<PAGE> 1
SUPPLEMENT TO THE PROSPECTUSES
WARBURG PINCUS EMERGING MARKETS FUND
WARBURG PINCUS INSTITUTIONAL FUND -- EMERGING MARKETS PORTFOLIO
WARBURG PINCUS INSTITUTIONAL FUND -- INTERNATIONAL EQUITY PORTFOLIO
WARBURG PINCUS INTERNATIONAL EQUITY FUND
WARBURG PINCUS INTERNATIONAL SMALL COMPANY FUND
WARBURG PINCUS MAJOR FOREIGN MARKETS FUND
WARBURG PINCUS TRUST -- EMERGING MARKETS PORTFOLIO
WARBURG PINCUS TRUST -- INTERNATIONAL EQUITY PORTFOLIO
The following information supersedes certain information in the funds'
Prospectuses.
New Adviser. Effective today, Credit Suisse Asset Management, LLC (CSAM) became
the funds' investment adviser as a result of the closing of the previously
announced acquisition of Warburg Pincus Asset Management, Inc. (Warburg Pincus)
by Credit Suisse Group (Credit Suisse), and the combination of Warburg Pincus
with Credit Suisse's existing U.S. asset management business. Accordingly, all
references in the Prospectuses to Warburg Pincus are now to CSAM.
CSAM in an indirect wholly-owned U.S. subsidiary of Credit Suisse. CSAM,
together with its predecessor firms, has been engaged in the investment advisory
business for over 60 years and has assets under management of approximately
$58.7 billion. CSAM's principal business address is 153 East 53rd Street, New
York, New York 10022.
Change of Name of Distributor. Counsellors Securities Inc., the funds'
distributor, has changed its name to Credit Suisse Asset Management Securities,
Inc. to reflect its ownership by Credit Suisse.
Address Change. The following address replaces the current address provided in
the Prospectus for overnight or courier service: Boston Financial, Attn: Warburg
Pincus Funds, 66 Brooks Drive, Braintree, MA 02184.
Portfolio Manager Changes. The following information replaces certain
information in the funds' Prospectuses:
WARBURG PINCUS EMERGING MARKETS FUND
WARBURG PINCUS INSTITUTIONAL FUND -- EMERGING MARKETS PORTFOLIO
Harold E. Sharon (see biography below) now serves as Co-Portfolio Manager of
these funds along with Vincent J. McBride. Richard H. King no longer serves as a
Co-Portfolio Manager. Morid Kamshad, Jun Sung Kim and Federico D. Laffan
continue to serve as Associate Portfolio Managers of the funds.
WARBURG PINCUS INTERNATIONAL EQUITY FUND
WARBURG PINCUS INSTITUTIONAL FUND -- INTERNATIONAL EQUITY PORTFOLIO
P. Nicholas Edwards (see biography below), Harold W. Ehrlich, Vincent J. McBride
and Harold E. Sharon (see biography below) continue to serve as
<PAGE> 2
Co-Portfolio Managers of these funds. Richard H. King no longer serves as a
Co-Portfolio Manager of the funds.
WARBURG PINCUS INTERNATIONAL SMALL COMPANY FUND
Harold E. Sharon (see biography below), formerly Portfolio Manager, and J.H.
Cullum Clark, formerly Associate Portfolio Manager, now each serve as
Co-Portfolio Manager of this fund.
WARBURG PINCUS MAJOR FOREIGN MARKETS FUND
P. Nicholas Edwards (see biography below) and Harold W. Ehrlich continue to
serve as Co-Portfolio Managers and Vincent J. McBride, Nancy Nierman, J.H.
Cullum Clark and Todd Jacobson continue to serve as Associate Portfolio Managers
of these funds. Richard H. King no longer serves as a Co-Portfolio Manager of
the funds.
WARBURG PINCUS TRUST -- EMERGING MARKETS PORTFOLIO
Harold E. Sharon (see biography below) now serves as Co-Portfolio Manager of
this portfolio along with Vincent J. McBride. Richard H. King no longer serves
as a Co-Portfolio Manager. Jun Sung Kim (see biography below) and Federico D.
Laffan (see biography below) now serve as Associate Portfolio Managers along
with Morid Kamshad.
WARBURG PINCUS TRUST -- INTERNATIONAL EQUITY PORTFOLIO
P. Nicholas Edwards (see biography below) now serves as Co-Portfolio Manager of
this portfolio along with Harold W. Ehrlich, Vincent J. McBride and Harold E.
Sharon. Richard H. King no longer serves as a Co-Portfolio Manager. Nancy
Nierman continues to serve as Associate Portfolio Manager of the portfolio.
CERTAIN MANAGER BIOGRAPHIES
P. Nicholas Edwards joined Warburg Pincus, CSAM's predecessor, in 1995.
Previously, Mr. Edwards was a director at Jardine Fleming Investment Advisors,
Tokyo, from 1984 to 1995.
