<PAGE> 1
SUPPLEMENT TO THE COMMON CLASS PROSPECTUS
WARBURG PINCUS INTERMEDIATE MATURITY GOVERNMENT FUND
WARBURG PINCUS NEW YORK INTERMEDIATE MUNICIPAL FUND
WARBURG PINCUS FIXED INCOME FUND
WARBURG PINCUS GLOBAL FIXED INCOME FUND
The following information supersedes the section in the funds' Common Class
Prospectus entitled "Other Information -- About the Distributor".
Provident Distributors, Inc. (PDI), Four Falls Corporate Center, West
Conshohocken, PA 19428-2961, is the funds' distributor and is responsible for
making the funds available to you.
Dated: January 3, 2000 WPBDF-16-0100
<PAGE> 2
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 22, 1999
AS REVISED JANUARY 3, 2000
WARBURG PINCUS FIXED INCOME FUND
WARBURG PINCUS GLOBAL FIXED INCOME FUND
WARBURG PINCUS INTERMEDIATE MATURITY GOVERNMENT FUND
WARBURG PINCUS NEW YORK INTERMEDIATE MUNICIPAL FUND
This combined Statement of Additional Information provides information about
Warburg Pincus Fixed Income Fund (the "Fixed Income Fund"), Warburg Pincus
Intermediate Maturity Government Fund (the "Intermediate Government Fund"),
Warburg Pincus New York Intermediate Municipal Fund (the "New York Municipal
Fund") and Warburg Pincus Global Fixed Income Fund (the "Global Fixed Income
Fund") (each a "Fund" and collectively, the "Funds") that supplements
information contained in the combined Prospectus for the Common Shares and the
combined Prospectus for the Advisor Shares of the Funds, each dated February 22,
1999.
Each Fund's audited annual report dated October 31, 1999, which either
accompanies this Statement of Additional Information or has previously been
provided to the investor to whom this Statement of Additional Information is
being sent, is incorporated herein by reference.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectuses. Copies of the Prospectuses and the annual
report can be obtained by writing or telephoning:
Common Shares: Advisor Shares:
Warburg Pincus Funds Warburg Pincus Advisor Funds
P.O. Box 9030 P.O. Box 9030
Boston, MA 02205-9030 Boston, MA 02205-9030
800-WARBURG Attn: Institutional Services
800-222-8977
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TABLE OF CONTENTS
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INVESTMENT OBJECTIVES AND POLICIES.................................................................................................1
Options on Securities and Securities Indices and Currency Exchange Transactions........................................1
Securities Options.........................................................................................1
Securities Index Options...................................................................................4
OTC Options................................................................................................5
Currency Exchange Transactions.............................................................................5
Hedging Generally..........................................................................................7
Asset Coverage for Forward Contracts, Options, Futures and Options on Futures..............................8
Futures Activities.....................................................................................................9
Money Market Obligations..............................................................................................11
Convertible Securities................................................................................................12
Structured Securities.................................................................................................12
Interest Rate, Index, Mortgage and Currency Swaps; Interest Rate Caps, Floors and Collars.............................16
Foreign Investments...................................................................................................17
U.S. Government Securities............................................................................................20
Government Trust Certificates.........................................................................................20
Municipal Obligations.................................................................................................21
Alternative Minimum Tax Bonds.........................................................................................22
Securities of Other Investment Companies..............................................................................22
Below Investment Grade Securities.....................................................................................23
Lending Portfolio Securities..........................................................................................24
Repurchase Agreements.................................................................................................25
Reverse Repurchase Agreements and Dollar Rolls........................................................................25
Zero Coupon Securities................................................................................................26
Government Zero Coupon Securities.....................................................................................26
Short Sales...........................................................................................................27
Emerging Growth and Smaller Capitalization Companies; Unseasoned Issuers..............................................27
Variable Rate and Master Demand Notes.................................................................................28
When-Issued Securities and Delayed-Delivery Transactions..............................................................28
Stand-By Commitment Agreements........................................................................................29
REITs.................................................................................................................30
Warrants..............................................................................................................30
Non-Publicly Traded and Illiquid Securities...........................................................................31
Borrowing.............................................................................................................32
Non-Diversified Status................................................................................................33
Taxable Investments...................................................................................................33
INVESTMENT RESTRICTIONS...........................................................................................................34
Fixed Income Fund.....................................................................................................34
Global Fixed Income Fund..............................................................................................36
</TABLE>
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<TABLE>
<S> <C>
Intermediate Government Fund..........................................................................................37
New York Municipal Fund...............................................................................................39
PORTFOLIO VALUATION...............................................................................................................41
PORTFOLIO TRANSACTIONS............................................................................................................42
PORTFOLIO TURNOVER................................................................................................................44
SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL OBLIGATIONS.................................................................45
State Economy.........................................................................................................46
State Budget..........................................................................................................46
Recent Financial Results..............................................................................................50
Debt Limits and Outstanding Debt......................................................................................50
Litigation............................................................................................................52
Authorities...........................................................................................................54
New York City and Other Localities....................................................................................54
Year 2000 Compliance..................................................................................................59
MANAGEMENT OF THE FUNDS...........................................................................................................59
Officers and Boards of Directors/Trustees.............................................................................59
Directors'/Trustees' Compensation.....................................................................................63
Portfolio Managers of the Funds.......................................................................................64
Investment Adviser and Co-Administrators..............................................................................65
Custodian and Transfer Agent..........................................................................................66
Organization of the Funds.............................................................................................67
Distribution and Shareholder Servicing................................................................................69
General ..................................................................................................70
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION....................................................................................71
Automatic Cash Withdrawal Plan........................................................................................71
EXCHANGE PRIVILEGE................................................................................................................71
ADDITIONAL INFORMATION CONCERNING TAXES...........................................................................................72
The Funds and Their Investments.......................................................................................72
Special Tax Matters Regarding the Fixed Income Fund, Global Fixed Income Fund and Intermediate Government Fund........74
Special Tax Considerations Regarding the Intermediate Government Fund.................................................75
Special Tax Considerations Regarding the New York Municipal Fund......................................................75
Passive Foreign Investment Companies..................................................................................77
Dividends and Distributions...........................................................................................78
Sales of Shares.......................................................................................................79
Foreign Taxes.........................................................................................................79
Backup Withholding....................................................................................................79
Notices...............................................................................................................80
Other Taxation........................................................................................................80
DETERMINATION OF PERFORMANCE......................................................................................................80
INDEPENDENT ACCOUNTANTS AND COUNSEL...............................................................................................84
MISCELLANEOUS.....................................................................................................................85
FINANCIAL STATEMENTS..............................................................................................................87
APPENDIX - DESCRIPTION OF RATINGS................................................................................................A-1
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each Fund's
investment objective and policies in the Prospectuses. There are no assurances
that the Funds will achieve their investment objectives.
The investment objectives of the Fixed Income Fund are to generate high
current income consistent with reasonable risk and, secondarily, capital
appreciation.
The investment objective of the Global Fixed Income Fund is to maximize
total investment return consistent with prudent investment management,
consisting of a combination of interest income, currency gains and capital
appreciation.
The investment objective of the Intermediate Government Fund is to achieve
as high a level of current income as is consistent with the preservation of
capital.
The investment objective of the New York Municipal Fund is to maximize
current interest income exempt from federal income tax and New York State and
New York City personal income taxes to the extent consistent with prudent
investment management and the preservation of capital.
Unless otherwise indicated, all of the Funds are permitted to engage in the
following investment strategies, subject to any percentage limitations set forth
below. Any percentage limitation on a Fund's ability to invest in debt
securities will not be applicable during periods when the Fund pursues a
temporary defensive strategy as discussed below.
The Funds are not obligated to pursue any of the following strategies and
do not represent that these techniques are available now or will be available at
any time in the future.
Options on Securities and Securities Indices and Currency Exchange
Transactions
The Funds may purchase and write (sell) options on securities, securities
indices and currencies for hedging purposes or to increase total return. Up to
25% of the Fund's total assets may be at risk in connection with investing in
options on securities, securities indices and, if applicable, currencies. The
amount of assets considered to be "at risk" in these transactions is, in the
case of purchasing options, the amount of the premium paid, and, in the case of
writing options, the value of the underlying obligation.
Securities Options. Each Fund may write covered put and call options on
stock and debt securities and each Fund may purchase such options that are
traded on foreign and U.S. exchanges, as well as over-the-counter ("OTC")
options. A Fund realizes fees (referred to as "premiums") for granting the
rights evidenced by the options it has written. A put option embodies the right
of its purchaser to compel the writer of the option to purchase from the option
holder an underlying security at a specified price for a specified time period
or at a specified time. In contrast, a call option embodies the right of its
purchaser to compel the
<PAGE> 6
writer of the option to sell to the option holder an underlying security at a
specified price for a specified time period or at a specified time.
The potential loss associated with purchasing an option is limited to the
premium paid, and the premium would partially offset any gains achieved from its
use. However, for an option writer the exposure to adverse price movements in
the underlying security or index is potentially unlimited during the exercise
period. Writing securities options may result in substantial losses to a Fund,
force the sale or purchase of portfolio securities at inopportune times or at
less advantageous prices, limit the amount of appreciation the Fund could
realize on its investments or require the Fund to hold securities it would
otherwise sell.
The principal reason for writing covered options on a security is to
attempt to realize, through the receipt of premiums, a greater return than would
be realized on the securities alone. In return for a premium, a Fund as the
writer of a covered call option forfeits the right to any appreciation in the
value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). A Fund that
writes call options retains the risk of a decline in the price of the underlying
security. The size of the premiums that a Fund may receive may be adversely
affected as new or existing institutions, including other investment companies,
engage in or increase their option-writing activities.
If security prices rise, a put writer would generally expect to profit,
although its gain would be limited to the amount of the premium it received. If
security prices remain the same over time, it is likely that the writer will
also profit, because it should be able to close out the option at a lower price.
If security prices decline, the put writer would expect to suffer a loss. This
loss may be less than the loss from purchasing the underlying instrument
directly to the extent that the premium received offsets the effects of the
decline.
In the case of options written by a Fund that are deemed covered by virtue
of the Fund's holding convertible or exchangeable preferred stock or debt
securities, the time required to convert or exchange and obtain physical
delivery of the underlying common stock with respect to which the Fund has
written options may exceed the time within which the Fund must make delivery in
accordance with an exercise notice. In these instances, a Fund may purchase or
temporarily borrow the underlying securities for purposes of physical delivery.
By so doing, the Fund will not bear any market risk, since the Fund will have
the absolute right to receive from the issuer of the underlying security an
equal number of shares to replace the borrowed securities, but the Fund may
incur additional transaction costs or interest expenses in connection with any
such purchase or borrowing.
Additional risks exist with respect to certain of the securities for which
a Fund may write covered call options. For example, if the Fund writes covered
call options on mortgage-backed securities, the mortgage-backed securities that
it holds as cover may, because of scheduled amortization or unscheduled
prepayments, cease to be sufficient cover. If this occurs, the Fund will
compensate for the decline in the value of the cover by purchasing an
appropriate additional amount of mortgage-backed securities.
2
<PAGE> 7
Options written by a Fund will normally have expiration dates between one
and nine months from the date written. The exercise price of the options may be
below, equal to or above the market values of the underlying securities at the
times the options are written. In the case of call options, these exercise
prices are referred to as "in-the-money," "at-the-money" and "out-of-the-money,"
respectively. A Fund may write (i) in-the-money call options when Credit Suisse
Asset Management, LLC, each Fund's investment adviser ("CSAM"), expects that the
price of the underlying security will remain flat or decline moderately during
the option period, (ii) at-the-money call options when CSAM expects that the
price of the underlying security will remain flat or advance moderately during
the option period and (iii) out-of-the-money call options when CSAM expects that
the premiums received from writing the call option plus the appreciation in
market price of the underlying security up to the exercise price will be greater
than the appreciation in the price of the underlying security alone. In any of
the preceding situations, if the market price of the underlying security
declines and the security is sold at this lower price, the amount of any
realized loss will be offset wholly or in part by the premium received.
Out-of-the-money, at-the-money and in-the-money put options (the reverse of call
options as to the relation of exercise price to market price) may be used in the
same market environments that such call options are used in equivalent
transactions. To secure its obligation to deliver the underlying security when
it writes a call option, the Fund will be required to deposit in escrow the
underlying security or other assets in accordance with the rules of the Options
Clearing Corporation (the "Clearing Corporation") and of the securities exchange
on which the option is written.
Prior to their expirations, put and call options may be sold in closing
sale or purchase transactions (sales or purchases by a Fund prior to the
exercise of options that it has purchased or written, respectively, of options
of the same series) in which the Fund may realize a profit or loss from the
sale. An option position may be closed out only where there exists a secondary
market for an option of the same series on a recognized securities exchange or
in the OTC market. When a Fund has purchased an option and engages in a closing
sale transaction, whether the Fund realizes a profit or loss will depend upon
whether the amount received in the closing sale transaction is more or less than
the premium the Fund initially paid for the original option plus the related
transaction costs. Similarly, in cases where a Fund has written an option, it
will realize a profit if the cost of the closing purchase transaction is less
than the premium received upon writing the original option and will incur a loss
if the cost of the closing purchase transaction exceeds the premium received
upon writing the original option. The Fund may engage in a closing purchase
transaction to realize a profit, to prevent an underlying security with respect
to which it has written an option from being called or put or, in the case of a
call option, to unfreeze an underlying security (thereby permitting its sale or
the writing of a new option on the security prior to the outstanding option's
expiration). The obligation of a Fund under an option it has written would be
terminated by a closing purchase transaction (a Fund would not be deemed to own
an option as a result of the transaction). So long as the obligation of the Fund
as the writer of an option continues, the Fund may be assigned an exercise
notice by the broker-dealer through which the option was sold, requiring the
Fund to deliver the underlying security against payment of the exercise price.
This obligation terminates when the option expires or the Fund effects a closing
3
<PAGE> 8
purchase transaction. The Fund cannot effect a closing purchase transaction with
respect to an option once it has been assigned an exercise notice.
There is no assurance that sufficient trading interest will exist to create
a liquid secondary market on a securities exchange for any particular option or
at any particular time, and for some options no such secondary market may exist.
A liquid secondary market in an option may cease to exist for a variety of
reasons. In the past, for example, higher than anticipated trading activity or
order flow or other unforeseen events have at times rendered certain of the
facilities of the Clearing Corporation and various securities exchanges
inadequate and resulted in the institution of special procedures, such as
trading rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that similar
events, or events that may otherwise interfere with the timely execution of
customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. Moreover, a Fund's ability to
terminate options positions established in the OTC market may be more limited
than for exchange-traded options and may also involve the risk that securities
dealers participating in OTC transactions would fail to meet their obligations
to the Fund. The Fund, however, intends to purchase OTC options only from
dealers whose debt securities, as determined by CSAM, are considered to be
investment grade. If, as a covered call option writer, a Fund is unable to
effect a closing purchase transaction in a secondary market, it will not be able
to sell the underlying security and would continue to be at market risk on the
security.
Securities exchanges generally have established limitations governing the
maximum number of calls and puts of each class which may be held or written, or
exercised within certain time periods by an investor or group of investors
acting in concert (regardless of whether the options are written on the same or
different securities exchanges or are held, written or exercised in one or more
accounts or through one or more brokers). It is possible that the Funds and
other clients of CSAM and certain of its affiliates may be considered to be such
a group. A securities exchange may order the liquidation of positions found to
be in violation of these limits and it may impose certain other sanctions. These
limits may restrict the number of options a Fund will be able to purchase on a
particular security.
Securities Index Options. A Fund may purchase and write exchange-listed and
OTC put and call options on securities indexes. A securities index measures the
movement of a certain group of securities by assigning relative values to the
securities included in the index, fluctuating with changes in the market values
of the securities included in the index. Some securities index options are based
on a broad market index, such as the NYSE Composite Index, or a narrower market
index such as the Standard & Poor's 100. Indexes may also be based on a
particular industry or market segment.
Options on securities indexes are similar to options on securities except
that (i) the expiration cycles of securities index options are monthly, while
those of securities options are currently quarterly, and (ii) the delivery
requirements are different. Instead of giving the right to take or make delivery
of securities at a specified price, an option on a securities index gives the
holder the right to receive a cash "exercise settlement amount" equal to (a) the
amount, if any, by which the fixed exercise price of the option exceeds (in the
case
4
<PAGE> 9
of a put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (b) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the securities index upon which the option is based being greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
index and the exercise price of the option times a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Securities index options may be offset by entering into
closing transactions as described above for securities options.
OTC Options. A Fund may purchase OTC or dealer options or sell covered OTC
options. Unlike exchange-listed options where an intermediary or clearing
corporation, such as the Clearing Corporation, assures that all transactions in
such options are properly executed, the responsibility for performing all
transactions with respect to OTC options rests solely with the writer and the
holder of those options. A listed call option writer, for example, is obligated
to deliver the underlying securities to the clearing organization if the option
is exercised, and the clearing organization is then obligated to pay the writer
the exercise price of the option. If the Fund were to purchase a dealer option,
however, it would rely on the dealer from whom it purchased the option to
perform if the option were exercised. If the dealer fails to honor the exercise
of the option by a Fund, the Fund would lose the premium it paid for the option
and the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while OTC
or dealer options do not. Consequently, a Fund will generally be able to realize
the value of a dealer option it has purchased only by exercising it or reselling
it to the dealer who issued it. Similarly, when the Fund writes a dealer option,
it generally will be able to close out the option prior to its expiration only
by entering into a closing purchase transaction with the dealer to which the
Fund originally wrote the option. Although the Fund will seek to enter into
dealer options only with dealers who will agree to and that are expected to be
capable of entering into closing transactions with the Fund, there can be no
assurance that the Fund will be able to liquidate a dealer option at a favorable
price at any time prior to expiration. The inability to enter into a closing
transaction may result in material losses to a Fund. Until the Fund, as a
covered OTC call option writer, is able to effect a closing purchase
transaction, it will not be able to liquidate securities (or other assets) used
to cover the written option until the option expires or is exercised. This
requirement may impair the Fund's ability to sell portfolio securities or, with
respect to currency options, currencies at a time when such sale might be
advantageous.
Currency Exchange Transactions. (Fixed Income and Global Fixed Income Funds
only) The value in U.S. dollars of the assets of a Fund that are invested in
foreign securities may be affected favorably or unfavorably by a variety of
factors not applicable to investment in U.S. securities, and the Fund may incur
costs in connection with conversion between various currencies. Currency
exchange transactions may be from any non-U.S. currency into U.S. dollars or
into other appropriate currencies and may be entered into for hedging purposes
or to seek to enhance total return (speculation). a fund will conduct its
currency exchange transactions (i) on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market, (ii) through entering into futures
contracts or options on such
5
<PAGE> 10
contracts (as described above), (iii) through entering into forward contracts to
purchase or sell currency or (iv) by purchasing exchange-traded currency
options.
Forward Currency Contracts. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract as agreed upon by the
parties, at a price set at the time of the contract. These contracts are entered
into in the interbank market conducted directly between currency traders
(usually large commercial banks and brokers) and their customers. Forward
currency contracts are similar to currency futures contracts, except that
futures contracts are traded on commodities exchanges and are standardized as to
contract size and delivery date.
At or before the maturity of a forward contract, a Fund may either sell a
portfolio security and make delivery of the currency, or retain the security and
fully or partially offset its contractual obligation to deliver the currency by
negotiating with its trading partner to enter into an offsetting transaction. If
a Fund retains the portfolio security and engages in an offsetting transaction,
the Fund, at the time of execution of the offsetting transaction, will incur a
gain or a loss to the extent that movement has occurred in forward contract
prices.
Currency Options. A Fund may purchase exchange-traded put and call options
on foreign currencies. Put options convey the right to sell the underlying
currency at a price which is anticipated to be higher than the spot price of the
currency at the time the option is exercised. Call options convey the right to
buy the underlying currency at a price which is expected to be lower than the
spot price of the currency at the time the option is exercised.
Currency Hedging. A Fund's currency hedging will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward currency with respect to specific
receivables or payables of the Fund generally accruing in connection with the
purchase or sale of its portfolio securities. Position hedging is the sale of
forward currency with respect to portfolio security positions. No Fund may
position hedge to an extent greater than the aggregate market value (at the time
of entering into the hedge) of the hedged securities.
A decline in the U.S. dollar value of a foreign currency in which a Fund's
securities are denominated will reduce the U.S. dollar value of the securities,
even if their value in the foreign currency remains constant. The use of
currency hedges does not eliminate fluctuations in the underlying prices of the
securities, but it does establish a rate of exchange that can be achieved in the
future. For example, in order to protect against diminutions in the U.S. dollar
value of non-dollar denominated securities it holds, a Fund may purchase foreign
currency put options. If the value of the foreign currency does decline, the
Fund will have the right to sell the currency for a fixed amount in dollars and
will thereby offset, in whole or in part, the adverse effect on the U.S. dollar
value of its securities that otherwise would have resulted. Conversely, if a
rise in the U.S. dollar value of a currency in which securities to be acquired
are denominated is projected, thereby potentially increasing the cost of the
securities, a Fund may purchase call options on the particular currency. The
purchase of these options
6
<PAGE> 11
could offset, at least partially, the effects of the adverse movements in
exchange rates. The benefit to the Fund derived from purchases of currency
options, like the benefit derived from other types of options, will be reduced
by premiums and other transaction costs. Because transactions in currency
exchange are generally conducted on a principal basis, no fees or commissions
are generally involved. Currency hedging involves some of the same risks and
considerations as other transactions with similar instruments. Although currency
hedges limit the risk of loss due to a decline in the value of a hedged
currency, at the same time, they also limit any potential gain that might result
should the value of the currency increase. If a devaluation is generally
anticipated, the Fund may not be able to contract to sell a currency at a price
above the devaluation level it anticipates.
While the values of currency futures and options on futures, forward
currency contracts and currency options may be expected to correlate with
exchange rates, they will not reflect other factors that may affect the value of
a Fund's investments and a currency hedge may not be entirely successful in
mitigating changes in the value of the Fund's investments denominated in that
currency. A currency hedge, for example, should protect a Yen-denominated bond
against a decline in the Yen, but will not protect the Fund against a price
decline if the issuer's creditworthiness deteriorates.
Hedging Generally. In addition to entering into options and futures
transactions for other purposes, including generating current income to offset
expenses or increase return, a Fund may enter into these transactions as hedges
to reduce investment risk, generally by making an investment expected to move in
the opposite direction of a portfolio position. A hedge is designed to offset a
loss in a portfolio position with a gain in the hedged position; at the same
time, however, a properly correlated hedge will result in a gain in the
portfolio position being offset by a loss in the hedged position. As a result,
the use of options and futures transactions for hedging purposes could limit any
potential gain from an increase in the value of the position hedged. In
addition, the movement in the portfolio position hedged may not be of the same
magnitude as movement in the hedge. With respect to futures contracts, since the
value of portfolio securities will far exceed the value of the futures contracts
sold by a Fund, an increase in the value of the futures contracts could only
mitigate, but not totally offset, the decline in the value of the Fund's assets.
In hedging transactions based on an index, whether a Fund will realize a
gain or loss depends upon movements in the level of securities prices in the
stock market generally or, in the case of certain indexes, in an industry or
market segment, rather than movements in the price of a particular security. The
risk of imperfect correlation increases as the composition of the Fund's
portfolio varies from the composition of the index. In an effort to compensate
for imperfect correlation of relative movements in the hedged position and the
hedge, the Fund's hedge positions may be in a greater or lesser dollar amount
than the dollar amount of the hedged position. Such "over hedging" or "under
hedging" may adversely affect a Fund's net investment results if market
movements are not as anticipated when the hedge is established. Securities index
futures transactions may be subject to additional correlation risks. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions which
would distort the
7
<PAGE> 12
normal relationship between the securities index and futures markets. Secondly,
from the point of view of speculators, the deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market also
may cause temporary price distortions. Because of the possibility of price
distortions in the futures market and the imperfect correlation between
movements in the securities index and movements in the price of securities
index futures, a correct forecast of general market trends by CSAM still may
not result in a successful hedging transaction.
A Fund will engage in hedging transactions only when deemed advisable by
CSAM, and successful use by the Fund of hedging transactions will be subject to
CSAM's ability to predict trends in currency, interest rate or securities
markets, as the case may be, and to predict correctly movements in the
directions of the hedge and the hedged position and the correlation between
them, which predictions could prove to be inaccurate. This requires different
skills and techniques than predicting changes in the price of individual
securities, and there can be no assurance that the use of these strategies will
be successful. Even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior or trends. Losses incurred in hedging
transactions and the costs of these transactions will affect the Fund's
performance.
To the extent that a Fund engages in the strategies described above, the
Fund may experience losses greater than if these strategies had not been
utilized. In addition to the risks described above, these instruments may be
illiquid and/or subject to trading limits, and the Fund may be unable to close
out a position without incurring substantial losses, if at all. The Funds are
also subject to the risk of a default by a counterparty to an off-exchange
transaction.
Asset Coverage for Forward Contracts, Options, Futures and Options on
Futures. Each Fund will comply with guidelines established by the U.S.
Securities and Exchange Commission (the "SEC") with respect to coverage of
forward currency contracts; options written by the Fund on currencies,
securities and indexes; and currency, interest rate and index futures contracts
and options on these futures contracts. These guidelines may, in certain
instances, require segregation by the Fund of cash or liquid securities with its
custodian or a designated sub-custodian to the extent the Fund's obligations
with respect to these strategies are not otherwise "covered" through ownership
of the underlying security, financial instrument or currency or by other
portfolio positions or by other means consistent with applicable regulatory
policies. Segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. As a result, there is a possibility that segregation of a large percentage
of a Fund's assets could impede portfolio management or the Fund's ability to
meet redemption requests or other current obligations.
