<PAGE> 1
SUPPLEMENT TO THE PROSPECTUSES
WARBURG PINCUS FUNDS
The following information supersedes certain information in the Funds'
Prospectuses.
New Adviser. Effective today, the Funds' investment adviser, Credit Suisse
Asset Management, became Credit Suisse Asset Management, LLC (CSAM LLC). In
addition, as a result of the closing of the previously announced acquisition of
Warburg Pincus Asset Management, Inc. (Warburg Pincus) by Credit Suisse Group
(Credit Suisse), Warburg Pincus was combined with CSAM LLC. Credit Suisse Asset
Management had changed its name from BEA Associates effective January 1, 1999.
Accordingly, all references in the Prospectuses to BEA Associates are now to
CSAM LLC.
CSAM LLC is an indirect wholly-owned U.S. subsidiary of Credit Suisse. CSAM LLC,
together with its predecessor firms, has been engaged in the investment advisory
business for over 60 years and has assets under management of approximately
$58.7 billion. CSAM LLC's principal business address is 153 East 53rd Street,
New York, New York 10022.
Change of Name of Distributor. Counsellors Securities Inc., the Funds'
distributor, has changed its name to Credit Suisse Asset Management Securities,
Inc. to reflect its ownership by Credit Suisse.
Address Change. The following address replaces the current address provided in
the Prospectus for overnight or courier service: Boston Financial, Attn: Warburg
Pincus Funds, 66 Brooks Drive, Braintree, MA 02184.
Dated: July 6, 1999
<PAGE> 2
STATEMENT OF ADDITIONAL INFORMATION
October 26, 1998
As Revised July 6, 1999
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> 3
CONTENTS
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GENERAL..........................................................................................1
COMMON INVESTMENT POLICIES -- ALL FUNDS..........................................................1
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................................................................7
SUPPLEMENTAL INVESTMENT OBJECTIVES AND
POLICIES -- INTERNATIONAL GROWTH, EMERGING
MARKETS, U.S. EQUITY, GLOBAL
TELECOMMUNICATIONS AND SELECT EQUITY FUNDS...................................................21
SUPPLEMENTAL INVESTMENT OBJECTIVES AND
POLICIES -- GLOBAL TELECOMMUNICATIONS FUND...................................................22
SUPPLEMENTAL INVESTMENT POLICIES -- MUNICIPAL
BOND FUND....................................................................................23
INVESTMENT LIMITATIONS..........................................................................24
RISK FACTORS....................................................................................26
DIRECTORS AND OFFICERS..........................................................................30
DIRECTORS' ESTIMATED COMPENSATION THROUGH
AUGUST 31, 1999..............................................................................36
INVESTMENT ADVISORY AND SERVICING ARRANGEMENTS..................................................37
PORTFOLIO TRANSACTIONS AND TURNOVER RATE........................................................43
PURCHASE AND REDEMPTION INFORMATION.............................................................47
VALUATION OF SHARES.............................................................................47
PERFORMANCE AND YIELD INFORMATION...............................................................49
TAXES...........................................................................................53
ADDITIONAL INFORMATION CONCERNING THE COMPANY
SHARES.......................................................................................62
MISCELLANEOUS...................................................................................63
INDEPENDENT ACCOUNTANTS AND COUNSEL.............................................................67
FINANCIAL STATEMENTS............................................................................67
APPENDIX A.....................................................................................A-1
APPENDIX B.....................................................................................B-1
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i
<PAGE> 4
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, 1998.
Unless otherwise indicated, the following investment policies may
be changed by the Funds' Board of Directors without an affirmative vote of
shareholders. Capitalized terms used herein and not otherwise defined have the
same meanings as are given to such terms in the 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 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
<PAGE> 5
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
Credit Suisse Asset Management, LLC ("CSAM") or, if applicable, Credit Suisse
Asset Management Limited ("CSAM Ltd"), 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 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
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<PAGE> 6
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.
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
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<PAGE> 7
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 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
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<PAGE> 8
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.
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
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<PAGE> 9
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 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,
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<PAGE> 10
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 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).
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<PAGE> 11
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 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
-8-
<PAGE> 12
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.
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
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<PAGE> 13
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 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
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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 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
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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 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
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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 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
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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 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.
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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
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
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<PAGE> 19
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 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
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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 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
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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 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
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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.
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
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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 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
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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.
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
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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 upon capital appreciation potential rather than
income considerations.
-22-
<PAGE> 26
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> 27
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> 28
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> 29
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> 30
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> 31
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> 32
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> 33
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 names (and ages) of each Fund's Directors and officers, their
addresses, present positions and principal occupations during the past five
years and other affiliations are set forth below.
-30-
<PAGE> 34
<TABLE>
<S> <C>
Richard H. Francis (67) Director
40 Grosvenor Road Currently retired; Executive Vice
Short Hills, New Jersey 07078 President and Chief Financial
Officer of Pan Am Corporation and
Pan American World Airways, Inc.
from 1988 to 1991; Director of
The Infinity Mutual Funds, BISYS
Group Incorporated;
Director/Trustee of other
Warburg Pincus Funds and other
CSAM-advised investment companies.
Jack W. Fritz (72) Director
2425 North Fish Creek Road Private investor; Consultant and
P.O. Box 483 Director of Fritz Broadcasting,
Wilson, Wyoming 83014 Inc. and Fritz Communications
(developers and operators of
radio stations); Director of
Advo, Inc. (direct mail
advertising); Director/Trustee
of other Warburg Pincus Funds.
Jeffrey E. Garten (52) Director
Box 208200 Dean of Yale School of Management
New Haven, Connecticut 06520-8200 and William S. Beinecke Professor
in the Practice of International
Trade and Finance; Undersecretary
of Commerce for International
Trade from November 1993 to
October 1995; Professor at
Columbia University from
September 1992 to November 1993;
Director/Trustee of other
Warburg Pincus Funds.
James S. Pasman, Jr. (68) Director
29 The Trillium Currently retired; President and
Pittsburgh, Pennsylvania 15238 Chief Operating Officer of
National InterGroup, Inc. from
April 1989 to March 1991;
Chairman of Permian Oil Co. from
April 1989 to March 1991;
Director of Education Management
Corp., Tyco International Ltd.;
Trustee, BT Insurance Funds
Trust; Director/Trustee of other
Warburg Pincus Funds and other
CSAM-advised investment companies.
</TABLE>
-31-
<PAGE> 35
<TABLE>
<S> <C>
William W. Priest* (57) Chairman of the Board
153 East 53rd Street Chairman- Management Committee,
New York, New York 10022 Chief Executive Officer and
Managing Director of CSAM (U.S.)
since 1990; Director of TIG
Holdings, Inc.; Director/Trustee
of other Warburg Pincus Funds
and other CSAM-advised investment
companies.
Steven N. Rappaport (50) Director
c/o Loanet, Inc. President of Loanet, Inc. since
153 East 53rd Street, 1997; Executive Vice President of
Suite 5500 Loanet, Inc. from 1994 to 1997;
New York, New York 10022 Director, President, North
American Operations, and former
Executive Vice President from
1992 to 1993 of Worldwide
Operations of Metallurg Inc.;
Executive Vice President,
Telerate, Inc. from 1987 to 1992;
Partner in the law firm of
Hartman & Craven until 1987;
Director/Trustee of other
Warburg Pincus Funds and other
CSAM-advised investment companies.
Arnold M. Reichman* (51) Vice Chairman of the Board
466 Lexington Avenue Managing Director and Chief
New York, New York 10017-3147 Operating Officer of CSAM;
Associated with CSAM since CSAM
acquired the Funds' predecessor
adviser in July 1999; with the
predecessor adviser since 1984;
Officer of CSAMSI; Director of
The RBB Fund, Inc.; Director/Trustee
of other Warburg Pincus Funds.
</TABLE>
- --------------------
* Indicates a Director who is an "interested person" of the Fund as defined
in the 1940 Act.
-32-
<PAGE> 36
<TABLE>
<S> <C>
Alexander B. Trowbridge (69) Director
1317 F Street, N.W., Currently retired; President of
5th Floor Trowbridge Partners, Inc.
