%, .375%, .50%,
1.00%, .70%, .70% and, .75% of average daily net assets, respectively.
For the fiscal years ended August 31, the BEA Funds have paid
BEA advisory fees and BEA has waived fees and/or reimbursed expenses of the BEA
Funds under the BEA Advisory Agreements as follows:
AUGUST 31, 1998
<TABLE>
<CAPTION>
Fees Paid
BEA Fund (after waivers) Waivers Reimbursements
-------- --------------- ------- --------------
<S> <C> <C> <C>
International Equity $4,943,773 $ 27,976 $ 0
Emerging Markets Equity $ 374,401 $ 234,633 $ 0
U.S. Core Equity $ 703,273 $ 36,437 $ 0
U.S. Core Fixed Income $ 579,143 $ 288,699 $ 0
Strategic Global $ 81,321 $ 89,310 $ 0
Fixed Income
Global Telecommunications $ 0 9,174 $ 37,067
High Yield $ 422,069 $ 271,277 $ 0
Municipal Bond $ 93,618 $ 51,669 $ 0
Select Economic $ 14,224 643 $ 0
Value Equity
</TABLE>
AUGUST 31, 1997
<TABLE>
<CAPTION>
Fees Paid
BEA Fund (after waivers) Waivers Reimbursements
-------- --------------- ------- --------------
<S> <C> <C> <C>
International Equity $5,300,316 $ 0 $ 0
Emerging Markets Equity $ 988,002 $ 18,498 $ 0
U.S. Core Equity $ 537,237 $ 27,626 $ 0
U.S. Core Fixed Income $ 357,196 $ 177,539 $ 0
Strategic Global $ 180,945 $ 27,305 $ 0
Fixed Income
Global Telecommunications $ 0 $ 3,745 $ 20,903
High Yield $ 393,841 $ 233,336 $ 0
Municipal Bond $ 91,093 $ 44,791 $ 0
Select Economic N/A N/A N/A
Value Equity
</TABLE>
AUGUST 31, 1996
<TABLE>
<CAPTION>
Fees Paid
BEA Fund (after waivers) Waivers Reimbursements
-------- --------------- ------- --------------
<S> <C> <C> <C>
International Equity $5,993,072 $ 0 $ 0
Emerging Markets Equity $1,289,739 $ 0 $ 0
U.S. Core Equity $ 234,890 $ 93,430 $ 0
U.S. Core Fixed Income $ 316,147 $ 134,639 $ 0
Strategic Global $ 103,144 $ 53,915 $ 0
Fixed Income
Global Telecommunications N/A N/A N/A
</TABLE>
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<PAGE> 107
<TABLE>
<CAPTION>
Fees Paid
BEA Fund (after waivers) Waivers Reimbursements
-------- --------------- ------- --------------
<S> <C> <C> <C>
High Yield $ 542,590 $ 100,763 $ 0
Municipal Bond $ 92,994 $ 68,790 $ 0
Select Economic N/A N/A N/A
Value Equity
</TABLE>
Each class of a Fund bears all of its own expenses not
specifically assumed by the Adviser or another service provider to the Fund.
General expenses of the Funds not readily identifiable as belonging to a
particular Fund are allocated among all investment funds by or under the
direction of the Funds' Board of Directors in such manner as the Board
determines fair and accurate. Each class of the Funds pays its own
administration fees, and may pay a different share than the other classes of the
Funds of other expenses (excluding advisory and custodial fees) if those
expenses are actually incurred in a different amount by such class or if a class
receives different services.
Under the Advisory Agreements, BEA will not be liable for any
error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the matters to which the Advisory Agreements relate.
The Advisory Agreements, including the Sub-investment Advisory
Agreements, if applicable; for the Funds were approved on July 20, 1998 by vote
of the Funds' Board of Directors, including a majority of those directors who
are not parties to the Advisory Agreements or interested persons (as defined in
the 1940 Act) of such parties. The Advisory Agreements were approved by each
Fund's initial shareholder. Each investment advisory agreement is terminable by
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<PAGE> 108
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 BEA. Each of the investment advisory agreements
may also be terminated by BEA on 60 days' written notice to the Fund. Each
Sub-investment Advisory Agreement is terminable, at any time without penalty, by
(i) vote of the Funds' Board of Directors or by the holders of a majority of the
outstanding voting securities of the relevant Fund on 60 days' written notice to
BEA and CSAM, (ii) BEA on 60 days' written notice to the Fund and CSAM or (iii)
CSAM on 60 days' written notice to the Fund and BEA. Each of the Advisory
Agreements terminates automatically in the event of assignment thereof.
CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. Brown Brothers
Harriman & Co. ("BBH") 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, BBH (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. BBH is authorized to select one or more banks
or trust companies to serve as sub-custodian on behalf of the Funds, provided
that BBH remains responsible for the performance of all its duties under the
Custodian Agreement and holds the Funds harmless from the negligent acts and
omissions of any sub-custodian. For its services to the Funds under the
Custodian Agreement, BBH receives a fee which is calculated based upon each
Fund's average daily gross assets, exclusive of transaction charges and
out-of-pocket expenses, which are also charged to the Funds.
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 AND ADMINISTRATIVE
SERVICES AGREEMENTS. Counsellors Service and PFPC, an indirect,
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<PAGE> 109
wholly owned subsidiary of PNC Bank Corp., both serve as co-administrators to
the Funds pursuant to separate written agreements (the "Counsellors Service
Co-Administration Agreements" and the "PFPC Co-Administration Agreements,"
respectively). BEA and PFPC had served as co-administrators to the Advisor Class
of the BEA Funds. The services provided by, and the fees payable by the Funds to
Cousellors Service under the Counsellors Service Co-Administration Agreements
and PFPC under the PFPC Co-Administration Agreements are described in the
Prospectuses for each of the Funds. Each class of shares of the Funds 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 Fund(s)."
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 (the Global
Telecommunications Fund commenced operations December 4, 1996; all other Funds
commenced operations November 1, 1996) and ending August 31, 1998, the Advisor
Class for the BEA Funds have paid BEA and PFPC administration fees and BEA and
PFPC have waived fees and/or reimbursed expenses as follows:
<TABLE>
<CAPTION>
PFPC Counsellors Service
---- -------------------
Fees Fees
Paid Paid
(after (after
BEA Fund Waivers) Waivers Reimbursements BEA Fund Waivers) Waivers Reimbursements
-------- -------- ------- -------------- --------- --------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
International Equity $769,622 $ 7,213 $ 0 International Equity $435,028 $497,175 $ 0
Emerging Markets Equity $ 76,129 $ 0 $ 0 Emerging Markets Equity $ 18,271 $ 73,084 $ 0
U.S. Core Equity $123,285 $ 0 $ 0 U.S. Core Equity $ 9,863 $138,079 $ 0
U.S. Core Fixed Income $235,924 $ 0 $ 0 U.S. Core Fixed Income $ 23,143 $323,994 $ 0
Strategic Global Fixed $ 42,937 $ 5,494 $ 0 Strategic Global Fixed $ 3,412 $ 47,777 $ 0
Income Income
High Yield $ 99,050 $24,762 $ 0 High Yield $ 9,905 $138,669 $ 0
Municipal Bond $ 30,402 $ 0 $ 0 Municipal Bond $ 2,076 $ 29,057 $ 0
Select Economic Value $ 0 $ 2,478 $ 0 Select Economic Value $ 198 $ 2,775 $ 0
Equity Equity
Global $ 0 $ 1,147 $ 0 Global $ 0 $ 459 $ 0
Telecommunications Telecommunications
</TABLE>
August 31, 1997
<TABLE>
<CAPTION>
PFPC Counsellors Service
---- -------------------
Fees Fees
Paid Paid
(after (after
BEA Fund Waivers) Waivers Reimbursements BEA Fund Waivers) Waivers Reimbursements
-------- -------- ------- -------------- --------- --------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
International Equity $785,014 $43,161 $ 0 International Equity $463,778 $530,031 $ 0
Emerging Markets Equity $125,801 $ 12 $ 0 Emerging Markets Equity $ 30,195 $129,780 $ 0
U.S. Core Equity $ 94,144 $ 0 $ 0 U.S. Core Equity $ 7,532 $105,441 $ 0
U.S. Core Fixed Income $159,177 $19,068 $ 0 U.S. Core Fixed Income $ 14,258 $199,636 $ 0
Strategic Global Fixed $ 41,650 $10,412 $ 0 Strategic Global Fixed $ 4,165 $ 58,310 $ 0
Income Income
High Yield $ 89,597 $22,399 $ 0 High Yield $ 8,959 $125,436 $ 0
Municipal Bond $ 24,265 $ 0 $ 0 Municipal Bond $ 1,941 $ 27,177 $ 0
Select Economic Value N/A N/A N/A Select Economic Value N/A N/A N/A
Equity Equity
Global N/A N/A N/A Global N/A N/A N/A
Telecommunications Telecommunications
</TABLE>
August 31, 1996
<TABLE>
<CAPTION>
PFPC Counsellors Service
---- ------------------
Fees Fees
Paid Paid
(after (after
BEA Fund Waivers) Waivers Reimbursements BEA Fund Waivers) Waivers Reimbursements
-------- -------- ------- -------------- --------- --------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
International Equity $931,214 $ 5,204 $ 0 International Equity $928,754 $194,947 $ 0
Emerging Markets Equity $521,709 $ 8,509 $ 0 Emerging Markets Equity $ 32,335 $161,461 $ 0
U.S. Core Equity $ 54,720 $ 0 $ 0 U.S. Core Equity $ 12,019 $ 53,645 $ 0
U.S. Core Fixed Income $102,178 $48,084 $ 0 U.S. Core Fixed Income $ 23,392 $180,314 $ 0
Strategic Global Fixed $ 31,412 $ 7,853 $ 0 Strategic Global Fixed $ 6,392 $ 40,238 $ 0
Income Income
High Yield $120,402 $12,483 $ 0 High Yield $ 44,362 $ 93,499 $ 0
Municipal Bond $ 28,890 $ 0 $ 0 Municipal Bond $ 7,328 $ 27,340 $ 0
Select Economic Value N/A N/A N/A Select Economic Value N/A N/A N/A
Equity Equity
Global N/A N/A N/A Global N/A N/A N/A
Telecommunications Telecommunications
</TABLE>
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
Counsellors Securities, 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 Counsellors Securities 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 Services, "Services") including, without limitation,
(a) payments reflecting an allocation of overhead and other office expenses of
Counsellors Securities related to providing Services; (b) payments made to, and
reimbursement of
-40-
<PAGE> 110
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 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, Counsellor Securities provides the
Board with periodic reports of amounts expended under the 12b-1 Plan and the
purpose for which the expenditures were made.
The 12b-1 Plans will continue in effect for so long as their
continuance is specifically approved at least annually by each Fund's Board,
including a majority of the Directors/Trustees who are not interested persons of
the Fund and who have no direct or indirect financial interest in the operation
of the 12b-1 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.
Each of the BEA International Equity Fund, BEA Emerging
Markets Equity Fund, BEA Global Telecommunications Fund and BEA High Yield Fund
had entered into a 12b-1 Plan with respect to its Advisor Shares (the "BEA 12b-1
Plan") pursuant to which Counsellors Securities was paid a fee based on the
average daily net assets of the Advisor Shares of the BEA Fund. For the fiscal
year ended August 31, 1998, the Advisor Shares of those BEA Funds have paid
Counsellors Securities under the BEA 12b-1 Plans $3,606, $352, $2,293 and
$5,317, respectively.
PORTFOLIO TRANSACTIONS AND TURNOVER RATE
Subject to policies established by the Board of Directors, BEA
is responsible for the execution of portfolio transactions and the allocation of
brokerage transactions for the Funds. In executing portfolio transactions, BEA
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 BEA 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 may be effected on
domestic or foreign securities exchanges. In transactions for
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<PAGE> 111
securities not actively traded on a domestic or foreign 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, 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, BEA'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 BEA 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 years ended August 31, the BEA Funds have paid
brokerage commissions as follows:
AUGUST 31, 1998
<TABLE>
<CAPTION>
BEA Fund Brokerage Commission
- -------- --------------------
<S> <C>
International Equity $3,481,661
Emerging Markets Equity $ 539,950
U.S. Core Equity $ 352,567
U.S. Core Fixed Income $ 12,023
Strategic Global Fixed Income $ 678
Global Telecommunications $ 2,639
High Yield $ 250
Municipal Bond N/A
Select Economic Value Equity $ 17,675
</TABLE>
AUGUST 31, 1997
<TABLE>
<CAPTION>
BEA Fund Brokerage Commission
- -------- --------------------
<S> <C>
International Equity $5,041,204
Emerging Markets Equity $1,074,701
U.S. Core Equity $ 181,354
U.S. Core Fixed Income $ 0
Strategic Global Fixed Income $ 0
Global Telecommunications $ 1,261
High Yield $ 0
Municipal Bond N/A
Select Economic Value Equity N/A
AUGUST 31, 1996
</TABLE>
-42-
<PAGE> 112
<TABLE>
<CAPTION>
BEA Fund Brokerage Commission
- -------- --------------------
<S> <C>
International Equity $3,385,421
Emerging Markets Equity $ 713,193
U.S. Core Equity $ 182,796
U.S. Core Fixed Income $ 0
Strategic Global Fixed Income $ 0
Global Telecommunications N/A
High Yield $ 0
Municipal Bond N/A
Select Economic Value Equity N/A
</TABLE>
No Fund has any obligation to deal with any broker or group of
brokers in the execution of portfolio transactions. BEA 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 BEA. Information and research
received from such brokers will be in addition to, and not in lieu of, the
services required to be performed by BEA 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 BEA,
as applicable, determines in good faith that such commission is reasonable in
terms either of the transaction or the overall responsibility of BEA 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
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.
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<PAGE> 113
BEA 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 BEA are made independently of each other in the 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 BEA 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 the Distributor, BEA or CSAM or any affiliated person of the foregoing
entities except as permitted by SEC exemptive order or by applicable law.
Each of the Funds expects that its annual portfolio turnover
rate will not exceed 100% under normal market conditions. 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.
The International Growth Fund (the successor Fund to the BEA
International Equity Fund) has the benefit of an exemptive order issued by the
SEC under the 1940 Act authorizing the Fund and certain other investment
companies advised by BEA to acquire jointly securities issued in private
placements, subject to the terms and conditions of the order.
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<PAGE> 114
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. 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 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
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<PAGE> 115
exchange or foreign market is closed, the securities traded on such exchange or
in such market will be valued at the market 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> 116
PERFORMANCE AND YIELD 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;
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the l, 5 or 10 year
(or other) periods at the end of the applicable
period (or a fractional portion thereof);
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed in
years.
Each Fund that advertises its "aggregate total return"
computes such returns separately for each class of shares by determining the
aggregate compounded rates of return during specified periods that likewise
equate the initial amount invested to the ending redeemable value of such
investment. The formula for calculating aggregate total return is as follows:
ERV
Aggregate Total Return = [(-----) - l]
P
The calculations are made assuming that (1) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the price
per share existing on the reinvestment date, (2) all recurring fees charged to
all shareholder accounts are included, and (3) for any account fees that vary
with the size of the account, a mean (or median) account size in the Fund during
the periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.
Although total return is calculated in a separate manner for
each class of shares, under certain circumstances, performance information for a
class may include performance information of another class with an earlier
inception date.
The average annual total returns for the Common Shares of the
following Funds for the period ended August 31, 1998 were as follows:+
<TABLE>
<CAPTION>
3 year 5 year Since Inception
Fund 1 year (ann.) (ann.) (ann.)