For example, a call option written by a Fund on securities may require the
Fund to hold the securities subject to the call (or securities convertible into
the securities without additional consideration) or to segregate assets (as
described above) sufficient to purchase and deliver the securities if the call
is exercised. A call option written by the Fund
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on an index may require the Fund to own portfolio securities that correlate with
the index or to segregate assets (as described above) equal to the excess of the
index value over the exercise price on a current basis. A put option written by
the Fund may require the Fund to segregate assets (as described above) equal to
the exercise price. The Fund could purchase a put option if the strike price of
that option is the same or higher than the strike price of a put option sold by
the Fund. If the Fund holds a futures or forward contract, the Fund could
purchase a put option on the same futures or forward contract with a strike
price as high or higher than the price of the contract held. The Fund may enter
into fully or partially offsetting transactions so that its net position,
coupled with any segregated assets (equal to any remaining obligation), equals
its net obligation. Asset coverage may be achieved by other means when
consistent with applicable regulatory policies.
Futures Activities. A Fund may enter into foreign currency, interest rate
and securities index futures contracts and purchase and write (sell) related
options traded on exchanges designated by the Commodity Futures Trading
Commission (the "CFTC") or consistent with CFTC regulations on foreign
exchanges. These futures contracts are standardized contracts for the future
delivery of foreign currency or an interest rate sensitive security or, in the
case of stock index and certain other futures contracts, a cash settlement with
reference to a specified multiplier times the change in the specified index,
exchange rate or interest rate. An option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract. These transactions may be entered into for "bona fide hedging"
purposes as defined in CFTC regulations and other permissible purposes including
hedging against changes in the value of portfolio securities due to anticipated
changes in currency values, interest rates and/or market conditions and
increasing return. Aggregate initial margin and premiums (discussed below)
required to establish positions other than those considered to be "bona fide
hedging" by the CFTC will not exceed 5% of a Portfolio's net asset value after
taking into account unrealized profits and unrealized losses on any such
contracts it has entered into. The Funds reserve the right to engage in
transactions involving futures contracts and options on futures contracts to the
extent allowed by CFTC regulations in effect from time to time and in accordance
with a Fund's policies. There is no overall limit on the percentage of Fund
assets that may be at risk with respect to futures activities.
Futures Contracts. (The Intermediate Government and New York Municipal
Funds may not engage in foreign currency futures transactions.) A foreign
currency futures contract provides for the future sale by one party and the
purchase by the other party of a certain amount of a specified non-U.S. currency
at a specified price, date, time and place. An interest rate futures contract
provides for the future sale by one party and the purchase by the other party of
a certain amount of a specific interest rate sensitive financial instrument
(debt security) at a specified price, date, time and place. Securities indexes
are capitalization weighted indexes which reflect the market value of the
securities represented in the indexes. A securities index futures contract is an
agreement to be settled by delivery of an amount of cash equal to a specified
multiplier times the difference between the value of the index at the close of
the last trading day on the contract and the price at which the agreement is
made.
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No consideration is paid or received by a Fund upon entering into a futures
contract. Instead, the Fund is required to segregate with its custodian an
amount of cash or securities acceptable to the broker equal to approximately 1%
to 10% of the contract amount (this amount is subject to change by the exchange
on which the contract is traded, and brokers may charge a higher amount). This
amount is known as "initial margin" and is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations have
been satisfied. The broker will have access to amounts in the margin account if
a Fund fails to meet its contractual obligations. Subsequent payments, known as
"variation margin," to and from the broker, will be made daily as the currency,
financial instrument or securities index underlying the futures contract
fluctuates, making the long and short positions in the futures contract more or
less valuable, a process known as "marking-to-market." The Fund will also incur
brokerage costs in connection with entering into futures transactions.
At any time prior to the expiration of a futures contract, a Fund may elect
to close the position by taking an opposite position, which will operate to
terminate the Fund's existing position in the contract. Positions in futures
contracts and options on futures contracts (described below) may be closed out
only on the exchange on which they were entered into (or through a linked
exchange). No secondary market for such contracts exists. Although the Fund may
enter into futures contracts only if there is an active market for such
contracts, there is no assurance that an active market will exist at any
particular time. Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the day. It is possible that futures contract prices could move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions at an advantageous
price and subjecting a Fund to substantial losses. In such event, and in the
event of adverse price movements, the Fund would be required to make daily cash
payments of variation margin. In such situations, if a Fund had insufficient
cash, it might have to sell securities to meet daily variation margin
requirements at a time when it would be disadvantageous to do so. In addition,
if the transaction is entered into for hedging purposes, in such circumstances
the Fund may realize a loss on a futures contract or option that is not offset
by an increase in the value of the hedged position. Losses incurred in futures
transactions and the costs of these transactions will affect the Fund's
performance.
Options on Futures Contracts. (The Intermediate Government and New York
Municipal Funds may not purchase or write options on foreign currency.) A Fund
may purchase and write put and call options on foreign currency, interest rate
and stock index futures contracts and may enter into closing transactions with
respect to such options to terminate existing positions. There is no guarantee
that such closing transactions can be effected; the ability to establish and
close out positions on such options will be subject to the existence of a liquid
market.
An option on a currency, interest rate or securities index futures
contract, as contrasted with the direct investment in such a contract, gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract at a specified exercise
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price at any time prior to the expiration date of the option. The writer of the
option is required upon exercise to assume an offsetting futures position (a
short position if the option is a call and a long position if the option is a
put). Upon exercise of an option, the delivery of the futures position by the
writer of the option to the holder of the option will be accompanied by delivery
of the accumulated balance in the writer's futures margin account, which
represents the amount by which the market price of the futures contract exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. The potential loss related to the
purchase of an option on a futures contract is limited to the premium paid for
the option (plus transaction costs). Because the value of the option is fixed at
the point of sale, there are no daily cash payments by the purchaser to reflect
changes in the value of the underlying contract; however, the value of the
option does change daily and that change would be reflected in the net asset
value of a Fund.
Money Market Obligations. Each Fund is authorized to invest, under normal
conditions, up to 35% of its total assets in short-term money market obligations
having remaining maturities of less than one year at the time of purchase. These
short-term instruments consist of obligations issued or guaranteed by the United
States government, its agencies or instrumentalities ("Government Securities");
bank obligations (including certificates of deposit, time deposits and bankers'
acceptances of domestic or foreign banks, domestic savings and loans and similar
institutions) that are high quality investments or, if unrated, deemed by CSAM
to be high quality investments; commercial paper rated no lower than A-2 by
Standard & Poor's Ratings Services ("S&P") or Prime-2 by Moody's Investors
Service, Inc. ("Moody's") or the equivalent from another major rating service
or, if unrated, of an issuer having an outstanding, unsecured debt issue then
rated within the three highest rating categories; in the case of the Fixed
Income Fund and the Global Fixed Income Fund, obligations of foreign
governments, their agencies or instrumentalities; and repurchase agreements with
respect to portfolio securities. The short-term money market obligations in
which the New York Municipal Fund is authorized to invest generally will be
tax-exempt obligations; however, the Fund may invest in taxable obligations when
suitable tax-exempt obligations are unavailable or to maintain liquidity for
meeting anticipated redemptions and paying operating expenses. Tax-exempt money
market obligations in which the New York Municipal Fund may invest consist of
investment grade tax-exempt notes and tax-exempt commercial paper rated no lower
than A-2 by S&P or Prime-2 by Moody's or the equivalent from another major
rating service or, if not rated, of municipal issuers having an issue of
outstanding municipal obligations rated within the three highest grades by
Moody's or S&P.
Temporary Defensive Strategies. For temporary defensive purposes or, in the
case of the Global Fixed Income Fund, during times of international political or
economic uncertainty, each Fund other than the Intermediate Government Fund may
invest without limit in short-term money market obligations, and the
Intermediate Government Fund may invest without limit in short-term Government
Securities.
Money Market Mutual Funds. Where CSAM believes that it would be beneficial
to the Fund and appropriate considering the factors of return and liquidity,
each Fund may invest up to 5% of its assets in securities of money market mutual
funds that are unaffiliated with the Fund or CSAM. A money market mutual fund is
an investment company
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that invests in short-term high quality money market instruments. A money market
mutual fund generally does not purchase securities with a remaining maturity of
more than one year. The Intermediate Government Fund and the New York Municipal
Fund would invest in money market mutual funds that invest in Government
Securities and tax-exempt securities, respectively. As a shareholder in any
mutual fund, a Fund will bear its ratable share of the mutual fund's expenses,
including management fees, and will remain subject to payment of the Fund's
management fees and other expenses with respect to assets so invested.
Convertible Securities. Convertible securities in which the Fixed Income
and Global Fixed Income Funds may invest, including both convertible debt and
convertible preferred stock, may be converted at either a stated price or stated
rate into underlying shares of common stock. Because of this feature,
convertible securities enable an investor to benefit from increases in the
market price of the underlying common stock. Convertible securities provide
higher yields than the underlying equity securities, but generally offer lower
yields than non-convertible securities of similar quality. The value of
convertible securities fluctuates in relation to changes in interest rates like
bonds and, in addition, fluctuates in relation to the underlying common stock.
Structured Securities. The Funds may purchase any type of publicly traded
or privately negotiated fixed income security, including mortgage-backed
securities; structured notes, bonds or debentures; and assignments of and
participations in loans.
Mortgage-Backed Securities. A Fund may invest in mortgage-backed
securities, such as those issued by the Government National Mortgage Association
("GNMA"), Federal National Mortgage Association ("FNMA"), Federal Home Loan
Mortgage Corporation ("FHLMC") or certain foreign issuers. 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
widely, it is not possible to predict accurately the average life of a
particular pool. For pools of fixed-rate 30-
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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. In periods of falling interest rates, the rate of prepayment tends to
increase, thereby shortening the actual average life of a pool of
mortgage-related securities. Conversely, in periods of rising rates the rate of
prepayment tends to decrease, thereby lengthening the actual average life of the
pool. However, these effects may not be present, or may differ in degree, if the
mortgage loans in the pools have adjustable interest rates or other special
payment terms, such as a prepayment charge. Actual prepayment experience may
cause the yield of mortgage-backed securities to differ from the assumed average
life yield. Reinvestment of prepayments may occur at higher or lower interest
rates than the original investment, thus affecting the Fund's yield.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificate holders and to any guarantor, such as GNMA, and
due to any yield retained by the issuer. Actual yield to the holder may vary
from the coupon rate, even if adjustable, if the mortgage-backed securities are
purchased or traded in the secondary market at a premium or discount. In
addition, there is normally some delay between the time the issuer receives
mortgage payments from the servicer and the time the issuer makes the payments
on the mortgage-backed securities, and this delay reduces the effective yield to
the holder of such securities.
Asset-Backed Securities. A 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. Such assets are securitized through the use of
trusts and special purpose corporations. Payments or distributions of principal
and interest may be guaranteed up to certain amounts and for a certain time
period by a letter of credit or a pool insurance policy issued by a financial
institution unaffiliated with the trust or corporation.
Asset-backed securities present certain risks that are not presented by
other securities in which the 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. In addition, there is no assurance that the security interest in
the collateral can be realized.
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Structured Notes, Bonds or Debentures. Typically, the value of the
principal and/or interest on these instruments is determined by reference to
changes in the value of specific currencies, interest rates, commodities,
indexes or other financial indicators (the "Reference") or the relevant change
in two or more References. The interest rate or the principal amount payable
upon maturity or redemption may be increased or decreased depending upon changes
in the applicable Reference. The terms of the structured securities may provide
that in certain circumstances no principal is due at maturity and, therefore,
may result in the loss of a Fund's entire investment. The value of structured
securities may move in the same or the opposite direction as the value of the
Reference, so that appreciation of the Reference may produce an increase or
decrease in the interest rate or value of the security at maturity. In addition,
the change in interest rate or the value of the security at maturity may be a
multiple of the change in the value of the Reference so that the security may be
more or less volatile than the Reference, depending on the multiple.
Consequently, structured securities may entail a greater degree of market risk
and volatility than other types of debt obligations.
Assignments and Participations. Each Fund may invest in assignments of and
participations in loans issued by banks and other financial institutions.
When a Fund purchases assignments from lending financial institutions, the
Fund will acquire direct rights against the borrower on the loan. However, since
assignments are generally arranged through private negotiations between
potential assignees and potential assignors, the rights and obligations acquired
by a Fund as the purchaser of an assignment may differ from, and be more limited
than, those held by the assigning lender.
Participations in loans will typically result in a Fund having a
contractual relationship with the lending financial institution, not the
borrower. A Fund would have the right to receive payments of principal, interest
and any fees to which it is entitled only from the lender of the payments from
the borrower. In connection with purchasing a participation, a Fund generally
will have no right to enforce compliance by the borrower with the terms of the
loan agreement relating to the loan, nor any rights of set-off against the
borrower, and the Fund may not benefit directly from any collateral supporting
the loan in which it has purchased a participation. As a result, a Fund
purchasing a participation will assume the credit risk of both the borrower and
the lender selling the participation. In the event of the insolvency of the
lender selling the participation, the Fund may be treated as a general creditor
of the lender and may not benefit from any set-off between the lender and the
borrower.
A Fund may have difficulty disposing of assignments and participations
because there is no liquid market for such securities. The lack of a liquid
secondary market will have an adverse impact on the value of such securities and
on a Fund's ability to dispose of particular assignments or participations when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the borrower.
The lack of a liquid market for assignments and participations also may make it
more difficult for a Fund to assign a value to these securities for purposes of
valuing the Fund's portfolio and calculating its net asset value.
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With respect to the New York Municipal Fund, income derived from
participations or assignments may not be tax-exempt, depending on the structure
of the particular securities. To the extent such income is not tax-exempt it
will be subject to the New York Municipal Fund's 20% limit on investing in
non-municipal securities.
A Fund may invest in fixed and floating rate loans ("Loans") arranged
through private negotiations between a foreign government (a "Borrower") and one
or more financial institutions ("Lenders"). The majority of the Fund's
investments in Loans are expected to be in the form of participations in Loans
("Participations") and assignments of portions of Loans from third parties
("Assignments"). Participations typically will result in the Fund having a
contractual relationship only with the Lender, not with the Borrower. A Fund
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the Borrower. In connection with
purchasing Participations, the Fund generally will have no right to enforce
compliance by the Borrower with the terms of the loan agreement relating to the
Loan, nor any rights of set-off against the Borrower, and the Fund may not
directly benefit from any collateral supporting the Loan in which it has
purchased the Participation. As a result, the Fund will assume the credit risk
of both the Borrower and the Lender that is selling the Participation. In the
event of the insolvency of the Lender selling a Participation, the Fund may be
treated as a general creditor of the Lender and may not benefit from any set-off
between the Lender and the Borrower. The Fund will acquire Participations only
if the Lender interpositioned between the Fund and the Borrower is determined by
CSAM to be creditworthy.
When a Fund purchases Assignments from Lenders, the Fund will acquire
direct rights against the Borrower on the Loan. However, since Assignments are
generally arranged through private negotiations between potential assignees and
potential assignors, the rights and obligations acquired by the Fund as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender.
There are risks involved in investing in Participations and Assignments. A
Fund may have difficulty disposing of them because there is no liquid market for
such securities. The lack of a liquid secondary market will have an adverse
impact on the value of such securities and on the Fund's ability to dispose of
particular Participations or Assignments when necessary to meet the Fund's
liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the Borrower. The lack of a liquid
market for Participations and Assignments also may make it more difficult for a
Fund to assign a value to these securities for purposes of valuing the Fund's
portfolio and calculating its net asset value.
Interest Rate, Index, Mortgage and Currency Swaps; Interest Rate Caps,
Floors and Collars. Each Fund may enter into interest rate, index and mortgage
swaps and interest rate caps, floors and collars for hedging purposes or to seek
to increase total return; the Fixed Income and Global Fixed Income Funds may
enter into currency swaps for hedging purposes and, in the case of the Global
Fixed Income Fund, to seek to enhance total return (speculation) as well.
Interest rate swaps involve the exchange by the Fund with another
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party of their respective commitments to pay or receive interest, such as an
exchange of fixed rate payments for floating rate payments. Index swaps involve
the exchange by the Fund with another party of the respective amounts payable
with respect to a notional principal amount related to one or more indexes.
Mortgage swaps are similar to interest rate swaps in that they represent
commitments to pay and receive interest. The notional principal amount, however,
is tied to a reference pool or pools of mortgages. Currency swaps involve the
exchange of cash flows on a notional amount of two or more currencies based on
their relative future values. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined interest
rate, to receive payment of interest on a notional principal amount from the
party selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling the interest rate floor. An interest
rate collar is the combination of a cap and a floor that preserves a certain
return within a predetermined range of interest rates.
A Fund will enter into interest rate, index and mortgage swaps only on a
net basis, which means that the two payment streams are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate, index and mortgage swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate, index and mortgage swaps is limited to the net
amount of interest payments that the Fund is contractually obligated to make. If
the other party to an interest rate, index or mortgage swap defaults, the Fund's
risk of loss consists of the net amount of interest payments that the Fund is
contractually entitled to receive. In contrast, currency swaps usually involve
the delivery of a gross payment stream in one designated currency in exchange
for the gross payment stream in another designated currency. Therefore, the
entire payment stream under a currency swap is subject to the risk that the
other party to the swap will default on its contractual delivery obligations. To
the extent that the net amount payable by the Fund under an interest rate, index
or mortgage swap and the entire amount of the payment stream payable by the Fund
under a currency swap or an interest rate cap, floor or collar are held in a
segregated account consisting of cash or liquid securities, the Funds and CSAM
believe that swaps do not constitute senior securities under the Investment
Company Act of 1940, as amended (the "1940 Act") and, accordingly, will not
treat them as being subject to each Fund's borrowing restriction.
The Fund will not enter into interest rate, index, mortgage or currency
swaps, or interest rate cap, floor or collar transactions unless the unsecured
commercial paper, senior debt or claims paying ability of the other party is
rated either AA or A-1 or better by S&P or Aa or P-1 or better by Moody's or, if
unrated by such rating organizations, determined to be of comparable quality by
CSAM.
Foreign Investments. (Fixed Income and Global Fixed Income Funds only)
Investors should recognize that investing in foreign companies involves certain
risks, including those discussed below, which are not typically associated with
investing in United States issuers. Individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. A Fund may
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invest in securities of foreign governments (or agencies or instrumentalities
thereof), and many, if not all, of the foregoing considerations apply to such
investments as well.
Foreign Currency Exchange. Since a Fund may invest in securities
denominated in currencies other than the U.S. dollar, and since the Fund may
temporarily hold funds in bank deposits or other money market investments
denominated in foreign currencies, the Fund may be affected favorably or
unfavorably by exchange control regulations or changes in the exchange rate
between such currencies and the dollar. A change in the value of a foreign
currency relative to the U.S. dollar will result in a corresponding change in
the dollar value of the Fund assets denominated in that foreign currency.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholder by the Fund. The rate of exchange between the U.S. dollar and other
currencies is determined by the forces of supply and demand in the foreign
exchange markets. Changes in the exchange rate may result over time from the
interaction of many factors directly or indirectly affecting economic and
political conditions in the United States and a particular foreign country,
including economic and political developments in other countries. Governmental
intervention may also play a significant role. National governments rarely
voluntarily allow their currencies to float freely in response to economic
forces. Sovereign governments use a variety of techniques, such as intervention
by a country's central bank or imposition of regulatory controls or taxes, to
affect the exchange rates of their currencies. A Fund may use hedging techniques
with the objective of protecting against loss through the fluctuation of the
value of foreign currencies against the U.S. dollar, particularly the forward
market in foreign exchange, currency options and currency futures. See "Currency
Exchange Transactions" and "Futures Activities" above.
Euro Conversion. The introduction of a single European currency, the euro,
on January 1, 1999 for participating European nations in the Economic and
Monetary Union presented unique risks and uncertainties for investors in those
countries, including (i) the functioning of the payment and operational systems
of banks and other financial institutions; (ii) the creation of suitable
clearing and settlement payment schemes for the euro; (iii) the fluctuation of
the euro relative to non-euro currencies during the transition period from
January 1, 1999 to December 31, 2000 and beyond; and (iv) whether the interest
rate, tax and labor regimes of the European countries participating in the euro
will converge over time. Further, the conversion of the currencies of other
Economic Monetary Union countries, such as the United Kingdom, and the admission
of other countries, including Central and Eastern European countries, to the
Economic Monetary Union could adversely affect the euro. These or other factors
may cause market disruptions and could adversely affect the value of foreign
securities and currencies held by the Funds.
Information. Many of the foreign securities held by a Fund will not be
registered with, nor the issuers thereof be subject to reporting requirements
of, the SEC. Accordingly, there may be less publicly available information about
such securities and about the foreign company or government issuing them than is
available about a domestic company or government entity. Foreign companies are
generally subject to financial reporting
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standards, practices and requirements that are not uniform or less rigorous than
those applicable to U.S. companies.
Political Instability. With respect to some foreign countries, there is the
possibility of expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Fund, political or social instability,
or domestic developments which could affect U.S. investments in those and
neighboring countries.
Foreign Markets. Securities of some foreign companies are less liquid and
their prices more volatile than securities of comparable U.S. companies. Certain
foreign countries are known to experience long delays between the trade and
settlement dates of securities purchased or sold which may result in increased
exposure to market and foreign exchange fluctuations and increased illiquidity.
Increased Expenses. The operating expenses of a Fund can be expected to be
higher than that of an investment company investing exclusively in U.S.
securities, since the expenses of the Fund, such as cost of converting foreign
currency into U.S. dollars, the payment of fixed brokerage commissions on
foreign exchanges, custodial costs, valuation costs and communication costs, as
well as the rate of the investment advisory fees, though similar to such
expenses of some other international funds, are higher than those costs incurred
by other investment companies.
Dollar-Denominated Debt Securities of Foreign Issuers. The returns on
foreign debt securities reflect interest rates and other market conditions
prevailing in those countries. The relative performance of various countries'
fixed income markets historically has reflected wide variations relating to the
unique characteristics of each country's economy. Year-to-year fluctuations in
certain markets have been significant, and negative returns have been
experienced in various markets from time to time.
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 a Fund 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
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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.
Privatizations. Each Fund may invest in privatizations (i.e. foreign
government programs of selling interests in government-owned or controlled
enterprises). The ability of U.S. entities, such as the Funds, to participate in
privatizations may be limited by local law, or the terms for participation may
be less advantageous than for local investors. There can be no assurance that
privatization programs will be available or successful.
Brady Bonds. The Fund may invest in so-called "Brady Bonds," which have
been issued by Costa Rica, Mexico, Uruguay and Venezuela and which may be issued
by other Latin American countries. Brady Bonds are issued as part of a debt
restructuring in which the bonds are issued in exchange for cash and certain of
the country's outstanding commercial bank loans. Investors should recognize that
Brady Bonds do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (primarily
the U.S. dollar) and are actively traded in the over-the-counter ("OTC")
secondary market for debt of Latin American issuers. In light of the history of
commercial bank loan defaults by Latin American public and private entities,
investments in Brady Bonds may be viewed as speculative.
Depositary Receipts. Assets of a Fund may be invested in the securities of
foreign issuers in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and International Depositary Receipts ("IDRs").
These securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically issued
by a U.S. bank or trust company which evidence ownership of underlying
securities issued by a foreign corporation. EDRs, which are sometimes referred
to as Continental Depositary Receipts ("CDRs"), are receipts issued in Europe
and IDRs, which are sometimes referred to as Global Depositary Receipts, are
issued outside the United States. EDRs and IDRs are typically issued by non-U.S.
banks and trust companies and evidence ownership of either foreign or domestic
securities. Generally, ADRs in registered form are designed for use in U.S.
securities markets and EDRs and IDRs in bearer form are designed for use in
European securities markets and non-U.S. securities markets, respectively.
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U.S. Government Securities. A Fund may invest in Government Securities.
Direct obligations of the U.S. Treasury include a variety of securities that
differ in their interest rates, maturities and dates of issuance. U.S.
government securities also include securities issued or guaranteed by the
Federal Housing Administration, Farmers Home Loan Administration, Export-Import
Bank of the United States, Small Business Administration, GNMA, General Services
Administration, Central Bank for Cooperatives, Federal Farm Credit Banks,
Federal Home Loan Banks, FHLMC, Federal Intermediate Credit Banks, Federal Land
Banks, FNMA, Federal Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board and Student Loan Marketing Association. A Fund
may also invest in instruments that are supported by the right of the issuer to
borrow from the U.S. Treasury and instruments that are supported by the credit
of the instrumentality. Because the United States Government is not obligated by
law to provide support to an instrumentality it sponsors, the Fund will invest
in obligations issued by such an instrumentality only if CSAM determines that
the credit risk with respect to the instrumentality does not make its securities
unsuitable for investment by the Fund.