Washington, DC 20004 (business consulting) from
January 1990 to November 1996;
Director or Trustee of New
England Mutual Life Insurance
Co., ICOS Corporation
(biopharmaceuticals), IRI
International (energy services),
The Rouse Company (real estate
development), Harris Corp.
(electronics and communications
equipment), The Gillette Co.
(personal care products) and
Sunoco, Inc. (petroleum refining
and marketing); Director/Trustee
of other Warburg Pincus Funds.
Eugene L. Podsiadlo (42) President
466 Lexington Avenue Managing Director of CSAM;
New York, New York 10017-3147 Associated with CSAM since CSAM
acquired the Funds' predecessor
adviser in July 1999; with the
predecessor adviser since 1991;
Vice President of Citibank, N.A.
from 1987 to 1991; Officer of
CSAMSI and of other Warburg Pincus
Funds.
Hal Liebes, Esq. (35) Vice President and Secretary
153 East 53rd Street Director and General Counsel of
New York, New York 10022 CSAM; Associated with CSAM since
1995; Associated with CS First
Boston Investment Management from
1994 to 1995; Associated with
Division of Enforcement, U.S.
Securities and Exchange
Commission from 1991 to 1994;
Officer of CSAMSI and other
Warburg Pincus Funds.
</TABLE>
-33-
<PAGE> 37
<TABLE>
<S> <C>
Michael A. Pignataro (39) Treasurer and Chief Financial
153 East 53rd Street Officer Vice President and
New York, New York 10022 Director of Fund Administration
of CSAM; Associated with CSAM
since 1986; Officer of other
Warburg Pincus Funds.
Janna Manes, Esq. (31) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel
New York, New York 10017-3147 of CSAM; Associated with CSAM
since CSAM acquired the Funds'
predecessor adviser in July 1999;
with the predecessor adviser
since 1996; Associated with the
law firm of Willkie Farr &
Gallagher from 1993 to 1996;
Officer of other Warburg Pincus
Funds.
Stuart J. Cohen, Esq. (30) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel
New York, New York 10017-3147 of CSAM; Associated with CSAM
since CSAM acquired the Funds'
predecessor adviser in July 1999;
with the predecessor adviser
since 1997; Associated with the
law firm of Gordon Altman
Butowsky Weitzen Shalov & Wein
from 1995 to 1997; Officer of
other Warburg Pincus Funds.
Rocco A. DelGuercio (36) Assistant Treasurer
153 East 53rd Street Assistant Vice President and
New York, New York 10022 Administrative Officer of CSAM;
Associated with CSAM since June
1996; Assistant Treasurer,
Bankers Trust Corp. -- Fund
Administration from March 1994 to
June 1996; Mutual Fund Accounting
Supervisor, Dreyfus Corporation
from April 1987 to March 1994;
Officer of other Warburg Pincus
Funds.
</TABLE>
No employee of CSAM, PFPC Inc. and Counsellors Funds Service,
Inc., the Funds' co-administrators ("PFPC" and "Counsellors Sevice,"
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,
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<PAGE> 38
trustee, officer or employee of CSAM, PFPC, Counsellors Service or any of their
affiliates receives an annual fee of $500 and $250 for each meeting of the
Boards attended by him for his services as Director, and is reimbursed for
expenses incurred in connection with his attendance at Board meetings. Each
member of the Audit Committee receives an annual fee of $250, and the chairman
of the Audit Committee receives an annual fee of $325.
-35-
<PAGE> 39
DIRECTORS' ESTIMATED COMPENSATION THROUGH AUGUST 31, 1999
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
All
Investment
Interna- Emerging U.S. U.S. Global Global High Munici- Companies
tional Markets Equity Fixed Income Telecommu- Yield pal in the
Name of Growth Growth Fund Income Fund nications Fund Bond Warburg
Director Fund Fund Fund Fund Fund Pincus
Fund
Complex*
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
William W. None None None None None None None None None
Priest**
- --------------------------------------------------------------------------------------------------------------------------------
Arnold M. None 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 1,750 $73,250
Cooper***
- --------------------------------------------------------------------------------------------------------------------------------
Richard H.
Francis**** 375 375 375 375 375 375 375 375 $16,500
- --------------------------------------------------------------------------------------------------------------------------------
Jack W.
Fritz 1,750 1,750 1,750 1,750 1,750 1,750 1,750 1,750 $73,250
- --------------------------------------------------------------------------------------------------------------------------------
Jeffrey E. 1,750 1,750 1,750 1,750 1,750 1,750 1,750 1,750 $73,250
Garten
- --------------------------------------------------------------------------------------------------------------------------------
James S. Pasman, 375 375 375 375 375 375 375 375 $16,500
Jr.****
- --------------------------------------------------------------------------------------------------------------------------------
Steven N. 375 375 375 375 375 375 375 375 $16,500
Rappaport****
- --------------------------------------------------------------------------------------------------------------------------------
Alexander B. 1,825 1,825 1,825 1,825 1,825 1,825 1,825 1,825 $76,025
Trowbridge
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------------
As of September 30, 1998, Directors and officers as a group, owned
of record less than 1% of each Fund's outstanding Common Shares. No Director or
officer owned any of the Funds' outstanding Advisor Shares.
- ---------------------
* Each Director serves as a Director or Trustee of 39 investment companies
in the Warburg Pincus family of funds.
** Mr. Priest and Mr. Reichman receive compensation as affiliates of CSAM,
and, accordingly, receive no compensation from any Fund or any other
investment company advised by CSAM.
*** Mr. Cooper resigned as a Director of each Fund effective July 6, 1999.
**** Messrs. Francis, Pasman and Rappaport became Directors of the Funds
effective July 6, 1999.
-36-
<PAGE> 40
INVESTMENT ADVISORY AND SERVICING ARRANGEMENTS
ADVISORY AGREEMENTS. CSAM renders advisory and administrative
services to each of the Funds pursuant to Investment Advisory Agreements and
CSAM Ltd serves as sub-investment adviser to the Global Income and Emerging
Markets Funds pursuant to Sub-investment Advisory Agreements (collectively, the
"Advisory Agreements"). CSAM's predecessor, BEA Associates, had rendered
advisory services to the predecessor to the Funds, each a series of The RBB
Fund, Inc. (the "BEA Funds"), pursuant to Investment Advisory Agreements (the
"BEA Advisory Agreements"). CSAM Ltd had not provided sub-investment advisory
services to the BEA Funds.
CSAM, located at 153 East 53rd Street, New York, New York 10022,
is an indirect wholly-owned U.S. subsidiary of Credit Suisse ("Credit Suisse").
Credit Suisse is a global financial services company, providing a comprehensive
range of banking and insurance products. Active on every continent and in all
major financial centers, Credit Suisse comprises five business units -- Credit
Suisse Asset Management (asset management); Credit Suisse First Boston
(investment banking); Credit Suisse Private Banking (private banking); Credit
Suisse (retail banking); and Winterthur (insurance). Credit Suisse has
approximately $680 billion of global assets under management and employs
approximately 62,000 people worldwide. The principal business address of Credit
Suisse is Paradeplatz 8, CH 8070, Zurich, Switzerland.
Credit Suisse Asset Management, together with its predecessor
firms, has been engaged in the investment advisory business for over 60 years.
CSAM and, with respect to the Global Income and Emerging Markets
Funds, CSAM Ltd 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. Equity, U.S. Fixed Income, Global Income, Global
Telecommunications, High Yield, Municipal Bond and Select Equity Funds, CSAM
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. CSAM pays CSAM Ltd a
sub-investment advisory fee out of the fees CSAM receives from the applicable
Funds.