- ---- ------ ------ ------ ---------------
<S> <C> <C> <C> <C>
International Growth* 16.33% 12.85% 8.58% 11.30% (10/01/92)
Emerging Markets* -42.86% -14.01% -8.15% -3.90% (02/01/93)
High Yield* 5.27% 10.81% 8.44% 10.04% (03/01/93)
Global Telecommunications 25.38% N/A N/A 23.58% (06/20/94)
</TABLE>
The aggregate total returns for the Common Shares of the
following Funds for the period ended August 31, 1998 since inception were as
follows:+
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<PAGE> 117
<TABLE>
<CAPTION>
Fund Aggregate Return
- -------- ----------------
<S> <C>
International Growth* 88.49%
Emerging Markets* -19.92%
High Yield* 69.33%
Global Telecommunications 44.61%
</TABLE>
+ Performance information provided above reflects the performance of the Advisor
Shares of the corresponding BEA Funds (which are the predecessors of the
Funds) for the periods noted.
* Performance information provided above for each of the International Growth,
Emerging Markets and High Yield Funds also reflects the performance of the
Institutional Shares since inception (October 1, 1992, February 1, 1993 and
March 1, 1993, respectively) until the BEA Funds' Advisor Shares was first
offered on November 1, 1996. Because the BEA Funds' Institutional Shares had
no distribution fee and lower co-administration fees, the expenses of the
Institutional Shares are lower than those of the BEA Funds' Advisor Shares.
Additionally, the BEA Funds' Institutional Shares performance was favorably
affected by expense waivers and/or reimbursements. The performance information
provided above has not been restated to reflect the higher expenses of the BEA
Funds' Advisor Shares or to adjust for the BEA Funds' Institutional Shares
expense waivers and/or reimbursements. Had these expense adjustments been
made, the performance information shown above for periods prior to November 1,
1996 would have been lower.
Because the Common Shares of the U.S. Equity, Select Equity,
Municipal Bond, U.S. Fixed Income and Global Income Fund, as well as the Advisor
Shares of the corresponding predecessor BEA Fund, had not been issued as of
August 31, 1998, no performance information is provided above with respect to
such shares. The tables below provide the average annual total returns and
aggregate total returns for the Institutional Shares of the corresponding
predecessor BEA Funds for the period ended August 31, 1998. Because the BEA
Funds' Institutional Shares had no distribution fee and lower co-administration
fees, as well as favorable expense waivers and/or reimbursements, the
performance figures provided below for the BEA Funds' Institutional Shares can
be expected to be higher than the performance figures for the Funds' Common
Shares had the Common Shares been issued over the same period of time.
Average Annual Total Return of Institutional Shares
---------------------------------------------------
<TABLE>
<CAPTION>
BEA Fund 1 yr 3 year 5 year Since Inception
- -------- ---- ------ ------ ---------------
<S> <C> <C> <C> <C>
U.S. Core Equity 3.18% 18.84% N/A 19.05% (9/1/94)
Select Economic Value Equity N/A N/A N/A -12.20% (8/3/98)
Municipal Bond 7.62% 6.50% N/A 6.72% (6/20/94)
U.S. Core Fixed Income 7.77% 8.14% N/A 7.93% (4/1/94)
Strategic Global Fixed Income 4.19% 6.07% N/A 6.89% (6/28/94)
</TABLE>
Aggregate Total Return of Institutional Shares
----------------------------------------------
<TABLE>
<CAPTION>
BEA Fund Inception Date Aggregate Return
- -------- -------------- ----------------
<S> <C> <C>
U.S. Core Equity 09/01/94 100.97%
Select Economic Value Equity 08/03/98 -12.20%
Municipal Bond 06/20/94 31.48%
U.S. Core Fixed Income 04/01/94 40.11%
Strategic Global Fixed Income 06/28/94 32.15%
</TABLE>
The Funds may also from time to time include in such
advertising an aggregate total return figure or a total return figure that is
not calculated according to the formula set forth above in order to compare more
accurately a Fund's performance with other measures of investment return. For
example, in comparing a Fund's total return with data published by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. or Weisenberger
Investment Company Service, or with the performance of the Standard & Poor's 500
Stock Index or the Dow Jones Industrial Average, as appropriate, a Fund may
calculate its aggregate and/or average annual total return for the specified
periods of time by assuming the investment of $10,000 in Fund shares and
assuming the reinvestment of each dividend or other distribution at net asset
value on the reinvestment date. The Funds do not, for these purposes, deduct
from the initial value invested any amount representing sales charges. The Funds
will, however, disclose the maximum sales charge and will also disclose that the
performance data do not reflect sales charges and that inclusion of sales
charges would reduce the performance quoted. Such alternative total return
information will be given no greater prominence in such advertising than the
information prescribed under SEC rules, and all advertisements containing
performance data will include a legend disclosing that such performance data
represent past performance and that the investment return and principal value of
an investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
YIELD. Certain Funds may advertise a 30-day (or one month)
standard yield as described in the Prospectus. Such yields are calculated
separately for each class of shares in each Fund in accordance with the method
prescribed by the SEC for mutual funds:
a - b 6
YIELD = 2[( - - - - +1) - 1)]
cd
Where: a = dividends and interest earned by a Fund during the
period;
b = expenses accrued for the period (net of
reimbursements);
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<PAGE> 118
c = average daily number of shares outstanding during
the period, entitled to receive dividends; and
d = maximum offering price per share on the last day of
the period.
For the purpose of determining net investment income earned during the period
(variable "a" in the formula), dividend income on equity securities held by a
Fund is recognized by accruing 1/360 of the stated dividend rate of the security
each day that the security is in the Fund. Except as noted below, interest
earned on debt obligations held by a Fund is calculated by computing the yield
to maturity of each obligation based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest) and dividing the result
by 360 and multiplying the quotient by the market value of the obligation
(including actual accrued interest) in order to determine the interest income on
the obligation for each day of the subsequent month that the obligation is held
by the Fund. For purposes of this calculation, it is assumed that each month
contains 30 days. The maturity of an obligation with a call provision is the
next call date on which the obligation reasonably may be expected to be called
or, if none, the maturity date. With respect to debt obligations purchased at a
discount or premium, the formula generally calls for amortization of the
discount or premium. The amortization schedule will be adjusted monthly to
reflect changes in the market value of such debt obligations. Expenses accrued
for the period (variable "b" in the formula) include all recurring fees charged
by a Fund to all shareholder accounts in proportion to the length of the base
period and the Fund's mean (or median) account size. Undeclared earned income
will be subtracted from the offering price per share (variable "d" in the
formula).
With respect to receivables-backed obligations that are
expected to be subject to monthly payments of principal and interest
("pay-downs"), (i) gain or loss attributable to actual monthly pay downs are
accounted for as an increase or decrease to interest income during the period,
and (ii) each Fund may elect either (a) to amortize the discount and premium on
the remaining security, based on the cost of the security, to the weighted
average maturity date, if such information is available, or to the remaining
term of the security, if any, if the weighted average date is not available or
(b) not to amortize discount or premium on the remaining security.
Based on the foregoing calculation, the Standard Yield for the
Common Shares of the High Yield Fund for the 30-day period ended August 31,
1998 was 7.79%. Such yield information is the yield of the Advisor Shares of
the BEA High Yield Fund (the predecessor of the High Yield Fund) for the 30-day
period ended August 31, 1998.
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<PAGE> 119
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 Prospectus 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 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
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<PAGE> 120
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").
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 mid-term or other long-term
capital gain, 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
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<PAGE> 121
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
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.
The Municipal Bond Fund is designed to provide investors with
current tax-exempt interest income. Exempt interest dividends distributed to
shareholders by this Fund are not included in the shareholder's gross income for
regular federal income tax purpose. In order for the Municipal Bond Fund to pay
exempt interest dividends during any taxable year, at the close of each fiscal
quarter at least 50% of the value of the Fund must consist of exempt interest
obligations.
In addition, the Municipal Bond Fund may not be an appropriate
investment for entities which are "substantial users" of facilities financed by
private activity bonds or "related persons" thereof. "Substantial user" is
defined under U.S. Treasury Regulations to include a nonexempt person who
regularly uses a part of such facilities in his trade or business and (a) whose
gross revenues are more than 5% of the total revenue derived by all users of
such facilities, (b) who occupies more than 5% of the entire usable area of such
facilities, or (c) for whom such facilities or a part thereof were specifically
constructed, reconstructed or acquired. "Related persons"
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<PAGE> 122
include certain related natural persons, affiliated corporations, a partnership
and its partners and an S corporation and its shareholder.
A Fund may acquire standby commitments with respect to
Municipal Obligations held in its portfolio and will treat any interest received
on Municipal Obligations subject to such stand-by commitments as tax-exempt
income. In Rev. Rul. 82-144, 1982-2 C.B. 34, the Internal Revenue Service held
that a mutual fund acquired ownership of municipal obligations for federal
income tax purposes, even though the fund simultaneously purchased "put"
agreements with respect to the same municipal obligations from the seller of the
obligations. The Funds will not engage in transactions involving the use of
stand-by commitments that differ materially from the transaction described in
Rev. Rul. 82-144 without first obtaining a private letter ruling from the
Internal Revenue Service or the opinion of counsel.
Interest on indebtedness incurred by a shareholder to purchase
or carry shares if the Municipal Bond Fund is not deductible for income tax
purposes of (as expected) the Municipal Bond Fund distributes exempt interest
dividends during the shareholder's taxable year. Receipt of exempt interest
dividends may result in collateral federal income tax consequences to certain
other taxpayers, including persons subject to alternative minimum tax (see
Prospectus and discussion below), financial institutions, property and casualty
insurance companies, individual recipients of Social Security or Railroad
Retirement benefits, and foreign corporations engaged in a trade or business in
the United States. Prospective investors should consult their own tax advisers
as to such consequences.
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 Prospectus) 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 and (2) the full amount of all dividends from a Fund
that are treated as "qualifying dividends"
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<PAGE> 123
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%.
Corporate investors should also note that the Superfund
Amendments and Reauthorization Act of 1986 imposes an environmental tax on
corporate taxpayers of 0.14% of the excess of "alternative minimum taxable
income" (with certain modifications) over $2,000,000 for taxable years beginning
after 1986 and before 1996, regardless of whether such taxpayers are liable for
alternative minimum tax.
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
(including amounts derived from interest on Municipal Obligations in the case of
the Municipal Bond Fund) 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 failure to
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<PAGE> 124
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."
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
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
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<PAGE> 125
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 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
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<PAGE> 126
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 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
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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.
Recently enacted changes to the Code will permit 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 was deemed to realize as ordinary income. A Fund
generally will not be subject to deferred federal income tax on any gains that
it is deemed to realize as a consequence of making a mark-to-market election,
but such gains will be taken into account by the Fund for purposes of satisfying
the Distribution Requirement and the excise tax distribution requirement. The
mark-to-market provisions will generally apply to the Fund's taxable years
beginning after December 31, 1997.
Asset Diversification Requirement. For purposes of the Asset
Diversification Requirement, the issuer of a call option on a security
(including an option written on an exchange) will be deemed to be the issuer of
the underlying security. The Internal Revenue Service has informally ruled,
however, that a call option that is written by a fund need not be counted for
purposes of the Asset Diversification Requirement where the fund holds the
underlying security. However, the Internal Revenue Service has also informally
ruled that a put option written by a fund must be treated as a separate asset
and its value measured by "the value of the underlying security" for purposes of
the Asset Diversification Requirement, regardless (apparently) of whether it is
"covered" under the rules of the exchange. The Internal Revenue Service has not
explained whether in valuing a written put option in this manner a fund should
use the current value of the underlying security (its prospective future
investment); the cash consideration that must be paid by the fund if the put
option is exercised (its liability); or some other measure that would take into
account the fund's unrealized profit or loss in writing the option. Under the
Code, a fund may not rely on informal rulings of the Internal Revenue Service
issued to other taxpayers. Consequently, a Fund may find it necessary to seek a
ruling from the Internal Revenue Service on this issue or to curtail its writing
of options in order to stay within the limits of the Asset Diversification
Requirement.
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ADDITIONAL INFORMATION CONCERNING THE COMPANY 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
CONTROL PERSONS. As of October 16, 1998, the name, address
and percentage of ownership of each person that own 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>
International Equity Fund - Employees Ret Plan Marshfield 7.22%
Institutional 1000 N. Oak Ave.
Marshfield, WI 54449
NationBanc Montgomery Securities 10.96%
600 Montgomery St., 4th Fl.
San Francisco, CA 94111
Indiana University Foundation 5.05%
Attn: Walter L. Koon, Jr.
PO Box 500
Bloomington, IN 47402
International Equity Fund - Charles Schwab & Co. 47.95%
Advisor Special Custody Account for Exclusive Benefit of
Customers
101 Montgomery St.
San Francisco, CA 94014
Transcorp 5.27%
FBO William E. Burns
PO Box 6535
Englewood, CO 80155
Bob & Co. 42.65%
PO Box 1809
Boston, MA 02105
Emerging Markets Fund - Wachovia Bank North Carolina 69.98%
Institutional TRST Carolina Power & Light Co.
PO Box 3073
301 N. Main Street
Winston Salem, NC 27101
National Academy of Sciences 8.20%
2101 Constitution Ave.
Washington, DC 20418
Clariden Bank 8.37%
Claidenstr 26
CH-8002
Zurich, Switzerland
Community Foundation Palm Beach 7.14%
Martin Counties Inc.
324 Datura St. #340
West Palm Beach, FL 33401-5420
Emerging Markets Equity SEMA & Co. 98.34%
Fund - Advisor 12 E. 49th Street
41st Fl.
New York, NY 10017
Core Equity Fund - Werner & Pfleiderer Pension Plan 10.05%
Institutional 663 E. Crescent Ave.
Ramsey, NJ 07446
Washington Hebrew Congregation 10.95%
3935 Macomb St. NW
Washington, DC 20016
Patterson & Co. 38.14%
PO Box 7829
Philadelphia, PA 19101
SEMA & Co. 5.79%
12 E. 49th Street, 41st Fl.
New York, NY 10017
FTC & Co. 6.66%
BEA Associates 401K
PO Box 173736
Denver, CO 80217
Fleet National Bank Trust 8.67%
Hospital ST Raphael
PO Box 92800
Rochester, NY 14692-8900
Credit Suisse Private Banking 8.24%
Dividend Reinvest Plan
C/O Credit Suisse Pvt Bkg
12 E. 49th St. 40th Floor
New York, NY 10017-1028
US Core Fixed Income Fund - The Northern Trust Company TTEE 18.79%
Institutional Uniroyal Holdings Bond Fund
c/o Uniroyal Holding Inc.
70 Great Hill Road
Naugatuck, CT 06770-2224
Winifred Masterson Burke Foundation 6.12%
785 Mamaroneck Ave.
White Plains, NY 10605-2593
New England UFCW & Employers' Pension Fund 11.89%
Board of Trustees
161 Forbes Road, Ste. 201
Braintree, MA 02184-2606
Fidelity Investments Institutional 5.42%
Operations Co. Inc. (F110C) As Agent
For Credit Suisse First Boston
Employee's Savings PSP
100 Magellan Way # KWIC
Covington, KY 41015-1987
Select Economic Value Equity Patterson & Co. 90.56%
Fund - Institutional PO Box 7829
Philadelphia, PA 19101
BEA Associates 5.44%
Pension Trust
153 East 53rd Street
New York, NY 10022
Strategic Global Fixed Income Sunkist Master Trust 53.09%
Fund - Institutional 14130 Riverside Drive
Sherman Oaks, CA 91423-2392
Patterson & Co. 37.27%
PO Box 7829
Philadelphia, PA 19101-7829
State Street Bank & Trustee TTEE 5.52%
Fenway Holdings LLC Master Trust
PO Box 470
Boston, MA 02102-0470
High Yield Fund - Carl F. Besenbach 18.86%
Institutional TRST Michelin North America Inc.