Government Trust Certificates. (Intermediate Government Fund only) A Fund
may invest in Government Trust Certificates. Each Certificate evidences an
undivided fractional interest in a Government Trust (each, a "Trust"). The
assets of each Trust consist of a promissory note, payable in U.S. Dollars (the
"Loan Note"), representing a loan made by the Trust to the government of Israel
(the "Borrower"), backed by a full faith and credit guaranty issued by the
United States of America, acting through the Defense Security Assistance Agency
of the Department of Defense (the "Guaranty"), of the due and punctual payment
of 90% of payments of principal and interest due on the Loan Note and a security
interest in collateral, consisting of non-callable securities issued or
guaranteed by the United States government, or derivatives thereof, such as
trust receipts or other securities evidencing an interest in such United States
government securities, sufficient to pay the remaining 10% of all payments of
principal and interest due on the Loan Notes. Each Certificate issued by a Trust
represents the right to receive a portion of the payments due on the Loan Note
held by that Trust. The Certificates are not subject to prepayment or
acceleration. Each Guaranty is entitled to the full faith and credit of the
United States of America. A certificate-holder's right to receive any payments
with respect to the Guaranty will be subject to termination if such holder
breaches the terms of its Certificate.
Certificates are not considered by the Fund to be Government Securities.
The Certificates represent undivided fractional interests in the Loan Notes, but
the Certificates are not direct obligations of, and are not guaranteed by, the
Borrower. Thus, in the event of a failure to pay principal and/or interest when
due, the Fund may be subject to delays, expenses and risks that are greater than
those that would have been involved if the Fund had purchased a direct
obligation of the Borrower.
Municipal Obligations. Under normal circumstances, each Fund may and the
Municipal Fund will invest in "Municipal Obligations." Municipal Obligations are
debt obligations issued by or on behalf of states (including the State of New
York), territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities.
Except for temporary defensive purposes, the New York
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Municipal Fund will invest its assets in intermediate and long term obligations
with interest which is excluded from gross income for federal income tax
purposes and which is exempt from New York State and New York City personal
income taxes ("New York Municipal Obligations") and intends to invest
substantially all of its assets in those obligations. New York Municipal
Obligations include obligations issued by or on the behalf of the State of New
York, its political subdivisions, agencies and instrumentalities.
Municipal Obligations are issued by governmental entities to obtain funds
for various public purposes, including the construction of a wide range of
public facilities, the refunding of outstanding obligations, the payment of
general operating expenses and the extension of loans to public institutions and
facilities. Private activity bonds that are issued by or on behalf of public
authorities to finance various privately-operated facilities are included within
the term Municipal Obligations if the interest paid thereon is exempt from
federal income tax.
The two principal types of Municipal Obligations, in terms of the source of
payment of debt service on the bonds, consist of "general obligation" and
"revenue" issues. General obligation bonds are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable from the revenues derived from a particular
facility or class of facilities or in some cases, from the proceeds of a special
excise tax or other specific revenue source such as the user of the facility
being financed. Consequently, the credit quality of revenue bonds is usually
directly related to the credit standing of the user of the facility involved.
There are, of course, variations in the quality of Municipal Obligations,
both within a particular classification and between classifications, and the
yields on Municipal Obligations depend upon a variety of factors, including
general money market conditions, the financial condition of the issuer, general
conditions of the municipal bond market, the size of a particular offering, the
maturity of the obligation and the rating of the issue. The ratings of Moody's
and S&P represent their opinions as to the quality of Municipal Obligations. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality, and Municipal Obligations with the same maturity, interest
rate and rating may have different yields while Municipal Obligations of the
same maturity and interest rate with different ratings may have the same yield.
Subsequent to its purchase by a Fund, an issue of Municipal Obligations may
cease to be rated or its rating may be reduced below the minimum rating required
for purchase by the Fund. The Fund's investment adviser will consider such an
event in determining whether the Fund should continue to hold the obligation.
See the Appendix attached hereto for further information concerning the ratings
of Moody's and S&P and their significance.
Among other instruments, a Fund may purchase short term Tax Anticipation
Notes, Bond Anticipation Notes, Revenue Anticipation Notes and other forms of
short term loans. Such notes are issued with a short term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements or
other revenues.
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The yields on Municipal Obligations are dependent upon a variety of
factors, including general economic and monetary conditions, money market
factors, conditions of the municipal bond market, size of a particular offering,
maturity of the obligation offered and rating of the issue.
Municipal Obligations are also subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Code, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. There is also
the possibility that as a result of litigation or other conditions, the power or
ability of any one or more issuers to pay, when due, principal of and interest
on its, or their, Municipal Obligations may be materially affected.
Alternative Minimum Tax Bonds. (Fixed Income and New York Municipal Funds
only) A Fund may invest without limit in "Alternative Minimum Tax Bonds," which
are certain bonds issued after August 7, 1986 to finance certain
non-governmental activities. While the income from Alternative Minimum Tax Bonds
is exempt from regular federal income tax, it is a tax preference item for
purposes of the federal individual and corporate "alternative minimum tax." The
alternative minimum tax is a special tax that applies to a limited number of
taxpayers who have certain adjustments or tax preference items. Available
returns on Alternative Minimum Tax Bonds acquired by a Fund may be lower than
those from other Municipal Obligations acquired by a Fund due to the possibility
of federal, state and local alternative minimum or minimum income tax liability
on Alternative Minimum Tax Bonds. At present, the Fixed Income Fund does not
intend to purchase Alternative Minimum Tax Bonds.
Securities of Other Investment Companies. A Fund may invest in securities
of other investment companies to the extent permitted under the 1940 Act.
Presently, under the 1940 Act, the Fund may hold securities of another
investment company in amounts which (i) do not exceed 3% of the total
outstanding voting stock of such company, (ii) do not exceed 5% of the value of
the Fund's total assets and (iii) when added to all other investment company
securities held by the Fund, do not exceed 10% of the value of the Fund's total
assets.
Below Investment Grade Securities. (Fixed Income and Global Fixed Income
Funds only) A Fund may invest up to 35% of its net assets in fixed income
securities rated below investment grade and as low as C by Moody's or D by S&P,
and in comparable unrated securities. While the market values of these
securities tend to react less to fluctuations in interest rate levels than do
those of investment grade securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than investment grade securities. In
addition, these securities generally present a higher degree of credit risk.
Issuers of such securities are often highly leveraged and may not have more
traditional methods of financing available to them so that their ability to
service their debt obligations during an economic downturn or during sustained
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periods of rising interest rates may be impaired. Investors should be aware that
ratings are relative and subjective and are not absolute standards of quality.
The market for below investment grade securities and unrated securities is
relatively new and has not weathered a major economic recession. Any such
recession could disrupt severely the market for such securities and may
adversely affect the value of such securities and the ability of the issuers of
such securities to repay principal and pay interest thereon.
A Fund may have difficulty disposing of certain of these securities because
there may be a thin trading market. Because there is no established retail
secondary market for many of these securities, the Fund anticipates that these
securities could be sold only to a limited number of dealers or institutional
investors. To the extent a secondary trading market for these securities does
exist, it generally is not as liquid as the secondary market for investment
grade securities. The lack of a liquid secondary market, as well as adverse
publicity and investor perception with respect to these securities, may have an
adverse impact on market price and the Fund's ability to dispose of particular
issues when necessary to meet the Fund's liquidity needs or in response to a
specific economic event such as a deterioration in the creditworthiness of the
issuer. The lack of a liquid secondary market for certain securities also may
make it more difficult for the Fund to obtain accurate market quotations for
purposes of valuing the Fund and calculating its net asset value.
Subsequent to its purchase by a Fund, an issue of securities may cease to
be rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither event will require sale of such securities by the Fund,
although CSAM will consider such event in its determination of whether the Fund
should continue to hold the securities. The Fixed Income Fund and the Global
Fixed Income Fund may invest in securities rated as low as C by Moody's or D by
S&P and in unrated securities considered to be of equivalent quality. Securities
that are rated C by Moody's are the lowest rated class and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Debt rated D by S&P is in default or is expected to default upon maturity or
payment date.
Below investment grade and comparable unrated securities (commonly referred
to as "junk bonds") (i) will likely have some quality and protective
characteristics that, in the judgment of the rating organization, are outweighed
by large uncertainties or major risk exposures to adverse conditions and (ii)
are predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation. The
market values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
higher-quality securities. In addition, these securities generally present a
higher degree of credit risk. The risk of loss due to default is significantly
greater because these securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness.
The market value of securities rated below investment grade is more
volatile than that of investment grade securities. Factors adversely impacting
the market value of these securities will adversely impact a Fund's net asset
value. A Fund will rely on the judgment,
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analysis and experience of CSAM in evaluating the creditworthiness of an issuer.
In this evaluation, CSAM will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and trends,
its operating history, the quality of the issuer's management and regulatory
matters. Normally, these securities are not intended for short-term investment.
The Fund may incur additional expenses to the extent it is required to seek
recovery upon a default in the payment of principal or interest on its portfolio
holdings of such securities.
Lending Portfolio Securities. A Fund may lend portfolio securities to
brokers, dealers and other financial organizations that meet capital and other
credit requirements or other criteria established by a Fund's Board of
Directors/Trustees (the "Board"). These loans, if and when made, may not exceed
33-1/3% of the Fund's total assets taken at value (including the loan
collateral). The Fund will not lend portfolio securities to CSAM or its
affiliates unless it has applied for and received specific authority to do so
from the SEC. Loans of portfolio securities will be collateralized by cash or
liquid securities, which are maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. Any gain or
loss in the market price of the securities loaned that might occur during the
term of the loan would be for the account of the Fund. From time to time, a Fund
may return a part of the interest earned from the investment of collateral
received for securities loaned to the borrower and/or a third party that is
unaffiliated with the Fund and that is acting as a "finder."
By lending its securities, a Fund can increase its income by continuing to
receive interest and any dividends on the loaned securities as well as by either
investing the collateral received for securities loaned in short-term
instruments or obtaining yield in the form of interest paid by the borrower when
U.S. government securities are used as collateral. The Fund will adhere to the
following conditions whenever its portfolio securities are loaned: (i) the Fund
must receive at least 100% cash collateral or equivalent securities of the type
discussed in the preceding paragraph from the borrower; (ii) the borrower must
increase such collateral whenever the market value of the securities rises above
the level of such collateral; (iii) the Fund must be able to terminate the loan
at any time; (iv) the Fund must receive reasonable interest on the loan, as well
as any dividends, interest or other distributions on the loaned securities and
any increase in market value; (v) the Fund may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower, provided, however, that if a material event
adversely affecting the investment occurs, the Board of a Fund must terminate
the loan and regain the right to vote the securities. Loan agreements involve
certain risks in the event of default or insolvency of the other party including
possible delays or restrictions upon the Fund's ability to recover the loaned
securities or dispose of the collateral for the loan. The Fund bears a risk of
loss in the event that the other party to the loan agreement defaults on its
obligations or becomes bankrupt and the Fund is delayed or prevented from
exercising its right to retrieve and dispose of the loaned securities, including
the risk of a possible decline in the value of the loaned securities during the
period in which the Fund seeks to assert its rights.
Repurchase Agreements. Each Fund may invest up to 20% of its total assets
in repurchase agreement transactions with member banks of the Federal Reserve
System and
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certain non-bank dealers. Repurchase agreements are contracts under which the
buyer of a security simultaneously commits to resell the security to the seller
at an agreed-upon price and date. Under the terms of a typical repurchase
agreement, a Fund would acquire any underlying security for a relatively short
period (usually not more than one week) subject to an obligation of the seller
to repurchase, and the Fund to resell, the obligation at an agreed-upon price
and time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the underlying
securities will at all times be at least equal to the total amount of the
purchase obligation, including interest. The Fund bears a risk of loss in the
event that the other party to a repurchase agreement defaults on its obligations
or becomes bankrupt and the Fund is delayed or prevented from exercising its
right to dispose of the collateral securities, including the risk of a possible
decline in the value of the underlying securities during the period while the
Fund seeks to assert this right. CSAM monitors the creditworthiness of those
bank and non-bank dealers with which the Fund enters into repurchase agreements
to evaluate this risk. A repurchase agreement is considered to be a loan under
the 1940 Act.
Reverse Repurchase Agreements and Dollar Rolls. A Fund may enter into
reverse repurchase agreements with member banks of the Federal Reserve System
and certain non-bank dealers. Reverse repurchase agreements involve the sale of
securities held by a Fund pursuant to its 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 segregate with an approved
custodian cash or liquid high-grade debt securities having a value not less than
the repurchase price (including accrued interest). The segregated assets will be
marked-to-market daily and additional assets will be segregated on any day in
which the assets fall below the repurchase price (plus accrued interest). 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.
A Fund also may enter into "dollar rolls," in which the Fund sells
fixed-income securities for delivery in the current month and simultaneously
contracts to repurchase similar but not identical (same type, coupon and
maturity) securities on a specified future date. During the roll period, a Fund
would forego principal and interest paid on such securities. A Fund would be
compensated by the difference between the current sales price and the forward
price for the future purchase, as well as by the interest earned on the cash
proceeds of the initial sale. At the time a Fund enters into a dollar roll
transaction, it will segregate with an approved custodian cash or liquid
securities having a value not less than the repurchase price (including accrued
interest) and will subsequently monitor the segregated assets to ensure that its
value is maintained. Reverse repurchase agreements and dollar rolls that are
accounted for as financings are considered to be borrowings under the 1940 Act.
Reverse repurchase agreements and dollar rolls 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
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obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision.
Zero Coupon Securities. A Fund may invest without limit in "zero coupon"
U.S. Treasury, foreign government and U.S. and foreign corporate convertible and
nonconvertible debt securities, which are bills, notes and bonds that have been
stripped of their unmatured interest coupons and custodial receipts or
certificates of participation representation interests in such stripped debt
obligations and coupons. 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 Fund
anticipates that it 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. Such accrued discount will be includible in determining the amount of
dividends the Fund must pay each year and, in order to generate cash necessary
to pay such dividends, the Fund may liquidate portfolio securities at a time
when it would not otherwise have done so. At present, the U.S. Treasury and
certain U.S. agencies issue stripped Government Securities. In addition, in the
recent past, a number of banks and brokerage firms have separated the principal
portions from the coupon portions of U.S. Treasury bonds and notes and sold them
separately in the form of receipts or certificates representing undivided
interests in these instruments.
Government Zero Coupon Securities. The Fund may invest in (i) Government
Securities that have been stripped of their unmatured interest coupons, (ii) the
coupons themselves and (iii) receipts or certificates representing interests in
stripped Government Securities and coupons (collectively referred to as
"Government zero coupon securities"). The market value of Government zero coupon
securities that are considered Government Securities is used for purposes of
determining whether at least 65% of the Fund's total assets is invested in
Government Securities. However, receipts or certificates which are underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain notes or bonds issued by the
U.S. government, its agencies, authorities or instrumentalities will not be
considered Government Securities for purposes of the 65% test.
Short Sales. (Fixed Income, Global Fixed Income and Intermediate Government
Funds only) In a short sale, a Fund sells a borrowed security and has a
corresponding obligation to the lender to return the identical security. The
seller does not immediately deliver the securities sold and is said to have a
short position in those securities until delivery occurs. If the Fund engages in
a short sale, the collateral for the short position will be maintained by the
Fund's custodian or qualified sub-custodian. While the short sale is open, the
Fund will maintain in a segregated account an amount of securities equal in
value to the securities sold short.
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While a short sale is made by selling a security a Fund does not own, a
short sale is "against the box" to the extent that the Fund contemporaneously
owns or has the right to obtain, at no added cost, securities identical to those
sold short. Not more than 10% of a Fund's net assets (taken at current value)
may be held as collateral for short sales against the box at any one time. A
Fund does not intend to engage in short sales against the box for investment
purposes. The 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). In such case, any future losses in the Fund's long position should be
offset by a gain in the short position and, conversely, any gain in the long
position should be reduced by a loss in the short position. The extent to which
such gains or losses are reduced will depend upon the amount of the security
sold short relative to the amount 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.
If a Fund effects a short sale of securities at a time when it has an
unrealized gain on the securities, it may be required to recognize that gain as
if it had actually sold the securities (as a "constructive sale") on the date it
effects the short sale. However, such constructive sale treatment may not apply
if the Fund closes out the short sale with securities other than the appreciated
securities held at the time of the short sale and if certain other conditions
are satisfied. Uncertainty regarding the tax consequences of effecting short
sales may limit the extent to which a Fund may effect short sales.
Emerging Growth and Smaller Capitalization Companies; Unseasoned Issuers.
Investing in securities of companies with continuous operations of less than
three years ("unseasoned issuers") may involve greater risks since these
securities may have limited marketability and, thus, may be more volatile than
securities of larger, more established companies or the market in general.
Because such companies normally have fewer shares outstanding than larger
companies, it may be more difficult for a Fund to buy or sell significant
amounts of such shares without an unfavorable impact on prevailing prices. These
companies may have limited product lines, markets or financial resources and may
lack management depth. In addition, these companies are typically subject to a
greater degree of changes in earnings and business prospects than are larger,
more established companies. There is typically less publicly available
information concerning these companies than for larger, more established ones.
Although investing in securities of unseasoned issuers offers potential for
above-average returns if the companies are successful, the risk exists that the
companies will not succeed and the prices of the companies' shares could
significantly decline in value. Therefore, an investment in a Fund may involve a
greater degree of risk than an investment in other mutual funds that seek
capital appreciation by investing in more established, larger companies.
"Special Situation" Companies. (Fixed Income and Global Fixed Income Funds
only) "Special situation companies" are companies involved in an actual or
prospective acquisition or consolidation; reorganization; recapitalization;
merger, liquidation or
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distribution of cash, securities or other assets; a tender or exchange offer; a
breakup or workout of a holding company; or litigation which, if resolved
favorably, would improve the value of the company's stock. If the actual or
prospective situation does not materialize as anticipated, the market price of
the securities of a "special situation company" may decline significantly. CSAM
believes, however, that if it analyzes "special situation companies" carefully
and invests in the securities of these companies at the appropriate time, the
Fund may achieve capital growth. There can be no assurance, however, that a
special situation that exists at the time of an its investment will be
consummated under the terms and within the time period contemplated.
Variable Rate and Master Demand Notes. (Fixed Income and New York Municipal
Funds only) Variable rate demand notes ("VRDNs") are obligations issued by
corporate or governmental entities which contain a floating or variable interest
rate adjustment formula and an unconditional right of demand to receive payment
of the unpaid principal balance plus accrued interest upon a short notice period
not to exceed seven days. The interest rates are adjustable at intervals ranging
from daily to up to every six months to some prevailing market rate for similar
investments, such adjustment formula being calculated to maintain the market
value of the VRDN at approximately the par value of the VRDN upon the adjustment
date. The adjustments are typically based upon the prime rate of a bank or some
other appropriate interest rate adjustment index.
Master demand notes are notes which provide for a periodic adjustment in
the interest rate paid (usually tied to the Treasury Bill auction rate) and
permit daily changes in the principal amount borrowed. While there may be no
active secondary market with respect to a particular VRDN purchased by a Fund,
the Fund may, upon the notice specified in the note, demand payment of the
principal of and accrued interest on the note at any time and may resell the
note at any time to a third party. The absence of such an active secondary
market, however, could make it difficult for the Fund to dispose of the VRDN
involved in the event the issuer of the note defaulted on its payment
obligations, and the Fund could, for this or other reasons, suffer a loss to the
extent of the default.
When-Issued Securities and Delayed-Delivery Transactions. A Fund may
utilize its assets to purchase securities on a "when-issued" basis or purchase
or sell securities for delayed delivery (i.e., payment or delivery occur beyond
the normal settlement date at a stated price and yield). The Fund will enter
into a when-issued transaction for the purpose of acquiring portfolio securities
and not for the purpose of leverage, but may sell the securities before the
settlement date if CSAM deems it advantageous to do so. The payment obligation
and the interest rate that will be received on when-issued securities are fixed
at the time the buyer enters into the commitment. Due to fluctuations in the
value of securities purchased or sold on a when-issued or delayed-delivery
basis, the yields obtained on such securities may be higher or lower than the
yields available in the market on the dates when the investments are actually
delivered to the buyers.
When a Fund agrees to purchase when-issued or delayed-delivery securities,
its custodian will set aside cash or liquid securities that are acceptable as
collateral to the appropriate regulatory authority equal to the amount of the
commitment in a segregated
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account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment, and in such a case the Fund may be required subsequently
to place additional assets in the segregated account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that the Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. When a Fund engages in when-issued or delayed-delivery
transactions, it relies on the other party to consummate the trade. Failure of
the seller to do so may result in the Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
Stand-By Commitment Agreements. (Fixed Income and New York Municipal Funds
only) A Fund may acquire "stand-by commitments" with respect to securities held
in its portfolio. Under a stand-by commitment, a dealer agrees to purchase at
the Fund's option specified securities at a specified price. The Fund's right to
exercise stand-by commitments is unconditional and unqualified. Stand-by
commitments acquired by the Fund may also be referred to as "put" options. A
stand-by commitment is not transferable by the Fund, although the Fund can sell
the underlying securities to a third party at any time.
The principal risk of stand-by commitments is that the writer of a
commitment may default on its obligation to repurchase the securities acquired
with it. When investing in stand-by commitments, a Fund will seek to enter into
stand-by commitments only with brokers, dealers and banks that, in the opinion
of CSAM, present minimal credit risks. In evaluating the creditworthiness of the
issuer of a stand-by commitment, CSAM will periodically review relevant
financial information concerning the issuer's assets, liabilities and contingent
claims. The Fund acquires stand-by commitments only in order to facilitate
portfolio liquidity and does not expect to exercise its rights under stand-by
commitments for trading purposes.
The amount payable to a Fund upon its exercise of a stand-by commitment is
normally (i) the Fund's acquisition cost of the securities (excluding any
accrued interest which the Fund paid on their acquisition), less any amortized
market premium or plus any amortized market or original issue discount during
the period the Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date during that period.
A Fund expects that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding stand-by commitments held in the Fund's portfolio will
not exceed 1/2 of 1% of the value of the Fund's total assets calculated
immediately after each stand-by commitment is acquired.
A Fund would acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The acquisition of a stand-by commitment would not affect the
valuation or assumed maturity of
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the underlying securities. Stand-by commitments acquired by the Fund would be
valued at zero in determining net asset value. Where the Fund paid any
consideration directly or indirectly for a stand-by commitment, its cost would
be reflected as unrealized depreciation for the period during which the
commitment was held by the Fund. Stand-by commitments would not affect the
average weighted maturity of a Fund's portfolio.
The Internal Revenue Service ("IRS") has issued a revenue ruling to the
effect that a registered investment company will be treated for federal income
tax purposes as the owner of the Municipal Obligations acquired subject to a
stand-by commitment and the interest on the Municipal Obligations will be tax
exempt to a Fund.
REITs. (Fixed Income and Global Fixed Income Funds only) A fund may invest
in real estate investment trusts ("REITs"), which are pooled investment vehicles
that invest primarily in income-producing real estate or real estate related
loans or interests. Like regulated investment companies such as the Funds, REITs
are not taxed on income distributed to shareholders provided they comply with
several requirements of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund investing in a REIT will indirectly bear its proportionate
share of any expenses paid by the REIT in addition to the expenses of the Fund.
Investing in REITs involves certain risks. A REIT may be affected by
changes in the value of the underlying property owned by such REIT or by the
quality of any credit extended by the REIT. REITs are dependent on management
skills, are not diversified (except to the extent the Code requires), and are
subject to the risks of financing projects. REITs are subject to heavy cash flow
dependency, default by borrowers, self-liquidation, the possibilities of failing
to qualify for the exemption from tax for distributed income under the Code and
failing to maintain their exemptions from the 1940 Act. REITs are also subject
to interest rate risks.
Warrants. (Fixed Income and Global Fixed Income Funds only) A Fund may
utilize up to 10% of its net assets to purchase warrants issued by domestic and
foreign companies to purchase newly created equity securities consisting of
common and preferred stock. Neither Fund currently intends to invest in
warrants. The equity security underlying a warrant is outstanding at the time
the warrant is issued or is issued together with the warrant.
Investing in warrants can provide a greater potential for profit or loss
than an equivalent investment in the underlying security, and, thus, can be a
speculative investment. The value of a warrant may decline because of a decline
in the value of the underlying security, the passage of time, changes in
interest rates or in the dividend or other policies of the company whose equity
underlies the warrant or a change in the perception as to the future price of
the underlying security, or any combination thereof. Warrants generally pay no
dividends and confer no voting or other rights other than to purchase the
underlying security.
Non-Publicly Traded and Illiquid Securities. A Fund may not invest more
than 15% of its net assets in non-publicly traded and illiquid securities,
including securities that are illiquid by virtue of the absence of a readily
available market, repurchase agreements which have a maturity of longer than
seven days, VRDNs and master demand notes providing for
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<PAGE> 35
settlement upon more than seven days notice by the Fund, and time deposits
maturing in more than seven calendar days. Securities that have legal or
contractual restrictions on resale but have a readily available market are not
considered illiquid for purposes of this limitation. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Companies whose securities are not publicly traded may not be
subject to the disclosure and other investor protection requirements applicable
to companies whose securities are publicly traded. Limitations on resale may
have an adverse effect on the marketability of portfolio securities and a mutual
fund might be unable to dispose of restricted or other illiquid securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemptions within seven days. A mutual fund might also have to
register such restricted securities in order to dispose of them resulting in
additional expense and delay. Adverse market conditions could impede such a
public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
Non-publicly traded securities (including Rule 144A Securities) may involve
a high degree of business and financial risk and may result in substantial
losses. These securities may be less liquid than publicly traded securities, and
a Fund may take longer to liquidate these positions than would be the case for
publicly traded securities. Although these securities may be resold in privately
negotiated transactions, the prices realized from these sales could be less than
those originally paid by the Fund. Further, companies whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements that would be applicable if their securities were
publicly traded. A Fund's investment in illiquid securities is subject to the
risk that should the Fund desire to sell any of these securities when a ready
buyer is not available at a price that is deemed to be representative of their
value, the value of the Fund's net assets could be adversely affected.