For the fiscal years ended August 31, the BEA Funds have paid BEA
Associates, the predecessor to CSAM, advisory fees and BEA Associates has waived
fees and/or reimbursed expenses of the BEA Funds under the BEA Advisory
Agreements as follows:
-37-
<PAGE> 41
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
Global Telecom- $ 0 $ 9,174 $37,067
munications
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 $ 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
Global Telecom- $ 0 $ 3,745 $20,903
munications
High Yield $ 393,841 $233,336 $0
Municipal Bond $ 91,093 $ 44,791 $0
Select Economic
Value Equity N/A N/A N/A
</TABLE>
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
</TABLE>
-38-
<PAGE> 42
<TABLE>
<CAPTION>
Fees Paid
BEA Fund (after waivers) Waivers Reimbursements
-------- --------------- ------- --------------
<S> <C> <C> <C>
U.S. Core Fixed $ 316,147 $134,639 $0
Income
Strategic Global $ 103,144 $ 53,915 $0
Fixed Income
Global Telecom- N/A N/A N/A
munications
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, CSAM 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
vote of the Funds' Board of Directors or by the holders of a majority of the
outstanding voting securities of the relevant Fund, at any time without penalty,
on 60 days' written notice to CSAM. Each of the investment advisory agreements
may also be terminated by CSAM 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
CSAM and CSAM Ltd, (ii) CSAM on 60 days' written notice to the Fund and CSAM
Ltd, or (iii) CSAM Ltd on 60 days' written notice to the Fund and CSAM. Each of
the Advisory Agreements terminates automatically in the event of assignment
thereof.
-39-
<PAGE> 43
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, 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
Associates, the predecessor of CSAM, 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 Counsellors 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
-40-
<PAGE> 44
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 BEA Funds
have paid BEA Associates and PFPC administration fees and BEA Associates and
PFPC have waived fees and/or reimbursed expenses as follows:
AUGUST 31, 1998
<TABLE>
<CAPTION>
PFPC
----
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
Income $ 42,937 $ 5,494 $ 0
High Yield $ 99,050 $ 24,762 $ 0
Municipal Bond $ 30,402 $ 0 $ 0
Select Economic Value
Equity $ 0 $ 2,478 $ 0
Global
Telecommunications $ 0 $ 1,147 $ 0
</TABLE>
<TABLE>
<CAPTION>
BEA Associates
--------------
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
Income $ 3,412 $ 47,777 $ 0
High Yield $ 9,905 $ 138,669 $ 0
Municipal Bond $ 2,076 $ 29,057 $ 0
Select Economic Value
Equity $ 198 $ 2,775 $ 0
Global
Telecommunications $ 0 $ 459 $ 0
</TABLE>
-41-
<PAGE> 45
AUGUST 31, 1997
<TABLE>
<CAPTION>
PFPC
----
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
Global N/A N/A N/A
Telecommunications
</TABLE>
<TABLE>
<CAPTION>
BEA Associates
--------------
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
Global N/A N/A N/A
Telecommunications
</TABLE>
AUGUST 31, 1996
<TABLE>
<CAPTION>
PFPC
----
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
Income $ 31,412 $ 7,853 $ 0
High Yield $ 120,402 $ 12,483 $ 0
Municipal Bond $ 28,890 $ 0 $ 0
Select Economic Value N/A N/A N/A
Equity
Global Telecommunications N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
BEA Associates
--------------
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
Global N/A N/A N/A
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
Credit Suisse Asset Management Securities, Inc. ("CSAMSI"), in consideration for
services (as defined below), a fee calculated at an annual rate of .25% of the
average daily net assets of Common Shares of the Fund. Services performed by
CSAMSI include (i) the sale of the Common Shares, as set forth in the 12b-1 Plan
("Selling Services"), (ii) ongoing servicing and/or maintenance of the accounts
of the Common Shareholders of the Fund, as set forth in the 12b-1 Plan
("Shareholder Services"), and (iii) sub-transfer agency services, subaccounting
services or administrative services related to the sale of the Common Shares, as
set forth in the 12b-1 Plan ("Administrative Services" and collectively with
Selling Services and Administrative Services, "Services") including, without
limitation, (a) payments reflecting an allocation of overhead and other office
expenses of CSAMSI related to providing Services; (b) payments made to, and
reimbursement of expenses of, persons who provide support services in connection
with the distribution of the Common Shares
-42-
<PAGE> 46
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, CSAMSI provides the Board with
periodic reports of amounts expended under the 12b-1 Plan and the purpose for
which the expenditures were made.
The 12b-1 Plans will continue in effect for so long as their
continuance is specifically approved at least annually by each Fund's Board,
including a majority of the Directors/Trustees who are not interested persons of
the Fund and who have no direct or indirect financial interest in the operation
of the 12b-1 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 CSAMSI 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 these BEA Funds have paid CSAMSI 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, CSAM is
responsible for the execution of portfolio transactions and the allocation of
brokerage transactions for the Funds. In executing portfolio transactions, CSAM
seeks to obtain the best net results for a Fund, taking into account such
factors as the price (including the applicable brokerage commission or
-43-
<PAGE> 47
dealer spread), size of the order, difficulty of execution and operational
facilities of the firm involved. While CSAM generally seeks reasonably
competitive commission rates, payment of the lowest commission or spread is not
necessarily consistent with obtaining the best results in particular
transactions.
Portfolio transactions for the Funds 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.
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>
-44-
<PAGE> 48
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
</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
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. CSAM may, consistent with
the interests of a Fund and subject to the approval of the Board of Directors,
select brokers on the basis of the research, statistical and pricing services
they provide to a Fund and other clients of CSAM. Information and research
received from such brokers will be in addition to, and not in lieu of, the
services required to be performed by CSAM under its respective contracts. A
commission paid to such brokers may be higher than that which another qualified
broker would have charged for effecting the same transaction, provided that
CSAM, as applicable, determines in good faith that such commission is reasonable
in terms either of the transaction or the overall responsibility of CSAM to a
Fund and its other clients and that the total commissions paid by a Fund will be
reasonable in relation to the benefits to a Fund over the long-term.
Corporate debt and U.S. Government securities are generally traded
on the over-the-counter market on a "net" basis without a stated commission,
through dealers acting for their own account and not as brokers. The Funds will
primarily engage in transactions with these dealers or deal directly with the
issuer unless a better price or execution could be obtained by using a 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
-45-
<PAGE> 49
specific security at the time, and includes the dealer's normal profit.
CSAM may seek to obtain an undertaking from issuers of commercial
paper or dealers selling commercial paper to consider the repurchase of such
securities from a Fund prior to their maturity at their original cost plus
interest (sometimes adjusted to reflect the actual maturity of the securities),
if it believes that a Fund's anticipated need for liquidity makes such action
desirable. Any such repurchase prior to maturity reduces the possibility that a
Fund would incur a capital loss in liquidating commercial paper (for which there
is no established market), especially if interest rates have risen since
acquisition of the particular commercial paper.
Investment decisions for each Fund and for other investment
accounts managed by CSAM are made independently of each other in 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 CSAM or any affiliated person (as defined in the 1940 Act) thereof is a
member except pursuant to procedures adopted by the Funds' Board of Directors
pursuant to Rule 10f-3 under the 1940 Act.
In no instance will portfolio securities be purchased from or sold
to the Distributor, CSAM or CSAM Ltd, CSAMSI or Credit Suisse First Boston ("CS
First Boston") or any affiliated person of the foregoing entities except as
permitted by Securities and Exchange Commission ("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
-46-
<PAGE> 50
exemptive order issued by the SEC under the 1940 Act authorizing the Fund and
certain other investment companies advised by CSAM 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.)
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
-47-
<PAGE> 51
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 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
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<PAGE> 52
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
<TABLE>
<S> <C>
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.
</TABLE>
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.
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<PAGE> 53
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>
Since
3 year 5 year Inception
Fund 1 year (ann.) (ann.) (ann.)
- ---- ------ ------ ------ ------
<S> <C> <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: +
<TABLE>
<CAPTION>
Fund Aggregate Return
- ---- ----------------
<S> <C>
International Growth* 88.49%
Emerging Markets * -19.26%
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 of the corresponding predecessor
BEA Fund since inception (October 1, 1992, February 1, 1993 and March 1,
1993, respectively) until the BEA Funds' Advisor Shares were 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,
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<PAGE> 54
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.