Harold E. Sharon joined Warburg Pincus, CSAM's predecessor, in March 1998.
Previously, Mr. Sharon was an executive director and portfolio manager with CIBC
Oppenheimer from 1994 to 1998 and a Senior Vice President and portfolio manager
at Warburg Pincus from 1990 to 1994.
Jun Sung Kim joined Warburg Pincus, CSAM's predecessor, in 1997. Previously, Mr.
Kim was an investment manager with Asset Korea Ltd., Seoul, from 1995 to 1997,
an investment analyst with Baring Securities Ltd., Seoul, from 1994 to 1995 and
an assistant investment manager with Koeneman Capital Management, Singapore,
from 1992 to 1994.
Federico D. Laffan joined Warburg Pincus, CSAM's predecessor, in 1997.
Previously, Mr. Laffan was a senior manager and partner with Green Cay Asset
Management from 1996 to 1997 and a senior portfolio manager and director with
Foreign & Colonial Emerging Markets, London, from 1990 to 1996.
Dated: July 6, 1999
<PAGE> 3
WARBURG PINCUS FUNDS
SHAREHOLDER
GUIDE
Common Class
December 3, 1998
As Revised July 6, 1999
This Shareholder Guide is incorporated into and legally part of each
Warburg Pincus (Common Class) prospectus.
[Warburg Pincus Funds Logo]
<PAGE> 4
BUYING SHARES
OPENING AN ACCOUNT
Your account application provides us with key information we need to set up
your account correctly. It also lets you authorize services that you may find
convenient in the future.
If you need an application, call our Shareholder Service Center to receive
one by mail or fax. Or you can download it from our Internet Web site:
www.warburg.com.
You can make your initial investment by check or wire. The "By Wire" method
in the table enables you to buy shares on a particular day at that day's closing
NAV.
ADDING TO AN ACCOUNT
You can add to your account in a variety of ways, as shown in the table. If
you want to use ACH transfer, be sure to complete the "ACH on Demand" section of
the account application.
INVESTMENT CHECKS
Please use either a personal or bank check payable in U.S. dollars to Warburg
Pincus Funds. Unfortunately, we cannot accept "starter" checks that do not have
your name preprinted on them. We also cannot accept checks payable to you or to
another party and endorsed to the order of Warburg Pincus Funds. These types of
checks may be returned to you and your purchase order may not be processed.
Limited exceptions include properly endorsed IRA Rollover and government checks.
MINIMUM INITIAL INVESTMENT
<TABLE>
<S> <C>
Cash Reserve Fund: $ 1,000
New York Tax Exempt
Fund: $ 1,000
Balanced Fund: $ 1,000
Growth & Income Fund: $ 1,000
WorldPerks(R) Funds: $ 5,000
Long-Short Funds $ 25,000
All other funds: $ 2,500
IRAs: $ 500*
Transfers/Gifts to
Minors: $ 500*
* $25,000 minimum for Long-Short
Funds.
</TABLE>
WIRE INSTRUCTIONS
State Street Bank and Trust Company
ABA# 0110 000 28
Attn: Mutual Funds/Custody Dept.
[Warburg Pincus Fund Name]
DDA# 9904-649-2
F/F/C: [Account Number and Registration]
HOW TO REACH US
SHAREHOLDER SERVICE CENTER
Toll free: 800 -WARBURG
(800 -927-2874)
Fax: 212-370-9833
MAIL
Warburg Pincus Funds
P.O. Box 9030
Boston, MA 02205-9030
OVERNIGHT/COURIER SERVICE
Boston Financial
Attn: Warburg Pincus Funds
66 Brooks Drive
Braintree, MA 02184
INTERNET WEB SITE
www.warburg.com
2
<PAGE> 5
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C>
BY CHECK
- - Complete the New Account Application. - Make your check payable to Warburg
For IRAs use the Universal IRA Pincus Funds.
Application. - Write the account number and the fund
- - Make your check payable to Warburg name on your check.
Pincus Funds. - Mail to Warburg Pincus Funds.
- - Mail to Warburg Pincus Funds. - Minimum amount is $100.
BY EXCHANGE
- - Call our Shareholder Service Center to - Call our Shareholder Service Center to
request an exchange. Be sure to read request an exchange.
the current prospectus for the new - Minimum amount is $250.
fund. Also please observe the minimum If you do not have telephone privileges,
initial investment. mail or fax a signed letter of
If you do not have telephone privileges, instruction.
mail or fax a signed letter of
instruction.
BY WIRE
- - Complete and sign the New Account - Call our Shareholder Service Center by
Application. 4 p.m. ET to inform us of the incoming
- - Call our Shareholder Service Center and wire. Please be sure to specify your
fax the signed New Account Application name, the account number and the fund
by 4 p.m. ET. name on your wire advice.