Rule 144A Securities. Rule 144A under the Securities Act adopted by the SEC
allows for a broader institutional trading market for securities otherwise
subject to restriction on resale to the general public. Rule 144A establishes a
"safe harbor" from the registration requirements of the Securities Act for
resales of certain securities to qualified institutional buyers. CSAM
anticipates that the market for certain restricted securities such as
institutional
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<PAGE> 36
commercial paper will expand further as a result of this regulation and use of
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc.
An investment in Rule 144A Securities will be considered illiquid and
therefore subject to a Fund's limit on the purchase of illiquid securities
unless the Fund's Board of Directors/Trustees or its delegates determines that
the Rule 144A Securities are liquid. In reaching liquidity decisions, CSAM may
consider, inter alia, the following factors: (i) the unregistered nature of the
security; (ii) the frequency of trades and quotes for the security; (iii) the
number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (iv) dealer undertakings to make a market in the
security; and (v) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer).
Investing in Rule 144A securities could have the effect of increasing the
level of illiquidity in the Funds to the extent that qualified institutional
buyers are unavailable or uninterested in purchasing such securities from the
Funds. The Boards may adopt guidelines and delegate to CSAM the daily function
of determining and monitoring the liquidity of Rule 144A Securities, although
each Board will retain ultimate responsibility for liquidity determinations.
Borrowing. A Fund may borrow up to 30% of its total assets for temporary or
emergency purposes, including to meet portfolio redemption requests so as to
permit the orderly disposition of portfolio securities or to facilitate
settlement transactions on portfolio securities. Investments (including
roll-overs) will not be made when borrowings exceed 5% of the Fund's net assets.
Although the principal of such borrowings will be fixed, a Fund's assets may
change in value during the time the borrowing is outstanding. The 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.
Non-Diversified Status. (Global Fixed Income and New York Municipal Funds
only) The Funds are classified as non-diversified within the meaning of the 1940
Act, which means that they are not limited by such Act in the proportion of its
assets that it may invest in securities of a single issuer. As non-diversified
investment companies, the Funds may invest a greater proportion of their assets
in the obligations of a small number of issuers and, as a result, may be subject
to greater risk with respect to portfolio securities. To the extent that the
Funds assume large positions in the securities of a small number of issuers,
their 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.
A Fund's investments will be limited, however, in order to qualify as a
"regulated investment company" for purposes of the Code. See "Additional
Information Concerning Taxes." To qualify, a Fund will comply with certain
requirements, including limiting its investments so that at the close of each
quarter of the taxable year (i) not more than
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25% of the market value of its total assets will be invested in the securities
of a single issuer, and (ii) with respect to 50% of the market value of its
total assets, not more than 5% of the market value of its total assets will be
invested in the securities of a single issuer and the Fund will not own more
than 10% of the outstanding voting securities of a single issuer.
Taxable Investments. (New York Municipal Fund only) Because the Fund's
purpose is to provide income exempt from federal income tax and New York State
and New York City personal income tax, the Fund generally will invest in taxable
obligations only if and when the Fund's investment adviser believes it would be
in the best interests of the Fund's investors to do so. Situations in which the
Fund may invest up to 20% of its total assets in taxable securities include: (i)
pending investment of proceeds of sales of Fund shares or portfolio securities
or (ii) when the Fund requires highly liquid securities in order to meet
anticipated redemptions. The Fund may temporarily invest more than 20% of its
total assets in taxable securities to maintain a "defensive" posture when the
Fund's investment adviser determines that it is advisable to do so because of
adverse market conditions affecting the market for Municipal Obligations
generally.
Among the taxable investments in which the Fund may invest are repurchase
agreements and time deposits maturing in not more than seven days. The Fund may
engage in repurchase agreement transactions on Government Securities with member
banks of the Federal Reserve System or with certain dealers listed on the
Federal Reserve Bank of New York's list of reporting dealers. Under the terms of
a typical repurchase agreement, the Fund would acquire an underlying debt
obligation for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. A repurchase agreement is considered to be a
loan under the 1940 Act. The value of the underlying securities will be at least
equal at all times to the total amount of the repurchase obligation, including
interest. The Fund bears a risk of loss in the event that the other party to a
repurchase agreement defaults on its obligations and the Fund is delayed or
prevented from exercising its rights to dispose of the collateral securities,
including the risk of a possible decline in the value of the underlying
securities during the period while the Fund seeks to assert these rights. The
Fund's investment adviser, acting under the supervision of the Board, reviews on
an ongoing basis, the creditworthiness and the values of the collateral of those
banks and dealers with which the Fund enters into repurchase agreements to
evaluate potential risks.
INVESTMENT RESTRICTIONS
Fixed Income Fund. The investment limitations numbered 1 through 12 may not
be changed without the affirmative vote of the holders of a majority of the
Fixed Income Fund's outstanding shares. Such majority is defined as the lesser
of (i) 67% or more of the shares present at the meeting, if the holders of more
than 50% of the outstanding shares of the Fund are present or represented by
proxy, or (ii) more than 50% of the outstanding shares. Investment limitations
13 through 15 may be changed by a vote of the Board at any time.
The Fixed Income Fund may not:
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1. Borrow money except that the Fund may (i) borrow from banks for
temporary or emergency purposes, and (ii) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the Fund's
total assets. For purposes of this restriction, short sales, the entry into
currency transactions, options, futures contracts, options on futures contracts,
forward commitment transactions and dollar roll transactions that are not
accounted for as financings (and the segregation of assets in connection with
any of the foregoing) shall not constitute borrowing.
2. 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 issuers conducting their principal business activities in the same industry;
provided that there shall be no limit on the purchase of U.S. government
securities.
3. Make loans except that the Fund may purchase or hold fixed-income
securities, including loan participations, assignments and structured
securities; lend portfolio securities; and enter into repurchase agreements.
4. Underwrite any securities issued by others except to the extent that the
investment in restricted securities and the sale of securities in accordance
with the Fund's investment objective, policies and limitations may be deemed to
be underwriting.
5. Purchase or sell real estate or invest in oil, gas or mineral
exploration or development programs or oil, gas and mineral leases, except that
the Fund may invest in (a) securities secured by real estate, mortgages or
interests therein and (b) securities of companies that invest in or sponsor oil,
gas or mineral exploration or development programs.
6. Make short sales of securities or maintain a short position, except the
Fund may maintain short positions in forward currency contracts, options,
futures contracts and options on futures contracts and make short sales "against
the box."
7. Purchase more than 10% of the voting securities of any one issuer;
provided that this limitation shall not apply to investments in U.S. government
securities.
8. Purchase securities on margin, except that the Fund may obtain any
short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of initial
or variation margin in connection with transactions in currencies, options,
futures contracts or related options will not be deemed to be a purchase of
securities on margin.
9. Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies and
indexes, and options on futures contracts, securities, currencies or indexes,
and purchase and sell currencies or securities on a forward commitment or
delayed-delivery basis.
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10. Issue any senior security except as permitted in these Investment
Restrictions.
11. Purchase the securities of any issuer if as a result more than 5% of
the value of the Fund's total assets would be invested in the securities of such
issuer, except that this 5% limitation does not apply to U.S. government
securities and except that up to 25% of the value of the Fund's total assets may
be invested without regard to this 5% limitation.
12. Purchase securities of other investment companies except in connection
with a merger, consolidation, acquisition, reorganization or offer of exchange
or as otherwise permitted under the 1940 Act.
13. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
and options on futures contracts.
14. Invest more than 15% of the value of the Fund's net assets in
securities which may be illiquid because of legal or contractual restrictions on
resale or securities for which there are no readily available market quotations.
For purposes of this limitation, (a) repurchase agreements with maturities
greater than seven days, (b) VRDNs and master demand notes providing for
settlement upon more than seven days notice by the Fund and (c) time deposits
maturing in more than seven calendar days shall be considered illiquid
securities.
15. Make additional investments (including roll-overs) if the Fund's
borrowings exceed 5% of its net assets.
Global Fixed Income Fund. The investment limitations numbered 1 through 10
may not be changed without the affirmative vote of the holders of a majority (as
defined above) of the Global Fixed Income Fund's outstanding shares. Investment
limitations 11 through 13 may be changed by a vote of the Board at any time.
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The Global Fixed Income Fund may not:
1. Borrow money except that the Fund may (a) borrow from banks for
temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the Fund's
total assets. For purposes of this restriction, short sales, the entry into
currency transactions, options, futures contracts, options on futures contracts,
forward commitment transactions and dollar roll transactions that are not
accounted for as financings (and the segregation of assets in connection with
any of the foregoing) shall not constitute borrowing.
2. 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 issuers conducting their principal business activities in the same industry;
provided that there shall be no limit on the purchase of U.S. government
securities.
3. Make loans, except that the Fund may purchase or hold fixed-income
securities, including loan participations and assignments and structured
securities; lend portfolio securities; and enter into repurchase agreements.
4. Underwrite any securities issued by others except to the extent that the
investment in restricted securities and the sale of securities in accordance
with the Fund's investment objective, policies and limitations may be deemed to
be underwriting.
5. Purchase or sell real estate or invest in real estate limited
partnerships, oil, gas or mineral exploration or development programs or oil,
gas and mineral leases, except that the Fund may invest in (a) securities
secured by real estate, mortgages or interests therein and (b) securities of
companies that invest in or sponsor oil, gas or mineral exploration or
development programs.
6. Make short sales of securities or maintain a short position, except the
Fund may maintain short positions in forward currency contracts, options,
futures contracts and options on futures contracts and make short sales "against
the box."
7. Purchase securities on margin, except that the Fund may obtain any
short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of initial
or variation margin in connection with transactions in currencies, options,
futures contracts or related options will not be deemed to be a purchase of
securities on margin.
8. Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies and
indexes, and options on futures contracts, securities, currencies or indexes,
and purchase and sell currencies or securities on a forward commitment or
delayed-delivery basis.
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9. Issue any senior security except as permitted in these Investment
Restrictions.
10. Purchase securities of other investment companies except in connection
with a merger, consolidation, acquisition, reorganization or offer of exchange,
or as otherwise permitted under the 1940 Act.
11. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
and options on futures contracts.
12. Invest more than 15% of the value of the Fund's net assets in
securities which may be illiquid because of legal or contractual restrictions on
resale or securities for which there are no readily available market quotations.
For purposes of this limitation, repurchase agreements with maturities greater
than seven days shall be considered illiquid securities.
13. Make additional investments (including roll-overs) if the Fund's
borrowings exceed 5% of its net assets.
Intermediate Government Fund. The investment limitations numbered 1 through
12 may not be changed without the affirmative vote of the holders of a majority
(as defined above) of the Intermediate Government Fund's outstanding shares.
Investment limitations 13 through 15 may be changed by a vote of the Board at
any time.
The Intermediate Government Fund may not:
1. Borrow money except that the Fund may (a) borrow from banks for
temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the Fund's
total assets. For purposes of this restriction, short sales, the entry into
currency transactions, options, futures contracts, options on futures contracts,
forward commitment transactions and dollar roll transactions that are not
accounted for as financings (and the segregation of assets in connection with
any of the foregoing) shall not constitute borrowing.
2. 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 issuers conducting their principal business activities in the same industry;
provided that there shall be no limit on the purchase of Government Securities.
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<PAGE> 42
3. Make loans except that the Fund may purchase or hold fixed income
securities, including loan participations, assignments and structured
securities; lend portfolio securities and enter into repurchase agreements.
4. Underwrite any securities issued by others except to the extent that the
investment in restricted securities and the sale of securities in accordance
with the Fund's investment objective, policies and limitations may be deemed to
be underwriting.
5. Purchase or sell real estate, real estate investment trust securities or
invest in oil, gas or mineral exploration or development programs, except that
the Fund may invest in securities secured by real estate, mortgages or interests
therein.
6. Make short sales of securities or maintain a short position, except the
Fund may maintain short positions in forward currency contracts, options,
futures contracts and options on futures contracts and make short sales "against
the box".
7. Purchase more than 10% of the voting securities of any one issuer;
provided that this limitation shall not apply to investments in Government
Securities.
8. Purchase securities on margin, except that the Fund may obtain any
short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of initial
or variation margin in connection with transactions in currencies, options,
futures contracts or related options will not be deemed to be a purchase of
securities on margin.
9. Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies and
indexes, and options on futures contracts, securities, currencies or indexes,
and purchase and sell currencies or securities on a forward commitment or
delayed-delivery basis.
10. Issue any senior security except as permitted in these Investment
Restrictions.
11. Purchase the securities of any issuer if as a result more than 5% of
the value of the Fund's total assets would be invested in the securities of such
issuer, except that this 5% limitation does not apply to Government Securities
and except that up to 25% of the value of the Fund's total assets may be
invested without regard to this 5% limitation.
12. Purchase securities of other investment companies except in connection
with a merger, consolidation, acquisition, reorganization or offer of exchange
or as permitted under the 1940 Act.
13. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or
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variation margin arrangements with respect to currency transactions, options,
futures contracts, and options on futures contracts.
14. Invest more than 15% of the value of the Fund's net assets in
securities which may be illiquid because of legal or contractual restrictions on
resale or securities for which there are no readily available market quotations.
For purposes of this limitation, repurchase agreements with maturities greater
than seven days shall be considered illiquid securities.
15. Make additional investments (including roll-overs) if the Fund's
borrowings exceed 5% of its net assets.
New York Municipal Fund. The investment limitations numbered 1 through 10
may not be changed without the affirmative vote of the holders of a majority (as
defined above) of the Municipal Fund's outstanding shares. Investment
limitations 11 and 14 may be changed by a vote of the Board at any time.
The New York Municipal Fund may not:
1. Borrow money except that the Fund may (a) borrow from banks for
temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the Fund's
total assets. For purposes of this restriction, short sales, the entry into
currency transactions, options, futures contracts, options on futures contracts,
forward commitment transactions and dollar roll transactions that are not
accounted for as financings (and the segregation of assets in connection with
any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause more than 25% of the value of
the Fund's total assets at the time of purchase to be invested in the securities
of issuers conducting their principal business activities in the same industry;
provided that there shall be no limit on the purchase of (a) U.S. government
securities, (b) certificates of deposit issued by United States branches of
United States banks or (c) Municipal Obligations. For purposes of this
restriction, private purpose bonds ultimately payable by companies within the
same industry are treated as if they were issued by issuers in the same
industry.
3. Make loans except that the Fund may purchase or hold fixed-income
securities, including loan participations, assignments and
structured securities, and enter into repurchase agreements in accordance with
its investment objective, policies and limitations.
4. Underwrite any securities issued by others except to the extent that the
investment in restricted securities and the sale of securities in accordance
with the Fund's investment objective, policies and limitations may be deemed to
be underwriting.
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5. Purchase or sell real estate, real estate investment trust securities or
invest in oil, gas or mineral exploration or development programs, except that
the Fund may invest in securities secured by real estate, mortgages or interests
therein.
6. Make short sales of securities or maintain a short position, except the
Fund may maintain short positions in forward currency contracts, options,
futures contracts and options on futures contracts.
7. Purchase securities on margin, except that the Fund may obtain any
short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of initial
or variation margin in connection with transactions in currencies, options,
futures contracts or related options will not be deemed to be a purchase of
securities on margin.
8. Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to securities, currencies and
indexes, and options on futures contracts, securities or indexes, and purchase
and sell currencies or securities on a forward commitment or delayed-delivery
basis.
9. Issue any senior security except as permitted in these Investment
Restrictions.
10. Purchase securities of other investment companies except (a) in
connection with a merger, consolidation, acquisition or reorganization or (b) as
permitted under the 1940 Act.
11. Invest less than 80% of its assets in securities the interest on which
is exempt from federal income tax, except during temporary defensive periods or
under unusual market conditions, as determined by the Fund's investment adviser.
12. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and purchased securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
and options on futures contracts.
13. Invest more than 15% of the value of the Fund's net assets in
securities which may be illiquid because of legal or contractual restrictions on
resale or securities for which there are no readily available market quotations.
For purposes of this limitation, (a) repurchase agreements with maturities
greater than seven days, (b) variable rate and master demand notes providing for
settlement upon more than seven days' notice by the Fund and (c) time deposits
maturing in more than seven calendar days shall be considered illiquid
securities.
14. Make additional investments (including roll-overs) if the Fund's
borrowings exceed 5% of its net assets.
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If a percentage restriction (other than the percentage limitation set forth
in each of No. 1 above) is adhered to at the time of an investment, a later
increase or decrease in the percentage of assets resulting from a change in the
values of portfolio securities or in the amount of a Fund's assets will not
constitute a violation of such restriction.
PORTFOLIO VALUATION
The following is a description of the procedures used by the Fund in
valuing its assets.
Securities listed on a U.S. securities exchange (including securities
traded through the Nasdaq National Market System) or foreign securities exchange
or traded in an over-the-counter market will be valued at the most recent sale
as of the time the valuation is made or, in the absence of sales, at the mean
between the highest bid and lowest asked quotations. If there are no such
quotations, the value of the securities will be taken to be the most recent bid
quotation on the exchange or market. Options contracts will be valued similarly.
Futures contracts will be valued at the most recent settlement price at the time
of valuation. A security which is listed or traded on more than one exchange is
valued at the quotation on the exchange determined to be the primary market for
such security. In determining the market value of portfolio investments, each
Fund may employ outside organizations (each, a "Pricing Service") which may use
a matrix, formula or other objective method that takes into consideration market
indexes, matrices, yield curves and other specific adjustments. The procedures
of Pricing Services are reviewed periodically by the officers of each Fund under
the general supervision and responsibility of the Board, which may replace a
Pricing Service at any time. Short-term obligations with maturities of 60 days
or less are valued at amortized cost, which constitutes fair value as determined
by the Board. Amortized cost involves valuing a portfolio instrument at its
initial cost and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. The amortized cost method of valuation may
also be used with respect to other debt obligations with 60 days or less
remaining to maturity. Securities, options, futures contracts and other assets
for which market quotations are not available will be valued at their fair value
as determined in good faith pursuant to consistently applied procedures
established by the Board. In addition, the Board or its delegates may value a
security at fair value if it determines that such security's value determined by
the methodology set forth above does not reflect its fair value.
Trading in securities in certain foreign countries is completed at various
times prior to the close of business on each business day in New York (i.e., a
day on which The New York Stock Exchange, Inc. (the "NYSE") is open for
trading). In addition, securities trading in a particular country or countries
may not take place on all business days in New York. Furthermore, trading takes
place in various foreign markets on days which are not business days in New York
and days on which a Fund's net asset value is not calculated. As a result,
calculation of the Fund's net asset value may not take place contemporaneously
with the determination of the prices of certain foreign portfolio securities
used in such calculation. All assets and liabilities initially expressed in
foreign currency values will be converted into U.S. dollar values at the
prevailing rate as quoted by a Pricing Service as of 12:00 noon
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<PAGE> 46
(Eastern time). If such quotations are not available, the rate of exchange will
be determined in good faith pursuant to consistently applied procedures
established by the Board.
PORTFOLIO TRANSACTIONS
CSAM is responsible for establishing, reviewing and, where necessary,
modifying a Fund's investment program to achieve its investment objectives.
Purchases and sales of newly issued portfolio securities are usually principal
transactions without brokerage commissions effected directly with the issuer or
with an underwriter acting as principal. Other purchases and sales may be
effected on a securities exchange or over-the-counter, depending on where it
appears that the best price or execution will be obtained. The purchase price
paid by a Fund to underwriters of newly issued securities usually includes a
concession paid by the issuer to the underwriter, and purchases of securities
from dealers, acting as either principals or agents in the after market, are
normally executed at a price between the bid and asked price, which includes a
dealer's mark-up or mark-down. Transactions on U.S. stock exchanges and some
foreign stock exchanges involve the payment of negotiated brokerage commissions.
On exchanges on which commissions are negotiated, the cost of transactions may
vary among different brokers. On most foreign exchanges, commissions are
generally fixed. There is generally no stated commission in the case of
securities traded in domestic or foreign over-the-counter markets, but the price
of securities traded in over-the-counter markets includes an undisclosed
commission or mark-up. Government Securities are generally purchased from
underwriters or dealers, although certain newly issued Government Securities may
be purchased directly from the U.S. Treasury or from the issuing agency or
instrumentality. No brokerage commissions are typically paid on purchases and
sales of Government Securities.
CSAM will select specific portfolio investments and effect transactions for
a Fund and in doing so seeks to obtain the overall best execution of portfolio
transactions. In evaluating prices and executions, CSAM will consider the
factors it deems relevant, which may include the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of a broker or dealer and the reasonableness of the commission, if
any, for the specific transaction and on a continuing basis. CSAM may, in its
discretion, effect transactions in portfolio securities with dealers who provide
brokerage and research services (as those terms are defined in Section 28(e) of
the Securities Exchange Act of 1934) to the Fund and/or other accounts over
which CSAM exercises investment discretion. CSAM may place portfolio
transactions with a broker or dealer with whom it has negotiated a commission
that is in excess of the commission another broker or dealer would have charged
for effecting the transaction if CSAM determines in good faith that such amount
of commission was reasonable in relation to the value of such brokerage and
research services provided by such broker or dealer viewed in terms of either
that particular transaction or of the overall responsibilities of CSAM. Research
and other services received may be useful to CSAM in serving its other clients
and, due to brokerage business on behalf of the Fund, research or other services
obtained by the placement of business of other clients may be useful to CSAM in
carrying out its obligations to the Fund. Research may include furnishing
advice, either directly or through publications or writings, as to the value of
securities, the advisability of purchasing or selling specific securities and
the availability of securities or purchasers or
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<PAGE> 47
sellers of securities; furnishing seminars, information, analyses and reports
concerning issuers, industries, securities, trading markets and methods,
legislative developments, changes in accounting practices, economic factors and
trends and portfolio strategy; access to research analysts, corporate management
personnel, industry experts, economists and government officials; comparative
performance evaluation and technical measurement services and quotation
services; and products and other services (such as third party publications,
reports and analyses, and computer and electronic access, equipment, software,
information and accessories that deliver, process or otherwise utilize
information, including the research described above) that assist CSAM in
carrying out its responsibilities. Research received from brokers or dealers is
supplemental to CSAM's own research program. The fees to CSAM under its advisory
agreement with a Fund are not reduced by reason of its receiving any brokerage
and research services.
The following table details amounts paid by each Fund in commissions to
broker-dealers for execution of portfolio transactions during the indicated
fiscal year or period.
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended
October 31, 1996 October 31, 1997 October 31, 1998
---------------------------------------------------------
<S> <C> <C> <C>
Fixed Income Fund $31,906 $29,433 $4,572
Global Fixed Income Fund -0- $900 $900
Intermediate Government Fund -0- -0- -0-
New York Municipal Fund -0- -0- -0-
</TABLE>
Investment decisions for a Fund concerning specific portfolio securities
are made independently from those for other clients advised by CSAM. Such other
investment clients may invest in the same securities as the Fund. When purchases
or sales of the same security are made at substantially the same time on behalf
of such other clients, transactions are averaged as to price and available
investments allocated as to amount, in a manner which CSAM believes to be
equitable to each client, including the Fund. In some instances, this investment
procedure may adversely affect the price paid or received by a Fund or the size
of the position obtained or sold for the Fund. To the extent permitted by law,
CSAM may aggregate the securities to be sold or purchased for the Fund with
those to be sold or purchased for such other investment clients in order to
obtain best execution.
In no instance will portfolio securities be purchased from or sold to CSAM,
Credit Suisse Asset Management Securities, Inc. ("CSAMSI") or Credit Suisse
First Boston ("CS First Boston") or any affiliated person of such companies. In
addition, a Fund will not give preference to any institutions with whom the Fund
enters into distribution or shareholder servicing agreements concerning the
provision of distribution services or support services.
Transactions for the Fixed Income and Global Fixed Income Funds may be
effected on foreign securities exchanges. In transactions for securities not
actively traded on a foreign securities exchange, a Fund will deal directly with
the dealers who make a market in
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<PAGE> 48
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.
A Fund may participate, if and when practicable, in bidding for the
purchase of securities for the Fund's portfolio directly from an issuer in order
to take advantage of the lower purchase price available to members of such a
group. The Fund will engage in this practice, however, only when CSAM, in its
sole discretion, believes such practice to be otherwise in the Fund's interest.
PORTFOLIO TURNOVER
The Funds do not intend to seek profits through short-term trading, but the
rate of turnover will not be a limiting factor when the Fund deems it desirable
to sell or purchase securities. A Fund's portfolio turnover rate is calculated
by dividing the lesser of purchases or sales of its portfolio securities for the
year by the monthly average value of the portfolio securities. Securities with
remaining maturities of one year or less at the date of acquisition are excluded
from the calculation.
Certain practices that may be employed by the Fund could result in high
portfolio turnover. For example, portfolio securities may be sold in
anticipation of a rise in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another of comparable quality purchased at
approximately the same time to take advantage of what CSAM believes to be a
temporary disparity in the normal yield relationship between the two securities.
These yield disparities may occur for reasons not directly related to the
investment quality of particular issues or the general movement of interest
rates, such as changes in the overall demand for, or supply of, various types of
securities. In addition, options on securities may be sold in anticipation of a
decline in the price of the underlying security (market decline) or purchased in
anticipation of a rise in the price of the underlying security (market rise) and
later sold. To the extent that its portfolio is traded for the short-term, the
Fund will be engaged essentially in trading activities based on short-term
considerations affecting the value of an issuer's stock instead of long-term
investments based on fundamental valuation of securities. Because of this
policy, portfolio securities may be sold without regard to the length of time
for which they have been held. Consequently, the annual portfolio turnover rate
of the Fund may be higher than mutual funds having a similar objective that do
not utilize these strategies.