<TABLE>
<CAPTION>
Average Annual Total Return of Institutional Shares
- ---------------------------------------------------
BEA Fund 1 year 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>
<TABLE>
<CAPTION>
Aggregate Total Return of Institutional Shares
- ----------------------------------------------
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
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<PAGE> 55
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
<TABLE>
<S> <C>
Where: a = dividends and interest earned by a
Fund during the period;
b = expenses accrued for the period
(net of reimbursements);
c = average daily number of shares
outstanding during the period,
entitled to receive dividends; and
d = maximum offering price per share
on the last day of the period.
</TABLE>
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
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<PAGE> 56
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.
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
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<PAGE> 57
amount equal to the sum of (i) at least 90% of its investment company taxable
income (net taxable investment income and the excess of net short-term capital
gain over net long-term capital loss), if any, for the year and (ii) at least
90% of its net tax-exempt interest income, if any, for the year (the
"Distribution Requirement"), and (b) satisfies certain other requirements of the
Code that are described below. Distributions of investment company taxable
income and net tax-exempt interest income made during the taxable year or, under
specified circumstances, within twelve months after the close of the taxable
year will satisfy the Distribution Requirement. The Distribution Requirement for
any year may be waived if a regulated investment company establishes to the
satisfaction of the Internal Revenue Service that it is unable to satisfy the
Distribution Requirement by reason of distributions previously made for the
purpose of avoiding liability for federal excise tax (discussed below).
In addition to satisfaction of the Distribution Requirement each
Fund must derive at least 90% of its gross income from dividends, interest,
certain payments with respect to securities loans and gains from the sale or
other disposition of stock or securities or foreign currencies, or from other
income derived with respect to its business of investing in such stock,
securities, or currencies (the "Income Requirement").
Future Treasury regulations may provide that currency gains that
are not "directly related" to a Fund's principal business of investing in stock
or securities (or in options or futures with respect to stock or securities)
will not satisfy the Income Requirement. Income derived by a regulated
investment company from a partnership or trust (including a foreign entity that
is classified as a partnership or trust for U.S. federal income tax purposes)
will satisfy the Income Requirement only to the extent such income is
attributable to items of income of the partnership or trust that would satisfy
the Income Requirement if they were realized by a regulated investment company
in the same manner as realized by the partnership or trust.
In addition to the foregoing requirements, at the close of each
quarter of its taxable year, at least 50% of the value of each Fund's assets
must consist of cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and securities of other issuers (as to
which the Fund has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which the Fund does not hold more than 10%
of the outstanding voting securities of such issuer), and no more than 25% of
the value of each Fund's total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which such Fund
controls and which are engaged in the same or similar trades or businesses (the
"Asset Diversification Requirement").
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<PAGE> 58
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 not later than 60 days after
the close of each Fund's respective taxable year.
In the case of corporate shareholders, distributions (other than
capital gain dividends) of a Fund for any taxable year will qualify for the 70%
dividends received deduction, only to the extent of the gross amount of
"qualifying dividends" received by such Fund for the year. Generally, a dividend
will be treated as a "qualifying dividend" only if it has been received from a
domestic corporation. However, if a Fund owns at least 10 percent of the stock
(by vote and value) of certain foreign corporations with U.S. source income,
then a portion of the dividends paid by such foreign corporations may constitute
"qualifying dividends." A dividend received by a taxpayer will not be treated as
a "qualifying dividend" if (1) it has been received with respect to any share
of stock that the taxpayer has held for 45 days (90 days in the case of certain
preferred stock) or less (excluding any day more than 45 days (or 90 days in
the
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<PAGE> 59
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" 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.
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<PAGE> 60
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" 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
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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 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
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<PAGE> 62
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
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.
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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 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
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<PAGE> 64
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 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
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<PAGE> 65
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.
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
The Funds are not sponsored, endorsed, sold or promoted by
Warburg, Pincus & Co. Warburg, Pincus & Co. makes no representation or warranty,
express or implied, to the owners of the Funds or any member of the public
regarding the advisability
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<PAGE> 66
of investing in securities generally or in the Funds particularly. Warburg,
Pincus & Co. licenses certain trademarks and trade names of Warburg, Pincus &
Co., and is not responsible for and has not participated in the calculation of
the Funds' net asset value, nor is Warburg, Pincus & Co. a distributor of the
Funds. Warburg, Pincus & Co. has no obligation or liability in connection with
the administration, marketing or trading of the Funds.
CONTROL PERSONS. As of October 16, 1998, the names, address and
percentage of ownership of each person that owns of record 5% or more of a class
of each Fund's outstanding shares were as follows:
<TABLE>
<CAPTION>
PERCENT
OWNED AS OF
FUND NAME AND ADDRESS OCTOBER 16, 1998
- ---- ---------------- ----------------
<S> <C> <C>
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
</TABLE>
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<PAGE> 67
<TABLE>
<CAPTION>
PERCENT
OWNED AS OF
FUND NAME AND ADDRESS OCTOBER 16, 1998
- ---- ---------------- ----------------
<S> <C> <C>
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 Fund -- SEMA & Co. 98.34%
Advisor 12 E. 49th Street, 41st Fl.
New York, NY 10017
Core Equity Fund -- Institutional Werner & Pfleiderer Pension Plan 10.05%
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
</TABLE>
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<PAGE> 68
<TABLE>
<CAPTION>
PERCENT
OWNED AS OF
FUND NAME AND ADDRESS OCTOBER 16, 1998
- ---- ---------------- ----------------
<S> <C> <C>
Winifred Masterson Burke Foundation 6.12%
785 Mamaroneck Ave.
White Plains, NY 10605-2593
New England UFCW & Employers' Pension Fund
Board of Trustees 11.89%
161 Forbes Road, Ste. 201
Braintree, MA 02184-2606
Fidelity Investments Institutional Operations Co. 5.42%
Inc. (FII0C) 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 Fund -- Sunkist Master Trust 53.09%
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 -- Institutional Carl F. Besenbach 18.86%
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
</TABLE>
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<PAGE> 69
<TABLE>
<CAPTION>
PERCENT
OWNED AS OF
FUND NAME AND ADDRESS OCTOBER 16, 1998
- ---- ---------------- ----------------
<S> <C> <C>
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
</TABLE>
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<PAGE> 70
<TABLE>
<CAPTION>
PERCENT
OWNED AS OF
FUND NAME AND ADDRESS OCTOBER 16, 1998
- ---- ---------------- ----------------
<S> <C> <C>
Global Telecommunications Fund E.M. Warburg Pincus & Co. Inc. 15.65%
- -- 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>
INDEPENDENT ACCOUNTANTS AND COUNSEL
PricewaterhouseCoopers LLP ("PWC"), with principal offices at 2400
Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as independent
accountants for each Fund.
The law firm of Willkie Farr & Gallagher, 787 Seventh Avenue, New
York, New York 10019-6099, serves as counsel to each Fund and provides legal
services from time to time for CSAM, Counsellors Service, and CSAMSI.
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 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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<PAGE> 71
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
A-1
<PAGE> 72
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
A-2
<PAGE> 73
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to 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:
A-3
<PAGE> 74
"TBW-1" - This designation represents Thomson BankWatch's highest
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
"TBW-2" - This designation represents Thomson BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's lowest
rating category and indicates that the obligation is regarded as non-investment
grade and therefore speculative.
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.
A-4
<PAGE> 75
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.
"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.
A-5
<PAGE> 76
"CC" - An obligation rated "CC" is currently highly vulnerable to
non-payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. This rating
is used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition or the taking of similar action if payments on
an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The 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
A-6
<PAGE> 77
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations, (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when 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-7
<PAGE> 78
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA,"
"A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch 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
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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 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.
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"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 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.
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"BBB" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A 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.
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"MIG-2"/"VMIG-2" - This designation denotes high quality, with
margins of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality,
carrying specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack of
margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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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
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out a futures contract sale is effected by a Fund entering into a 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
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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).
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.