Master Trust
PO Box 19001
Greenville, SC 29602-9001
Credit Suisse Private Banking 5.41%
Dividend Reinvestment Plan
Cash Election Plan
Cash/DRIP
c/o Credit Suisse Pvt. Bkg.
12 E. 49th Street, 40th Fl.
New York, NY 10017-1028
Southdown Inc. Pension PL 9.87%
MAC & Co. A/C SDIF8575302
Mutual Fund Operations
PO Box 3198
Pittsburgh, PA 15230-3198
Edward J. Demske TTEE 9.97%
Miami University Foundation
202 Roudebush Hall
Oxford, OH 45056
Fidelity Investments Institutional Operations Co. 16.93%
Inc. as Agents for Certain Employee Benefits Plan
100 Magellan Way, # KWIC
Covington, KY 41015-1987
MAC & Co. A/C CSBF8605082 5.32%
Mutual Fund Operations
PO Box 3198
Pittsburgh, PA 15230-3198
High Yield Fund - Advisor Charles Schwab & Co. 82.87%
Special Custody Account for the Exclusive Benefit
of Customers
101 Montgomery St.
San Francisco, CA 94104-4122
Richard A. Wilson TTEE 14.41%
E. Francis Wilson TTEE
The Wilson Family Trust
U/A 11/1/95
7612 March Ave.
West Hills, CA 91304-5232
Municipal Bond Fund - Arnold Leon 12.57%
Institutional c/o Fiduciary Trust Company
PO Box 3199 Church Street Station
New York, NY 10008-3199
William A. Marquard 35.96%
2199 Maysville Rd.
Carlisle, KY 40311-9716
Leo Bogart 5.20%
135 Central Park West 9N
New York, NY 10023-2465
Howard Isermann 8.85%
9 Tulane Dr.
Livingston, NJ 07039-6212
Global Telecommunications E.M. Warburg Pincus & Co. Inc. 15.65%
Fund - Advisor Attn: Sandra Correale
466 Lexington Ave.
New York, NY 10017
FTC & Co. 21.59%
BEA Associates 401K
PO Box 173736
Denver, CO 80217
Charles Schwab & Co. 20.04%
Exclusive Benefit of Customers
101 Montgomery Street
San Francisco, CA 94104-4122
</TABLE>
<PAGE> 129
<PAGE> 130
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 for the Funds as well as
counsel to Warburg, Counsellors Service and Counsellors Securities.
FINANCIAL STATEMENTS
Common 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 Advisor shares of
certain corresponding BEA Funds (which are the predecessors of the 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") are
incorporated by reference into this Statement of Additional Information. No
other parts of the 1998 Annual Report are incorporated by reference herein. The
financial statements included in the 1998 Annual Report have been audited by
PWC. The reports of PWC are incorporated herein by
-60-
<PAGE> 131
reference given upon their authority as experts in accounting and auditing.
Copies of the 1998 Annual Report 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.
-61-
<PAGE> 132
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" - The highest category indicates that the degree of
safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
"A-2" - Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
"A-3" - Issues carrying this designation have adequate
capacity for timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
"B" - Issues are regarded as having only a speculative
capacity for timely payment.
"C" - This rating is assigned to short-term debt obligations
with a doubtful capacity for payment.
"D" - Issues are in payment default. The "D" rating category
is used when interest payments of principal payments 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.
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:
"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
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<PAGE> 133
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
effects 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 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.
"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.
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<PAGE> 134
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure 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 short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as the "F-1+" and "F-1" ratings.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
"D" - Securities are in actual or imminent payment default.
"LOC" - The symbol "LOC" indicates that the rating is based on
a letter of credit issued by a commercial bank.
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
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<PAGE> 135
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.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for
timely repayment. Where issues possess a particularly strong credit feature, a
rating of "A1+" is assigned.
"A2" - Obligations are supported by a satisfactory capacity
for timely repayment although such capacity may be susceptible to adverse
changes in business, economic or financial conditions.
"A3" - Obligations are supported by an adequate capacity for
timely repayment such capacity is more susceptible to adverse changes in
business, economic, or financial conditions than for obligations in higher
categories.
"B" - Obligations for which the capacity for timely repayment
is susceptible to adverse changes in business, economic, or financial
conditions.
"C" - Obligations for which there is a high risk of default or
which are currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
A-4
<PAGE> 136
"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.
"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
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<PAGE> 137
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 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
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<PAGE> 138
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 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.
(P)... - When applied to forward delivery bonds, indicates
that the rating is provisional pending delivery of the bonds. The rating may be
revised prior to delivery if changes occur in the legal documents or the
underlying credit quality of the bonds.
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 to be 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.
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<PAGE> 139
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 for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB" - Bonds considered to be speculative. The obligor's
ability to pay interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified, which could assist the obligor in satisfying its debt service
requirements.
"B" - Bonds are considered highly speculative. While
securities in this class are currently meeting debt service requirements, the
probability of continued timely payment of
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principal and interest reflects the obligor's limited margin of safety and the
need for reasonable business and economic activity throughout the life of the
issue.
"CCC" - Bonds have certain identifiable characteristics that,
if not remedied, may lead to default. The ability to meet obligations requires
an advantageous business and economic environment.
"CC" - Bonds are minimally protected. Default in payments of
interest and/or principal seems probable over time.
"C" - Bonds are in imminent default in payment of interest or
principal.
"DDD," "DD" and "D" - Bonds are in default on interest and/or
principal payments. Such securities are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents 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 ratings from and including "AA" to "C" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in
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business, economic or financial conditions are more likely to lead to increased
investment risk than for obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
below "AAA" to denote relative status within major rating categories.
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.
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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 Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the ratings by Moody's Investors
Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality,
enjoying strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with
margins of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality,
carrying specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack
of margins of protection.
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Fitch 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 Prospectus, 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 broker, will be made on a daily basis as the price of the
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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 that, where a Fund has sold futures to hedge its portfolio against a
decline in the market, the market may advance and the
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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 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
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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 result in losses in excess of the
amount invested in the contract.
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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 Fund 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.
VII. Other Matters
Accounting for futures contracts will be in accordance with
generally accepted accounting principles.
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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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STATEMENT OF ADDITIONAL INFORMATION
October 26, 1998
BEA
INSTITUTIONAL FUNDS
WARBURG, PINCUS INTERNATIONAL GROWTH FUND, INC.
WARBURG, PINCUS EMERGING MARKETS II FUND, INC.
WARBURG, PINCUS U.S. CORE EQUITY FUND, INC.
WARBURG, PINCUS U.S. CORE FIXED INCOME FUND, INC.
WARBURG, PINCUS STRATEGIC GLOBAL FIXED INCOME FUND, INC.
WARBURG, PINCUS HIGH YIELD FUND, INC.
WARBURG, PINCUS MUNICIPAL BOND FUND, INC.
WARBURG, PINCUS SELECT ECONOMIC VALUE 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 combined Prospectus for the Institutional Shares
of Warburg Pincus International Growth, Warburg Pincus Emerging Markets II,
Warburg Pincus U.S. Core Equity, Warburg Pincus U.S. Core Fixed Income, Warburg
Pincus Strategic Global Fixed Income, Warburg Pincus High Yield, Warburg Pincus
Municipal Bond and Warburg Pincus Select Economic Value Equity Funds
(collectively, the "Funds"), dated October 26, 1998, as amended or supplemented
from time to time, and is incorporated by reference in its entirety into that
Prospectus. 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' Prospectus and information
regarding each Fund's current performance may be obtained by calling the Fund 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
<PAGE> 153
PROSPECTUS 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.
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CONTENTS
<TABLE>
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Page
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<S> <C>
GENERAL...........................................................................................................1
COMMON INVESTMENT POLICIES -- ALL FUNDS...........................................................................1
COMMON INVESTMENT OBJECTIVES AND POLICIES -- WARBURG PINCUS INTERNATIONAL
GROWTH, WARBURG PINCUS EMERGING MARKETS II, WARBURG PINCUS U.S.
CORE EQUITY, WARBURG PINCUS U.S. CORE FIXED INCOME, WARBURG
PINCUS HIGH YIELD, WARBURG PINCUS STRATEGIC GLOBAL FIXED INCOME AND
WARBURG PINCUS SELECT ECONOMIC VALUE EQUITY FUNDS...........................................................7
SUPPLEMENTAL INVESTMENT OBJECTIVES AND POLICIES -- WARBURG PINCUS
INTERNATIONAL GROWTH, WARBURG PINCUS EMERGING MARKETS II, WARBURG
PINCUS U.S. CORE EQUITY AND WARBURG PINCUS SELECT ECONOMIC
VALUE EQUITY FUNDS .........................................................................................22
SUPPLEMENTAL INVESTMENT POLICIES -- WARBURG PINCUS MUNICIPAL BOND FUND .........................................23
INVESTMENT LIMITATIONS...........................................................................................24
RISK FACTORS.....................................................................................................26
DIRECTORS AND OFFICERS...........................................................................................30
DIRECTORS' ESTIMATED COMPENSATION THROUGH AUGUST 31, 1999........................................................35
INVESTMENT ADVISORY AND SERVICING ARRANGEMENTS...................................................................36
PORTFOLIO TRANSACTIONS...........................................................................................41
PURCHASE AND REDEMPTION INFORMATION..............................................................................45
VALUATION OF SHARES..............................................................................................46
PERFORMANCE AND YIELD INFORMATION................................................................................48
TAXES............................................................................................................52
ADDITIONAL INFORMATION CONCERNING THE COMPANY SHARES.............................................................61
MISCELLANEOUS....................................................................................................61
INDEPENDENT ACCOUNTANTS AND COUNSEL..............................................................................62
FINANCIAL STATEMENTS.............................................................................................62
APPENDIX A......................................................................................................A-1
APPENDIX B......................................................................................................B-1
</TABLE>
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GENERAL
The investment objective of each of the Warburg Pincus
International Growth ("International Growth"), Warburg Pincus Emerging Markets
II ("Emerging Markets"), Warburg Pincus Select Economic Value Equity ("Select
Equity") and Warburg Pincus U.S. Core Equity ("U.S. Equity") Funds is to provide
long-term appreciation of capital.
The investment objective of each of the Warburg Pincus High
Yield ("High Yield"), Warburg Pincus Municipal Bond ("Municipal Bond"), Warburg
Pincus Strategic Global Fixed Income ("Global Income"), Warburg Pincus Select
Economic Value Equity Fund ("Select Equity Fund") and Warburg Pincus U.S. Core
Fixed Income ("U.S. Fixed Income") Funds is to provide high total return.
Each of the Funds is an open-end management investment
company. Each Fund was organized as a Maryland corporation on July 31, 1988.
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 Funds' Prospectus.
COMMON INVESTMENT POLICIES -- ALL FUNDS
The following supplements the information contained in the
Prospectus 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
<PAGE> 156
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 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 adverse market action, expenses and/or delays in connection with
the disposition of the underlying obligations. The financial institutions with
which a Fund may enter into repurchase agreements will be banks and non-bank
dealers of U.S. Government securities that are listed on the Federal Reserve
Bank of New York's list of reporting dealers, if such banks and non-bank dealers
are deemed creditworthy by BEA Associates ("BEA") or, if applicable, Credit
Suisse Asset Management Limited ("CSAM"), the Fund's adviser or sub-investment
adviser, as the case may be (each, an "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
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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 AND DOLLAR ROLLS. 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 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. Each Fund also may enter into "dollar rolls," in which it sells fixed
income securities for delivery in the current month and simultaneously contracts
to repurchase substantially similar (same type, coupon and maturity) securities
on a specified future date. During the roll period, a Fund would forgo principal
and interest paid on such securities. A Fund would be compensated by the
difference between the current sales price and the forward price for the future
purchase, as well as by the interest earned on the cash proceeds of the initial
sale. The Funds do not presently intend to invest more than 5% of net assets in
reverse repurchase agreements or dollar rolls during the coming year.
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WHEN-ISSUED SECURITIES, DELAYED DELIVERY TRANSACTIONS AND
FORWARD COMMITMENTS. Each Fund may purchase securities on a when-issued basis or
on a forward commitment basis, and it may purchase or sell securities for
delayed delivery. These transactions occur when securities are purchased or sold
by a Fund with payment and delivery taking place in the future to secure what is
considered an advantageous yield and price to a Fund at the time of entering
into the transaction. Although the Funds have not established a limit on the
percentage of their assets that may be committed in connection with such
transactions, they will maintain segregated accounts with their custodian
consisting of cash or liquid securities denominated in U.S. dollars or non-U.S.
currencies in an aggregate amount equal to the amount of their commitment in
connection with such purchase transactions. The assets contained in the
segregated account will be marked-to-market daily and additional assets will be
placed in such account on any day in which assets fall below the amount of its
commitment. Each Fund's liquidity and ability to manage its assets might be
affected when it sets aside cash or portfolio fund securities to cover such
commitments. When a Fund engages in when-issued transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in the
Fund incurring a loss or missing an opportunity to obtain a price considered to
be advantageous. When-issued and forward commitment transactions involve the
risk that the price or yield obtained in a transaction may be less favorable
than the price or yield available in the market when the securities delivery
takes place. Each Fund currently anticipates that when-issued securities will
not exceed 25% of its net assets. Each Fund does not intend to engage in
when-issued purchases and forward commitments for speculative purposes but only
in furtherance of its investment objectives.
STAND-BY COMMITMENT AGREEMENTS. Each Fund may from time to
time enter into stand-by commitment agreements. Such agreements commit a Fund,
for a stated period of time, to purchase a stated amount of a fixed income
securities which may be issued and sold to the Fund at the option of the issuer.
The price and coupon of the security is fixed at the time of the commitment. At
the time of entering into the agreement, a Fund is paid a commitment fee,
regardless of whether or not the security is ultimately issued. A Fund will
enter into such agreements only for the purpose of investing in the security
underlying the commitment at a yield and price that is considered advantageous
to a Fund. Each Fund will not enter into a stand-by commitment with a remaining
term in excess of 45 days and it will limit its investment in such commitments
so that the aggregate purchase price of the securities subject to such
commitments, together with the value of portfolio securities subject to legal
restrictions on resale, will not exceed 10% of its assets taken at the time of
acquisition of such commitment or security. Each Fund will at all times maintain
a segregated account with its custodian consisting of cash or liquid securities
denominated in U.S. dollars or non-U.S. currencies in an aggregate amount equal
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to the purchase price of the securities underlying the commitment. The assets
contained in the segregated account will be marked-to-market daily and
additional assets will be placed in such account on any day in which assets fall
below the amount of the purchase price. A Fund's liquidity and ability to manage
its assets might be affected when it sets aside cash or portfolio securities to
cover such commitments.
There can be no assurance that the securities subject to a
stand-by commitment will be issued and the value of the security, if issued, on
the delivery date may be more or less than its purchase price. Because the
issuance of the security underlying the commitment is at the option of the
issuer, a Fund may bear the risk of a decline in the value of such security and
may not benefit from an appreciation in the value of the security during the
commitment period.
The purchase of a security subject to a stand-by commitment
agreement and the related commitment fee will be recorded on the date on which
the security can reasonably be expected to be issued, and the value of the
security will be adjusted by the amount of the commitment fee. In the event the
security is not issued, the commitment fee will be recorded as income on the
expiration date of the stand-by commitment. The Funds do not presently intend to
invest more than 5% of net assets in stand-by commitment 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, 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 BEA 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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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 can 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. A Fund's investment in Rule 144A securities could increase the level
of illiquidity during any period that qualified institutional buyers become
uninterested in purchasing these 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.