It is not possible to predict the Funds' portfolio turnover rates. High
portfolio turnover rates (100% or more) may result in higher brokerage
commission, higher dealer markups or underwriting commissions as well as other
transaction costs. In addition, gains realized from portfolio turnover may be
taxable to shareholders.
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SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL
OBLIGATIONS
The New York Municipal Fund's ability to achieve its investment objective
is dependent upon the ability of the issuers of New York Municipal Obligations
to meet their continuing obligations for the payment of principal and interest.
New York State and New York City face long-term economic problems that could
seriously affect their ability and that of other issuers of New York Municipal
Obligations to meet their financial obligations. Certain substantial issuers of
New York Municipal Obligations (including issuers whose obligations may be
acquired by the Fund) have experienced serious financial difficulties in recent
years. These difficulties have at times jeopardized the credit standing and
impaired the borrowing abilities of all New York issuers and have generally
contributed to higher interest costs for their borrowings and fewer markets for
their outstanding debt obligations. Although several different issues of
municipal securities of New York State and its agencies and instrumentalities
and of New York City have been downgraded by S&P and Moody's in recent years,
the most recent actions of S&P and Moody's have been to place the debt
obligations of New York State and New York City on CreditWatch with positive
implications and to upgrade the debt obligations of New York City, respectively.
Strong demand for New York Municipal Obligations has also at times had the
effect of permitting New York Municipal Obligations to be issued with yields
relatively lower, and after issuance, to trade in the market at prices
relatively higher than comparably rated municipal obligations issued by other
jurisdictions. A recurrence of the financial difficulties previously experienced
by certain issuers of New York Municipal Obligations could result in defaults or
declines in the market values of those issuers' existing obligations and,
possibly, in the obligations of other issuers of New York Municipal Obligations.
Although as of the date of this Prospectus, no issuers of New York Municipal
Obligations are in default with respect to the payment of their municipal
obligations, the occurrence of any such default could affect adversely the
market values and marketability of all New York Municipal Obligations and,
consequently, the net asset value of the New York Municipal Fund's portfolio.
Some of the significant financial considerations relating to the Fund's
investments in New York Municipal Obligations are summarized below. This summary
information is not intended to be a complete description and is principally
derived from official statements relating to issues of New York Municipal
Obligations that were available prior to the date of this Statement of
Additional Information. The accuracy and completeness of the information
contained in those official statements have not been independently verified.
State Economy
New York is the third most populous state in the nation and has a
relatively high level of personal wealth. The State's economy is diverse with a
comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a very small share of the nation's
farming and mining activity. The State's location and its excellent air
transport facilities and natural harbors have made it an important link in
international commerce. Travel and tourism constitute an important part of the
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economy. Like the rest of the nation, New York has a declining proportion of its
workforce engaged in manufacturing, and an increasing proportion engaged in
service industries.
The State has historically been one of the wealthiest states in the nation.
For decades, however, the State has grown more slowly than the nation as a
whole, gradually eroding its relative economic position. State per capita
personal income has historically been significantly higher than the national
average, although the ratio has varied substantially. Because New York City (the
"City") is a regional employment center for a multi-state region, State personal
income measured on a residence basis understates the relative importance of the
State to the national economy and the size of the base to which State taxation
applies.
The State economic forecast has been raised slightly from the enacted
budget forecast. Continued growth is projected in 1998 and 1999 for employment,
wages, and personal income, although the growth rates of personal income and
wages are expected to be lower than those in 1997. The growth of personal income
is projected to decline from 5.7 percent in 1997 to 4.8 percent in 1998 and 4.2
percent in 1999, in part because growth in bonus payments is expected to slow
down, a distinct shift from the torrid rate of the last few years. Overall
employment growth is expected to be 1.9 percent in 1998, the strongest in a
decade, but will drop to 1.0 percent in 1999, reflecting the slowing growth in
the national economy, continued restraint in governmental spending, and
restructuring in the health care, social service, and banking sectors.
There can be no assurance that the State economy will not experience
worse-than-predicted results, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.
State Budget
The State Constitution requires the governor (the "Governor") to submit to
the State legislature (the "Legislature") a balanced executive budget which
contains a complete plan of expenditures for the ensuing fiscal year and all
moneys and revenues estimated to be available therefor, accompanied by bills
containing all proposed appropriations or reappropriations and any new or
modified revenue measures to be enacted in connection with the executive budget.
The entire plan constitutes the proposed State financial plan for that fiscal
year. The Governor is required to submit to the Legislature quarterly budget
updates which include a revised cash-basis state financial plan, and an
explanation of any changes from the previous state financial plan.
State law requires the Governor to propose a balanced budget each year. In
recent years, the State has closed projected budget gaps of $5.0 billion
(1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than $1
billion (1998-99). The State, as a part of the 1998-99 Executive Budget
projections submitted to the Legislature in February 1998, projected a 1999-00
General Fund budget gap of approximately $1.7 billion and a 2000-01 gap of $3.7
billion. As a result of changes made in the 1998-99 enacted budget, the 1999-00
gap is now expected to be roughly $1.3 billion, or about $400 million less than
previously
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<PAGE> 51
projected, after application of reserves created as part of the 1998-99 budget
process. Such reserves would not be available against subsequent year
imbalances.
Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of
higher-than-projected tax receipts and in lower-than-expected entitlement
spending. However, the State's projections in 1999-00 currently assume actions
to achieve $600 million in lower disbursements and $250 million in additional
receipts from the settlement of State claims against the tobacco industry.
Consistent with past practice, the projections do not include any costs
associated with new collective bargaining agreements after the expiration of the
current round of contracts at the end of the 1998-99 fiscal year. The State
expects that the 1990-00 Financial Plan will achieve savings from initiatives by
State agencies to deliver services more efficiently, workforce management
efforts, maximization of federal and non-General Fund spending offsets, and
other actions necessary to bring projected disbursements and receipts into
balance.
The State will formally update its outyear projections of receipts and
disbursements for the 2000-01 and 2001-02 fiscal years as a part of the 1999-00
Executive Budget process, as required by law. The revised expectations for years
2000-01 and 2001-02 will reflect the cumulative impact of tax reductions and
spending commitments enacted over the last several years as well as new 1999-00
Executive Budget recommendations. The School Tax Relief Program ("STAR")
program, which dedicates a portion of personal income tax receipts to fund
school tax reductions, has a significant impact on General Fund receipts. STAR
is projected to reduce personal income tax revenues available to the General
Fund by an estimated $1.3 billion in 2000-01. Measured from the 1998-99 base,
scheduled reductions to estate and gift, sales and other taxes, reflecting tax
cuts enacted in 1997-98 and 1998-99, will lower General Fund taxes and fees by
an estimated $1.8 billion in 2000-01. Disbursement projections for the outyears
currently assume additional outlays for school aid, Medicaid, welfare reform,
mental health community reinvestment, and other multi-year spending commitments
in law.
On September 11, 1997, the New York State Comptroller issued a report which
noted that the ability to deal with future budget gaps could become a
significant issue in the State's 2000-2001 fiscal year, when the cost of tax
cuts increases by $1.9 billion. The report contained projections that, based on
current economic conditions and current law for taxes and spending, showed a gap
in the 2000-2001 State fiscal year of $5.6 billion and of $7.4 billion in the
2001-2002 State fiscal year. The report noted that these gaps would be smaller
if recurring spending reductions produce savings in earlier years. The State
Comptroller has also stated that if Wall Street earnings moderate and the State
experiences a moderate recession, the gap for the 2001-2002 State fiscal year
could grow to nearly $12 billion.
The State's current fiscal year began on April 1, 1998 and ends on March
31, 1999 and is referred to herein as the State's 1998-99 fiscal year. The
Legislature adopted the debt service component of the State budget for the
1998-99 fiscal year on March 30, 1998 and the remainder of the budget on April
18, 1998. In the period prior to adoption of the budget for the current fiscal
year, the Legislature also enacted appropriations to permit the State to
continue its operations and provide for other purposes. On April 25, 1998, the
Governor
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vetoed certain items that the Legislature added to the Executive
Budget. The Legislature had not overridden any of the Governor's vetoes as of
the start of the legislative recess on June 19, 1998 (under the State
Constitution, the Legislature can override one or more of the Governor's vetoes
with the approval of two-thirds of the members of each house).
General Fund disbursements in 1998-99 are now projected to grow by $2.43
billion over 1997-98 levels, or $690 million more than proposed in the
Governor's Executive Budget, as amended. The change in General Fund
disbursements from the Executive Budget to the enacted budget reflects
legislative additions (net of the value of the Governor's vetoes), actions taken
at the end of the regular legislative session, as well as spending that was
originally anticipated to occur in 1997-98 but is now expected to occur in
1998-99. The State projects that the 1998-99 State Financial Plan is balanced on
a cash basis, with an estimated reserve for future needs of $761 million.
The State's enacted budget includes several new multi-year tax reduction
initiatives, including acceleration of State-funded property and local income
tax relief for senior citizens under the STAR, expansion of the child care
income-tax credit for middle-income families, a phased-in reduction of the
general business tax, and reduction of several other taxes and fees, including
an accelerated phase-out of assessments on medical providers. The enacted budget
also provides for significant increases in spending for public schools, special
education programs, and for the State and City university systems. It also
allocates $50 million for a new Debt Reduction Reserve Fund ("DRRF") that may
eventually be used to pay debt service costs on or to prepay outstanding
State-supported bonds.
The 1998-99 State Financial Plan projects a closing balance in the General
Fund of $1.42 billion that is comprised of a reserve of $761 million available
for future needs, a balance of $400 million in the Tax Stabilization Reserve
Fund ("TSRF"), a balance of $158 million in the Community Projects Fund ("CPF"),
and a balance of $100 million in the Contingency Reserve Fund ("CRF"). The TSRF
can be used in the event of an unanticipated General Fund cash operating
deficit, as provided under the State Constitution and State Finance Law. The CPF
is used to finance various legislative and executive initiatives. The CRF
provides resource to help finance any extraordinary litigation costs during the
fiscal year.
The forecast of General Fund receipts in 1998-99 incorporates several
Executive Budget tax proposals that, if enacted, would further reduce receipts
otherwise available to the General Fund by approximately $700 million during
1998-99. The Executive Budget proposes accelerating school tax relief for senior
citizens under STAR, which is projected to reduce General Fund receipts by $537
million in 1998-99. The proposed reduction supplements STAR tax reductions
already scheduled in law, which are projected at $187 million in 1998-99. The
Budget also proposes several new tax-cut initiatives and other funding changes
that are projected to further reduce receipts available to the General Fund by
over $200 million. These initiatives include reducing the fee to register
passenger motor vehicles and earmarking a larger portion of such fees to
dedicated funds and other purposes; extending the number of weeks in which
certain clothing purchases are exempt from sales taxes; more fully conforming
State law to reflect recent Federal changes in estate taxes; continuing lower
pari-mutuel tax rates; and accelerating scheduled property tax relief for
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<PAGE> 53
farmers from 1999 to 1998. In addition to the specific tax and fee reductions
discussed above, the Executive Budget also proposes establishing a reserve of
$100 million to permit the acceleration into 1998-99 of other tax reductions
that are otherwise scheduled in law for implementation in future fiscal years.
The Division of the Budget ("DOB") estimates that the 1998-99 Financial
Plan includes approximately $64 million in non-recurring resources, comprising
less than two-tenths of one percent of General Fund disbursements. The
non-recurring resources projected for use in 1998-99 consist of $27 million in
retroactive federal welfare reimbursements for family assistance recipients with
HIV/AIDS, $25 million in receipts from the Housing Finance Agency that were
originally anticipated in 1997-98, and $10 million in other measures, including
$5 million in asset sales.
Disbursements from Capital Projects funds in 1998-99 are estimated at $4.82
billion, or $1.07 billion higher than 1997-98. The proposed spending plan
includes: $2.51 billion in disbursements for transportation purposes, including
the State and local highway and bridge program; $815 million for environmental
activities; $379 million for correctional services; $228 million for the State
University of New York ("SUNY") and the City University of New York ("CUNY");
$290 million for mental hygiene projects; and $375 million for CEFAP.
Approximately 28 percent of capital projects are proposed to be financed by
"pay-as-you-go" resources. State-supported bond issuances finance 46 percent of
capital projects, with federal grants financing the remaining 26 percent.
Many complex political, social and economic forces influence the State's
economy and finances, which may in turn affect the State's Financial Plan. These
forces may affect the State unpredictably from fiscal year to fiscal year and
are influenced by governments, institutions, and organizations that are not
subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. The DOB believes that its projections
of receipts and disbursements relating to the current State Financial Plan, and
the assumptions on which they are based, are reasonable. Actual results,
however, could differ materially and adversely from their projections, and those
projections may be changed materially and adversely from time to time.
In the past, the State has taken management actions and made use of
internal sources to address potential State financial plan shortfalls, and the
DOB believes it could take similar actions should variances occur in its
projections for the current fiscal year.
Recent Financial Results
The General Fund is the principal operating fund of the State and is used
to account for all financial transactions, except those required to be accounted
for in another fund. It is the State's largest fund and receives almost all
State taxes and other resources not dedicated to particular purposes.
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On March 31, 1998, the State recorded, on a GAAP-basis, its first-ever,
accumulated positive balance in its General Fund. This "accumulated surplus" was
$567 million. The improvement in the State's GAAP position is attributable, in
part, to the cash surplus recorded at the end of the State's 1997-98 fiscal
year. Much of that surplus is reserved for future requirements, but a portion is
being used to meet spending needs in 1998-99. Thus, the State expects some
deterioration in its GAAP position, but expects to maintain a positive GAAP
balance through the end of the current fiscal year.
The State completed its 1997-98 fiscal year with a combined Governmental
Funds operating surplus of $1.80 billion, which included an operating surplus in
the General Fund of $1.56 billion, in Capital Projects Funds of $232 million and
in Special Revenue Funds of $49 million, offset in part by an operating deficit
of $43 million in Debt Service Funds.
The State reported a General Fund operating surplus of $1.56 billion for
the 1997-98 fiscal year, as compared to an operating surplus of $1.93 billion
for the 1996-97 fiscal year. As a result, the State reported an accumulated
surplus of $567 million in the General Fund for the first time since it began
reporting its operations on a GAAP-basis. The 1997-98 fiscal year operating
surplus reflects several major factors, including the cash-basis operating
surplus resulting from the higher-than-anticipated personal income tax receipts,
an increase in taxes receivable of $681 million, an increase in other assets of
$195 million and a decrease in pension liabilities of $144 million. This was
partially offset by an increase in payables to local governments of $270 million
and tax refunds payable of $147 million.
Debt Limits and Outstanding Debt
There are a number of methods by which the State of New York may incur
debt. Under the State Constitution, the State may not, with limited exceptions
for emergencies, undertake long-term general obligation borrowing (i.e.,
borrowing for more than one year) unless the borrowing is authorized in a
specific amount for a single work or purpose by the Legislature and approved by
the voters. There is no limitation on the amount of long-term general obligation
debt that may be so authorized and subsequently incurred by the State.
The State may undertake short-term borrowings without voter approval (i) in
anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes, and (ii) in anticipation of the receipt of proceeds from the
sale of duly authorized but unissued general obligation bonds, by issuing bond
anticipation notes. The State may also, pursuant to specific constitutional
authorization, directly guarantee certain obligations of the State of New York's
authorities and public benefit corporations ("Authorities"). Payments of debt
service on New York State general obligation and New York State-guaranteed bonds
and notes are legally enforceable obligations of the State of New York.
The State employs additional long-term financing mechanisms, lease-purchase
and contractual-obligation financings, which involve obligations of public
authorities or municipalities that are State-supported but are not general
obligations of the State. Under
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these financing arrangements, certain public authorities and municipalities have
issued obligations to finance the construction and rehabilitation of facilities
or the acquisition and rehabilitation of equipment, and expect to meet their
debt service requirements through the receipt of rental or other contractual
payments made by the State. Although these financing arrangements involve a
contractual agreement by the State to make payments to a public authority,
municipality or other entity, the State's obligation to make such payments is
generally expressly made subject to appropriation by the Legislature and the
actual availability of money to the State for making the payments. The State has
also entered into a contractual-obligation financing arrangement with the local
Government Assistance Corporation to restructure the way the State makes certain
local aid payments.
In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
structure. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities had been suspended since the Governor
took office in 1995. As a result of the structural imbalances in JDA's capital
structure, and defaults in its loan portfolio and loan guarantee program
incurred between 1991 and 1996, JDA would have experienced a debt service cash
flow shortfall had it not completed its recent refinancing. JDA anticipates that
it will transact additional refinancings in 1999, 2000 and 2003 to complete its
long-term plan of finance and further alleviate cash flow imbalances which are
likely to occur in future years. JDA recently resumed its lending activities
under a revised set of lending programs and underwriting guidelines.
On January 13, 1992, S&P reduced its ratings on the State's general
obligation bonds from A to A- and, in addition, reduced its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. On August 28, 1997, S&P revised its ratings on the State's general
obligation bonds from A- to A and revised its ratings on the State's moral
obligation, lease purchase, guaranteed and contractual obligation debt. On March
2, 1998, S&P affirmed its A rating on the State's outstanding bonds.
On January 6, 1992, Moody's reduced its ratings on outstanding
limited-liability State lease purchase and contractual obligations from A to
Baa1. On February 28, 1994, Moody's reconfirmed its A rating on the State's
general obligation long-term indebtedness. On March 20, 1998, Moody's assigned
the highest commercial paper rating of P-1 to the short-term notes of the State.
On July 6, 1998, Moody's assigned an A2 rating with a stable outlook to the
State's general obligations.
The State anticipates that its capital programs will be financed, in part,
through borrowings by the State and its public authorities in the 1998-99 fiscal
year. Information on the State's five-year Capital Program and Financing Plan
for the 1998-99 through 2002-03 fiscal years, updated to reflect actions taken
in the 1998-99 State budget (the "Plan"), was released on July 30, 1998. The
projection of State borrowings for the 1998-99 fiscal year is subject to change
as market conditions, interest rates and other factors vary throughout the
fiscal year.
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<PAGE> 56
The State expects to issue $528 million in general obligation bonds
(including $154 million for purposes of redeeming outstanding BANs) and $154
million in general obligation commercial paper. The State also anticipates the
issuance of up to a total of $419 million in Certificates of Participation to
finance equipment purchases (including costs of issuance, reserve funds, and
other costs) during the 1998-99 fiscal year. Of this amount, it is anticipated
that approximately $191 million will be issued to finance agency equipment
acquisitions, including amounts to address Statewide technology issues related
to Year 2000 compliance. Approximately $228 million will also be issued to
finance equipment acquisitions for welfare reform-related information technology
systems.
Borrowings by public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total approximately $2.93 billion, including costs of issuance,
reserve funds, and other costs, net of anticipated refundings and other
adjustments in 1998-99.
As a part of the Plan, changes were proposed to the State's borrowing plan,
including: the delay in the issuance of COPs to finance welfare information
systems until 1998-99 to permit a thorough assessment of needs; and the
elimination of issuances for the CEFAP to reflect the proposed conversion of
that bond-financed program to pay-as-you-go financing.
New York State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
Litigation
Certain litigation pending against New York State or its officers or
employees could have a substantial or long-term adverse effect on New York State
finances. Among the more significant of these cases are those that involve (1)
the validity of agreements and treaties by which various Indian tribes
transferred title to New York State of certain land in central and upstate New
York; (2) certain aspects of New York State's Medicaid policies, including its
rates, regulations and procedures; (3) action against New York State and New
York City officials alleging inadequate shelter allowances to maintain proper
housing; (4) alleged responsibility of New York State officials to assist in
remedying racial segregation in the City of Yonkers; (5) challenges to
regulations promulgated by the Superintendent of Insurance establishing certain
excess medical malpractice premium rates; (6) challenges to the
constitutionality of Public Health Law 2807-d, which imposes a gross receipts
tax from certain patient care services; (7) action seeking enforcement of
certain sales and excise taxes and tobacco products and motor fuel sold to
non-Indian consumers on Indian reservations; and (8) a challenge to the
Governor's application of his constitutional line item veto authority.
Several actions challenging the constitutionality of legislation enacted
during the 1990 legislative session which changed actuarial funding methods for
determining state and local contributions to state employee retirement systems
have been decided against the State.
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<PAGE> 57
As a result, the Comptroller developed a plan to restore the State's
retirement systems to prior funding levels. Such funding is expected to exceed
prior levels by $116 million in fiscal 1996-97, $193 million in fiscal 1997-98,
peaking at $241 million in fiscal 1998-99. Beginning in fiscal 2001-02, State
contributions required under the Comptroller's plan are projected to be less
than that required under the prior funding method. As a result of the United
States Supreme Court decision in the case of State of Delaware v. State of New
York, on January 21, 1994, the State entered into a settlement agreement with
various parties. Pursuant to all agreements executed in connection with the
action, the State was required to make aggregate payments of $351.4 million.
Annual payments to the various parties will continue through the State's 2002-03
fiscal year in amounts which will not exceed $48.4 million in any fiscal year
subsequent to the State's 1994-95 fiscal year. Litigation challenging the
constitutionality of the treatment of certain moneys held in a reserve fund was
settled in June 1996 and certain amounts in a Supplemental Reserve Fund
previously credited by the State against prior State and local pension
contributions will be paid in 1998.
The legal proceedings noted above involve State finances, State programs
and miscellaneous cure rights, tort, real property and contract claims in which
the State is a defendant and the monetary damages sought are substantial,
generally in excess of $100 million. These proceedings could affect adversely
the financial condition of the State in the 1998-99 fiscal year or thereafter.
Adverse developments in these proceedings, other proceedings for which there are
unanticipated, unfavorable and material judgments, or the initiation of new
proceedings could affect the ability of the State to maintain a balanced
financial plan. An adverse decision in any of these proceedings could exceed the
amount of the reserve established in the State's financial plan for the payment
of judgments and, therefore, could affect the ability of the State to maintain a
balanced financial plan.
Although other litigation is pending against New York State, except as
described herein, no current litigation involves New York State's authority, as
a matter of law, to contract indebtedness, issue its obligations, or pay such
indebtedness when it matures, or affects New York State's power or ability, as a
matter of law, to impose or collect significant amounts of taxes and revenues.
Authorities
The fiscal stability of New York State is related, in part, to the fiscal
stability of its Authorities, which generally have responsibility for financing,
constructing and operating revenue-producing public benefit facilities.
Authorities are not subject to the constitutional restrictions on the incurrence
of debt which apply to the State itself, and may issue bonds and notes within
the amounts of, and as otherwise restricted by, their legislative authorization.
The State's access to the public credit markets could be impaired, and the
market price of its outstanding debt may be materially and adversely affected,
if any of the Authorities were to default on their respective obligations,
particularly with respect to debt that is State-supported or State-related.
Authorities are generally supported by revenues generated by the projects
financed or operated, such as fares, user fees on bridges, highway tolls and
rentals for
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<PAGE> 58
dormitory rooms and housing. In recent years, however, New York State has
provided financial assistance through appropriations, in some cases of a
recurring nature, to certain of the Authorities for operating and other expenses
and, in fulfillment of its commitments on moral obligation indebtedness or
otherwise, for debt service. This operating assistance is expected to continue
to be required in future years. In addition, certain statutory arrangements
provide for State local assistance payments otherwise payable to localities to
be made under certain circumstances to certain Authorities. The State has no
obligation to provide additional assistance to localities whose local assistance
payments have been paid to Authorities under these arrangements. However, in the
event that such local assistance payments are so diverted, the affected
localities could seek additional State funds.
New York City and Other Localities
The fiscal health of the State may also be impacted by the fiscal health of
its localities, particularly the City, which has required and continues to
require significant financial assistance from the State. The City depends on
State aid both to enable the City to balance its budget and to meet its cash
requirements. There can be no assurance that there will not be reductions in
State aid to the City from amounts currently projected or that State budgets
will be adopted by the April 1 statutory deadline or that any such reductions or
delays will not have adverse effects on the City's cash flow or expenditures. In
addition, the Federal budget negotiation process could result in a reduction in
or a delay in the receipt of Federal grants which could have additional adverse
effects on the City's cash flow or revenues.
In 1975, New York City suffered a fiscal crisis that impaired the borrowing
ability of both the City and New York State. In that year the City lost access
to the public credit markets. The City was not able to sell short-term notes to
the public again until 1979. In 1975, S&P suspended its A rating of City bonds.
This suspension remained in effect until March 1981, at which time the City
received an investment grade rating of BBB from S&P.
On July 2, 1985, S&P revised its rating of City bonds upward to BBB+ and on
November 19, 1987, to A-. On February 3, 1998 and again on May 27, 1998, S&P
assigned a BBB+ rating to the City's general obligation debt and placed the
ratings on CreditWatch with positive implications.
Moody's ratings of City bonds were revised in November 1981 from B (in
effect since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in
May 1988 to A and again in February 1991 to Baa1. On February 25, 1998, Moody's
upgraded nearly $28 billion of the City's general obligations from Baa1 to A3.
On June 9, 1998, Moody's again assigned on A3 rating to the City's general
obligations and stated that its outlook was stable.