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Subsequent payments, called variation margin, to and from the broker, will be
made on a daily basis as the price of the underlying instruments fluctuates
making the long and short positions in the futures contract more or less
valuable, a process known as marking-to-the-market. For example, when a
particular Fund has purchased a futures contract and the price of the contract
has risen in response to a rise in the underlying instruments, that position
will have increased in value and the Fund will be entitled to receive from the
broker a variation margin payment equal to that increase in value. Conversely,
where the Fund has purchased a futures contract and the price of the future
contract has declined in response to a decrease in the underlying instruments,
the position would be less valuable and the Fund would be required to make a
variation margin payment to the broker. Prior to expiration of the futures
contract, the Adviser may elect to close the position by taking an opposite
position, subject to the availability of a secondary market, which will operate
to terminate the Fund's position in the futures contract. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or gain.
V. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by a
Fund. One risk arises because of the imperfect correlation between movements in
the price of the futures and movements in the price of any instruments which are
the subject of a hedge. The price of the futures may move more than or less than
the price of the instruments being hedged. If the price of the futures moves
less than the price of the instruments which are the subject of the hedge, the
hedge will not be fully effective but, if the price of the instruments being
hedged has moved in an unfavorable direction, the Fund would be in a better
position than if it had not hedged at all. If the price of the instruments being
hedged has moved in a favorable direction, this advantage will be partially
offset by the loss on the futures. If the price of the futures moves more than
the price of the hedged instruments, the Fund involved will experience either a
loss or gain on the futures which will not be completely offset by movements in
the price of the instruments which are the subject of the hedge. To compensate
for the imperfect correlation of movements in the price of instruments being
hedged and movements in the price of futures contracts, a Fund may buy or sell
futures contracts in a greater dollar amount than the dollar amount of
instruments being hedged if the volatility over a particular time period of the
prices of such instruments has been greater than the volatility over such time
period of the future, or if otherwise deemed to be appropriate by the Adviser.
Conversely, a Fund may buy or sell fewer futures contracts if the volatility
over a particular time period of the prices of the instruments being hedged is
less than the volatility over such time period of the futures contract being
used, or if otherwise
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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 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
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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 contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by a Fund is also subject to the
Adviser's ability to predict correctly movements in the direction of the market.
For example, if a particular Fund has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Fund will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. A Fund may
have to sell securities at a time when it may be disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies
can be substantial, due both to the low margin deposits required, and the
extremely high degree of leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit, before any
deduction for the transaction costs, if the contract were closed out. Thus, a
purchase or sale of a futures contract may
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result in losses in excess of the amount invested in the contract.
VI. Options on Futures Contracts
A Fund may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. A Fund will be required to deposit initial margin and variation
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements similar to those described above. Net option
premiums received will be included as initial margin deposits. As an example, in
anticipation of a decline in interest rates, a 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.
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VII. Other Matters
Accounting for futures contracts will be in accordance with
generally accepted accounting principles.
The Funds intend to comply with the regulations of the Commodity
Futures Trading Commission exempting the Funds from registration as a "commodity
pool operator."
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STATEMENT OF ADDITIONAL INFORMATION
October 26, 1998
As Revised July 6, 1999
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 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> 92
CONTENTS
<TABLE>
<CAPTION>
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......................................................22
INVESTMENT LIMITATIONS......................................................23
RISK FACTORS................................................................25
DIRECTORS AND OFFICERS......................................................30
DIRECTORS' ESTIMATED COMPENSATION THROUGH AUGUST 31, 1999...................35
INVESTMENT ADVISORY AND SERVICING ARRANGEMENTS..............................35
PORTFOLIO TRANSACTIONS......................................................41
PURCHASE AND REDEMPTION INFORMATION.........................................44
VALUATION OF SHARES.........................................................45
PERFORMANCE AND YIELD INFORMATION...........................................46
TAXES.......................................................................50
ADDITIONAL INFORMATION CONCERNING THE COMPANY SHARES........................59
MISCELLANEOUS...............................................................59
INDEPENDENT ACCOUNTANTS AND COUNSEL.........................................64
FINANCIAL STATEMENTS........................................................64
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, 1998.
Unless otherwise indicated, the following investment policies may be
changed by the Funds' Board of Directors without an affirmative vote of
shareholders. Capitalized terms used herein and not otherwise defined have the
same meanings as are given to such terms in the 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 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
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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
Credit Suisse Asset Management, LLC ("CSAM") or, if applicable, Credit Suisse
Asset Management Limited ("CSAM Ltd"), 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 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
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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.
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
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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 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.
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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.
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
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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 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
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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, 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 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
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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 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
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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.
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
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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 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
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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 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
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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 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.
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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 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
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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 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
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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 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
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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 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
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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 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
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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 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
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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.
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
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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 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
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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.
SUPPLEMENTAL INVESTMENT OBJECTIVES AND POLICIES --
INTERNATIONAL GROWTH, EMERGING MARKETS, 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
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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 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
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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.
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
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7. Purchase any securities, which would cause 25% or more of the
value of the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
(i) instruments issued or guaranteed by the United States, any state, territory
or possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions, and (ii)
repurchase agreements secured by the instruments described in clause (i); (b)
wholly-owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents; and (c) utilities will be divided according to their
services, for example, gas, gas transmission, electric and gas, electric and
telephone will each be considered a separate industry.
For purposes of Investment Limitation No. 1, collateral arrangements
with respect to, if applicable, the writing of options, futures contracts,
options on futures contracts, forward currency contracts and collateral
arrangements with respect to initial and variation margin are not deemed to be a
pledge of assets and neither such arrangements nor the purchase or sale of
futures or related options are deemed to be the issuance of a senior security
for purposes of Investment Limitation No. 2.
In addition to the fundamental investment limitations specified
above, a Fund may not:
1. Make investments for the purpose of exercising control or
management, but investments by a Fund in wholly-owned investment entities
created under the laws of certain countries will not be deemed the making
of investments for the purpose of exercising control or management;
2. Purchase securities on margin, except for short-term
credits necessary for clearance of portfolio transactions, and except that
a Fund may make margin deposits in connection with its use of options,
futures contracts, options on futures contracts and forward contracts;
3. Purchase or sell interests in mineral leases, oil, gas or
other mineral exploration or development programs, except that a Fund may
invest in securities issued by companies that engage in oil, gas or other
mineral exploration or development activities; and
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
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<PAGE> 117
the time of investment, a later increase or decrease in percentage resulting
from a change in market values of portfolio securities or amount of total or net
assets will not be considered a violation of any of the foregoing restrictions.
Securities held by a Fund generally may not be purchased from, sold
or loaned to the Adviser or its affiliates or any of their directors, officers
or employees, acting as principal, unless pursuant to a rule or exemptive order
under the 1940 Act.
RISK FACTORS
FOREIGN SECURITIES. Investments in foreign securities are
subject to certain risks, as discussed below.
Political, Economic and Market Factors. Investments in foreign
securities involve risks relating to political and economic developments abroad,
as well as those that result from the differences between the regulations to
which U.S. and foreign 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
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<PAGE> 118
information concerning foreign issuers of securities held by the Funds than will
be available concerning U.S. companies. Foreign companies, and in particular,
companies in emerging markets, are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory requirements
comparable to those applicable to U.S. companies.
Exchange Rate Fluctuations. Because foreign securities ordinarily
will be denominated in currencies other than the U.S. dollar, changes in foreign
currency exchange rates will affect a Fund's net asset value, the value of
interest and dividends earned, gains and losses realized on the sale of
securities and net investment income and capital gain, if any, to be distributed
to shareholders by a Fund. If the value of a foreign currency rises against the
U.S. dollar, the value of a Fund's assets denominated in that currency will
increase; conversely, if the value of a foreign currency declines against the
U.S. dollar, the value of a Fund's assets denominated in that currency will
decrease. The exchange rates between the U.S. dollar and other currencies are
determined by supply and demand in the currency exchange markets, international
balances of payments, government 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
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<PAGE> 119
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.
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
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<PAGE> 120
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 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
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<PAGE> 121
sovereign debt. While the Adviser intends to manage the Funds in a manner that
will minimize the exposure to such risks, there can be no assurance that adverse
political changes will not cause a Fund to suffer a loss of interest or
principal on any of its holdings.