EMERGING GROWTH AND SMALLER CAPITALIZATION COMPANIES;
UNSEASONED ISSUERS. Each Fund will not invest in securities of unseasoned
issuers, including equity securities of unseasoned issuers which are not readily
marketable, if the aggregate investment in such securities would exceed 5% of
such Fund's net assets. The term "unseasoned" refers to issuers which, together
with their predecessors, have been in operation for less than three years.
LENDING OF PORTFOLIO SECURITIES. To increase income on its
investments, a Fund may lend its portfolio securities with an aggregate value of
up to 50% of its total assets (in the case of the Select Economic Value Equity
Fund, up to 33 1/3% of its total assets, including the loan collateral) to
broker/dealers and
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other institutional investors. Each Fund may lend its portfolio securities on a
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 (for the Select
Economic Value Equity Fund, at least equal to 102% of 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.
COMMON INVESTMENT OBJECTIVES AND POLICIES --
INTERNATIONAL GROWTH, EMERGING MARKETS GROWTH, U.S.
EQUITY, U.S. FIXED INCOME, HIGH YIELD, GLOBAL INCOME
AND SELECT EQUITY FUNDS
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
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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).
FOREIGN DEBT SECURITIES. The returns on foreign debt
securities reflect interest rates and other market conditions prevailing in
those countries and the effect of gains and losses in the denominated currencies
against the U.S. dollar, which have had a substantial impact on investment in
foreign fixed-income securities. The relative performance of various countries'
fixed-income markets historically has reflected wide variations relating to the
unique characteristics of each country's economy. Year-to-year fluctuations in
certain markets have been significant, and negative returns have been
experienced in various markets from time to time.
The foreign government securities in which the Funds may
invest generally consist of obligations issued or backed by national, state or
provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt obligations
of supranational entities, which include international organizations designated,
or backed by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples include the International Bank for Reconstruction and Development (the
"World Bank"), the European Coal and Steel Community, the Asian Development Bank
and the InterAmerican Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt securities
of quasi-governmental agencies are issued by entities owned by either a
national, state or equivalent government or are obligations of a political unit
that is not backed by the national government's full faith and credit and
general taxing powers. An example of a multinational currency unit is the
European Currency Unit ("ECU"). An ECU represents specified amounts of the
currencies of certain member states of the European Economic Community. The
specific amounts of currencies comprising the ECU may be adjusted by the Council
of Ministers of the European Community to reflect changes in relative values of
the underlying currencies.
BRADY BONDS. Each Fund may invest in so-called "Brady Bonds,"
which are securities created through the exchange of existing commercial bank
loans to Latin American public and private entities for new bonds in connection
with debt restructurings under a debt restructuring plan announced by former
U.S. Secretary of the Treasury Nicholas F. Brady (the "Brady Plan"). Brady Bonds
may be collateralized or uncollateralized, are issued in various currencies
(primarily the
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U.S. dollar) and are currently actively traded in the over-the-counter secondary
market for Latin American debt instruments.
Dollar-denominated, collateralized Brady Bonds, which may be
fixed rate par bonds or floating rate discount bonds, are collateralized in full
as to principal by U.S. Treasury zero coupon bonds having the same maturity as
the bonds. Interest payments on these Brady Bonds generally are collateralized
by cash or securities in an amount that, in the case of fixed rate bonds, is
equal to at least one year of rolling interest payments or, in the case of
floating rate bonds, initially is equal to at least one year's rolling interest
payments based on the applicable interest rate at that time and is adjusted at
regular intervals thereafter.
All Mexican Brady Bonds issued to date, except New Money
Bonds, have principal repayments at final maturity fully collateralized by U.S.
Treasury zero coupon bonds (or comparable collateral in other currencies) and
interest coupon payments collateralized on an 18-month rolling-forward basis by
funds held in escrow by an agent for the bondholders. Approximately half of the
Venezuelan Brady Bonds issued to date have principal repayments at final
maturity collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral in other currencies), while slightly more than half have interest
coupon payments collateralized on a 14-month rolling-forward basis by securities
held by the Federal Reserve Bank of New York as collateral agent.
Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk").
LOAN PARTICIPATIONS AND ASSIGNMENTS. Each Fund may invest in
fixed and floating rate loans ("Loans") arranged through private negotiations
between a foreign government and one or more financial institutions ("Lenders").
The majority of the Funds' investments in Loans in Latin America are expected to
be in the form of participations in Loans ("Participations") and assignments of
portions of Loans from third parties ("Assignments"). Participations typically
will result in a Fund having a contractual relationship only with the Lender,
not with the borrower. A participating Fund will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participation and only upon receipt by the Lender of the
payments from the borrower. In connection with purchasing Participations, a Fund
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the Loan ("Loan Agreement"), nor any
rights of set-off against the borrower, and a Fund may not directly benefit from
any collateral supporting the Loan in which it has purchased the Participation.
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As a result, participating Funds will assume the credit risk of both the
borrower and the Lender that is selling the Participation. In the event of the
insolvency of the Lender selling a Participation, a Fund may be treated as a
general creditor of the Lender and may not benefit from any set-off between the
Lender and the borrower. The Funds will acquire Participations only if the
Lender interpositioned between the Funds and the borrower is determined by the
Adviser to be creditworthy. Each Fund currently anticipates that it will not
invest more than 5% of its net assets in Loan Participations and Assignments.
CONVERTIBLE SECURITIES. A convertible security is a bond,
debenture, note, preferred stock or other security that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Before conversion, convertible
securities have characteristics similar to nonconvertible debt securities in
that they ordinarily provide a stable stream of income with generally higher
yields than those of common stocks of the same or similar issuers. Convertible
securities rank senior to common stock in a corporation's capital structure but
are usually subordinated to comparable nonconvertible securities. While no
securities investment is completely without risk, investments in convertible
securities generally entail less risk than the corporation's common stock,
although the extent to which such risk is reduced depends in large measure upon
the degree to which the convertible security sells above its value as a
fixed-income security. Convertible securities have unique investment
characteristics in that they generally (1) have higher yields than common
stocks, but lower yields than comparable non-convertible securities, (2) are
less subject to fluctuation in value than the underlying stock since they have
fixed-income characteristics and (3) provide the potential for capital
appreciation if the market price of the underlying common stock increases. Most
convertible securities currently are issued by U.S. companies, although a
substantial Eurodollar convertible securities market has developed, and the
markets for convertible securities denominated in local currencies are
increasing.
The value of a convertible security is a function of its
"investment value" (determined by its yield in comparison with the yields of
other securities of comparable maturity and quality that do not have a
conversion privilege) and its "conversion value" (the security's worth, at
market value, if converted into the underlying common stock). The investment
value of a convertible security is influenced by changes in interest rates, with
investment value declining as interest rates increase and increasing as interest
rates decline. The credit standing of the issuer and other factors also may have
an effect
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on the convertible security's investment value. The conversion value of a
convertible security is determined by the market price of the underlying common
stock. If the conversion value is low relative to the investment value, the
price of the convertible security is governed principally by its investment
value. Generally the conversion value decreases as the convertible security
approaches maturity. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. A convertible
security generally will sell at a premium over its conversion value by the
extent to which investors place value on the right to acquire the underlying
common stock while holding a fixed-income security.
The Funds have no current intention of converting any
convertible securities they may own into equity securities or holding them as
equity securities upon conversion, although they may do so for temporary
purposes. A convertible security might be subject to redemption at the option of
the issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Fund is called for redemption,
the Fund will be required to permit the issuer to redeem the security, convert
it into the underlying common stock or sell it to a third party. The Funds will
invest in convertible securities without regard to their credit rating. See
"Risk Factors and Special Considerations -- Lower-Rated Securities" in the
Prospectus.
MORTGAGE-BACKED SECURITIES. The Funds may invest in
mortgage-backed securities, such as those issued by the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage Association
("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or certain
foreign issuers, as well as by private issuers such as commercial investment
banks, savings and loan institutions, mortgage bankers and private mortgage
insurance companies. Mortgage-backed securities represent direct or indirect
participations in, or are secured by and payable from, mortgage loans secured by
real property. The mortgages backing these securities include, among other
mortgage instruments, conventional 30-year fixed rate mortgages, 15-year fixed
rate mortgages, graduated payment mortgages and adjustable rate mortgages. The
government or the issuing agency typically guarantees the payment of interest
and principal of these securities. However, the guarantees do not extend to the
securities' yield or value, which are likely to vary inversely with fluctuations
in interest rates, nor do the guarantees extend to the yield or value of the
Fund's shares. These securities generally are "pass-through" instruments,
through which the holders receive a share of all interest and principal payments
from the mortgages underlying the securities, net of certain fees.
Yields on pass-through securities are typically quoted by
investment dealers and vendors based on the maturity of the
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underlying instruments and the associated average life assumption. The average
life of pass-through pools varies with the maturities of the underlying mortgage
loans. A pool's term may be shortened by unscheduled or early payments of
principal on the underlying mortgages. The occurrence of mortgage prepayments is
affected by various factors, including the level of interest rates, general
economic conditions, the location, scheduled maturity and age of the mortgage
and other social and demographic conditions. Because prepayment rates of
individual pools vary widely, it is not possible to predict accurately the
average life of a particular pool. For pools of fixed rate 30-year mortgages, a
common industry practice in the U.S. has been to assume that prepayments will
result in a 12-year average life. At present, pools, particularly those with
loans with other maturities or different characteristics, are priced on an
assumption of average life determined for each pool.
Although certain mortgage-related securities are guaranteed by
a third party or are otherwise similarly secured, the market value of the
security, which may fluctuate, is not so secured. If a Fund purchases a
mortgage-related security at a premium, that portion may be lost if there is a
decline in the market value of the security whether resulting from increases in
interest rates or prepayment of the underlying mortgage collateral. As with
other interest-bearing securities, the prices of such securities are inversely
affected by changes in interest rates. However, though the value of a
mortgage-related security may decline when interest rates rise, the converse is
not necessarily true because in periods of declining interest rates mortgages
underlying securities are prone to prepayment. In periods of falling interest
rates, the rate of prepayment tends to increase, thereby shortening the actual
average life of a pool of mortgage-related securities. Conversely, in periods of
rising rates the rate of prepayment tends to decrease, thereby lengthening the
actual average life of the pool. However, these effects may not be present, or
may differ in degree, if the mortgage loans in the pools have adjustable
interest rates or other special payment terms, such as a prepayment charge.
Actual prepayment experience may cause the yield of mortgage-backed securities
to differ from the assumed average life yield. Reinvestment of prepayments may
occur at higher or lower interest rates than the original investment, thus
affecting a Fund's yield. For this and other reasons, a mortgage-related
security's stated maturity may be shortened by an unscheduled prepayment on
underlying mortgages and, therefore, it is not possible to predict accurately
the security's return to a Fund. Mortgage- related securities provide regular
payments consisting of interest and principal. No assurance can be given as to
the return a Fund will receive when these amounts are reinvested.
The rate of interest on mortgage-backed securities is lower
than the interest rates paid on the mortgages included in the underlying pool
due to the annual fees paid to the servicer of the mortgage pool for passing
through monthly payments to
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certificate holders and to any guarantor, such as GNMA, and due to any yield
retained by the issuer. Actual yield to the holder may vary from the coupon
rate, even if adjustable, if the mortgage-backed securities are purchased or
traded in the secondary market at a premium or discount. In addition, there is
normally some delay between the time the issuer receives mortgage payments from
the servicer and the time the issuer makes the payments on the mortgage-backed
securities, and this delay reduces the effective yield to the holder of such
securities.
COLLATERALIZED MORTGAGE OBLIGATIONS. The Funds may also
purchase collateralized mortgage obligations ("CMOs") issued by a U.S.
Government instrumentality which are backed by a portfolio of mortgages or
mortgage-backed securities. The issuer's obligations to make interest and
principal payments is secured by the underlying portfolio of mortgages or
mortgage-backed securities. Generally, CMOs are partitioned into several classes
with a ranked priority by which the classes of obligations are redeemed. These
securities may be considered mortgage derivatives. The Funds may only invest in
CMOs issued by FHLMC, FNMA or other agencies of the U.S. Government or
instrumentalities established or sponsored by the U.S. Government.
CMOs provide an investor with a specified interest in the cash
flow of a pool of underlying mortgages or other mortgage-related securities.
Issuers of CMOs frequently elect to be taxed as pass-through entities known as
real estate mortgage investment conduits ("REMICs"). CMOs are issued in multiple
classes, each with a specified fixed or floating interest rate and a final
distribution date. Coupons can be fixed or variable. If variable, they can move
with or in the reverse direction of interest rates. The coupon changes could be
a multiple of the actual rate change and there may be limitations on what the
coupon can be. Cash flows of pools can also be divided into a principal only
class and an interest only class. In this case the principal only class will
only receive principal cash flows from the pool. All interest cash flows go to
the interest only class. The relative payment rights of the various CMO classes
may be structured in many ways, either sequentially or by other rules of
priority. Generally, payments of principal are applied to the CMO classes in the
order of their respective stated maturities, so that no principal payments will
be made on a CMO class until all other classes having an earlier stated maturity
date are paid in full. Sometimes, however, CMO classes are "parallel pay," i.e.
payments of principal are made to two or more classes concurrently. CMOs may
exhibit more or less price volatility and interest rate risk than other types of
mortgaged- related obligations.
The CMO structure returns principal to investors sequentially,
rather than according to the pro rata method of a pass-through. In the
traditional CMO structure, all classes (called tranches) receive interest at a
stated rate, but only one
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class at a time receives principal. All principal payments received on the
underlying mortgages or securities are first paid to the "fastest pay" tranche.
After this tranche is retired, the next tranche in the sequence becomes the
exclusive recipient of principal payments. This sequential process continues
until the last tranche is retired. In the event of sufficient early repayments
on the underlying mortgages, the "fastest-pay" tranche generally will be retired
prior to its maturity. Thus the early retirement of a particular tranche of a
CMO held by a Fund would have the same effect as the prepayment of mortgages
underlying a mortgage-backed pass-through security as described above.
ASSET-BACKED SECURITIES. Each Fund may invest in asset-backed
securities, which represent participations in, or are secured by and payable
from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property and receivables
from revolving credit (credit card) agreements. The Funds may also invest in
other types of asset-backed securities that may be available in the future. Such
assets are securitized through the use of trusts and special purpose
corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the trust or corporation. The estimated life of an asset-backed security
varies with the prepayment experience with respect to the underlying debt
instruments. The rate of such prepayments, and hence the life of the
asset-backed security, will be primarily a function of current market rates,
although other economic and demographic factors will be involved. In certain
circumstances, asset-backed securities may be considered illiquid securities
subject to the percentage limitations described above. Asset-backed securities
are considered an industry for industry concentration purposes, and a Fund will
therefore not purchase any asset-backed securities which would cause 25% or more
of a Fund's net assets at the time of purchase to be invested in asset-backed
securities.
Asset-backed securities present certain risks that are not
presented by other securities in which a Fund may invest. Automobile receivables
generally are secured by automobiles. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations. If
the servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the holders of
the asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in the underlying automobiles. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities. Credit card receivables
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are generally unsecured, and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due.
ZERO COUPON SECURITIES. Each Fund may invest in "zero coupon"
U.S. Treasury, foreign government and U.S. and foreign corporate debt
securities, which are bills, notes and bonds that have been stripped of their
unmatured interest coupons and receipts or certificates representing interests
in such stripped debt obligations and coupons. Each Fund currently anticipates
that zero coupon securities will not exceed 5% of its net assets. A zero coupon
security pays no interest to its holder prior to maturity. Accordingly, such
securities usually trade at a deep discount from their face or par value and
will be subject to greater fluctuations of market value in response to changing
interest rates than debt obligations of comparable maturities that make current
distributions of interest. The Funds anticipate that they will not normally hold
zero coupon securities to maturity. Federal tax law requires that a holder of a
zero coupon security accrue a portion of the discount at which the security was
purchased as income each year, even though the holder receives no interest
payment on the security during the year.