New York City is heavily dependent on New York State and federal assistance
to cover insufficiencies in its revenues. There can be no assurance that in the
future federal and State assistance will enable the City to make up its budget
deficits. To help alleviate the City's financial difficulties, the Legislature
created the Municipal Assistance Corporation ("MAC") in 1975. Since its
creation, MAC has provided, among other things, financing
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<PAGE> 59
assistance to the City by refunding maturing City short-term debt and
transferring to the City funds received from sales of MAC bonds and notes. MAC
is authorized to issue bonds and notes payable from certain stock transfer tax
revenues, from the City's portion of the State sales tax derived in the City
and, subject to certain prior claims, from State per capita aid otherwise
payable by the State to the City. Failure by the State to continue the
imposition of such taxes, the reduction of the rate of such taxes to rates less
than those in effect on July 2, 1975, failure by the State to pay such aid
revenues and the reduction of such aid revenues below a specified level are
included among the events of default in the resolutions authorizing MAC's
long-term debt. The occurrence of an event of default may result in the
acceleration of the maturity of all or a portion of MAC's debt. MAC bonds and
notes constitute general obligations of MAC and do not constitute an enforceable
obligation or debt of either the State or the City.
Since 1975, the City's financial condition has been subject to oversight
and review by the New York State Financial Control Board (the "Control Board")
and since 1978 the City's financial statements have been audited by independent
accounting firms. To be eligible for guarantees and assistance, the City is
required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal years covering the City and certain
agencies showing balanced budgets determined in accordance with GAAP. New York
State also established the Office of the State Deputy Comptroller for New York
City ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. On June 30, 1986, the City satisfied the statutory
requirements for termination of the control period. This means that the Control
Board's powers of approval are suspended, but the Board continues to have
oversight responsibilities.
On June 10, 1997, the City submitted to the Control Board the Financial
Plan (the "1998-2001 Financial Plan") for the 1998 through 2001 fiscal years,
relating to the City, the Board of Education ("BOE") and CUNY and reflected the
City's expense and capital budgets for the 1998 fiscal year, which were adopted
on June 6, 1997. The 1998-2001 Financial Plan projected revenues and
expenditures for the 1998 fiscal year balanced in accordance with GAAP. The
1998-99 Financial Plan projects General Fund receipts (including transfers from
other funds) of $36.22 billion, an increase of $1.02 billion over the estimated
1997-1998 level. Recurring growth in the State General Fund tax base is
projected to be approximately six percent during 1998-99, after adjusting for
tax law and administrative changes. This growth rate is lower than the rates for
1996-97 or currently estimated for 1997-98, but roughly equivalent to the rate
for 1995-96.
The 1998-99 forecast for user taxes and fees also reflects the impact of
scheduled tax reductions that will lower receipts by $38 million, as well as the
impact of two Executive Budget proposals that are projected to lower receipts by
an additional $79 million. The first proposal would divert $30 million in motor
vehicle registration fees from the General Fund to the Dedicated Highway and
Bridge Trust Fund; the second would reduce fees for motor vehicle registrations,
which would further lower receipts by $49 million. The underlying growth of
receipts in this category is projected at 4 percent, after adjusting for these
scheduled and recommended changes.
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In comparison to the current fiscal year, business tax receipts are
projected to decline slightly in 1998-99, falling from $4.98 million to $4.96
billion. The decline in this category is largely attributable to scheduled tax
reductions. In total, collections for corporation and utility taxes and the
petroleum business tax are projected to fall by $107 million from 1997-98. The
decline in receipts in these categories is partially offset by growth in the
corporation franchise, insurance and bank taxes, which are projected to grow by
$88 million over the current fiscal year.
The Financial Plan is projected to show a GAAP-basis surplus of $131
million for 1997-98 and a GAAP-basis deficit of $1.3 billion for 1998-99 in the
General Fund, primarily as a result of the use of the 1997-98 cash surplus. In
1998-99, the General Fund GAAP Financial Plan shows total revenues of $34.68
billion, total expenditures of $35.94 billion, and net other financing sources
and uses of $42 million.
Although the City has maintained balanced budgets in each of its last
eighteen fiscal years and is projected to achieve balanced operating results for
the 1999 fiscal year, there can be no assurance that the gap-closing actions
proposed in the 1998-2001 Financial Plan can be successfully implemented or that
the City will maintain a balanced budget in future years without additional
State aid, revenue increases or expenditure reductions. Additional tax increases
and reductions in essential City services could adversely affect the City's
economic base.
The projections set forth in the 1998-2001 Financial Plan were based on
various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly affect the City's
ability to balance its budget as required by State law and to meet its annual
cash flow and financing requirements. Such assumptions and contingencies include
the condition of the regional and local economies, the impact on real estate tax
revenues of the real estate market, wage increases for City employees consistent
with those assumed in the 1998-2001 Financial Plan, employment growth, the
ability to implement proposed reductions in City personnel and other cost
reduction initiatives, the ability of the Health and Hospitals Corporation and
the BOE to take actions to offset reduced revenues, the ability to complete
revenue generating transactions, provision of State and Federal aid and mandate
relief and the impact on City revenues and expenditures of Federal and State
welfare reform and any future legislation affecting Medicare or other
entitlements.
Implementation of the 1998-2001 Financial Plan is also dependent upon the
City's ability to market its securities successfully. The City's financing
program for fiscal years 1998 through 2001 contemplates the issuance of $5.7
billion of general obligation bonds and $5.7 billion of bonds to be issued by
the proposed New York City Transitional Finance Authority (the "Finance
Authority") to finance City capital projects. The Finance Authority, was created
as part of the City's effort to assist in keeping the City's indebtedness within
the forecast level of the constitutional restrictions on the amount of debt the
City is authorized to incur. Despite this additional financing mechanism, the
City currently projects that, if no further action is taken, it will reach its
debt limit in City fiscal year 1999-2000. Indebtedness subject to the
constitutional debt limit includes liability on capital contracts that are
expected to
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be funded with general obligation bonds, as well as general obligation bonds. On
June 2, 1997, an action was commenced seeking a declaratory judgment declaring
the legislation establishing the Transitional Finance Authority to be
unconstitutional. If such legislation were voided, projected contracts for the
City capital projects would exceed the City's debt limit during fiscal year
1997-98. Future developments concerning the City or entities issuing debt for
the benefit of the City, and public discussion of such developments, as well as
prevailing market conditions and securities credit ratings, may affect the
ability or cost to sell securities issued by the City or such entities and may
also affect the market for their outstanding securities.
The City Comptroller and other agencies and public officials have issued
reports and made public statements which, among other things, state that
projected revenues and expenditures may be different from those forecast in the
City's financial plans. It is reasonable to expect that such reports and
statements will continue to be issued and to engender public comment.
The City since 1981 has fully satisfied its seasonal financing needs in the
public credit markets, repaying all short-term obligations within their fiscal
year of issuance. Although the City's 1998 fiscal year financial plan projected
$2.4 billion of seasonal financing, the City expected to undertake only
approximately $1.4 billion of seasonal financing. The City issued $2.4 billion
of short-term obligations in fiscal year 1997. Seasonal financing requirements
for the 1996 fiscal year increased to $2.4 billion from $2.2 billion and $1.75
billion in the 1995 and 1994 fiscal years, respectively. Seasonal financing
requirements were $1.4 billion in the 1993 fiscal year. The delay in the
adoption of the State's budget in certain past fiscal years has required the
City to issue short-term notes in amounts exceeding those expected early in such
fiscal years.
Certain localities, in addition to the City, have experienced financial
problems and have requested and received additional New York State assistance
during the last several State fiscal years. The potential impact on the State of
any future requests by localities for additional assistance is not included in
the State's projections of its receipts and disbursements for the 1997-98 fiscal
year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the re-establishment of the Financial Control Board for the City of Yonkers
(the "Yonkers Board") by New York State in 1984. The Yonkers Board is charged
with oversight of the fiscal affairs of Yonkers. Future actions taken by the
State to assist Yonkers could result in increased State expenditures for
extraordinary local assistance.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the city of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding. Troy MAC has issued
bonds to effect a restructuring of the City of Troy's obligations.
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Eighteen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities, and that was largely continued in 1997. Twenty-eight
municipalities were scheduled to share in more than $32 million in targeted
unrestricted aid allocated in the 1997-98 budget. An additional $21 million will
be dispersed among all cities, towns and villages, a 3.97% increase in General
Purpose State Aid.
The 1998-99 budget includes an additional $29.4 million in unrestricted aid
targeted to 57 municipalities across the State. Other assistance for
municipalities with special needs totals more than $25.6 million. Twelve upstate
cities will receive $24.2 million in one-time assistance from a cash flow
acceleration of State aid.
Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. In 1996, the total indebtedness of all localities in
the State other than New York City was approximately $20.0 billion. A small
portion (approximately $77.2 million) of that indebtedness represented borrowing
to finance budgetary deficits and was issued pursuant to enabling State
legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City that are authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
From time to time, federal expenditure reductions could reduce, or in some
cases eliminate, federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities. If
the State, the City or any of the Authorities were to suffer serious financial
difficulties jeopardizing their respective access to the public credit markets,
the marketability of notes and bonds issued by localities within the State could
be adversely affected. Localities also face anticipated and potential problems
resulting from certain pending litigation, judicial decisions and long-range
economic trends. Long-range potential problems of declining urban population,
increasing expenditures and other economic trends could adversely affect
localities and require increasing the State assistance in the future.
Year 2000 Compliance
The State is currently addressing "Year 2000" data processing compliance
issues. The Year 2000 compliance issue ("Y2K") arises because most computer
software programs allocate two digits to the data field for "year" on the
assumption that the first two digits will be "19". Such programs will thus
interpret the year 2000 as the year 1900 absent reprogramming. Y2K could impact
both the ability to enter data into computer programs and the ability of such
programs to correctly process data.
The Office for Technology is monitoring compliance on a quarterly basis and
is providing assistance and assigning resources to accelerate compliance for
mission critical systems, with most compliance testing expected to be completed
by mid-1999. There can be no guarantee, however, that all of the State's
mission-critical and high-priority computer
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systems will be Year 2000 compliant and that there will not be an adverse impact
upon State operations or State finances as a result.
MANAGEMENT OF THE FUNDS
Officers and Boards of Directors/Trustees
The business and affairs of the Global Fixed Income and Intermediate
Government Funds are managed by the Board of Directors in accordance with the
laws of the State of Maryland. The business and affairs of the Fixed Income and
New York Municipal Funds are managed by a Board of Trustees in accordance with
the laws of The Commonwealth of Massachusetts. Each Board elects officers who
are responsible for the day-to-day operations of a Fund and who execute policies
authorized by the Board. Under each Fund's Charter, a Board may classify or
reclassify any unissued shares of the Funds into one or more additional classes
by setting or changing in any one or more respects their relative rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption. A Board may similarly classify or reclassify any class
of its shares into one or more series and, without shareholder approval, may
increase the number of authorized shares of the Funds.
The names (and ages) of the Funds' Directors/Trustees and officers, their
addresses, present positions and principal occupations during the past five
years and other affiliations are set forth below.
<TABLE>
<S> <C>
Richard H. Francis (67) Director/Trustee
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/Trustee
2425 North Fish Creek Road Private investor; Consultant and
P.O. Box 483 Director of Fritz Broadcasting, Inc.
Wilson, Wyoming 83014 and Fritz Communications (developers
and operators of radio stations);
Director of Advo, Inc. (direct mail
advertising); Director/Trustee of
other Warburg Pincus Funds.
</TABLE>
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<TABLE>
<S> <C>
Jeffrey E. Garten (53) Director/Trustee
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. (69) Director/Trustee
29 The Trillium Currently retired; President and Chief
Pittsburgh, Pennsylvania 15238 Operating Officer of National
InterGroup, Inc. from April 1989 to
March 1991; Chairman of Permian Oil
Co. from April 1989 to March 1991;
Director of Education Management
Corp., Tyco International Ltd.;
Trustee, BT Insurance Funds Trust;
Director/Trustee of other Warburg
Pincus Funds and other CSAM-advised
investment companies.
William W. Priest* (58) Chairman of the Board
153 East 53rd Street Chairman- Management Committee, Chief
New York, New York 10022 Executive Officer and Managing
Director of CSAM (U.S.) since 1990;
Director of TIG Holdings, Inc.;
Director/Trustee of other Warburg
Pincus Funds and other CSAM-advised
investment companies.
</TABLE>
- ----------------------
Indicates a Director/Trustee who is an "interested person" of the Fund as
defined in the 1940 Act.
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<PAGE> 65
<TABLE>
<S> <C>
Steven N. Rappaport (51) Director/Trustee
40 East 52nd Street President of Loanet, Inc. since 1997;
New York, New York 10022 Executive Vice President of Loanet,
Inc. from 1994 to 1997; Director,
President, North American Operations,
and former Executive Vice President
from 1992 to 1993 of Worldwide
Operations of Metallurg Inc.;
Executive Vice President, Telerate,
Inc. from 1987 to 1992; Partner in the
law firm of Hartman & Craven until
1987; Director/Trustee of other
Warburg Pincus Funds and other
CSAM-advised investment companies.
Alexander B. Trowbridge (70) Director/Trustee
1317 F Street, N.W., 5th Floor Currently retired; President of
Washington, DC 20004 Trowbridge 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
New York, New York 10017-3147 with CSAM since CSAM acquired the
Funds' predecessor adviser in July
1999; with the predecessor adviser
since 1991; Vice President of
Citibank, N.A. from 1987 to 1991;
Officer of CSAMSI and of other
investment companies in the
Warburg Pincus family of funds.
</TABLE>
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<TABLE>
<S> <C>
Hal Liebes, Esq. (35) Vice President and Secretary
153 East 53rd Street Managing Director and General Counsel
New York, New York 10022 of CSAM; Associated with Lehman
Brothers, Inc. from 1996 to 1997;
Associated with CSAM from 1995 to
1996; Associated with CS First Boston
Investment Management from 1994 to
1995; Associated with Division of
Enforcement, U.S. Securities and
Exchange Commission from 1991 to 1994;
Officer of CSAMSI, other Warburg
Pincus Funds and other CSAM-advised
investment companies.
Michael A. Pignataro (40) Treasurer and Chief Financial Officer
153 East 53rd Street Vice President and Director of Fund
New York, New York 10022 Administration of CSAM; Associated
with CSAM since 1984; Officer of other
Warburg Pincus Funds and other
CSAM-advised investment companies.
Stuart J. Cohen, Esq. (31) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel of
New York, New York 10017-3147 CSAM; Associated with CSAM since CSAM
acquired the Funds' predecessor
adviser in July 1999; with the
predecessor adviser since 1997;
Associated with the law firm of Gordon
Altman Butowsky Weitzen Shalov & Wein
from 1995 to 1997; Officer of other
Warburg Pincus Funds.
</TABLE>
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<PAGE> 67
<TABLE>
<S> <C>
Rocco A. DelGuercio (36) Assistant Treasurer
153 East 53rd Street Assistant Vice President and
New York, New York 10022 Administrative Officer of CSAM;
Associated with CSAM since June 1996;
Assistant Treasurer, Bankers Trust
Corp. -- Fund Administration from
March 1994 to June 1996; Mutual Fund
Accounting Supervisor, Dreyfus
Corporation from April 1987 to March
1994; Officer of other Warburg Pincus
Funds and other CSAM-advised
investment companies.
</TABLE>
No employee of CSAM, PFPC Inc., the Funds' co-administrator ("PFPC"), or
any of their affiliates receives any compensation from the Funds for acting as
an officer or director/trustee of a Fund. Each Director who is not a director,
trustee, officer or employee of CSAM, PFPC or any of their affiliates receives
an annual fee of $2,000, and $500 for each meeting of the Board and $250 for
each Audit Committee Meeting, as applicable, attended by him for his services as
Director and is reimbursed for expenses incurred in connection with his
attendance at Board meetings.
Directors'/Trustees' Compensation
(for fiscal year ended October 31, 1998)
<TABLE>
<CAPTION>
Total Compensation from
all Investment Companies
Total Compensation in Warburg Pincus Fund
Name of Director/Trustee from a Fund Complex*
- ------------------------ ----------- --------
<S> <C> <C>
William W. Priest None** None**
Arnold M. Reichman+ None **None**
Richard N. Cooper*** $2,000 $56,600
Donald J. Donahue*** $2,000 $13,525
Richard H. Francis**** None None
Jack W. Fritz $2,000 $63,100
Jeffrey E. Garten**** $2,000 $49,325
Thomas A. Melfe*** $2,000 $60,700
James S. Pasman, Jr.**** None None
Steven N. Rappaport**** None None
Alexander B. Trowbridge $2,000 $64,000
</TABLE>
* Each Director/Trustee serves as a Director or Trustee of 51 investment
companies and portfolios in the Warburg Pincus family of funds.
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<PAGE> 68
** Mr. Priest receives compensation as an affiliate of CSAM, and, accordingly,
receives no compensation from any Fund or any other investment company
advised by CSAM.
*** Mr. Donahue resigned as a Director/Trustee of each Fund effective February
6, 1998. Messrs. Cooper and Melfe resigned as a Director/Trustee of each
Fund effective July 6, 1999.
**** Mr. Garten became a Director/Trustee of each Fund effective February 6,
1998. Messrs. Francis, Pasman and Rappaport became Directors/Trustees of
the Funds effective July 6, 1999.
+ Mr. Reichman resigned as a Director/Trustee of each Fund effective February
6, 1998. Mr. Reichman had been an employee of CSAM and, accordingly, had
received no compensation from any Fund or any other investment company
advised by CSAM.
As of January 31, 1999, the Directors and officers of each Fund as a group
owned less than 1% of the outstanding shares of each Fund.
Portfolio Managers of the Funds
Mr. M. Anthony E. van Daalen, Portfolio Manager of the Intermediate
Government Fund and Fixed Income Fund, earned a B.A. degree from Wesleyan
University and a M.B.A. degree from New York University. Mr. van Daalen has been
associated with CSAM since CSAM acquired the Funds' predecessor adviser in July
1999 and joined the predecessor adviser in 1992, specializing in government and
high yield bonds. Prior to that Mr. van Daalen was an assistant vice president,
portfolio manager at Citibank in the Private Banking Group from 1985 to 1991.
Prior to that Mr. van Daalen was a retail banking manager at The Connecticut
Bank and Trust Co. from 1983 to 1985 and an analyst at Goldstein/Krall Market
Research from 1982 to 1983.
Ms. Sharon B. Parente, Co-Portfolio Manager of the Municipal Fund, earned a
B.S. degree from the University of Virginia. Ms. Parente has been associated
with CSAM since CSAM acquired the Funds' predecessor adviser in July 1999 and
joined the predecessor adviser in 1992, specializing in municipal bonds and
corporate cash. Prior to that Ms. Parente was a vice president at Citibank, N.A.
in the Private Banking Group from 1985 to 1992. Prior to that, Ms. Parente was a
fixed income portfolio manager at Calvert Group from 1981 to 1985 and a
municipal trader's assistant at Prescott, Ball & Turben from 1979 to 1981.
Mr. Charles C. Van Vleet, Portfolio Manager of the Global Fixed Income
Fund, earned a B.A. degree from the University of California, Berkeley. Mr. Van
Vleet has been associated with CSAM since CSAM acquired the Funds' predecessor
adviser in July 1999 and joined the predecessor adviser in May 1998. Prior to
that Mr. Van Vleet was a senior vice president and senior global strategist at
Putnam Investment Management from 1994 to 1998. Prior to that Mr. Van Vleet
served as vice president and senior portfolio manager at Alliance Capital
Management.
Mr. Patrick A. Bittner, CFA, Co-Portfolio Manager of the Municipal Fund,
earned a B.S. degree from the University of Wisconsin (Madison) and a Masters of
Business Science from Temple University. Mr. Bittner has been associated with
CSAM since CSAM acquired the Funds' predecessor adviser in July 1999 and
joined the predecessor adviser in
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<PAGE> 69
1994. Prior to that Mr. Bittner served as an assistant portfolio manager at
First Fidelity Bank from 1991 to 1994.
Investment Adviser and Co-Administrators
CSAM, located at 153 East 53rd Street, New York, New York 10022, serves as
investment adviser to each Fund pursuant to a written agreement (the "Advisory
Agreement"). CSAM is an indirect wholly-owned U.S. subsidiary of Credit Suisse
Group ("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.
Prior to July 6, 1999, Warburg Pincus Asset Management, Inc. ("Warburg")
served as investment adviser to each Fund. On that date, Credit Suisse acquired
Warburg and combined Warburg with Credit Suisse's existing U.S.-based asset
management business ("Credit Suisse Asset Management"). Consequently, the
combined entity, CSAM, became the Funds' investment adviser. Credit Suisse Asset
Management, formerly known as BEA Associates, together with its predecessor
firms, has been engaged in the investment advisory business for over 60 years.
CSAMSI and PFPC both serve as co-administrators to the Funds pursuant to
separate written agreements with each Fund (the "CSAMSI Co-Administration
Agreement" and the "PFPC Co-Administration Agreement" respectively). CSAMSI
became co-administrator to each Fund on November 1, 1999. Prior to that,
Counsellors Funds Service, Inc. ("Counsellors Service") served as
co-administrator to the Funds. For the services provided by CSAM under the
Advisory Agreements, Fixed Income Fund, Global Fixed Income Fund, Intermediate
Government Fund and New York Intermediate Municipal Fund each pay CSAM a fee
calculated at an annual rate of .50%, 1.00%, .50% and .40%, respectively, of the
Fund's average daily net assets. For the services provided by CSAMSI under the
CSAMSI Co-Administration Agreement, each Fund pays CSAMSI a fee calculated at an
annual rate of .10% of the Fund's average daily net assets. For the services
provided by PFPC under the PFPC Co-Administration Agreement, each Fund pays PFPC
a fee calculated at an annual rate of .05% of the Fund's average daily net
assets, exclusive of out-of-pocket expense. Each class of shares of the Fund
bears its proportionate share of fees payable to CSAM, CSAMSI and PFPC in the
proportion that its assets bear to the aggregate assets of the Fund at the time
of calculation. These fees are calculated at an annual rate based on a
percentage of a Portfolio's average daily net assets.
65
<PAGE> 70
Advisory Fees paid to CSAM's predecessor, Warburg
(portions of fees waived, if any, are noted in parenthesis next to the amount
earned)
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal Year ended
October 31, 1996 October 31, 1997 October 31, 1998
----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Fixed Income Fund $ 648,732 ($163,311) $ 973,381 ($151,599) $1,799,237 ($138,880)
Global Fixed Income Fund $1,031,630 ($514,200) $1,783,032 ($707,931) $1,811,063 ($821,020)
Intermediate Government Fund $ 254,649 ($196,577) $ 234,862 ($133,433) $ 274,007 ($165,038)
New York Municipal Fund $ 301,602 ($102,812) $ 332,574 ($65,877) $ 386,531 ($67,141)
</TABLE>
Co-Administration Fees paid to PFPC
(portions of fees waived, if any, are noted in parenthesis next to the amount
earned)
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended
October 31, 1996 October 31, 1997 October 31, 1998
----------------------- ---------------------- --------------------
<S> <C> <C> <C>
Fixed Income Fund $117,711 ($28,629) $97,338 $189,784
Global Fixed Income
Fund $109,014 ($58,514) $89,151 $97,076
Intermediate Government Fund $ 47,013 ($36,869) $23,486 ($22,971) $30,565 ($21,456)
New York Municipal Fund $ 68,978 ($25,703) $41,572 $58,524
</TABLE>
Co-Administration Fees paid to Counsellors Service (THE FUNDS' PREDECESSOR
CO-ADMINISTRATOR)
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended
October 31, 1996 October 31, 1997 October 31, 1998
---------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed Income Fund $ 129,747 $194,676 $359,847
Global Fixed Income
Fund $ 103,163 $178,303 $181,107
Intermediate Government Fund $ 50,930 $ 46,972 $ 54,802
New York Municipal Fund $ 75,401 $ 83,144 $ 96,633
</TABLE>
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<PAGE> 71
Custodian and Transfer Agent
PFPC Trust Company ("PFPC Trust") and State Street Bank and Trust Company
serve as custodians of each Funds' U.S. and non-U.S. assets, respectively,
pursuant to separate custodian agreements (the "Custodian Agreements"). Under
the Custodian Agreements, PFPC Trust and State Street each (i) maintains a
separate account or accounts in the name of the Fund, (ii) holds and transfers
portfolio securities on account of the Fund, (iii) makes receipts and
disbursements of money on behalf of the Fund, (iv) collects and receives all
income and other payments and distributions for the account of the Fund's
portfolio securities held by it and (v) makes periodic reports to the Board
concerning the Fund's custodial arrangements. PFPC Trust may delegate its duties
under its Custodian Agreement with the Fund to a wholly owned direct or indirect
subsidiary of PFPC Trust or PNC Bank Corp. upon notice to the Fund and upon the
satisfaction of certain other conditions. With the approval of the Board, State
Street is authorized to select one or more foreign banking institutions and
foreign securities depositories to serve as sub-custodian on behalf of the Fund
and PFPC Trust is authorized to select one or more domestic banks or trust
companies to serve as sub-custodian on behalf of the Funds. PFPC Trust has
entered into a sub-custodian agreement with PNC Bank, National Association
("PNC"), pursuant to which PNC provides asset safekeeping and securities
clearing services. PFPC Trust and PNC are indirect, wholly owned subsidiaries of
PNC Bank Corp. and their principal business address is 200 Stevens Drive,
Lester, Pennsylvania 19113. The principal business address of State Street is
225 Franklin Street, Boston, Massachusetts 02110.
State Street serves as the shareholder servicing, transfer and dividend
disbursing agent of each Fund pursuant to separate Transfer Agency and Service
Agreements, under which State Street (i) issues and redeems shares of a Fund,
(ii) addresses and mails all communications by the Fund to record owners of Fund
shares, including reports to shareholders, dividend and distribution notices and
proxy material for its meetings of shareholders, (iii) maintains shareholder
accounts and, if requested, sub-accounts and (iv) makes periodic reports to the
Fund's Board concerning the transfer agent's operations with respect to the
Fund. State Street has delegated to Boston Financial Data Services, Inc., an
affiliate of State Street ("BFDS"), responsibility for most shareholder
servicing functions. BFDS's principal business address is 2 Heritage Drive,
Boston, Massachusetts 02171.