Investors should also be aware that certain sovereign debt
instruments in which a Fund may invest involve great risk. Sovereign debt issued
by issuers in many emerging markets generally is deemed to be the equivalent in
terms of quality to securities rated below investment grade by Moody's and S&P.
Such securities are regarded as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligations and involve major risk exposure to adverse conditions.
Some of such sovereign debt, which may not be paying interest currently or may
be in payment default, may be comparable to securities rated "D" by S&P or "C"
by Moody's. A Fund may have difficulty disposing of certain sovereign debt
obligations because there may be a limited trading market for such securities.
Because there is no liquid secondary market for many of these securities, the
Funds anticipate that such securities could be sold only to a limited number of
dealers or institutional investors. The lack of a liquid secondary market may
have an adverse impact on the market price of such securities and a Fund's
ability to dispose of particular issues when necessary to meet a Fund's
liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities also may make it more difficult for a
Fund to obtain accurate market quotations for purposes of valuing a Fund's
portfolio and calculating its net asset value. When and if available, fixed
income securities 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> 122
<TABLE>
<S> <C>
Richard H. Francis (67) Director
40 Grosvenor Road Currently retired; Executive Vice President
Short Hills, New Jersey 07078 and Chief Financial Officer of Pan Am
Corporation and Pan American World Airways,
Inc. from 1988 to 1991; Director of The
Infinity Mutual Funds, BISYS Group
Incorporated; Director/Trustee of other Warburg Pincus
Funds and other CSAM-advised investment companies.
Jack W. Fritz (72) Director
2425 North Fish Creek Road Private investor; Consultant and Director
P.O. Box 483 of Fritz Broadcasting, Inc. and Fritz
Wilson, Wyoming 83014 Communications (developers and operators of
radio stations); Director of Advo,
Inc. (direct mail advertising);
Director/Trustee of other Warburg Pincus Funds.
Jeffrey E. Garten (52) Director
Box 208200 Dean of Yale School of Management and
New Haven, Connecticut 06520-8200 William S. Beinecke Professor in the
Practice of International Trade and Finance;
Undersecretary of Commerce for International
Trade from November 1993 to October 1995;
Professor at Columbia University from
September 1992 to November 1993; Director/
Trustee of other Warburg Pincus Funds.
James S. Pasman, Jr. (68) Director
29 The Trillium Currently retired; President and Chief
Pittsburgh, Pennsylvania 15238 Operating Officer of National InterGroup,
Inc. from April 1989 to March 1991; Chairman
of Permian Oil Co. from April 1989 to March
1991; Director of Education Management Corp.,
Tyco International Ltd; Trustee, BT Insurance
Funds Trust; Director/Trustee of other Warburg Pincus
Funds and other CSAM-advised investment companies.
</TABLE>
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<PAGE> 123
<TABLE>
<S> <C>
William W. Priest* (57) Chairman of the Board
153 East 53rd Street Chairman--Management Committee, Chief
New York, New York 10022 Executive Officer and Managing Director
of CSAM (U.S.) since 1990; Director of TIG
Holdings, Inc.; Director/Trustee of other
Warburg Pincus Funds and other CSAM-advised
investment companies.
Steven N. Rappaport (50) Director
c/o Loanet, Inc. President of Loanet, Inc. since 1997;
153 East 53rd Street, Executive Vice President of Loanet, Inc.
Suite 5500 from 1994 to 1997; Director, President,
New York, New York 10022 North American Operations, and former
Executive Vice President from 1992 to 1993
of Worldwide Operations of Metallurg Inc.;
Executive Vice President, Telerate, Inc.
from 1987 to 1992; Partner in the law firm
of Hartman & Craven until 1987; Director/Trustee
of other Warburg Pincus Funds and other CSAM-advised
investment companies.
Arnold M. Reichman* (51) Vice Chairman of the Board
466 Lexington Avenue Managing Director and Chief Operating Officer
New York, New York 10017-3147 of CSAM; Associated with CSAM since CSAM acquired the
Funds' predecessor adviser in July 1999; with
the predecessor adviser since 1984; Officer of
CSAMSI; Director of The RBB Fund, Inc.; Director/Trustee
of other Warburg Pincus Funds.
</TABLE>
- --------
* Indicates a Director/Trustee who is an "interested person" of the Fund as
defined in the 1940 Act.
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<PAGE> 124
<TABLE>
<S> <C>
Alexander B. Trowbridge (69) Director
1317 F Street, N.W., 5th Floor Currently retired; President of Trowbridge
Washington, DC 20004 Partners, Inc. (business consulting) from
January 1990 to November 1996; Director or
Trustee of New England Mutual Life Insurance
Co., ICOS Corporation (biopharmaceuticals),
IRI International (energy services), The
Rouse Company (real estate development),
Harris Corp. (electronics and communications
equipment), The Gillette Co. (personal care
products) and Sunoco, Inc. (petroleum
refining and marketing); Director/Trustee
of other Warburg Pincus Funds.
Eugene L. Podsiadlo (42) President
466 Lexington Avenue Managing Director of CSAM; Associated with
New York, New York 10017-3147 CSAM since CSAM acquired the Funds'
predecessor adviser in July 1999; with the
predecessor adviser since 1991; Vice
President of Citibank, N.A. from 1987 to
1991; Officer of CSAMSI and other Warburg Pincus Funds.
Hal Liebes, Esq. (35) Vice President and Secretary
153 East 53rd Street Director and General Counsel of CSAM;
New York, New York 10022 Associated with CSAM since 1995; Associated
with CS First Boston Investment Management
from 1994 to 1995; Associated with Division
of Enforcement, U.S. Securities and Exchange
Commission from 1991 to 1994; Officer of
CSAMSI and other Warburg Pincus Funds.
</TABLE>
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<PAGE> 125
<TABLE>
<S> <C>
Michael A. Pignataro (39)
153 East 53rd Street Treasurer and Chief Financial Officer
New York, New York 10022 Vice President and Director of Fund
Administration of CSAM; Associated with CSAM
since 1986; Officer of other Warburg Pincus Funds.
Janna Manes, Esq. (31) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel of CSAM;
New York, New York 10017-3147 Associated with CSAM since CSAM acquired the
Funds' predecessor adviser in July 1999; with
the predecessor adviser since 1996; Associated
with the law firm of Willkie Farr & Gallagher
from 1993 to 1996; Officer of other Warburg Pincus Funds.
Stuart J. Cohen, Esq. (30) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel of CSAM;
New York, New York 10017-3147 Associated with CSAM since CSAM acquired
the Funds' predecessor adviser in July 1999;
with the predecessor adviser since 1997;
Associated with the law firm of Gordon Altman
Butowsky Weitzen Shalov & Wein from 1995 to
1997; Officer of other Warburg Pincus Funds.
Rocco A. DelGuercio (36) Assistant Treasurer
153 East 53rd Street Assistant Vice President and Administrative
New York, New York 10022 Officer of CSAM; Associated with CSAM since
June 1996; Assistant Treasurer, Bankers Trust
Corp. -- Fund Administration from March 1994
to June 1996; Mutual Fund Accounting Supervisor,
Dreyfus Corporation from April 1987 to March
1994; Officer of other Warburg Pincus Funds.
</TABLE>
No employee of CSAM, PFPC Inc. and Counsellors Funds Service, Inc.,
the Funds' co-administrators ("PFPC" and "Counsellors Service," respectively),
or any of their affiliates,
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<PAGE> 126
receives any compensation from the Funds for acting as an officer or director
of a Fund. Each Director who is not a director, trustee, officer or employee
of CSAM, PFPC, Counsellors Service or any of their affiliates receives an
annual fee of $500 and $250 for each meeting of the Boards attended by him for
his services as Director, and is reimbursed for expenses incurred in connection
with his attendance at Board meetings. Each member of the Audit Committee
receives an annual fee of $250, and the chairman of the Audit Committee
receives an annual fee of $325.
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<PAGE> 127
DIRECTORS' ESTIMATED COMPENSATION THROUGH AUGUST 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
All
Investment
Companies
in the
Interna- U.S. Munici- Warburg
tional Emerging U.S. Fixed Global High pal Pincus
Name of Growth Markets Equity Income Income Yield Bond Fund
Director Fund Fund Fund Fund Fund Fund Fund Complex*
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William W.