STRUCTURED NOTES. The Funds may invest in structured notes.
The distinguishing feature of a structured note is that the amount of interest
and/or principal payable on the notes is based on the performance of a benchmark
asset or market other than fixed-income securities or interest rates. Examples
of a benchmark include stock prices, currency exchange rates and physical
commodity prices. Investing in a structured note allows a Fund to gain exposure
to the benchmark market while fixing the maximum loss that the Fund may
experience in the event that the market does not perform as expected. The
performance tie can be a straight relationship or leveraged, although the
Adviser generally will not use leverage in its structured note strategies.
Normally, these bonds are issued by U.S. Government Agencies and investment
banks arrange the structuring. Depending on the terms of the note, a Fund may
forego all or part of the interest and principal that would be payable on a
comparable conventional note; a Fund's loss cannot exceed this foregone interest
and/or principal. An investment in a structured note involves risks similar to
those associated with a direct investment in the benchmark asset. Structured
notes will be treated as illiquid securities for investment limitation purposes.
ADDITIONAL INVESTMENT CONSIDERATIONS AND RISKS--NON-
INVESTMENT GRADE FIXED-INCOME SECURITIES. When and if available, fixed-income
securities may be purchased by a Fund at a discount from face value. From time
to time, a Fund may purchase securities in default with respect to the paying of
principal
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and/or interest at the time acquired if, in the opinion of the Adviser, such
securities have the potential for future capital appreciation.
Debt securities purchased by the Funds may bear fixed, fixed
and contingent or variable rates of interest and may involve equity features
such as conversion or exchange rights or warrants for the acquisition of stock
of the same or a different issuer; participations based on revenues, sales or
profits, or the purchase of common stock in a unit transaction (where corporate
debt securities and common stock are offered as a unit). Conversion of certain
debt securities may reduce net income per share and net asset value per share.
The occurrence of any income dilution of previously outstanding shares of common
stock when debt securities are converted will depend upon whether a Fund can,
from the investments made with the proceeds of the debt securities, earn an
amount per share issuable upon conversion at least equal to the amount earned
with respect to shares of common stock outstanding prior to conversion. If debt
securities are converted at a time when the net asset value per share of common
stock is greater than the conversion price, the conversion will result in a
decrease or dilution in then current net asset value per share of common stock.
The value of the lower rated fixed income securities that the
Funds purchase may fluctuate more than the value of higher rated debt
securities. These lower rated fixed income securities generally tend to reflect
short-term corporate and market developments to a greater extent than higher
rated securities which react primarily to fluctuations in the general level of
interest rates. Changes in the value of securities subsequent to their
acquisition will not affect cash income or yields to maturity to a Fund but will
be reflected in the net asset value of a Fund's shares. The Funds attempt to
reduce risk through credit analysis and attention to current developments and
trends in both the economy and financial markets. There can be no assurance that
such attempts will be successful.
Lower-rated debt securities may include zero coupon securities
or pay-in-kind securities. A zero coupon security bears no interest but is
issued at a discount from its value at maturity. When held to maturity, its
entire return equals the difference between its issue price and its maturity
value. Pay-in-kind securities typically do not provide for cash interest
payments but instead provide for the issuance of additional debt securities of
the issuer in the face amount of the interest payment amount due in lieu of a
cash payment. The market prices of both of these securities are affected to a
greater extent by interest rate changes and thereby tend to be more volatile
than securities which pay interest periodically and in cash.
There are also special considerations associated with
investing in lower-rated debt securities structured as zero coupon or
pay-in-kind securities. For example, a Fund must
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include the interest ("original issue discount") on these securities in
determining the amount of its required distributions to shareholders for federal
income tax and federal excise tax purposes, even though it receives no cash
interest until the security's maturity or payment date. Therefore, in order to
satisfy these distribution requirements, a Fund may have to sell some of its
assets without regard to their investment merit to obtain cash to distribute to
shareholders. These actions may occur under disadvantageous circumstances and
are likely to reduce a Fund's assets and may thereby increase its expense ratio
and decrease its rate of return. For additional information concerning these tax
considerations, see "Taxes" below. From time to time, a Fund may also purchase
securities not paying interest at the time acquired if, in the opinion of the
Fund's Adviser, such securities have the potential for future income or capital
appreciation.
HEDGING. Each of the Funds may engage in various hedging
strategies. See "Certain Investment Strategies -- Foreign Currency Transactions"
in the Prospectus.
FORWARD CURRENCY CONTRACTS. Each Fund may use forward currency
contracts to protect against uncertainty in the level of future exchange rates
and to enhance total return. The Funds may also enter into forward currency
contracts with respect to specific transactions. For example, when a Fund
anticipates the receipt in a foreign currency of interest payments on a security
that it holds, a Fund may desire to "lock-in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such payment, as the case may be, by
entering into a forward contract for the purchase or sale, for a fixed amount of
U.S. dollars, of the amount of foreign currency involved in the underlying
transaction. A Fund will thereby be able to protect itself against a possible
loss resulting from an adverse change in the relationship between the currency
exchange rates during the period between the date on which the security is
purchased or sold, or on which the payment is declared, and the date on which
such payments are made or received.
The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible because the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. Accordingly,
it may be necessary for a Fund to purchase additional foreign currency on the
spot (i.e., cash) market (and bear the expense of such purchase) if the market
value of the security is less than the amount of foreign currency the Fund is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency. Conversely, it may be necessary to sell on the
spot market some of the foreign currency received upon the sale of a Fund
security if its market value exceeds the amount of foreign currency a Fund is
obligated to deliver. The projection
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of short-term currency market movements is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain.
Forward contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing a Fund to sustain losses on
these contracts and transaction costs. A Fund may enter into a forward contract
and maintain a net exposure on such contract only if (1) the consummation of the
contract would not obligate a Fund to deliver an amount of foreign currency in
excess of the value of a Fund's portfolio securities or other assets denominated
in that currency or (2) a Fund maintains cash or liquid securities in a
segregated account with its custodian in the amount prescribed. Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, the Adviser believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of a Fund will be served.
At or before the maturity date of a forward contract requiring
a Fund to sell a currency, the Funds may either sell a portfolio security and
use the sale proceeds to make delivery of the currency or retain the security
and offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Fund will obtain, on the same maturity
date, the same amount of the currency that it is obligated to deliver.
Similarly, the Funds may close out a forward contract requiring them to purchase
a specified currency by entering into a second contract entitling them to sell
the same amount of the same currency on the maturity date of the first contract.
A Fund would realize a gain or loss as a result of entering into such an
offsetting forward currency contract under either circumstance to the extent the
exchange rate or rates between the currencies involved moved between the
execution dates of the first contract and the offsetting contract.
The cost to a Fund of engaging in forward currency contracts
will vary with factors such as the currencies involved, the length of the
contract period and the market conditions then prevailing. Because forward
currency contracts are usually entered into on a principal basis, no fees or
commissions are involved. The use of forward currency contracts will not
eliminate fluctuations in the prices of the underlying securities a Fund owns or
intends to acquire, but it will fix a rate of exchange in advance. In addition,
although forward currency contracts limit the risk of loss due to a decline in
the value of the hedged currencies, at the same time they limit any potential
gain that might result should the value of the currencies increase. Moreover,
investors should be aware that dollar-denominated securities may not be
available in some or all foreign countries, that the forward currency market for
the purchase of U.S. dollars in many foreign countries is not highly
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developed and that in certain countries no forward market for foreign currencies
currently exists or that such market may be closed to investment by a Fund.
Although a Fund will value its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. The Funds may convert foreign currency from time
to time, and investors should be aware of the costs of currency conversion.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to a Fund at one rate, while offering a lesser rate of exchange
should a Fund desire to resell that currency to the dealer.
OPTIONS AND FUTURES CONTRACTS. The Funds, except the Municipal
Bond Fund, 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 to various indexes and may or may
not be listed on a national securities exchange and issued by the Options
Clearing Corporation. The 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.
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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 the 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 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 "AGAINST THE BOX." In a short sale, a Fund sells a
borrowed security and has a corresponding obligation to the lender to return the
identical security. Each Fund may
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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." In
a short sale, a seller does not immediately deliver the securities sold and is
said to have a short position in those securities until delivery occurs. If a
Fund engages in a short sale, the collateral for the short position will be
maintained by the Fund's custodian or a qualified sub-custodian. While the short
sale is open, the Fund will maintain in a segregated account an amount of
securities equal in kind and amount to the securities sold short or securities
convertible into or exchangeable for such equivalent securities. These
securities constitute the Fund's long position. A Fund may, however, make a
short sale as a hedge, when it believes that the price of a security may
decline, causing a decline in the value of a security owned by the Fund (or a
security convertible or exchangeable for such security), or when the Fund wants
to sell the security at an attractive current price, but also wishes possibly to
defer recognition of gain or loss for federal income tax purposes. (A short sale
against the box will defer recognition of gain for federal income tax purposes
only if the Fund subsequently closes the short position by making a purchase of
the relevant securities no later than 30 days after the end of the taxable
year.) In such case, any future losses in the Fund's long position should be
reduced by a gain in the short position. Conversely, any gain in the long
position should be reduced by a loss in the short position. The extent to which
such gains or losses are reduced will depend upon the amount of the security
sold short relative to the amount the Fund owns. There will be certain
additional transaction costs associated with short sales against the box, but
the Fund will endeavor to offset these costs with the income from the investment
of the cash proceeds of short sales. The Funds do not presently intend to invest
more than 5% of net assets in short sales against the box.
SECTION 4(2) PAPER. "Section 4(2) paper" is commercial paper
which is issued in reliance on the "private placement" exemption from
registration which is afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) paper is restricted as to disposition under the federal securities
laws and is generally sold to institutional investors such as the Funds which
agree that they are purchasing the paper for investment and not with a view to
public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) paper normally is resold to other institutional
investors through or with the assistance of investment dealers who make a market
in the Section 4(2) paper, thereby providing liquidity. See "Illiquid
Securities" above. See Appendix "A" for a list of commercial paper ratings.
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SUPPLEMENTAL INVESTMENT OBJECTIVES AND POLICIES --
INTERNATIONAL GROWTH, EMERGING MARKETS GROWTH, U.S. EQUITY
AND SELECT EQUITY FUNDS
RIGHTS OFFERINGS AND PURCHASE WARRANTS. Rights offerings and
purchase warrants are privileges issued by a corporation which enable the owner
to subscribe to and purchase a specified number of shares of the corporation at
a specified price during a specified period of time. Subscription rights
normally have a short lifespan to expiration. The purchase of rights or warrants
involves the risk that a Fund could lose the purchase value of a right or
warrant if the right to subscribe to additional shares is not executed prior to
the rights and warrants expiration. Also, the purchase of rights and/or warrants
involves the risk that the effective price paid for the right and/or warrant
added to the subscription price of the related security may exceed the value of
the subscribed security's market price such as when there is no movement in the
level of the underlying security.
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SUPPLEMENTAL INVESTMENT POLICIES --
MUNICIPAL BOND FUND
Opinions relating to the validity of Municipal Obligations and
to the exemption of interest thereon from federal income tax are rendered by
bond counsel to the respective issuers at the time of issuance, and opinions
relating to the validity of and the tax-exempt status of payments received by
the Fund from tax-exempt derivative securities are rendered by counsel to the
respective sponsors of such securities. The Fund and the Adviser will rely on
such opinions and will not review independently the underlying proceedings
relating to the issuance of Municipal Obligations, the creation of any
tax-exempt derivative securities, or the basis for such opinions.
The Tax Reform Act of 1986 substantially revised provisions of
prior law affecting the issuance and use of proceeds of certain Municipal
Obligations. A new definition of private activity bonds applies to many types of
bonds, including those which were industrial development bonds under prior law.
Interest on private activity bonds issued after August 15, 1986 is tax-exempt
only if the bonds fall within certain defined categories of qualified private
activity bonds and meet the requirements specified in those respective
categories. In addition, interest on certain private activity bonds issued after
August 7, 1986 that is received by taxpayers subject to federal alternative
minimum tax is taxable. The Act has generally not changed the tax treatment of
bonds issued to finance governmental operations. As used in this Statement of
Additional Information, the term "private activity bonds" also includes
industrial development revenue bonds issued prior to the effective date of the
provisions of the Tax Reform Act of 1986. Investors should also be aware of the
possibility of state and local alternative minimum or minimum income tax
liability on interest from Alternative Minimum Tax Securities.
Although the Municipal Bond Fund may invest 25% or more of its
net assets in Municipal Obligations the interest on which is paid solely from
revenues of similar projects, and may invest up to 40% of its total assets in
private activity bonds when added together with any taxable investments held by
the Municipal Bond Fund, it does not presently intend to do so unless in the
opinion of the Adviser the investment is warranted. To the extent the Municipal
Bond Fund's assets are invested in Municipal Obligations payable from the
revenues of similar projects or are invested in private activity bonds, the
Municipal Bond Fund will be subject to the peculiar risks presented by the laws
and economic conditions relating to such projects and bonds to a greater extent
than it would be if its assets were not so invested.
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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 the 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;
2. Issue any senior securities, except as permitted under the
1940 Act;
3. Act as an underwriter of securities within the meaning of
the Securities Act, except insofar as it might be deemed to be an underwriter
upon disposition of certain portfolio securities acquired within the limitation
on purchases of restricted securities;
4. Purchase or sell real estate (including real estate limited
partnership interests), provided that a Fund may invest in securities secured by
real estate or interests therein or issued by companies that invest in real
estate or interests therein;
5. Purchase or sell commodities or commodity contracts, except
that a Fund may deal in forward foreign exchange transactions between currencies
of the different countries in which it may invest and purchase and sell stock
index and currency options, stock index futures, financial futures and currency
futures contracts and related options on such futures;
6. Make loans, except through loans of portfolio instruments
and repurchase agreements, provided that for purposes of this restriction the
acquisition of bonds, debentures or other debt instruments or interests therein
and investment in government obligations, Loan Participations and Assignments,
short-term commercial paper, certificates of deposit and bankers' acceptances
shall not be deemed to be the making of a loan; and
7. Purchase any securities, which would cause 25% or more of
the value of the Fund's total assets at the time of purchase to be invested in
the securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no limitation with
respect to (i) instruments issued or guaranteed by the United States, any
state,
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territory or possession of the United States, the District of Columbia or any of
their authorities, agencies, instrumentalities or political subdivisions, and
(ii) repurchase agreements secured by the instruments described in clause (i);
(b) wholly-owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents; and (c) utilities will be divided according to their
services, for example, gas, gas transmission, electric and gas, electric and
telephone will each be considered a separate industry.
For purposes of Investment Limitation No. 1, collateral
arrangements with respect to, if applicable, the writing of options, futures
contracts, options on futures contracts, forward currency contracts and
collateral arrangements with respect to initial and variation margin are not
deemed to be a pledge of assets and neither such arrangements nor the purchase
or sale of futures or related options are deemed to be the issuance of a senior
security for purposes of Investment Limitation No. 2.