Organization of the Funds
The Funds are open-end management investment companies. The Fixed Income
and New York Municipal Funds were organized in 1987 and 1986, respectively,
under the laws of The Commonwealth of Massachusetts and each is a business
entity commonly known as a "Massachusetts business trust." The Global Fixed
Income and Intermediate Government Funds were incorporated in 1990 and 1988,
respectively, under the laws of the State of Maryland and each is an entity
commonly known as a "Maryland corporation." Each of the Funds is "diversified"
within the meaning of the 1940 Act, other than the Global Fixed Income and New
York Municipal Funds, which are "non-diversified." Each Fund other than the New
York Municipal Fund offers two classes of shares, Common Shares and Advisor
67
<PAGE> 72
Shares. Unless otherwise indicated, references to a "Fund" apply to each class
of shares of that Fund.
The Fixed Income Fund's and New York Municipal Fund's Agreement and
Declaration of Trust (the "Trust Agreements") and the Global Fixed Income Fund's
and Intermediate Government Fund's charter authorizes the Board of each Fund to
issue full and fractional shares of common stock, $.001 par value per share
("Common Stock"), of which one billion shares are designated Common Shares and
two billion shares are designated Advisor Shares.
Massachusetts law provides that shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fixed Income
and New York Municipal Funds. However, the Trust Agreements disclaim shareholder
liability for acts or obligations of a Fund and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Fund or a Trustee. The Trust Agreements provide for
indemnification from the Fund's property for all losses and expenses of any
shareholder held personally liable for the obligations of the Fund. Thus, the
risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund would be unable to meet
its obligations, a possibility that CSAM believes is remote and immaterial. Upon
payment of any liability incurred by the Fund, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the Fund.
The Trustees intend to conduct the operations of the Fund in such a way so as to
avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Fund.
All shareholders of a Fund in each class, upon liquidation, will
participate ratably in the Fund's net assets. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Directors/Trustees can elect all Directors/Trustees of a
Fund. Shares are transferable but have no preemptive, conversion or subscription
rights.
Investors in a Fund are entitled to one vote for each full share held and
fractional votes for fractional shares held. Shareholders of a Fund will vote in
the aggregate except where otherwise required by law and except that each class
will vote separately on certain matters pertaining to its distribution and
shareholder servicing arrangements. There will normally be no meetings of
investors for the purpose of electing members of the governing Board unless and
until such time as less than a majority of the members holding office have been
elected by investors. Any Director of a Fund may be removed from office upon the
vote of shareholders holding at least a majority of the relevant Fund's
outstanding shares, at a meeting called for that purpose. A meeting will be
called for the purpose of voting on the removal of a Board member at the written
request of holders of 10% of the outstanding shares of a Fund.
The Fixed Income Fund and the New York Municipal Fund were organized under
the laws of The Commonwealth of Massachusetts as Massachusetts business trusts
in 1987 and 1986, respectively. In 1992, these Funds changed their names from
"Counsellors
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<PAGE> 73
Fixed Income Fund" and "Counsellors New York Municipal Bond Fund" to "Warburg,
Pincus Fixed Income Fund" and "Warburg, Pincus New York Municipal Bond Fund,"
respectively. On February 28, 1995, the New York Municipal Fund changed its name
to "Warburg, Pincus New York Intermediate Municipal Fund." The Global Fixed
Income Fund and the Intermediate Government Fund were incorporated under the
laws of the State of Maryland in 1990 and 1988, respectively, under the names
"Counsellors Global Fixed Income Fund, Inc." and "Counsellors Intermediate
Maturity Government Fund, Inc.," respectively. On October 27, 1995 and February
16, 1996, the Funds amended their respective charters to change their names to
"Warburg, Pincus Global Fixed Income Fund, Inc." and "Warburg, Pincus
Intermediate Maturity Government Fund, Inc."
Distribution and Shareholder Servicing
Provident Distributors, Inc. ("PDI") serves as distributor of the Funds'
shares. PDI offers each Fund's shares on a continuous basis. No compensation is
payable by the Funds to PDI for distribution services, however, pursuant to a
separate agreement with CSAM, PDI is compensated for the services provided to
the Funds. PDI's principal business address is Four Falls Corporate Center, West
Conshohocken, Pennsylvania 19428-2961.
The Funds have entered into agreements ("Agreements") with institutional
shareholders of record, broker-dealers, financial institutions, depository
institutions, retirement plans and financial intermediaries ("Institutions") to
provide certain distribution, shareholder servicing, administrative and/or
accounting services for their clients or customers (or participants in the case
of retirement plans) ("Customers") who are beneficial owners of Advisor Shares.
Agreements will be governed by a distribution plan (the "Distribution Plan")
pursuant to Rule 12b-1 under the 1940 Act. The Distribution Plan requires the
Board, at least quarterly, to receive and review written reports of amounts
expended under the Distribution Plan and the purposes for which such
expenditures were made. Payments may be made to Institutions directly by a Fund
or by CSAMSI on behalf of the Fund. The Distribution Plan was adopted on
November 1, 1999. Prior to that date, a substantially similar plan was in place
with respect to the Advisor Shares (the "Prior Advisor Shares Distribution
Plan"). For the fiscal year ended October 31, 1998, the Fixed Income, Global
Fixed Income and Intermediate Government Funds paid $8,768, $38,716 and $17
respectively, in 12b-1 fees pursuant to the Prior Advisor Shares Distribution
Plan, all of which were paid to Institutions.
An Institution with which a Fund has entered into an Agreement may charge a
Customer one or more of the following types of fees, as agreed upon by the
Institution and the Customer, with respect to the cash management or other
services provided by the Institution: (i) account fees (a fixed amount per month
or per year); (ii) transaction fees (a fixed amount per transaction processed);
(iii) compensation balance requirements (a minimum dollar amount a Customer must
maintain in order to obtain the services offered); or (iv) account maintenance
fees (a periodic charge based upon the percentage of assets in the account or of
the dividend
69
<PAGE> 74
paid on those assets). Services provided by an Institution to Customers are in
addition to, and not duplicative of, the services to be provided under each
Fund's co-administration and distribution and shareholder servicing
arrangements. A Customer of an Institution should read the relevant Prospectus
and this Statement of Additional Information in conjunction with the Agreement
and other literature describing the services and related fees that would be
provided by the Institution to its Customers prior to any purchase of Fund
shares. Prospectuses are available from the Fund's distributor upon request. No
preference will be shown in the selection of Fund portfolio investments for the
instruments of Institutions.
Each Fund has authorized certain broker-dealers, financial institutions,
recordkeeping organizations and other financial intermediaries (collectively,
"Service Organizations") or, if applicable, their designees to enter confirmed
purchase and redemption orders on behalf of their clients and customers, with
payment to follow no later than the Fund's pricing on the following business
day. If payment is not received by such time, the Service Organization could be
held liable for resulting fees or losses. The Fund may be deemed to have
received a purchase or redemption order when a Service Organization, or, if
applicable, its authorized designee, accepts the order. Such orders received by
the Fund in proper form will be priced at the Fund's net asset value next
computed after they are accepted by the Service Organization or its authorized
designee. Service Organizations may impose transaction or administrative charges
or other direct fees, which charges or fees would not be imposed if Fund shares
are purchased directly from the Funds.
For administration, subaccounting, transfer agency and/or other services,
CSAM or its affiliates may pay Service Organizations a fee of up to .40% of the
average annual value of accounts with the Funds maintained by such Service
Organizations. Service Organizations may also be reimbursed for marketing costs.
The Service Fee payable to any one Service Organization is determined based upon
a number of factors, including the nature and quality of services provided, the
operations processing requirements of the relationship and the standardized fee
schedule of the Service Organization or recordkeeper. The Funds may reimburse
part of the Service Fee at rates they would normally pay to the transfer agent
for providing the services.
Advisor shares. Certain Institutions may receive additional fees from
CSAMSI, CSAM or their affiliates for providing supplemental services in
connection with investments in a fund. Institutions may also be reimbursed for
marketing and other costs. Additional fees may be up to 0.10% per year of the
value of fund accounts maintained by the firm. Fees payable to any particular
Institution are determined based upon a number of factors, including the nature
and quality of the services provided, the operations processing requirements of
the relationship and the standardized fee schedule of the Institution. To the
extent that CSAMSI, CSAM or their affiliates provide additional compensation or
reimbursements for marketing expenses, such payments would not represent an
additional expense to the fund or its shareholders.
General. The Distribution Plans will continue in effect for so long as
their continuance is specifically approved at least annually by the Board,
including
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<PAGE> 75
a majority of the Directors/Trustees who are not interested persons of a Fund
and who have no direct or indirect financial interest in the operation of the
Distribution Plan ("Independent Directors/Trustees"). Any material amendment of
the Distribution Plan would require the approval of the Board in the same
manner. The Distribution Plans may not be amended to increase materially the
amount to be spent under it without shareholder approval of the Advisor Shares.
The Distribution Plans may be terminated at any time, without penalty, by vote
of a majority of the Independent Directors/Trustees or by a vote of a majority
of the outstanding voting securities of the Advisor Shares of a Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of a Fund's shares is equal to the per share net asset
value of the relevant class of shares of the Fund.
Under the 1940 Act, a Fund may suspend the right of redemption or postpone
the date of payment upon redemption for any period during which the NYSE is
closed, other than customary weekend and holiday closings, or during which
trading on the NYSE is restricted, or during which (as determined by the SEC) an
emergency exists as a result of which disposal or fair valuation of portfolio
securities is not reasonably practicable, or for such other periods as the SEC
may permit. (The Funds may also suspend or postpone the recordation of an
exchange of its shares upon the occurrence of any of the foregoing conditions.)
If conditions exist which make payment of redemption proceeds wholly in
cash unwise or undesirable, a Fund may make payment wholly or partly in
securities or other investment instruments which may not constitute securities
as such term is defined in the applicable securities laws. If a redemption is
paid wholly or partly in securities or other property, a shareholder would incur
transaction costs in disposing of the redemption proceeds. The Fund intends to
comply with Rule 18f-1 promulgated under the 1940 Act with respect to
redemptions in kind.
Automatic Cash Withdrawal Plan. An automatic cash withdrawal plan (the
"Plan") is available to shareholders who wish to receive specific amounts of
cash periodically. Withdrawals may be made under the Plan by redeeming as many
shares of a Fund as may be necessary to cover the stipulated withdrawal payment.
To the extent that withdrawals exceed dividends, distributions and appreciation
of a shareholder's investment in a Fund, there will be a reduction in the value
of the shareholder's investment and continued withdrawal payments may reduce the
shareholder's investment and ultimately exhaust it. Withdrawal payments should
not be considered as income from investment in the Fund.
EXCHANGE PRIVILEGE
An exchange privilege with certain other funds advised by CSAM is available
to investors in each Fund. A Common Shareholder may exchange Common Shares of a
Fund for Common Shares of another Fund or for Common Shares of another Warburg
Pincus Fund at their respective net asset values. An Advisor Shareholder may
exchange Advisor Shares of
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<PAGE> 76
a Fund for Advisor Shares of another Warburg Pincus fund at their respective
net asset values. If an exchange request is received by Warburg Pincus Funds or
their agent prior to the close of regular trading on the NYSE, the exchange will
be made at each Fund's net asset value determined at the end of that business
day. Exchanges will be effected without a sales charge but must satisfy the
minimum dollar amount necessary for new purchases. The Fund may refuse exchange
purchases at any time without prior notice.
The exchange privilege is available to shareholders residing in any state
in which the shares being acquired may legally be sold. When an investor effects
an exchange of shares, the exchange is treated for federal income tax purposes
as a redemption. Therefore, the investor may realize a taxable gain or loss in
connection with the exchange. Investors wishing to exchange shares of a Fund for
shares in another Warburg Pincus Fund should review the prospectus of the other
fund prior to making an exchange. For further information regarding the exchange
privilege or to obtain a current prospectus for another Warburg Pincus Fund, an
investor should contact Warburg Pincus Funds at 800-927-2874.
The Funds reserve the right to refuse exchange purchases by any person or
group if, in CSAM's judgment, a Fund would be unable to invest the money
effectively in accordance with its investment objective and policies, or would
otherwise potentially be adversely affected. Examples of when an exchange
purchase could be refused are when the Fund receives or anticipates receiving
large exchange orders at or about the same time and/or when a pattern of
exchanges within a short period of time (often associated with a "market timing"
strategy) is discerned. The Funds reserve the right to terminate or modify the
exchange privilege at any time upon 30 days' notice to shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is a summary of the material United States federal income tax
considerations regarding the purchase, ownership and disposition of shares in
each Fund. Each prospective shareholder is urged to consult his own tax adviser
with respect to the specific federal, state, local and foreign tax consequences
of investing in a Fund. The summary is based on the laws in effect on the date
of this Statement of Additional Information, which are subject to change.
The Funds and Their Investments
Each Fund intends to continue to qualify to be treated as a regulated
investment company each taxable year under the Code. To so qualify, a Fund must,
among other things: (a) derive at least 90% of its gross income in each taxable
year from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of stock or securities or foreign
currencies, or other income (including, but not limited to, gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies; and (b) diversify its holdings so that,
at the end of each quarter of the Fund's taxable year, (i) at least 50% of the
market value of the Fund's assets is represented by cash, securities of other
regulated investment companies, Government Securities and other securities, with
such other securities limited, in respect of any one issuer,
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<PAGE> 77
to an amount not greater than 5% of the Fund's assets and not greater than 10%
of the outstanding voting securities of such issuer and (ii) not more than 25%
of the value of its assets is invested in the securities (other than Government
Securities or securities of other regulated investment companies) of any one
issuer or any two or more issuers that the Fund controls and are determined to
be engaged in the same or similar trades or businesses or related trades or
businesses.
As a regulated investment company, each Fund will not be subject to United
States federal income tax on its net investment income (i.e., income other than
its net realized long- and short-term capital gains) and its net realized long-
and short-term capital gains, if any, that it distributes to its shareholders,
provided that an amount equal to at least 90% of the sum of its investment
company taxable income (i.e., 90% of its taxable income minus the excess, if
any, of its net realized long-term capital gains over its net realized
short-term capital losses (including any capital loss carryovers), plus or minus
certain other adjustments as specified in the Code) and its net tax-exempt
income for the taxable year is distributed, but will be subject to tax at
regular corporate rates on any taxable income or gains that it does not
distribute.
Each Fund intends to distribute annually to its shareholders substantially
all of its investment company taxable income, including the income (if any)
imputed with respect to investments in zero coupon securities. The Board of each
Fund will determine annually whether to distribute any net realized long-term
capital gains in excess of net realized short-term capital losses (including any
capital loss carryovers). Each Fund currently expects to distribute any excess
annually to its shareholders. However, if a Fund retains for investment an
amount equal to all or a portion of its net long-term capital gains in excess of
its net short-term capital losses and capital loss carryovers, it will be
subject to a corporate tax (currently at a rate of 35%) on the amount retained.
In that event, a Fund will designate such retained amounts as undistributed
capital gains in a notice to its shareholders who (a) will be required to
include in income for United Stares federal income tax purposes, as long-term
capital gains, their proportionate shares of the undistributed amount, (b) will
be entitled to credit their proportionate shares of the 35% tax paid by the Fund
on the undistributed amount against their United States federal income tax
liabilities, if any, and to claim refunds to the extent their credits exceed
their liabilities, if any, and (c) will be entitled to increase their tax basis,
for United States federal income tax purposes, in their shares by an amount
equal to 65% of the amount of undistributed capital gains included in the
shareholder's income. Organizations or persons not subject to federal income tax
on such capital gains will be entitled to a refund of their pro rata share of
such taxes paid by the Fund upon filing appropriate returns or claims for refund
with the IRS. Even if a Fund makes such an election, it is possible that it may
incur an excise tax as a result of not having distributed net capital gains.
The Code imposes a 4% nondeductible excise tax on a Fund to the extent the
Fund does not distribute by the end of any calendar year at least 98% of its net
investment income for that year and 98% of the net amount of its capital gains
(both long-and short-term) for the one-year period ending, as a general rule, on
October 31 of that year. For this purpose, however, any income or gain retained
by the Fund that is subject to corporate income
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tax will be considered to have been distributed by year-end. In addition, the
minimum amounts that must be distributed in any year to avoid the excise tax
will be increased or decreased to reflect any underdistribution or
overdistribution, as the case may be, from the previous year. Each Fund
anticipates that it will pay such dividends and will make such distributions as
are necessary in order to avoid the application of this tax.
With regard to each Fund's investments in foreign securities, exchange
control regulations may restrict repatriations of investment income and capital
or the proceeds of securities sales by foreign investors such as the Fund and
may limit the Fund's ability to pay sufficient dividends and to make sufficient
distributions to satisfy the 90% and excise tax distribution requirements.
If, in any taxable year, a Fund fails to qualify as a regulated investment
company under the Code or fails to meet the distribution requirement, it would
be taxed in the same manner as an ordinary corporation and distributions to its
shareholders would not be deductible by the Fund in computing its taxable
income. In addition, in the event of a failure to qualify, a Fund's
distributions, to the extent derived from the Fund's current or accumulated
earnings and profits (including amounts derived from interest on tax-exempt
obligations), would constitute dividends (eligible for the corporate
dividends-received deduction) which are taxable to shareholders as ordinary
income, even though those distributions might otherwise (at least in part) have
been treated in the shareholders' hands as long-term capital gains. If a Fund
fails to qualify as a regulated investment company in any year, it must pay out
its earnings and profits accumulated in that year in order to qualify again as a
regulated investment company. In addition, if the Fund failed to qualify as a
regulated investment company for a period greater than one taxable year, the
Fund may be required to recognize any net built-in gains (the excess of the
aggregate gains, including items of income, over aggregate losses that would
have been realized if it had been liquidated) in order to qualify as a regulated
investment company in a subsequent year.
Special Tax Matters Regarding the Fixed Income Fund, Global Fixed Income
Fund and Intermediate Government Fund. Each Fund's short sales against the box,
if any, and transactions in foreign currencies, forward contracts, options and
futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the Fund (i.e.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund and defer Fund losses. These rules could
therefore affect the character, amount and timing of distributions to
shareholders. These provisions also (a) will require each Fund to mark-to-market
certain types of the positions in its portfolio (i.e., treat them as if they
were closed out) and (b) may cause the Fund to recognize income without
receiving cash with which to pay dividends or make distributions in amounts
necessary to satisfy the distribution requirements for avoiding income and
excise taxes. Each Fund will monitor its transactions, will make the appropriate
tax elections and will make the appropriate entries in its books and records
when it engages in short sales against the box or acquires any foreign currency,
forward contract, option, futures contract or hedged investment in order to
mitigate the effect of these rules and prevent disqualification of the Fund as a
regulated investment company.
74
<PAGE> 79
Special Tax Matters Regarding the Intermediate Government Fund. Investors
in the Intermediate Government Fund do not have to pay state and local income
taxes with respect to interest income on most types of Government Securities if
the investors are the tax owners of these Government Securities. Furthermore,
some states, if certain requirements are satisfied, permit investors to treat
the portion of their regulated investment company dividends that is attributable
to interest income on these Government Securities as tax-exempt income for state
or local income tax purposes. Other states treat all of these dividends as
subject to state and local income taxation. Investors in the Fund should consult
their own tax advisers to assess the consequences of investing in the Fund under
state and local laws generally and to determine whether dividends paid by the
Fund that represent interest derived from Government Securities are exempt from
any applicable state or local taxes.
Special Tax Considerations Regarding the New York Municipal Fund. Because
the New York Municipal Fund will distribute exempt-interest dividends, interest
on indebtedness incurred by a shareholder to purchase or carry Fund shares is
not deductible for federal income, New York State and New York City personal
income tax purposes. If a shareholder receives an exempt-interest dividend with
respect to any share of the Fund and if such share is held by the shareholder
for six months or less, then any loss on the sale or exchange of such share, to
the extent of such exempt-interest dividend, shall be disallowed. In addition,
the Code may require a shareholder, if he or she receives exempt-interest
dividends, to treat as taxable income a portion of certain otherwise non-taxable
social security and railroad retirement benefit payments. Furthermore, that
portion of any exempt interest dividend paid by the Fund which represents income
from private activity bonds may not retain its tax-exempt status in the hands of
a shareholder who is a "substantial user" (or persons related thereto) of a
facility financed by such bonds. Similar rules apply for purposes of New York
State and New York City personal income tax.
Under the Code, interest on specified private activity bonds issued after
August 7, 1986, although otherwise exempt from federal income tax, is treated as
an item of tax preference for purposes of the alternative minimum tax on
individuals and corporations. If the New York Municipal Fund invests in such
specified "private activity bonds," it will report a portion of the
"exempt-interest dividends" paid to its shareholders as interest on specified
private activity bonds, and hence as a tax preference item. Exempt interest
dividends are included in adjusted current earnings. The amount of the
alternative minimum tax imposed by the Code is the excess, if any, of the
taxpayer's "tentative minimum tax" over the taxpayer's regular tax liability for
the taxable year. The "tentative minimum tax" is equal to (i) 26% of the first
$175,000, and 28% of any amount over $175,000 (for corporations, 20% of the
whole), of the taxpayer's alternative minimum taxable income (defined as regular
taxable income modified by certain adjustments and increased by the taxpayer's
"items of tax preference," including the adjustment for corporate current
earnings and the tax preference for tax-exempt interest on private activity
bonds described above) for the taxable year in excess of the exemption amount,
less (ii) the alternative minimum tax foreign tax credit for the taxable year.
The exemption amount is $40,000 for corporations, $45,000 for those filing joint
returns, lesser amounts for others, and is phased out over certain income
levels. Prospective investors should consult their own tax advisers with respect
to the possible application of the alternative minimum tax to their tax
situations.
75
<PAGE> 80
In addition, the receipt of New York Municipal Fund dividends and
distributions may affect a foreign corporate shareholder's federal "branch
profits" tax liability and a Subchapter S corporation shareholder's federal
"excess net passive income" tax liability. Shareholders should consult their own
tax advisers as to whether they are (i) substantial users with respect to a
facility or related to such users within the meaning of the Code or (ii) subject
to a federal alternative minimum tax, any applicable state alternative minimum
tax, the federal branch profits tax, or the federal excess net passive income
tax.
While the New York Municipal Fund does not expect to realize a significant
amount of net capital gains, any such gains realized will be distributed
annually as described in the Fund's Prospectus. Such distributions ("capital
gain dividends"), if any, will be taxable to the shareholders as long-term
capital gains, regardless of how long a shareholder has held the Fund's shares,
and will be designated as capital gain dividends in a written notice mailed by
the Fund to the shareholders after the close of the Fund's prior taxable year.
If a shareholder receives a capital gain dividend with respect to any share and
if such share is held by the shareholder for six months or less, then any loss
(to the extent not disallowed pursuant to the other six month rule described
above) on the sale or exchange of such share, to the extent of the capital gain
dividend, shall be treated as a long-term capital loss.
Capital gain distributions by the New York Municipal Fund result in a
reduction in the net asset value of the Fund's shares. Should a distribution
reduce the net asset value below a shareholder's cost basis, such distribution
would nevertheless be taxable to the shareholder as ordinary income or capital
gain as described above, even though, from an investment standpoint, it may
constitute a partial return of capital. In particular, investors should consider
the tax implications of buying shares just prior to a distribution. The price of
shares purchased at that time includes the amount of the forthcoming
distribution. Those purchasing just prior to a distribution will then receive a
partial return of capital upon the distribution, which will nevertheless be
taxable to them.
If, for any full fiscal year, the New York Municipal Fund's total
distributions exceed net investment income and net realized capital gains, the
excess distributions may be treated as a taxable dividend or as a tax-free
return of capital (up to the amount of the shareholder's tax basis in his or her
shares). The amount treated as a tax-free return of capital will reduce a
shareholder's adjusted basis in his or her shares. Pursuant to the requirements
of the 1940 Act and other applicable laws, a notice will accompany any
distribution paid from sources other than net investment income.
Dividends derived by the New York Municipal Fund from tax-exempt interest
are designated as tax-exempt in the same percentage of the day's dividend as the
actual tax-exempt income earned on that day. Thus, the percentage of the
dividend designated as tax-exempt may vary from day to day. Similarly, dividends
derived by the Fund from interest on New York State Municipal Obligations will
be designated as exempt from New York's personal income taxation in the same
percentage of the day's dividend as the actual interest on New York's Municipal
Obligations earned on that day.
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<PAGE> 81
It should be noted that the portion of any New York Municipal Fund
dividends constituting New York exempt-interest dividends is excludable from
income for New York State and New York City personal income tax purposes only.
Any dividends paid to the Fund's shareholders subject to state or city franchise
or corporate income tax therefore may be taxed as ordinary dividends to such
shareholders, notwithstanding that all or a portion of such dividends is exempt
from state or city personal income tax.