Priest** None None None None None None None None
- ------------------------------------------------------------------------------------------------------------
Arnold M.
Reichman** 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 $73,250
- ------------------------------------------------------------------------------------------------------------
Richard H.
Francis**** 375 375 375 375 375 375 375 $16,500
- ------------------------------------------------------------------------------------------------------------
Jack W.
Fritz 1,750 1,750 1,750 1,750 1,750 1,750 1,750 $73,250
- ------------------------------------------------------------------------------------------------------------
Jeffrey E.
Garten 1,750 1,750 1,750 1,750 1,750 1,750 1,750 $73,250
- ------------------------------------------------------------------------------------------------------------
James S.
Pasman,
Jr. **** 375 375 375 375 375 375 375 $16,500
- ------------------------------------------------------------------------------------------------------------
Steven N.
Rappaport**** 375 375 375 375 375 375 375 $16,500
- ------------------------------------------------------------------------------------------------------------
Alexander B.
Trowbridge 1,825 1,825 1,825 1,825 1,825 1,825 1,825 $76,025
- ------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------
* Each Director serves as a Director or Trustee of 39 investment companies
in the Warburg Pincus family of funds.
** Mr. Priest and Mr. Reichman receive compensation as affiliates of CSAM,
and, accordingly, receive no compensation from any Fund or any other
investment company advised by CSAM.
*** Mr. Cooper resigned as a Director of each Fund effective July 6, 1999.
**** Messrs. Francis, Pasman and Rappaport became Directors of the Funds
effective July 6, 1999.
As of September 30, 1998, Directors and officers as a group, owned
of record less than 1% of each Fund's outstanding Common Shares. No Director or
officer owned any of the Funds' outstanding Advisor Shares.
INVESTMENT ADVISORY AND SERVICING ARRANGEMENTS
ADVISORY AGREEMENTS. CSAM renders advisory and administrative
services to each of the Funds pursuant to Investment Advisory Agreements and
CSAM Ltd serves as sub-investment adviser to the Global Income and Emerging
Markets Funds pursuant to Sub-investment Advisory Agreements (collectively, the
"Advisory Agreements"). CSAM's predecessor,
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<PAGE> 128
BEA Associates, had rendered advisory services to the predecessor to the Funds,
each a series of The RBB Fund, Inc. (the "BEA Funds"), pursuant to Investment
Advisory Agreements (the "BEA Advisory Agreements"). CSAM Ltd has not provided
sub-investment advisory services to the BEA Funds.
CSAM, located at 153 East 53rd Street, New York, New York 10022, is
an indirect wholly-owned U.S. subsidiary of Credit Suisse ("Credit Suisse").
Credit Suisse is a global financial services company, providing a comprehensive
range of banking and insurance products. Active on every continent and in all
major financial centers, Credit Suisse comprises five business units -- Credit
Suisse Asset Management (asset management); Credit Suisse First Boston
(investment banking); Credit Suisse Private Banking (private banking); Credit
Suisse (retail banking); and Winterthur (insurance). Credit Suisse has
approximately $680 billion of global assets under management and employs
approximately 62,000 people worldwide. The principal business address of Credit
Suisse is Paradeplatz 8, CH 8070, Zurich, Switzerland.
Credit Suisse Asset Management, together with its predecessor firms,
has been engaged in the investment advisory business for over 60 years.
CSAM and, with respect to the Global Income and Emerging Markets
Funds, CSAM Ltd 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, CSAM
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. CSAM pays CSAM Ltd a
sub-investment advisory fee out of the fees CSAM receives from the applicable
Funds.
For the fiscal years ended August 31, the BEA Funds have paid BEA
Associates, the predecessor to CSAM, advisory fees and BEA Associates 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
</TABLE>
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<PAGE> 129
<TABLE>
<CAPTION>
Fees Paid
BEA Fund (after waivers) Waivers Reimbursements
-------- --------------- ------- --------------
<S> <C> <C> <C>
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
Fixed Income $ 81,321 $ 89,310 $0
High Yield $ 422,069 $271,277 $0
Municipal Bond $ 93,618 $ 51,669 $0
Select Economic
Value Equity $ 14,224 $ 643 $0
</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
Fixed Income $ 180,945 $ 27,305 $0
High Yield $ 393,841 $ 233,336 $0
Municipal Bond $ 91,093 $ 44,791 $0
Select Economic
Value Equity N/A N/A N/A
</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
Fixed Income $ 103,144 $ 53,915 $0
High Yield $ 542,590 $ 100,763 $0
Municipal Bond $ 92,994 $ 68,790 $0
Select Economic
Value Equity N/A N/A N/A
</TABLE>
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<PAGE> 130
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, CSAM 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 CSAM. Each of the investment advisory agreements
may also be terminated by CSAM 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' notice to CSAM
and CSAM Ltd, (ii) CSAM on 60 days' written notice to the Fund and CSAM Ltd or
(iii) CSAM Ltd on 60 days' written notice to the Fund and CSAM. 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
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<PAGE> 131
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 both serve as co-administrators to the
Funds pursuant to separate written agreements (the "Cousellors Service
Co-Administration Agreements" and the "PFPC 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
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<PAGE> 132
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:
AUGUST 31, 1998
<TABLE>
<CAPTION>
PFPC Counsellors Service
---- -------------------
Fees Paid Reim- Fees Paid Reim-
(after burse- (after burse-
BEA Fund Waivers) Waivers ments BEA Fund Waivers) Waivers ments
- -------- --------- --------- -------- -------- ----------------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
International Equity $769,622 $ 7,213 $0 International Equity $435,028 $497,175 $0
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 Strategic Global Fixed
Income $ 42,937 $ 5,494 $0 Income $3,412 $ 47,777 $0
High Yield $ 99,050 $24,762 $0 High Yield $9,905 $138,669 $0
Municipal Bond $ 30,402 $ 0 $0 Municipal Bond $2,076 $ 29,057 $0
Select Economic Value Select Economic Value
Equity $ 0 $ 2,478 $0 Equity $198 $2,775 $0
</TABLE>
AUGUST 31, 1997
<TABLE>
<CAPTION>
PFPC Counsellors Service
---- -------------------
Fees Paid Reim- Fees Paid Reim-
(after burse- (after burse-
BEA Fund Waivers) Waivers ments BEA Fund Waivers) Waivers ments
- -------- --------- --------- -------- -------- ----------------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
International Equity $785,014 $43,161 $0 International Equity $463,778 $530,031 $0
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 Strategic Global Fixed
Income $ 41,650 $10,412 $0 Income $ 4,165 $ 58,310 $0
High Yield $ 89,597 $22,399 $0 High Yield $ 8,959 $125,436 $0
Municipal Bond $ 24,265 $ 0 $0 Municipal Bond $ 1,941 $ 27,177 $0
Select Economic Value Select Economic Value
Equity N/A N/A N/A Equity N/A N/A N/A
</TABLE>
AUGUST 31, 1996
<TABLE>
<CAPTION>
PFPC Counsellors Service
---- -------------------
Fees Paid Reim- Fees Paid Reim-
(after burse- (after burse-
BEA Fund Waivers) Waivers ments BEA Fund Waivers) Waivers ments
- -------- --------- --------- -------- -------- ----------------- --------- ------
<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 Strategic Global Fixed
Income $ 31,412 $ 7,853 $0 Income $ 6,392 $ 40,238 $0
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 Select Economic Value
Equity N/A N/A N/A Equity N/A N/A N/A
</TABLE>
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<PAGE> 133
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors, CSAM is
responsible for the execution of portfolio transactions and the allocation of
brokerage transactions for the Funds. In executing portfolio transactions, CSAM
seeks to obtain the best net results for a Fund, taking into account such
factors as the price (including the applicable brokerage commission or dealer
spread), size of the order, difficulty of execution and operational facilities
of the firm involved. While CSAM generally seeks reasonably competitive
commission rates, payment of the lowest commission or spread is not necessarily
consistent with obtaining the best results in particular transactions.