In addition to the fundamental investment limitations
specified above, a Fund may not:
1. Make investments for the purpose of exercising
control or management, but investments by a Fund in wholly-owned
investment entities created under the laws of certain countries will
not be deemed the making of investments for the purpose of exercising
control or management;
2. Purchase securities on margin, except for
short-term credits necessary for clearance of portfolio transactions,
and except that a Fund may make margin deposits in connection with its
use of options, futures contracts, options on futures contracts and
forward contracts;
3. Purchase or sell interests in mineral leases, oil,
gas or other mineral exploration or development programs, except that a
Fund may invest in securities issued by companies that engage in oil,
gas or other mineral exploration or development activities; and
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.
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Securities held by a Fund generally may not be purchased from,
sold or loaned to the Adviser or its affiliates or any of their directors,
officers or employees, acting as principal, unless pursuant to a rule or
exemptive order under the 1940 Act.
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 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
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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 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.
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LOWER-RATED OR NON-RATED CRITERIA FOR DEBT SECURITIES. The
High Yield, U.S. Fixed Income, Global Income, and the Municipal Bond Funds have
established no rating criteria for the debt securities in which they may invest.
Issuers of low rated or non-rated securities ("high yield" securities, commonly
known as "junk bonds") may be highly leveraged and may not have available to
them more traditional methods of financing. Therefore, the risks associated with
acquiring the securities of such issuers generally are greater than is the case
with higher rated securities. For example, during an economic downturn or a
sustained period of rising interest rates, issuers of high yield securities may
be more likely to experience financial stress, especially if such issuers are
highly leveraged. During such periods, such issuers may not have sufficient
revenues to meet their interest payment obligations. The issuer's ability to
service its debt obligations also may be adversely affected by specific issuer
developments, or the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer is significantly greater for the holders of lower-rated
securities because such securities may be unsecured and may be subordinated to
other creditors of the issuer.
Lower-rated securities frequently have call or redemption
features which would permit an issuer to repurchase the security from a Fund. If
a call were exercised by the issuer during a period of declining interest rates,
a Fund likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to a Fund and dividends to
shareholders.
A Fund may have difficulty disposing of certain lower- rated
securities because there may be a thin trading market for such securities. The
secondary trading market for high yield securities is generally not as liquid as
the secondary market for higher rated securities. Reduced secondary market
liquidity may have an adverse impact on market price 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.
Adverse publicity and investor perceptions, which may not be
based on fundamental analysis, also may decrease the value and liquidity of
lower-rated securities, particularly in a thinly traded market. Factors
adversely affecting the market value of lower-rated securities are likely to
adversely affect a Fund's net asset value. In addition, a Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
on a portfolio holding or participate in the restructuring of the obligation.
Finally, there are risks involved in applying credit ratings
as a method for evaluating lower-rated debt securities. For example, credit
ratings evaluate the safety of principal and
-28-
<PAGE> 183
interest payments, not the market risks involved in lower-rated debt securities.
Since credit rating agencies may fail to change the credit ratings in a timely
manner to reflect subsequent events, the Adviser will monitor the issuers of
lower-rated debt securities in the Funds to determine if the issuers will have
sufficient cash flow and profits to meet required principal and interest
payments, and to assure the debt securities' liquidity so the Funds can meet
redemption requests. The Adviser will not necessarily dispose of a portfolio
security when its ratings have been changed.
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 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.
-29-
<PAGE> 184
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 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 directors and executive officers of the Funds, their ages,
business addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
<S> <C>
Richard N. Cooper* (64) Director
Harvard University Professor at Harvard University; National
1737 Cambridge Street Intelligence Council from June 1995 until January
Cambridge, Massachusetts 02138 1997; Director or Trustee of Circuit City Stores,
Inc. (retail
</TABLE>
- --------
* Indicates a Director who is an "interested person" of the Funds as
defined in the 1940 Act.
-30-
<PAGE> 185
<TABLE>
<CAPTION>
<S> <C>
electronics and appliances) and Phoenix
Home Life Mutual Insurance Company; Director/Trustee
of other investment companies advised by Warburg.
Jack W. Fritz (71) Director
2425 North Fish Creek Road Private investor; Consultant and Director of Fritz
P.O. Box 483 Broadcasting, Inc. and Fritz Communications
Wilson, Wyoming 83014 (developers and operators of radio stations);
Director of Advo, Inc. (direct mail advertising);
Director/Trustee of other investment companies advised by
Warburg.
John L. Furth* (67) Chairman of the Board
466 Lexington Avenue Vice Chairman, Managing Director and Director of
New York, New York 10017-3147 Warburg; Associated with Warburg since 1970; Director
of Counsellors Securities; Chairman of the Board of
other investment companies advised by Warburg.
Jeffrey E. Garten (51) Director
Box 208200 Dean of Yale School of Management and William S.
New Haven, Connecticut 06520-8200 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 investment
companies advised by Warburg.
</TABLE>
- --------
* Indicates a Director who is an "interested person" of the Funds as
defined in the 1940 Act.
-31-
<PAGE> 186
<TABLE>
<CAPTION>
<S> <C>
</TABLE>
-32-
<PAGE> 187
<TABLE>
<CAPTION>
<S> <C>
Arnold M. Reichman* (50) Director
466 Lexington Avenue Managing Director, Chief Operating Officer and
New York, New York 10017-3147 Assistant Secretary of Warburg; Director of The RBB
Fund, Inc.; Associated with Warburg since 1984;
Director and officer of Counsellors Securities;
Director/Trustee of other investment companies advised by
Warburg.
Alexander B. Trowbridge (68) Director
1317 F Street President of Trowbridge Partners, Inc. (business
5th Floor consulting) from January 1990 to November 1996;
Washington, DC 20004 Director or Trustee of New England Mutual Life
Insurance Co., ICOS Corporation (biopharmaceuticals),
Waste Management, Inc. (solid and hazardous waste
collection and disposal), IRI International (energy
services), The Rouse Company (real estate
development), Harris Corp. (electronics and
communications equipment), The Gillette Co. (personal
care products) and Sun Company Inc. (petroleum
refining and marketing); Director/Trustee of other
investment companies advised by Warburg.
Eugene L. Podsiadlo (41) President
466 Lexington Avenue Managing Director of Warburg; Associated with Warburg
New York, New York 10017-3147 since 1991; Officer of Counsellors Securities and
other investment companies advised by Warburg.
</TABLE>
- --------
* Indicates a Director who is an "interested person" of the Funds as
defined in the 1940 Act.
-33-
<PAGE> 188
<TABLE>
<CAPTION>
<S> <C>
Stephen Distler (45) Vice President
466 Lexington Avenue Managing Director of Warburg; Associated with Warburg
New York, New York 10017-3147 since 1984; Treasurer of Counsellors Securities;
Officer of other investment companies advised by Warburg.
Eugene P. Grace (47) Vice President and Secretary
466 Lexington Avenue Senior Vice President of Warburg; Associated with
New York, New York 10017-3147 Warburg since April 1994; Attorney-at-law from
September 1989-April 1994; Life insurance agent, New York Life
Insurance Company from 1993 to 1994; Officer of Counsellors
Securities and other investment companies advised by Warburg.
Howard Conroy, CPA (44) Vice President and Chief Financial Officer
466 Lexington Avenue Vice President of Warburg; Associated with Warburg
New York, New York 10017-3147 since 1992; Officer of other investment companies
advised by Warburg.
Daniel S. Madden, CPA (32) Treasurer and Chief Accounting Officer
466 Lexington Avenue Vice President of Warburg; Associated with Warburg
New York, New York 10017-3147 since 1995; Associated with BlackRock Financial
Management, Inc. from September 1994 to October 1995;
Associated with BEA from April 1993 to September
1994; Associated with Ernst & Young LLP from 1990 to 1993;
Officer of other investment companies advised by Warburg.
</TABLE>
-34-
<PAGE> 189
<TABLE>
<CAPTION>
<S> <C>
Janna Manes, Esq. (31) Assistant Secretary
466 Lexington Avenue Vice President of Warburg; Associated with Warburg
New York, New York 10017-3147 since 1996; Associated with the law firm of Willkie
Farr & Gallagher from 1993 to 1996; Officer of other investment
companies advised by Warburg.
Hal Liebes (34) Assistant Secretary
153 East 53rd Street Senior Vice President and General Counsel of BEA from March 1997
New York, New York 10022 to present; Vice President and Legal Counsel for BEA from June 1995
to March 1997; Chief Compliance Officer, CS First Boston Investment
Management from 1994 to 1995; Staff Attorney, Division of
Enforcement, U.S. Securities and Exchange Commission from 1991 to
1994; Associate, Morgan, Lewis & Bockius from 1989 to 1991; Officer
of other investment companies advised by BEA.
Michael A. Pignataro (38) Assistant Secretary
153 East 53rd Street Vice President of BEA from December 1995 to present; Assistant
New York, New York 10022 Vice President and Chief Administrative Officer for
Investment Companies of BEA from 1989 to December 1995; Officer
of other investment companies advised by BEA.
Wendy S. Setnicka (33) Assistant Treasurer
153 East 53rd Street Assistant Vice President of BEA from January 1997 to the present;
New York, New York 10022 Administrative Officer for Investment Companies of BEA from
November 1993 to the present; Supervisor of Fund Accounting and
Administration at Reich & Tang LP from June 1989 to November 1993;
Officer of other investment companies advised by BEA.
Rocco A. Del Guercio (35) Assistant Treasurer
153 East 53rd Street Administrative Officer for BEA-advised investment companies from
New York, New York 10022 June 1996 to the present; Assistant Treasurer, Bankers Trust Corp.
--Fund Administration from March 1994 to June 1996; Mutual Fund
Accounting Supervisor, Dreyfus Corporation from April 1987 to
March 1994; Officer of other investment companies advised by BEA.
</TABLE>
No employee of Warburg, PFPC Inc. and Counsellors Funds
Service, Inc., the Funds' co-administrators ("PFPC" and "Counsellors Funds
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 Warburg, PFPC, Counsellors
Funds Service or any of their affiliates receives an annual fee of $500 and $250
for each meeting of the Boards attended by him for his services as Director, and
is reimbursed for expenses incurred in connection with his attendance at Board
meetings. Each member of the Audit Committee receives an annual fee of $250, and
the chairman of the Audit Committee receives an annual fee of $325.
DIRECTORS' ESTIMATED COMPENSATION THROUGH AUGUST 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
All
Interna- Emerging U.S. U.S. Global High Munici- Investment
tional Markets Equity Fixed Income Yield pal Companies
Name of Growth Fund Fund Income Fund Fund Bond Managed by
Director Fund Fund Fund Warburg+
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John L. None None None None None None None None
Furth*
- ------------------------------------------------------------------------------------------------------------------
Arnold M. None None None None None None None None
Reichman*
- ------------------------------------------------------------------------------------------------------------------
Richard N. $1,750 $1,750 $1,750 $1,750 $1,750 $1,750 $1,750 $73,250
Cooper
- ------------------------------------------------------------------------------------------------------------------
Jack W. $1,750 $1,750 $1,750 $1,750 $1,750 $1,750 $1,750 $73,250
Fritz
- ------------------------------------------------------------------------------------------------------------------
Alexander B. $1,825 $1,825 $1,825 $1,825 $1,825 $1,825 $1,825 $76,025
Trowbridge
- ------------------------------------------------------------------------------------------------------------------
Jeffrey E. $1,750 $1,750 $1,750 $1,750 $1,750 $1,750 $1,750 $73,250
Garten
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------
+ Each Director serves as a Director or Trustee of 39 investment
companies advised by Warburg.
* Mr. Furth and Mr. Reichman receive compensation as affiliates of
Warburg and, accordingly, receive no compensation from the Funds or any
other investment company advised by Warburg.
-35-
<PAGE> 190
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. BEA renders advisory and administrative
services to each of the Funds pursuant to Investment Advisory Agreements and
CSAM serves as sub-investment adviser to the Global Income and Emerging Markets
Funds pursuant to Sub-investment Advisory Agreements (collectively, the
"Advisory Agreements"). BEA 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 had not
provided sub-investment advisory services to the BEA Funds.
BEA is a diversified investment adviser, managing global
equity, fixed income and derivative securities accounts for private individuals,
as well as corporate pension and profit-sharing plans, state pension funds,
union funds, endowments and other charitable institutions. As of September 30,
1998, BEA managed approximately $35.2 billion in assets. BEA is a wholly-owned
subsidiary of Credit Suisse, the second largest Swiss bank, which in turn is a
subsidiary of CS Holding, a Swiss corporation. Active employees of BEA have a
long-term equity incentive plan. BEA is a registered investment adviser under
the Investment Advisors Act of 1940, as amended.
As an investment adviser, BEA emphasizes a global investment
strategy. BEA currently acts as investment adviser for twenty-two 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, BEA 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),
-36-
<PAGE> 191
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 is a wholly-owned subsidiary of Credit Suisse. Credit
Suisse had identified BEA and CSAM as its leading institutional international
asset management product centers. As of May 31, 1998, CSAM managed $143 billion
in discretionary assets. CSAM Limited is a registered investment adviser under
the Investment Advisers Act of 1940, as amended. CSAM's principal offices are
located at Beaufort House, 15 St. Botolph Street, GB-London EC3A 7JJ.
BEA and, with respect to the Global Income and Emerging
Markets Funds, CSAM have investment discretion for the Funds and will make all
decisions affecting assets in the Funds under the supervision of the Funds'
Board of Directors and in accordance with each Fund's stated policies. The
Adviser will select investments for the Funds and will place purchase and sale
orders on behalf of the Funds. For its services to the International Growth,
Emerging Markets, U.S. Structured Core Equity, U.S. Core Fixed Income, Global
Income, High Yield, Municipal Bond and Select Economic Value Equity Funds, BEA
will be paid (before any voluntary waivers or reimbursements) a monthly fee
computed at an annual rate of .80%, 1.00%, .75%, .375%, .50%, .70%, .70% and
.75% of average daily net assets, respectively. BEA pays CSAM a sub-investment
advisory fee out of the fees BEA receives from the applicable Funds.
For the fiscal years ended August 31, the BEA Funds have paid
BEA advisory fees and BEA has waived fees and/or reimbursed expenses of the BEA
Funds under the BEA Advisory Agreements as follows:
AUGUST 31, 1998
<TABLE>
<CAPTION>
Fees Paid
BEA Fund (after waivers) Waivers Reimbursements
-------- --------------- ------- --------------
<S> <C> <C> <C>
International $ 4,943,773 $ 27,976 $0
Equity
Emerging Markets $ 374,401 $ 234,633 $0
Equity
U.S. Core Equity $ 703,273 $ 36,437 $0
U.S. Core Fixed $ 579,143 $ 288,699 $0
Income
Strategic Global $ 81,321 $ 89,310 $0
Fixed Income
High Yield $ 422,069 $ 271,277 $0
Municipal Bond $ 93,618 $ 51,669 $0
Select Economic 14,224 643 N/A
Value Equity
</TABLE>
AUGUST 31, 1997
<TABLE>
<CAPTION>
Fees Paid
BEA Fund (after waivers) Waivers Reimbursements
-------- --------------- ------- --------------
<S> <C> <C> <C>
International $ 5,300,316 $0 $0
Equity
Emerging Markets $ 988,002 $ 18,498 $0
Equity
U.S. Core Equity $ 537,237 $ 27,626 $0
U.S. Core Fixed $ 357,196 $ 177,539 $0
Income
Strategic Global $ 180,945 $ 27,305 $0
Fixed Income
High Yield $ 393,841 $ 233,336 $0
Municipal Bond $ 91,093 $ 44,791 $0
Select Economic N/A N/A N/A
Value Equity
</TABLE>
-37-
<PAGE> 192
AUGUST 31, 1996
<TABLE>
<CAPTION>
Fees Paid
BEA Fund (after waivers) Waivers Reimbursements
-------- --------------- ------- --------------
<S> <C> <C> <C>
International $ 5,993,072 $0 $0
Equity
Emerging Markets $ 1,289,739 $0 $0
Equity
U.S. Core Equity $ 234,890 $ 93,430 $0
U.S. Core Fixed Income $ 316,147 $ 134,639 $0
Strategic Global $ 103,144 $ 53,915 $0
Fixed Income
High Yield $ 542,590 $ 100,763 $0
Municipal Bond $ 92,994 $ 68,790 $0
Select Economic N/A N/A N/A
Value Equity
</TABLE>
Each class of a Fund bears all of its own expenses not
specifically assumed by the Adviser or another service provider to the Fund.