Potential shareholders in the New York Municipal Fund, including, in
particular, corporate shareholders which may be subject to either New York
franchise tax or New York corporate income tax, should consult their tax
advisers with respect to (i) the application of corporate and franchise taxes to
the receipt of Fund dividends and as to their own state tax situation in
general, and (ii) the application of other state and local taxes to the receipt
of the Fund's dividends and distributions.
Although the New York Municipal Fund expects to be relieved of all or
substantially all federal, New York State and New York City income or franchise
taxes, depending upon the extent of its activities in other 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, that portion of the Fund's income which is treated as
earned in any such state or locality could be subject to state and local tax.
Any such taxes paid by the Fund would reduce the amount of income and gains
available for distribution to shareholders.
Passive Foreign Investment Companies (Fixed Income and Global Fixed Income Funds
only)
If a Fund purchases shares in certain foreign investment entities, called
"passive foreign investment companies" (a "PFIC"), it may be subject to United
States federal income tax on a portion of any "excess distribution" or gain from
the disposition of such shares even if such income is distributed as a taxable
dividend by the Fund to its shareholders. Additional charges in the nature of
interest may be imposed on the Fund in respect of deferred taxes arising from
such distributions or gains. If a Fund were to invest in a PFIC and elected to
treat the PFIC as a "qualified electing fund" under the Code, in lieu of the
foregoing requirements, the Fund might be required to include in income each
year a portion of the ordinary earnings and net capital gains of the qualified
electing fund, even if not distributed to the Fund, and such amounts would be
subject to the 90% and excise tax distribution requirements described above. In
order to make this election, a Fund would be required to obtain certain annual
information from the passive foreign investment companies in which it invests,
which may be difficult or not possible to obtain.
Alternatively, a Fund may make a mark-to-market election that will result
in a Fund being treated as if it had sold and repurchased all of the PFIC stock
at the end of each year. In this case, a Fund would report gains as ordinary
income and would deduct losses as ordinary losses to the extent of previously
recognized gains. The election, once made, would be effective for all subsequent
taxable years of the Fund, unless revoked with the consent of the IRS. By making
the election, a Fund could potentially ameliorate the adverse tax consequences
with respect to its ownership of shares in a PFIC, but in any particular year
may
77
<PAGE> 82
be required to recognize income in excess of the distributions it receives from
PFICs and its proceeds from dispositions of PFIC company stock. A Fund may have
to distribute this "phantom" income and gain to satisfy its distribution
requirement and to avoid imposition of the 4% excise tax. Each Fund will make
the appropriate tax elections if possible, and take any additional steps that
are necessary to mitigate the effect of these rules.
Dividends and Distributions
Dividends of net investment income and distributions of net realized
short-term capital gains are taxable to a United States shareholder as ordinary
income, whether paid in cash or in shares. Distributions of net-long-term
capital gains, if any, that a Fund designates as capital gains dividends are
taxable as long-term capital gains, whether paid in cash or in shares and
regardless of how long a shareholder has held shares of the Fund. Dividends and
distributions paid by a Fund (except for the portion thereof, if any,
attributable to dividends on stock of U.S. corporations received by the Fund)
will not qualify for the deduction for dividends received by corporations.
Distributions in excess of a Fund's current and accumulated earnings and profits
will, as to each shareholder, be treated as a tax-free return of capital, to the
extent of a shareholder's basis in his shares of the Fund, and as a capital gain
thereafter (if the shareholder holds his shares of the Fund as capital assets).
Any dividend declared by a Fund in October, November or December of any calendar
year and payable to shareholders of record on a specified date in such a month
shall be deemed to have been received by each shareholder on December 31 of such
calendar year and to have been paid by the Fund not later than such December 31,
provided that such dividend is actually paid by the Fund during January of the
following calendar year.
Shareholders receiving dividends or distributions in the form of additional
shares should be treated for United States federal income tax purposes as
receiving a distribution in the amount equal to the amount of money that the
shareholders receiving cash dividends or distributions will receive, and should
have a cost basis in the shares received equal to such amount.
If a Fund is the holder of record of any stock on the record date for any
dividends payable with respect to such stock, such dividends are included in the
Fund's gross income not as of the date received but as of the later of (a) the
date such stock became ex-dividend with respect to such dividends (i.e., the
date on which a buyer of the stock would not be entitled to receive the
declared, but unpaid, dividends) or (b) the date the Fund acquired such stock.
Accordingly, in order to satisfy its income distribution requirements, the Fund
may be required to pay dividends based on anticipated earnings, and shareholders
may receive dividends in an earlier year than would otherwise be the case.
Sales of Shares
Upon the sale or exchange of his shares, a shareholder will realize a
taxable gain or loss equal to the difference between the amount realized and his
basis in his shares. Such gain or loss will be treated as capital gain or loss,
if the shares are capital assets in the shareholder's hands, and will be
long-term capital gain or loss if the shares are held for more
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<PAGE> 83
than one year and short-term capital gain or loss if the shares are held for one
year or less. Any loss realized on a sale or exchange will be disallowed to the
extent the shares disposed of are replaced, including replacement through the
reinvesting of dividends and capital gains distributions in a Fund, within a
61-day period beginning 30 days before and ending 30 days after the disposition
of the shares. In such a case, the basis of the shares acquired will be
increased to reflect the disallowed loss. Any loss realized by a shareholder on
the sale of a Fund share held by the shareholder for six months or less will be
treated for United States federal income tax purposes as a long-term capital
loss to the extent of any distributions or deemed distributions of long-term
capital gains received by the shareholder with respect to such share.
Foreign Taxes
Dividends and interest received by a Fund with respect to its foreign
investments may be subject to withholding and other taxes imposed by foreign
countries. However, tax conventions between certain countries and the United
States may reduce or eliminate such taxes. If either of the Fixed Income Fund or
the Global Fixed Income Fund qualifies as a regulated investment company, if
certain asset and distribution requirements are satisfied and if more than 50%
of the respective Fund's total assets at the close of its fiscal year consists
of stock or securities of foreign corporations, that Fund may elect for U.S.
income tax purposes to treat foreign income taxes paid by it as paid by its
shareholders. The Fixed Income Fund or the Global Fixed Income Fund may qualify
for and make this election in some, but not necessarily all, of its taxable
years. As a result, shareholders of the Fund would be required to include their
pro rata portions of such foreign taxes in computing their taxable incomes and
then treat an amount equal to those foreign taxes as a U.S. federal income tax
deduction or as a foreign tax credit against their U.S. federal income taxes.
Shortly after any year for which it makes such an election, each Fund will
report to its shareholders the amount per share of such foreign tax that must be
included in each shareholder's gross income and the amount which will be
available for the deduction or credit. No deduction for foreign taxes may be
claimed by a shareholder who does not itemize deductions. Certain limitations
will be imposed on the extent to which the credit (but not the deduction) for
foreign taxes may be claimed.
Backup Withholding
A Fund may be required to withhold, for United States federal income tax
purposes, 31% of the dividends and distributions payable to shareholders who
fail to provide the Fund with their correct taxpayer identification number or to
make required certifications, or who have been notified by the IRS that they are
subject to backup withholding. Certain shareholders are exempt from backup
withholding. Backup withholding is not an additional tax and any amount withheld
may be credited against a shareholder's United States federal income tax
liabilities.
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<PAGE> 84
Notices
Shareholders will be notified annually by a Fund as to the United States
federal income tax status of the dividends, distributions and deemed
distributions attributable to undistributed capital gains (discussed above in
"The Funds and Their Investments") made by the Fund to its shareholders.
Furthermore, shareholders will also receive, if appropriate, various written
notices after the close of the Fund's taxable year regarding the United States
federal income tax status of certain dividends, distributions and deemed
distributions that were paid (or that are treated as having been paid) by a Fund
to its shareholders during the preceding taxable year.
Other Taxation
Distributions also may be subject to additional state, local and foreign
taxes depending on each shareholder's particular situation.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN MATERIAL TAX CONSEQUENCES AFFECTING A
FUND AND ITS SHAREHOLDERS. SHAREHOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX
ADVISERS WITH RESPECT TO THE PARTICULAR
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE FUND.
DETERMINATION OF PERFORMANCE
From time to time, a Fund may quote the total return of its Common Shares
and/or Advisor Shares in advertisements or in reports and other communications
to shareholders. The net asset value of Common Shares is listed in The Wall
Street Journal each business day under the heading "Warburg Pincus Funds."
Current total return figures may be obtained by calling Warburg Pincus Funds at
800-927-2874.
With respect to a Funds' Common and Advisor Shares, the Fund's average
annual total returns for the period ended October 31, 1998 were as follows
(performance figures calculated without the waiver of fees, if any, are noted in
parenthesis):
Performance (Common Shares)
(performance figures calculated without the waiver of fees
by a Fund's service provider(s), if any, are noted in parenthesis)
<TABLE>
<CAPTION>
Period from the
commencement
One-Year Five-Year Ten-Year of operations
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Fixed Income Fund 6.48% (6.44%) 6.92% (6.79%) 8.06% (7.91%) 8.11% (7.95%)
(commenced operations on
August 17, 1987)
Global Fixed Income
Fund 4.10% (3.55%) 5.69% (5.12%) 7.92% (6.74%)
(commenced operations on
November 1, 1990)
</TABLE>
80
<PAGE> 85
<TABLE>
<CAPTION>
Period from the
commencement
One-Year Five-Year Ten-Year of operations
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Intermediate Government
Fund 9.08% (8.70%) 6.25% (5.81%) 8.00% (7.47%) 8.28% (7.64%)
(commenced operations on
August 22, 1988)
New York Municipal
Fund 6.24% (6.16%) 5.02% (4.86%) 6.37% (5.99%) 6.00% (5.47%)
(commenced operations on
April 1, 1987)
</TABLE>
Performance (Advisor Shares)
(performance figures calculated without the waiver of fees by a Fund's service
provider(s), if any, are noted in parenthesis)
<TABLE>
<CAPTION>
Period from the
commencement of
One-Year operations
---------------------- -------------------
<S> <C> <C>
Fixed Income Fund 6.21% (6.16%) 8.47% (8.38%)
(Advisor Class commenced operations on July 3, 1996)
Global Fixed Income Fund 3.51% (3.13%) 5.48% (5.11%)
(Advisor Class commenced operations on August 12, 1996)
Intermediate Government Fund 8.80% (7.01%) 9.16% (7.68%)
(Advisor Class commenced operations on August 15, 1997)
</TABLE>
These total return figures show the average percentage change in value of
an investment in the Common Shares from the beginning of the measuring period to
the end of the measuring period. The figures reflect changes in the price of
Common Shares assuming that any income dividends and/or capital gain
distributions made by the Fund during the period were reinvested in Common
Shares of the Fund. Total return will be shown for recent one-, five- and
ten-year periods, and may be shown for other periods as well (such as from
commencement of the Fund's operations or on a year-by-year, quarterly or current
year-to-date basis).
These figures are calculated by finding the average annual compounded rates
of return for the one-, five- and ten- (or such shorter period as the relevant
class of shares has been offered) year periods that would equate the initial
amount invested to the ending redeemable value according to the following
formula: P (1 + T)(n) = ERV. For purposes of this formula, "P" is a hypothetical
investment of $1,000; "T" is average annual total return; "n" is number of
years; and "ERV" is the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the one-, five- or ten-year periods (or fractional
portion thereof). Total return or "T" is computed by finding the average annual
change in the value
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<PAGE> 86
of an initial $1,000 investment over the period and assumes that all dividends
and distributions are reinvested during the period. Investor should note that
the performance may not be representative of the Fund's total return over longer
market cycles.
When considering average total return figures for periods longer than one
year, it is important to note that the annual total return for one year in the
period might have been greater or less than the average for the entire period.
When considering total return figures for periods shorter than one year,
investors should bear in mind that each Fund seeks long-term appreciation and
that such return may not be representative of any Fund's return over a longer
market cycle. Each Fund may also advertise aggregate total return figures of its
Common Shares for various periods, representing the cumulative change in value
of an investment in the Common Shares of the specific period (again reflecting
changes in share prices and assuming reinvestment of dividends and
distributions). Aggregate and average total returns may be shown by means of
schedules, charts or graphs and may indicate various components of total return
(i.e., change in value of initial investment, income dividends and capital gain
distributions).
A Fund may advertise, from time to time, comparisons of the performance of
its Common Shares and/or Advisor Shares with that of one or more other mutual
funds with similar investment objectives. The Fund may advertise average annual
calendar year-to-date and calendar quarter returns, which are calculated
according to the formula set forth in the preceding paragraph except that the
relevant measuring period would be the number of months that have elapsed in the
current calendar year or most recent three months, as the case may be. Investors
should note that this performance may not be representative of the Fund's total
return in longer market cycles.
Yield is calculated by annualizing the net investment income generated by a
Fund over a specified thirty-day period according to the following formula:
YIELD = 2[( a-b +1)(6)-1]
--------
cd
For purposes of this formula: "a" is dividends and interest earned during the
period; "b" is expenses accrued for the period (net of reimbursements); "c" is
the average daily number of shares outstanding during the period that were
entitled to receive dividends; and "d" is the maximum offering price per share
on the last day of the period.
<TABLE>
<CAPTION>
30-day annualized current yield
Fund (Common/Advisor Shares) as of October 31, 1998
- ---- ----------------------
<S> <C>
Fixed Income Fund 5.16%/4.90%
Global Fixed Income Fund 4.99%/4.49%
Intermediate Government Fund 4.86%/4.59%
New York Municipal Fund 3.45%/1.10%
</TABLE>
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<PAGE> 87
Tax equivalent yield is calculated over a specified thirty-day period by
dividing that portion of the Fund's yield which is tax-exempt by one minus a
stated income tax rate and adding the product to that portion, if any, of the
yield of the Municipal Fund that is not tax-exempt. The New York Municipal
Fund's tax-equivalent yield for the thirty-day period ending October 31, 1998
was 6.44%.
The performance of a class of a Fund shares will vary from time to time
depending upon market conditions, the composition of the Fund's portfolio and
operating expenses allocable to it. As described above, total return and yield
are based on historical earnings and are not intended to indicate future
performance. Consequently, any given performance quotation should not be
considered as representative of performance for any specified period in the
future. Performance information may be useful as a basis for comparison with
other investment alternatives. However, the Fund's performance will fluctuate,
unlike certain bank deposits or other investments which pay a fixed yield for a
stated period of time. Any fees charged by Institutions or other institutional
investors directly to their customers in connection with investments in Fund
shares are not reflected in the Fund's performance figures and such fees, if
charged, will reduce the actual return received by customers on their
investments.
In addition, reference may be made in advertising a class of Fund shares to
opinions of Wall Street economists and analysts regarding economic cycles and
their effects historically on the performance of small companies, both as a
class and relative to other investments. A Fund may also discuss its beta, or
volatility relative to the market, and make reference to its relative
performance in various market cycles in the United States.
Each Fund may compare its performance with (i) that of other mutual funds
with similar investment objectives and policies, which may be based on the
rankings prepared by Lipper Analytical Services, Inc. or similar investment
services that monitor the performance of mutual funds; (ii) in the case of the
Fixed Income Fund, with the Lehman Intermediate Government/Corporate Bond Index
(an unmanaged index of government and corporate bonds calculated by Lehman
Brothers); in the case of the Global Fixed Income Fund, with the Salomon
Brothers World Government Bond Index (a hedged, market-capitalization weighted
index designed to track major government debt markets), Lehman Brothers
Aggregate Index and the Lipper World Income Average (an average of funds that
invest primarily in non-U.S. dollar and U.S. dollar debt instruments); in the
case of the Intermediate Government Fund, with the Lehman Intermediate
Government Bond Index (an unmanaged index of government bonds calculated by
Lehman Brothers); and in the case of the New York Municipal Fund, with the
Lehman 5-Year Municipal Bond Index and the Lipper New York Intermediate
Municipal Debt Funds Average (an unmanaged index of 61 Intermediate Municipal
Debt Funds calculated by Lipper Analytical Services); or (iii) other appropriate
indexes of investment securities or with data developed by CSAM derived from
such indexes. A Fund may also include evaluations of the Fund published by
nationally recognized ranking services and by financial publications such as
Barron's, Business Week, Financial Times, Forbes, Fortune, Inc., Institutional
Investor, Investor's Business Daily, Money, Morningstar, Mutual Fund Magazine,
SmartMoney, The Wall Street Journal and Worth. Morningstar, Inc. rates funds in
broad categories based on risk/reward analyses over
83
<PAGE> 88
various time periods. In addition, each Fund may from time to time compare the
expense ratio of its Common Shares to that of investment companies with similar
objectives and policies, based on data generated by Lipper Analytical Services,
Inc. or similar investment services that monitor mutual funds.
In reports or other communications to investors or in advertising, each
Fund may also describe the general biography or work experience of the portfolio
managers of the Fund and may include quotations attributable to the portfolio
managers describing approaches taken in managing the Fund's investments,
research methodology underlying stock selection or the Fund's investment
objective. In addition, a Fund and its portfolio managers may render periodic
updates of Fund activity, which may include a discussion of significant
portfolio holdings; analysis of holdings by industry, country, credit quality
and other characteristics; and comparison and analysis of the Fund with respect
to relevant market industry benchmarks. Each Fund may also discuss measures of
risk, the continuum of risk and return relating to different investments and the
potential impact of foreign stocks on a portfolio otherwise composed of domestic
securities.
INDEPENDENT ACCOUNTANTS AND COUNSEL
PricewaterhouseCoopers LLP ("PwC"), with principal offices at 2400 Eleven
Penn Center, Philadelphia, Pennsylvania 19103, serves as independent accountants
for the Funds. The financial statements for the fiscal year ended October 31,
1999 that are incorporated by reference in this Statement of Additional
Information have been audited by PwC, whose report thereon appears elsewhere
herein and have been incorporated by reference herein in reliance upon the
report of such firm of independent accountants given upon their authority as
experts in accounting and auditing.
Willkie Farr & Gallagher serves as counsel for the Funds and provides legal
services from time to time for CSAM and CSAMSI.
MISCELLANEOUS
The Funds are not sponsored, endorsed, sold or promoted by Warburg, Pincus
& Co. Warburg, Pincus & Co. makes no representation or warranty, express or
implied, to the owners of the Funds or any member of the public regarding the
advisability of investing in securities generally or in the Funds particularly.
Warburg, Pincus & Co. licenses certain trademarks and trade names of Warburg,
Pincus & Co., and is not responsible for and has not participated in the
calculation of the Funds' net asset value, nor is Warburg, Pincus & Co. a
distributor of the Funds. Warburg, Pincus & Co. has no obligation or liability
in connection with the administration, marketing or trading of the Funds.
As of January 29, 1999, the name, address and percentage of ownership of
each person that owns of record 5% or more of each Fund's outstanding shares
were as follows:
84
<PAGE> 89
<TABLE>
<CAPTION>
FIXED INCOME FUND Common Shares Advisor Shares
------------- --------------
<S> <C> <C>
Charles Schwab & Co., Inc.* 30.96%
Special Custody Account for the Exclusive Benefit of Customers
Attn.: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104-4122
IN Trust* 99.95%
c/o Brian Frambes
3435 Stelzer Road, Ste. 1000
Columbus, OH 43219-6004
John L. Vogelstein* 6.00%
466 Lexington Avenue
New York, NY 10017-3140
Salomon Smith Barney Inc. 10.15%
Book Entry Account
Attn.: Matt Maestri
333 West 34 Street
7th Floor Mutual Funds Dept.
New York, NY 10001-2483
</TABLE>
<TABLE>
<CAPTION>
GLOBAL FIXED INCOME FUND Common Shares Advisor Shares
------------- --------------
<S> <C> <C>
Charles Schwab & Co., Inc.* 34.98%
Special Custody Account for the Exclusive
Benefit of Customers
Attn.: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104-4122
Corelink Financial Inc.* 16.06%
P.O. Box 4054
Concord, CA 94524-4054
Nat'l Financial Svcs. Corp.* 13.25%
FBO Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
Prudential Securities Inc.* 6.69%
For Exclusive Benefit of Customer PC
1 New York Plaza
New York, NY 10004-1902
</TABLE>
85
<PAGE> 90
<TABLE>
<S> <C> <C>
SBT & CO FBO 8134* 83.58%
PO Box 8469
La Jolla, CA 92038-8469
Salomon Smith Barney Inc.* 17.28%
Book Entry Account
Attn.: Matt Maestri
333 West 34 Street
7th Floor Mutual Funds Dept.
New York, NY 10001-2483
Donaldson Lufkin & Jenrette 6.65%
Securities Corp Pershing Division
Mutual Fund Balancing
1 Pershing Plaza Floor 14
Jersey City, NJ 07399-0001
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE GOVERNMENT FUND Common Shares Advisor Shares
------------- --------------
<S> <C> <C>
Charles Schwab & Co., Inc.* 34.12%
Special Custody Account for the Exclusive
Benefit of Customers
Attn.: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104-4122
Albert J. Lagerman 99.43%
Gene W. Reisinger TTEES
Family Practice Center PC
401k Trust
307 E. Chestnut Street
Mifflinburg, PA 17844-9678
Nat'l Financial Svcs. Corp.* 7.29%
FBO Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
</TABLE>
<TABLE>
<CAPTION>
NEW YORK MUNICIPAL FUND Common Shares
-------------
<S> <C> <C>
Christopher W. Brody 13.93%
30 East 71st Street
New York, NY 10021-4956
</TABLE>
86
<PAGE> 91
<TABLE>
<CAPTION>
NEW YORK MUNICIPAL FUND Common Shares
-------------
<S> <C>
Charles Schwab & Co., Inc.* 8.49%
Special Custody Account for the Exclusive
Benefit of Customers
Attn.: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104-4122
</TABLE>
* The Funds believe that these entities are not the beneficial owner of shares
held of record by them.
FINANCIAL STATEMENTS
Each Fund's audited annual report, dated October 31, 1999, which either
accompanies this Statement of Additional Information or has previously been
provided to the investor to whom this Statement of Additional Information is
being sent, is incorporated herein by reference with respect to all information
regarding the relevant Fund included therein. Each Fund will furnish without
charge a copy of the annual reports upon request by calling Warburg Pincus Funds
at 800-927-2874.
87
<PAGE> 92
APPENDIX
DESCRIPTION OF RATINGS
Commercial Paper Ratings
Commercial paper rated A-1 by Standard & Poor's Ratings Services ("S&P")
indicates that the degree of safety regarding timely payment is strong. Those
issues determined to possess extremely strong safety characteristics are denoted
with a plus sign designation. Capacity for timely payment on commercial paper
rated A-2 is satisfactory, but the relative degree of safety is not as high as
for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's Investors Service, Inc. ("Moody's"). Issuers rated Prime-1 (or related
supporting institutions) are considered to have a superior capacity for
repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics of issuers rated Prime-1 but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
Corporate Bond Ratings
The following summarizes the ratings used by S&P for corporate bonds:
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay interest and repay principal.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB - This is the lowest investment grade. Debt rated BBB has an adequate
capacity to pay interest and repay principal. Although it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for bonds in this category than for bonds in higher rated
categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominately speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
represents a lower degree of speculation than B and C the highest degree of
speculation. While such bonds will likely have
<PAGE> 93
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions, which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B - Debt rated B has a greater vulnerability to default but currently have
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to default
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC - This rating is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
Additionally, the rating CI is reserved for income bonds on which no
interest is being paid. Such debt is rated between debt rated C and debt rated
D.
To provide more detailed indications of credit quality, the ratings from
"AA" to "CCC" may be modified by the addition of a plus or minus sign to show
relative standing within this major rating category.
D - Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The following summarizes the ratings used by Moody's for corporate bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure.
A-2
<PAGE> 94
While the various protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally strong position of
such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Moody's applies numerical modifiers (1, 2 and 3) with respect to the bonds
rated "Aa" through "B". The modifier 1 indicates that the bond being rated ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the bond ranks in the lower
end of its generic rating category.
Caa - Bonds that are rated Caa are of poor standing. These issues may be in
default or present elements of danger may exist with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
A-3
<PAGE> 95
Short-Term Note Ratings
The following summarizes the two highest ratings used by S&P for short-term
notes:
SP-1 - Loans bearing this designation evidence a very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics will be given a plus sign designation.
SP-2 - Loans bearing this designation evidence a satisfactory capacity to
pay principal and interest.
The following summarizes the two highest ratings used by Moody's for
short-term notes and variable rate demand obligations:
MIG-1/VMIG-1 - Obligations bearing these designations are of the best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established and broad-based access to the market for
refinancing, or both.
MIG-2/VMIG-2 - Obligations bearing these designations are of high quality
with margins of protection ample although not so large as in the preceding
group.
Municipal Obligations Ratings
The following summarizes the ratings used by S&P for Municipal Obligations:
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay interest and repay principal.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB - This is the lowest investment grade. Debt rated BBB has an adequate
capacity to pay interest and repay principal. Although adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than in
higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominately speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
represents a lower degree of speculation than B and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
A-4
<PAGE> 96
BB - Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions, which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B - Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to default
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC - This rating is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
Additionally, the rating CI is reserved for income bonds on which no
interest is being paid. Such debt is rated between debt rated C and debt rated
D.
To provide more detailed indications of credit quality, the ratings from
"AA" to "CCC" may be modified by the addition of a plus or minus sign to show
relative standing within this major rating category.
D - Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The following summarizes the highest four municipal ratings used by
Moody's:
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
A-5
<PAGE> 97
Aa - Bonds which are rated as are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1, and B1.
Caa - Bonds that are rated Caa are of poor standing. These issues may be in
default or present elements of danger may exist with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
A-6