Portfolio transactions for the Funds 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.
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:
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<PAGE> 134
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
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. CSAM may, consistent with
the interests of a Fund and subject to the approval of the Board of Directors,
select brokers on the basis of the research, statistical and pricing services
they provide to a Fund and other clients of CSAM. Information and research
received from such brokers will be in addition to, and not in lieu of, the
services required to be performed by CSAM under its respective contracts. A
commission paid to such brokers may be higher than that which another qualified
broker would have charged for effecting the same transaction, provided that
CSAM, as applicable, determines in good faith that such commission is reasonable
in terms either of the transaction or the overall responsibility of CSAM to a
Fund and its other clients and that the total commissions paid by a Fund will be
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<PAGE> 135
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.
CSAM may seek to obtain an undertaking from issuers of commercial
paper or dealers selling commercial paper to consider the repurchase of such
securities from a Fund prior to their maturity at their original cost plus
interest (sometimes adjusted to reflect the actual maturity of the securities),
if it believes that a Fund's anticipated need for liquidity makes such action
desirable. Any such repurchase prior to maturity reduces the possibility that a
Fund would incur a capital loss in liquidating commercial paper (for which there
is no established market), especially if interest rates have risen since
acquisition of the particular commercial paper.
Investment decisions for each Fund and for other investment accounts
managed by CSAM are made independently of each other in 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 CSAM or
any affiliated person (as defined in the 1940 Act) thereof is a member except
pursuant to procedures adopted by the Funds' Board of Directors pursuant to Rule
10f-3 under the 1940 Act.
In no instance will portfolio securities be purchased from or sold
to the Distributor, CSAM or CSAM Ltd, Credit Suisse Asset Management Securities,
Inc. ("CSAMSI") or Credit Suisse First Boston {"CS First Boston") or any
affiliated person of the foregoing entities except as permitted by Securities
and Exchange Commission ("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)
-43-
<PAGE> 136
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 CSAM 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.)
Redemption or exchange requested by telephone will not be honored by
the Funds nor their agents if they concern Institutional Shares of the Funds.
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<PAGE> 137
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 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
-45-
<PAGE> 138
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.
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
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<PAGE> 139
specified periods that likewise equate the initial amount invested to the ending
redeemable value of such investment. The formula for calculating aggregate total
return is as follows:
ERV
Aggregate Total Return = [(-----) - l]
P
The calculations are made assuming that (1) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the price
per share existing on the reinvestment date, (2) all recurring fees charged to
all shareholder accounts are included, and (3) for any account fees that vary
with the size of the account, a mean (or median) account size in the Fund during
the periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.
The 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:+
- -------------
+ 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.
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<PAGE> 140
<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%
High Yield 03/31/93 61.14%
Municipal Bond 06/20/94 22.18%
Select Equity 08/03/98 -12.20%
</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:
- ------------
* Inception dates of the Institutional Shares of the Funds refer to the
inception dates of the Institutional Shares of the corresponding predecessor
BEA Funds.
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<PAGE> 141
a - b 6
YIELD = 2[( - - - - +1) - 1]
cd
<TABLE>
<S> <C>
Where: a = dividends and interest earned by a Fund
during the period;
b = expenses accrued for the period (net of
reimbursements);
c = average daily number of shares outstanding during the
period, entitled to receive dividends; and
d = maximum offering price per share on the last day of the
period.
</TABLE>
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
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<PAGE> 142
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:
<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>
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
- ----------------
+ 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.
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<PAGE> 143
any year may be waived if a regulated investment company establishes to the
satisfaction of the Internal Revenue Service that it is unable to satisfy the
Distribution Requirement by reason of distributions previously made for the
purpose of avoiding liability for federal excise tax (discussed below).
In addition to satisfaction of the Distribution Requirement each
Fund must derive at least 90% of its gross income from dividends, interest,
certain payments with respect to securities loans and gains from the sale or
other disposition of stock or securities or foreign currencies, or from other
income derived with respect to its business of investing in such stock,
securities, or currencies (the "Income Requirement").
Future Treasury regulations may provide that currency gains that are
not "directly related" to a Fund's principal business of investing in stock or
securities (or in options or futures with respect to stock or securities) will
not satisfy the Income Requirement. Income derived by a regulated investment
company from a partnership or trust (including a foreign entity that is
classified as a partnership or trust for U.S. federal income tax purposes) will
satisfy the Income Requirement only to the extent such income is attributable to
items of income of the partnership or trust that would satisfy the Income
Requirement if they were realized by a regulated investment company in the same
manner as realized by the partnership or trust.
In addition to the foregoing requirements, at the close of each
quarter of its taxable year, at least 50% of the value of each Fund's assets
must consist of cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and securities of other issuers (as to
which the Fund has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which the Fund does not hold more than 10%
of the outstanding voting securities of such issuer), and no more than 25% of
the value of each Fund's total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which such Fund
controls and which are engaged in the same or similar trades or businesses (the
"Asset Diversification Requirement").
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
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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 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
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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" 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
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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" 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
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<PAGE> 147
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 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
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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
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
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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 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
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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 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
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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.
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
The Funds are not sponsored, endorsed, sold or promoted by
Warburg, Pincus & Co. Warburg, Pincus & Co. makes no representation or
warranty, express or implied, to the owners of the Funds or any member of the
public regarding the advisability of investing in securities generally or in
the Funds particularly. Warburg, Pincus & Co. licenses certain trademarks
and trade names of Warburg, Pincus & Co., and is not responsible for and has
not participated in the calculation of the Funds' net asset value, nor is
Warburg, Pincus & Co. a distributor of the Funds. Warburg, Pincus & Co. has
no obligation or liability in connection with the administration, marketing
or trading of the Funds.
CONTROL PERSONS. As of October 16, 1998, the names, addresses and
percentage of ownership of each person that owns of
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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 -- Advisor Charles Schwab & Co. 47.95%
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 -- Institutional Wachovia Bank North Carolina 69.98%
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
SEMA & Co. 98.34%
Emerging Markets Equity Fund -- 12 E. 49th Street, 41st Fl.
Advisor New York, NY 10017
</TABLE>
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<PAGE> 153
<TABLE>
<CAPTION>
PERCENT OWNED AS OF
FUND NAME AND ADDRESS OCTOBER 16, 1998
- -------------------------------------- ---------------------------------- ---------------------------
<S> <C> <C>
Core Equity Fund -- Institutional Werner & Pfleiderer Pension Plan 10.05%
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 6.12%
Foundation
785 Mamaroneck Ave.
White Plains, NY 10605-2593
New England UFCW & Employers' 11.89%
Pension Fund Board of Trustees
161 Forbes Road, Ste. 201
Braintree, MA 02184-2606
Fidelity Investments Institutional 5.42%
Operations Co Inc (FII0C) as
Agent for Credit Suisse First
Boston Employee's Savings PSP
100 Magellan Way #KWIC
Covington, KY 41015-1987
</TABLE>
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<PAGE> 154
<TABLE>
<CAPTION>
PERCENT OWNED AS OF
FUND NAME AND ADDRESS OCTOBER 16, 1998
- -------------------------------------- ---------------------------------- ---------------------------
<S> <C> <C>
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 Fund -- Sunkist Master Trust 53.09%
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 -- Institutional Carl F. Besenbach 18.86%
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 16.93%
Institutional Operations Co. Inc.
as Agents for Certain Employee
Benefits Plan
100 Magellan Way, #KWIC
Covington, KY 41015-1987
</TABLE>
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<PAGE> 155
<TABLE>
<CAPTION>
PERCENT OWNED AS OF
FUND NAME AND ADDRESS OCTOBER 16, 1998
- -------------------------------------- ---------------------------------- ---------------------------
<S> <C> <C>
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 -- Institutional Arnold Leon 12.57%
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
E.M. Warburg Pincus & Co. Inc. 15.65%
Global Attn: Sandra Correale
Telecommunications Fund 466 Lexington Ave.
- -- Advisor 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>
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<PAGE> 156
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 each Fund and
provides legal services from time to time for CSAM, Counsellors Service and
CSAMSI.
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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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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"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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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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