General expenses of the Funds not readily identifiable as belonging to a
particular Fund are allocated among all investment funds by or under the
direction of the Funds' Board of Directors in such manner as the Board
determines fair and accurate. Each class of the Funds pays its own
administration fees, and may pay a different share than the other classes of the
Funds of other expenses (excluding advisory and custodial fees) if those
expenses are actually incurred in a different amount by such class or if a class
receives different services.
-38-
<PAGE> 193
Under the Advisory Agreements, BEA will not be liable for any
error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the performance of the Advisory Agreements.
The Advisory Agreements, including the Sub-investment Advisory
Agreements, if applicable, for the Funds were approved on July 20, 1998 by vote
of the Funds' Board of Directors, including a majority of those directors who
are not parties to the Advisory Agreements or interested persons (as defined in
the 1940 Act) of such parties. The Advisory Agreements were approved by each
Fund's initial shareholder. Each investment 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 BEA. Each of the investment advisory agreements
may also be terminated by BEA on 60 days' written notice to the Fund. Each
Sub-investment Advisory Agreement is terminable, at any time without penalty, by
(i) vote of the Funds' Board of Directors or by the holders of a majority of the
outstanding voting securities of the relevant Fund on 60 days' written notice to
BEA and CSAM, (ii) BEA on 60 days' written notice to the Fund and CSAM or (iii)
CSAM on 60 days' written notice to the Fund and BEA. Each of the Advisory
Agreements terminates automatically in the event of assignment thereof.
CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. Brown Brothers
Harriman & Co. ("BBH") 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, BBH (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. BBH is authorized to select one or more banks
or trust companies to serve as sub-custodian on behalf of the Funds, provided
that BBH remains responsible for the performance of all its duties under the
Custodian Agreement and holds the Funds harmless from the negligent acts and
omissions of any sub-custodian. For its services to the Funds under the
Custodian Agreement, BBH receives a fee which is calculated based upon each
Fund's average daily gross assets, exclusive of transaction charges and
out-of-pocket expenses, which are also charged to the Funds.
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
-39-
<PAGE> 194
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 AND ADMINISTRATIVE
SERVICES AGREEMENTS. Counsellors Service and PFPC both serve as
co-administrators to the Funds pursuant to separate written agreements (the
"Counsellors Service Co-Administration Agreements" and the "BEA
Co-Administration Agreements," respectively). PFPC and Counsellors Service (as a
delegee of Provident Distributors Inc.) had served as co-administrators to the
Institutional Class of the BEA Funds. 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 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 fiscal years ended August 31, the BEA Funds have paid
PFPC and Counsellors Service administration fees and PFPC and Counsellors
Service have waived fees and/or reimbursed expenses as follows:
-40-
<PAGE> 195
AUGUST 31, 1998
PFPC
<TABLE>
<CAPTION>
Fees Paid Reim-
(after burse-
BEA Fund Waivers) Waivers ments
- -------- -------- ------- ------
<S> <C> <C> <C>
International Equity $ 769,622 $ 7,213 $ 0
Emerging Markets Equity $ 76,129 $ 0 $ 0
U.S. Core Equity $ 123,285 $ 0 $ 0
U.S. Core Fixed Income $ 235,924 $ 0 $ 0
Strategic Global Fixed $ 42,937 $ 5,494 $ 0
Income
High Yield $ 99,050 $ 24,762 $ 0
Municipal Bond $ 30,402 $ 0 $ 0
Select Economic Value $ 0 $ 2,478 $ 0
Equity
</TABLE>
Counsellors Service
<TABLE>
<CAPTION>
Fees Paid Reim-
(after burse-
BEA Fund Waivers) Waivers ments
-------- -------- ------- -----
<S> <C> <C> <C>
International Equity $ 435,028 $ 497,175 $ 0
Emerging Markets Equity $ 18,271 $ 73,084 $ 0
U.S. Core Equity $ 9,863 $ 138,079 $ 0
U.S. Core Fixed Income $ 23,143 $ 323,994 $ 0
Strategic Global Fixed $ 3,412 $ 47,777 $ 0
Income
High Yield $ 9,905 $ 138,669 $ 0
Municipal Bond $ 2,076 $ 29,057 $ 0
Select Economic Value $ 198 $ 2,775 $ 0
Equity
</TABLE>
AUGUST 31, 1997
PFPC
<TABLE>
<CAPTION>
Fees Paid Reim-
(after burse-
BEA Fund Waivers) Waivers ments
- -------- -------- ------- ------
<S> <C> <C> <C>
International Equity $ 785,014 $ 43,161 $ 0
Emerging Markets Equity $ 125,801 $ 12 $ 0
U.S. Core Equity $ 94,144 $ 0 $ 0
U.S. Core Fixed Income $ 159,177 $ 19,068 $ 0
Strategic Global Fixed $ 41,650 $ 10,412 $ 0
Income
High Yield $ 89,597 $ 22,399 $ 0
Municipal Bond $ 24,265 $ 0 $ 0
Select Economic Value N/A N/A N/A
Equity
</TABLE>
Counsellors Service
<TABLE>
<CAPTION>
Fees Paid Reim-
(after burse-
BEA Fund Waivers) Waivers ments
-------- -------- ------- -----
<S> <C> <C> <C>
International Equity $ 463,778 $ 530,031 $ 0
Emerging Markets Equity $ 30,195 $ 129,780 $ 0
U.S. Core Equity $ 7,532 $ 105,441 $ 0
U.S. Core Fixed Income $ 14,258 $ 199,636 $ 0
Strategic Global Fixed $ 4,165 $ 58,310 $ 0
Income
High Yield $ 8,959 $ 125,436 $ 0
Municipal Bond $ 1,941 $ 27,177 $ 0
Select Economic Value N/A N/A N/A
Equity
</TABLE>
AUGUST 31, 1996
PFPC
<TABLE>
<CAPTION>
Fees Paid Reim-
(after burse-
BEA Fund Waivers) Waivers ments
- -------- -------- ------- ------
<S> <C> <C> <C>
International Equity $ 931,214 $ 5,204 $ 0
Emerging Markets Equity $ 521,709 $ 8,509 $ 0
U.S. Core Equity $ 54,720 $ 0 $ 0
U.S. Core Fixed Income $ 102,178 $ 48,084 $ 0
Strategic Global Fixed $ 31,412 $ 7,853 $ 0
Income
High Yield $ 120,402 $ 12,483 $ 0
Municipal Bond $ 28,890 $ 0 $ 0
Select Economic Value N/A N/A N/A
Equity
</TABLE>
Counsellors Service
<TABLE>
<CAPTION>
Fees Paid Reim-
(after burse-
BEA Fund Waivers) Waivers ments
-------- -------- ------- -----
<S> <C> <C> <C>
International Equity $ 928,754 $ 194,947 $ 0
Emerging Markets Equity $ 32,335 $ 161,461 $ 0
U.S. Core Equity $ 12,019 $ 53,645 $ 0
U.S. Core Fixed Income $ 23,392 $ 180,314 $ 0
Strategic Global Fixed $ 6,392 $ 40,238 $ 0
Income
High Yield $ 44,362 $ 93,499 $ 0
Municipal Bond $ 7,328 $ 27,340 $ 0
Select Economic Value N/A N/A N/A
Equity
</TABLE>
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors, BEA
is responsible for the execution of portfolio transactions and the allocation of
brokerage transactions for the Funds. In executing portfolio transactions, BEA
seeks to obtain the best net results for a Fund, taking into account such
factors as the price (including the applicable brokerage commission or
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<PAGE> 196
dealer spread), size of the order, difficulty of execution and operational
facilities of the firm involved. While BEA 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 may be effected on
domestic or foreign securities exchanges. In transactions for securities not
actively traded on a domestic or foreign 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, 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, BEA'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 BEA 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 years ended August 31, the BEA Funds have paid
brokerage commissions as follows:
AUGUST 31, 1998
<TABLE>
<CAPTION>
BEA Fund Brokerage Commission
- -------- --------------------
<S> <C>
International Equity $3,481,661
Emerging Markets Equity $ 539,950
U.S. Core Equity $ 352,567
U.S. Core Fixed Income $ 12,023
Strategic Global Fixed Income $ 678
High Yield $ 250
Municipal Bond $ N/A
Select Economic Value Equity $ 17,675
</TABLE>
AUGUST 31, 1997
<TABLE>
<CAPTION>
BEA Fund Brokerage Commission
- -------- --------------------
<S> <C>
International Equity $5,041,204
Emerging Markets Equity $1,074,701
U.S. Core Equity $ 181,354
U.S. Core Fixed Income $ 0
</TABLE>
-42-
<PAGE> 197
<TABLE>
<CAPTION>
BEA Fund Brokerage Commission
- -------- --------------------
<S> <C>
Strategic Global Fixed Income $ 0
High Yield $ 0
Municipal Bond N/A
Select Economic Value Equity N/A
</TABLE>
AUGUST 31, 1996
<TABLE>
<CAPTION>
BEA Fund Brokerage Commission
- -------- --------------------
<S> <C>
International Equity $3,385,421
Emerging Markets Equity $ 713,193
U.S. Core Equity $ 182,796
U.S. Core Fixed Income $ 0
Strategic Global Fixed Income $ 0
High Yield $ 0
Municipal Bond N/A
Select Economic Value Equity N/A
</TABLE>
No Fund has any obligation to deal with any broker or group of brokers
in the execution of portfolio transactions. BEA 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 BEA. Information and research
received from such brokers will be in addition to, and not in lieu of, the
services required to be performed by BEA 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 BEA,
as applicable, determines in good faith that such commission is reasonable in
terms either of the transaction or the overall responsibility of BEA 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.
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<PAGE> 198
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 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.
BEA 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 BEA are made independently of each other in the 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 BEA 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
the Distributor, BEA or CSAM or any affiliated person of the foregoing entities
except as permitted by SEC exemptive order or by applicable law.
Each of the Funds expects that its annual portfolio turnover rate will
not exceed 100% under normal market conditions. 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
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<PAGE> 199
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.
The International Growth Fund has (the successor Fund to the BEA
International Equity Fund) the benefit of an exemptive order issued by the SEC
under the 1940 Act authorizing the Fund and certain other investment companies
advised by BEA to acquire jointly securities issued in private placements,
subject to the terms and conditions of the order.
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.)
-45-
<PAGE> 200
Redemption or exchange requested by telephone will not be honored by
the Funds nor their agents if they concern Institutional Shares of the Funds.
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
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<PAGE> 201
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. 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 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 market 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
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<PAGE> 202
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.
PERFORMANCE AND YIELD 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;
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
l, 5 or 10 year (or other) periods at the
end of the applicable period (or a
fractional portion thereof);
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed
in years.
Each Fund that advertises its "aggregate total return" computes such
returns separately for each class of shares by determining the aggregate
compounded rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
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<PAGE> 203
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 average annual total returns for the Institutional
Shares of the Funds for the period ended August 31, 1998 were as follows:+
<TABLE>
<CAPTION>
Since
3 year 5 year Inception
Fund 1 year (ann.) (ann.) ann.*
- ---- ------ ------ ------ -----
<S> <C> <C> <C> <C>
International Growth 16.74% 13.07% 8.71% 11.41% (10/01/92)
Emerging Markets -42.96% -13.90% -8.08% - 3.83% (02/01/93)
U.S. Equity 3.18% 18.84% N/A 19.05% (09/01/94)
U.S. Fixed Income 7.77% 8.14% N/A 7.93% (04/01/94)
Global Income 4.19% 6.07% N/A 6.89% (06/28/94)
High Yield 5.48% 10.95% 8.52% 10.11% (03/31/93)
Municipal Bond 7.62% 6.50% N/A 6.72% (06/20/94)
Select Equity N/A N/A N/A -12.20% (08/03/98)
</TABLE>
The aggregate total returns for the Institutional Shares of the Funds
for the period ended August 31, 1998 since inception were as follows:+
<TABLE>
<CAPTION>
Fund Inception Date* Aggregate Return
- -------- -------------- ----------------
<S> <C> <C>
International Growth 10/01/92 62.40%
Emerging Markets 02/01/93 40.94%
U.S. Equity 09/01/94 94.76%
U.S. Fixed Income 04/01/94 30.01%
Global Income 06/28/94 26.84%
</TABLE>
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<PAGE> 204
<TABLE>
<CAPTION>
BEA Fund Inception Date Aggregate Return
- -------- -------------- ----------------
<S> <C> <C>
High Yield 03/31/93 61.14%
Municipal Bond 06/20/94 22.18%
Select Equity 08/03/98 -12.20%
</TABLE>
- ----------
+ Performance information provided above reflects the performance of the
Institutional Shares of the corresponding BEA Funds (which are the
predecessors of the Funds) for the periods noted.
* Inception dates of the Institutional Shares of the Funds refer to the
inception dates of the Institutional Shares of the corresponding
predecessor BEA Funds.
The Funds may also from time to time include in such advertising an
aggregate total return figure or a total return figure that is not calculated
according to the formula set forth above in order to compare more accurately a
Fund's performance with other measures of investment return. For example, in
comparing a Fund's total return with data published by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. or Weisenberger Investment
Company Service, or with the performance of the Standard & Poor's 500 Stock
Index or the Dow Jones Industrial Average, as appropriate, a Fund may calculate
its aggregate and/or average annual total return for the specified periods of
time by assuming the investment of $10,000 in Fund shares and assuming the
reinvestment of each dividend or other distribution at net asset value on the
reinvestment date. The Funds do not, for these purposes, deduct from the initial
value invested any amount representing sales charges. The Funds will, however,
disclose the maximum sales charge and will also disclose that the performance
data do not reflect sales charges and that inclusion of sales charges would
reduce the performance quoted. Such alternative total return information will be
given no greater prominence in such advertising than the information prescribed
under SEC rules, and all advertisements containing performance data will include
a legend disclosing that such performance data represent past performance and
that the investment return and principal value of an investment will fluctuate
so that an investor's shares, when redeemed, may be worth more or less than
their original cost.
YIELD. Certain Funds may advertise a 30-day (or one month) standard
yield as described in the Prospectus. Such yields are calculated separately for
each class of shares in each Fund in accordance with the method prescribed by
the SEC for mutual funds:
a - b
YIELD = 2[( - - - - +1)(6) - 1)]
cd
Where: a = dividends and interest earned by a Fund during the period;
b = expenses accrued for the period (net of reimbursements);
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<PAGE> 205
c = average daily number of shares outstanding during the period,
entitled to receive dividends; and
d = maximum offering price per share on the last day of the period.
For the purpose of determining net investment income earned during the period
(variable "a" in the formula), dividend income on equity securities held by a
Fund is recognized by accruing 1/360 of the stated dividend rate of the security
each day that the security is in the Fund. Except as noted below, interest
earned on debt obligations held by a Fund is calculated by computing the yield
to maturity of each obligation based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest) and dividing the result
by 360 and multiplying the quotient by the market value of the obligation
(including actual accrued interest) in order to determine the interest income on
the obligation for each day of the subsequent month that the obligation is held
by the Fund. For purposes of this calculation, it is assumed that each month
contains 30 days. The maturity of an obligation with a call provision is the
next call date on which the obligation reasonably may be expected to be called
or, if none, the maturity date. With respect to debt obligations purchased at a
discount or premium, the formula generally calls for amortization of the
discount or premium. The amortization schedule will be adjusted monthly to
reflect changes in the market value of such debt obligations. Expenses accrued
for the period (variable "b" in the formula) include all recurring fees charged
by a Fund to all shareholder accounts in proportion to the length of the base
period and the Fund's mean (or median) account size. Undeclared earned income
will be subtracted from the offering price per share (variable "d" in the
formula).
With respect to receivables-backed obligations that are expected to be
subject to monthly payments of principal and interest ("pay-downs"), (i) gain or
loss attributable to actual monthly pay downs are accounted for as an increase
or decrease to interest income during the period, and (ii) each Fund may elect
either (a) to amortize the discount and premium on the remaining security, based
on the cost of the security, to the weighted average maturity date, if such
information is available, or to the remaining term of the security, if any, if
the weighted average date is not available or (b) not to amortize discount or
premium on the remaining security.
Based on the foregoing calculation the Standard Yield for the
Institutional Shares of the following Funds for the 30-day period ended August
31, 1998 were as follows:+
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<PAGE> 206
<TABLE>
<CAPTION>
Fund 30-Day Yield
- ---- ------------
<S> <C>
U.S. Fixed Income 5.75%
Global Income 4.80%
High Yield 7.79%
Municipal Bond 4.59%
Select Equity 0.58%
U.S. Core Equity 0.66%
</TABLE>
- ----------
+ Yield information provided above is the yield of the Institutional Shares of
the corresponding BEA Funds (which are the predecessors of the Funds) for the
periods noted.
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'
Prospectus. 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 Prospectus 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 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
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<PAGE> 207
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").
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 mid-term or other long-term capital gain,
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
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<PAGE> 208
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
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.
The Municipal Bond Fund is designed to provide investors with current
tax-exempt interest income. Exempt interest dividends distributed to
shareholders by this Fund are not included in the shareholder's gross income for
regular federal income tax purpose. In order for the Municipal Bond Fund to pay
exempt interest dividends during any taxable year, at the close of each fiscal
quarter at least 50% of the value of the Fund must consist of exempt interest
obligations.
In addition, the Municipal Bond Fund may not be an appropriate
investment for entities which are "substantial users" of facilities financed by
private activity bonds or "related persons" thereof. "Substantial user" is
defined under U.S.
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<PAGE> 209
Treasury Regulations to include a nonexempt person who regularly uses a part of
such facilities in his trade or business and (a) whose gross revenues are more
than 5% of the total revenue derived by all users of such facilities, (b) who
occupies more than 5% of the entire usable area of such facilities, or (c) for
whom such facilities or a part thereof were specifically constructed,
reconstructed or acquired. "Related persons" include certain related natural
persons, affiliated corporations, a partnership and its partners and an S
corporation and its shareholder.
A Fund may acquire standby commitments with respect to Municipal
Obligations held in its portfolio and will treat any interest received on
Municipal Obligations subject to such stand-by commitments as tax-exempt income.
In Rev. Rul. 82-144, 1982-2 C.B. 34, the Internal Revenue Service held that a
mutual fund acquired ownership of municipal obligations for federal income tax
purposes, even though the fund simultaneously purchased "put" agreements with
respect to the same municipal obligations from the seller of the obligations.
The Funds will not engage in transactions involving the use of stand-by
commitments that differ materially from the transaction described in Rev. Rul.
82-144 without first obtaining a private letter ruling from the Internal Revenue
Service or the opinion of counsel.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares if the Municipal Bond Fund is not deductible for income tax purposes of
(as expected) the Municipal Bond Fund distributes exempt interest dividends
during the shareholder's taxable year. Receipt of exempt interest dividends may
result in collateral federal income tax consequences to certain other taxpayers,
including persons subject to alternative minimum tax (see Prospectus and
discussion below), financial institutions, property and casualty insurance
companies, individual recipients of Social Security or Railroad Retirement
benefits, and foreign corporations engaged in a trade or business in the United
States. Prospective investors should consult their own tax advisers as to such
consequences.
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 Prospectus) 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
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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 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%.
Corporate investors should also note that the Superfund Amendments and
Reauthorization Act of 1986 imposes an environmental tax on corporate taxpayers
of 0.14% of the excess of "alternative minimum taxable income" (with certain
modifications) over $2,000,000 for taxable years beginning after 1986 and before
1996, regardless of whether such taxpayers are liable for alternative minimum
tax.
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 (including amounts derived
from interest on Municipal Obligations in the case of the Municipal Bond Fund)
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
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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 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."
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
addition, losses realized by the Funds on positions that are part of a straddle
may be deferred under the straddle rules, rather
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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 currency contracts for
which such gain or loss is treated as ordinary income or loss. Such short-term
capital gain (and, in
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the case of marked-to-market forward foreign currency contracts, such ordinary
income) would be included in determining the investment company taxable income
of the relevant Fund for purposes of the Distribution Requirement, even if it
were wholly attributable to the year-end marking-to-market of Section 1256
contracts that the relevant Fund continued to hold. Investors should also note
that Section 1256 contracts will be treated as having been sold on October 31 in
calculating the "required distribution" that a Fund must make to avoid federal
excise tax liability.
Each of the Funds may elect not to have the year-end mark-to-market
rule apply to Section 1256 contracts that are part of a "mixed straddle" with
other investments of such Fund that are not Section 1256 contracts (the "Mixed
Straddle Election").
Foreign Currency Transactions. In general, gains from "foreign
currencies" and from foreign currency options, foreign currency futures and
forward foreign exchange contracts relating to investments in stock, securities
or foreign currencies will be qualifying income for purposes of determining
whether the Fund qualifies as a RIC. It is currently unclear, however, who will
be treated as the issuer of a foreign currency instrument or how foreign
currency options, futures or forward foreign currency contracts will be valued
for purposes of the Asset Diversification Requirement. 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 would be recharacterized
as a return of capital to shareholders, thereby reducing each shareholder's
basis in his Shares.
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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.
Recently enacted changes to the Code will permit 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
was deemed to realize as ordinary income. A Fund generally will not be subject
to deferred federal income tax on any gains that it is deemed to realize as a
consequence of making a mark-to-market election, but such gains will be taken
into account by the Fund for purposes of satisfying the Distribution Requirement
and the excise tax distribution requirement. The mark-to-market provisions will
generally apply to the Fund's taxable years beginning after December 31, 1997.
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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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 COMPANY 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
CONTROL PERSONS. As of October 16, 1998, the name, address and
percentage of ownership of each person that own of record 5% or more of a class
of each Fund's outstanding shares were as follows:
<TABLE>
<CAPTION>
FUND PERCENT
OWNED AS OF
NAME AND ADDRESS OCTOBER 16, 1998
<S> <C> <C>
International Equity Fund - Employees Ret Plan Marshfield 7.22%
Institutional 1000 N. Oak Ave
Marshfield, WI 54449
NationBanc Montgomery Securities 10.96%
600 Montgomery St., 4th Fl.
San Francisco, CA 94111
Indiana University Foundation 5.05%
Attn: Walter L. Koon, Jr.
P.O. Box 500
Bloomington, IN 47402
International Equity Fund - Charles Schwab & Co. 47.95%
Advisor Special Custody Account for
Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94014
Transcorp 5.27%
FBO William E. Burns
PO Box 6535
Englewood, CO 80155
Bob & Co. 42.65%
PO Box 1809
Boston, MA 02105
Emerging Markets Fund - Wachovia Bank North Carolina 69.98%
Institutional TRST Carolina Power & Light Co.
PO Box 3073
301 N. Main Street
Winston Salem, NC 27101
National Academy of Sciences 8.20%
2101 Constitution Ave.
Washington, DC 20418
Clariden Bank 8.37%
Claidenstr 26
CH-8002
Zurich, Switzerland
COMMUNITY FOUNDATION PALM BEACH 7.14%
MARTIN COUNTIES INC.
324 DATURA ST. #340
WEST PALM BEACH, FL 33401-5420
Emerging Markets Equity SEMA & Co. 98.34%
Fund - Advisor 12 E. 49th Street, 41st Fl.
New York, NY 10017
Core Equity Fund - Werner & Pfleiderer Pension Plan 10.05%
Institutional 663 E. Crescent Ave.
Ramsey, NJ 07446
Washington Hebrew Congregation 10.95%
3935 Macomb St. NW
Washington, DC 20016
Patterson & Co. 38.14%
PO Box 7829
Philadelphia, PA 19101
SEMA & Co. 5.79%
12 E. 49th Street, 41st Fl.
New York, NY 10017
FTC & Co 6.66%
BEA Associates 401K
PO Box 173736
Denver CO, 80217
Fleet National Bank Trust 8.67%
Hospital ST Raphael
PO Box 92800
Rochester, NY 14692-8900
CREDIT SUISSE PRIVATE BANKING 8.24%
DIVIDEND REINVEST PLAN
C/O CREDIT SUISSE PVT BKG
12 E 49TH ST 40TH FLOOR
NEW YORK, NY 10017-1028
US Core Fixed Income Fund The Northern Trust Company TTEE 18.79%
- - Institutional Uniroyal Holdings Bond Fund
c/o Uniroyal Holding Inc.
70 Great Hill Road
Naugatuck, CT 06770-2224
Winifred Masterson Burke Foundation 6.12%
785 Mamaroneek Ave.
White Plains, NY 10605-2593
New England UFCW & Employers' Pension Fund 11.89%
Board of Trustees
161 Forbes Road, Ste. 201
Braintree, MA 02184-2606
FIDELITY INVESTMENTS INSTITUTIONAL 5.42%
OPERATIONS CO. INC. (F110C) AS AGENT
FOR CREDIT SUISSE FIRST BOSTON
EMPLOYEE'S SAVINGS PSP
100 MAGELLAN WAY #KWIC
COVINGTON, KY 41015-1987
Select Economic Value Equity Fund - Patterson & Co. 90.56%
Institutional PO Box 7829
Philadelphia, PA 19101
BEA Associates 5.44%
Pension Trust
153 East 53rd, Street
New York, NY 10022
Strategic Global Fixed Income Sunkist Master Trust 53.09%
Fund - Institutional 14130 Riverside Drive
Sherman Oaks, CA 91423-2392
Patterson & Co. 37.27%
PO Box 7829
Philadelphia, PA 19101-7829
State Street Bank & Trustee TTEE 5.52%
Fenway Holdings LLC Master Trust
PO Box 470
Boston, MA 02102-0470
High Yield Fund - Carl F. Besenbach 18.86%
Institutional TRST Michelin North America Inc.
Master Trust
PO Box 19001
Greenville, SC 29602-9001
Credit Suisse Private Banking 5.41%
Dividend Reinvestment Plan
Cash Election Plan
Cash/DRIP
c/o Credit Suisse Pvt. Bkg.
12 E. 49th Street, 40th Fl.
New York, NY 10017-1028
Southdown Inc. Pension PL 9.87%
MAC & Co. A/C SDIF8575302
Mutual Fund Operations
PO Box 3198
Pittsburg, PA 15230-3198
Edward J. Demske TTEE 9.97%
Miami University Foundation
202 Roudebush Hall
Oxford, OH 45056
Fidelity Investments 16.93%
Institutional Operations Co.
Inc. as Agents for Certain Employee
Benefits Plan
100 Magellan Way, #KWIC
Covington, KY 41015-1987
MAC & Co. A/C CSBF8605082 5.32%
Mutual Fund Operations
PO Box 3198
Pittsburgh, PA 15230-3198
High Yield Fund - Advisor Charles Schwab & Co. 82.87%
Special Custody Account for the
Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104-4122
Richard A. Wilson TTEE 14.41%
E. Francis Wilson TTEE
The Wilson Family Trust
U/A 11/1/95
7612 March Ave.
West Hills, CA 91304-5232
Municipal Bond Fund - Arnold Leon 12.57%
Institutional c/o Fiduciary Trust Company
PO Box 3199 Church Street Station
New York, NY 10008-3199
William A. Marquard 35.96%
2199 Maysville Rd.
Carlisle, KY 40311-9716
Leo Bogart 5.20%
135 Central Park West 9N
New York, NY 10023-2465
Howard Isermann 8.85%
9 Tulane Dr.
Livingston, NJ 07039-6212
Global Telecommunications E.M. Warburg Pincus & Co., Inc. 15.65%
Fund - Advisor Attn: Sandra Correale
466 Lexington Ave.
New York, NY 10017
FIC & Co 21.59%
BEA Associates 401K
PO Box 173736
Denver, CO 60217
Charles Schwab & Co. 20.04%
Exclusive Benefit of Customers
101 Montgomery Street
San Francisco, CA 94104-4122
</TABLE>
<PAGE> 216
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.
Willkie Farr & Gallagher serves as counsel for the Funds as well as
counsel to Counsellors Service and Counsellors Securities.
FINANCIAL STATEMENTS
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 (which are the predecessors of the 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") are
incorporated by reference into this Statement of Additional Information. No
other parts of the 1998 Annual Report are incorporated by reference herein. The
financial statements included in the 1998 Annual Report have been audited by
PWC. The reports of PWC are incorporated herein by reference given upon their
authority as experts in accounting and auditing. Copies of the 1998 Annual
Report 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.
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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" - The highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
"A-2" - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
"A-3" - Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
"B" - Issues are regarded as having only a speculative capacity for
timely payment.
"C" - This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
"D" - Issues are in payment default. The "D" rating category is used
when interest payments of principal payments 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.
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:
"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
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<PAGE> 218
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 effects 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 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.
"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.
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<PAGE> 219
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure 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 short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" ratings.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
"LOC" - The symbol "LOC" indicates that the rating is based on a letter
of credit issued by a commercial bank.
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
A-3
<PAGE> 220
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.
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a rating
of "A1+" is assigned.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
"A3" - Obligations are supported by an adequate capacity for timely
repayment such capacity is more susceptible to adverse changes in business,
economic, or financial conditions than for obligations in higher categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic, or financial conditions.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
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"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.
"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
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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 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
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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
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.
(P)... - When applied to forward delivery bonds, indicates that the
rating is provisional pending delivery of the bonds. The rating may be revised
prior to delivery if changes occur in the legal documents or the underlying
credit quality of the bonds.
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 to be 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.
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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 for corporate and
municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB" - Bonds considered to be speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
"B" - Bonds are considered highly speculative. While securities in this
class are currently meeting debt service requirements, the probability of
continued timely payment of
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principal and interest reflects the obligor's limited margin of safety and the
need for reasonable business and economic activity throughout the life of the
issue.
"CCC" - Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
"CC" - Bonds are minimally protected. Default in payments of interest
and/or principal seems probable over time.
"C" - Bonds are in imminent default in payment of interest or
principal.
"DDD," "DD" and "D" - Bonds are in default on interest and/or principal
payments. Such securities are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. "DDD" represents 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
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an original
maturity of more than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in
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business, economic or financial conditions are more likely to lead to increased
investment risk than for obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of these
ratings where it is considered that speculative characteristics are present.
"BB" represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation and
indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating below
"AAA" to denote relative status within major rating categories.
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.
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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 Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit a strong capacity
to pay principal and interest. Those issues determined to possess very strong
characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with margins
of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality, carrying
specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
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"SG" - This designation denotes speculative quality and lack of margins
of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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APPENDIX B
As stated in the Prospectus, 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
broker, will be made on a daily basis as the price of the
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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 that, where a Fund has sold futures to hedge its portfolio against a
decline in the market, the market may advance and the
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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 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
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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 result in losses in excess of the amount invested in the
contract.
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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 Fund 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.
VII. Other Matters
Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
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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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