- - Shareholder Services will telephone you - Wire the money for receipt that day.
with your account number. Please be - Minimum amount is $500.
sure to specify your name, the account
number and the fund name on your wire
advice.
- - Wire your initial investment for
receipt that day.
- - Mail the original, signed application
to Warburg Pincus Funds.
This method is not available for IRAs.
BY AUTOMATED CLEARING HOUSE (ACH) TRANSFER
- - Cannot be used to open an account. - Call our Shareholder Service Center to
request an ACH transfer from your bank.
- Your purchase will be effective at the
next NAV calculated after we receive your
order in proper form.
- Minimum amount is $50.
Requires ACH on Demand privileges.
</TABLE>
800-WARBURG (800-927-2874)
MONDAY - FRIDAY, 8 A.M. - 8 P.M. ET SATURDAY, 8 A.M. - 4 P.M. ET
3
<PAGE> 6
SELLING SHARES(*)
<TABLE>
<CAPTION>
SELLING SOME OR ALL OF YOUR SHARES CAN BE USED FOR
<S> <C>
BY MAIL
Write us a letter of instruction that - Accounts of any type.
includes: - Sales of any amount.
- - your name(s) and signature(s) For IRAs please use the IRA Distribution
- - the fund name and account number Request Form.
- - the dollar amount you want to sell
- - how to send the proceeds
Obtain a signature guarantee or other
documentation, if required (see "Selling
Shares
in Writing").
Mail the materials to Warburg Pincus
Funds.
If only a letter of instruction is
required, you can fax it to the
Shareholder Service Center.
BY EXCHANGE
- - Call our Shareholder Service Center to - Accounts with telephone privileges.
request an exchange. Be sure to read If you do not have telephone privileges,
the current prospectus for the new fund. mail or fax a letter of instruction to
Also please observe the minimum initial exchange shares.
investment.
BY PHONE
Call our Shareholder Service Center to - Non-IRA accounts with telephone
request a redemption. You can receive the privileges.
proceeds as:
- - a check mailed to the address of record
- - an ACH transfer to your bank ($50
minimum)
- - a wire to your bank ($500 minimum)
See "By Wire or ACH Transfer" for
details.
BY WIRE OR ACH TRANSFER
- - Complete the "Wire Instructions" or - Non-IRA accounts with wire-redemption
"ACH on Demand" section of your New or ACH on Demand privileges.
Account Application. - Requests by phone or mail.
- - For federal-funds wires, proceeds will
be wired on the next business day. For
ACH transfers, proceeds will be
delivered within two business days.
</TABLE>
()* For the Central & Eastern Europe Fund only: A short-term trading fee of 1.0%
of the amount redeemed will be deducted from the redemption proceeds if you sell
shares of the fund after holding them less than six months. This fee, which is
currently being waived, does not apply to shares acquired through reinvestment
of distributions. For purposes of computing the short-term trading fee, any
shares bought through reinvestment of distributions will be redeemed first
without charging the fees, followed by the shares held longest.
4
<PAGE> 7
SELLING SHARES IN WRITING
Some circumstances require a written sell order, along with a signature
guarantee. These include:
- accounts whose address of record has been changed within the past 30 days
- redemption in certain large amounts (other than by exchange)
- requests to send the proceeds to a different payee or address
- shares represented by certificates, which must be returned with your sell
order
A signature guarantee helps protect against fraud. You can obtain one from
most banks or securities dealers, but not from a notary public.
RECENTLY PURCHASED SHARES
If the fund has not yet collected payment for the shares you are selling, it
will delay sending you the proceeds until your purchase payment clears. This may
take up to 10 calendar days after the purchase. To avoid the collection period,
consider buying shares by bank wire, bank check, certified check or money order.
LOW-BALANCE ACCOUNTS
If your account balance falls below the minimum required to keep it open due
to redemptions or exchanges, the fund may ask you to increase your balance. If
it is still below the minimum after 60 days, the fund may close your account and
mail you the proceeds.
MINIMUM TO KEEP AN ACCOUNT OPEN
<TABLE>
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Cash Reserve Fund: $ 750
New York Tax Exempt Fund: $ 750
Balanced Fund: $ 500
Growth & Income Fund: $ 500
WorldPerks Funds: $ 750
All other funds: $2,000
IRAs: $ 250
Transfers/Gifts to
Minors: $ 250
</TABLE>
800-WARBURG (800-927-2874)
MONDAY - FRIDAY, 8 A.M. - 8 P.M. ET SATURDAY, 8 A.M. - 4 P.M. ET
5
<PAGE> 8
SHAREHOLDER SERVICES
AUTOMATIC SERVICES
Buying or selling shares automatically is easy with the services described
below. You can set up most of these services with your account application or by
calling our Shareholder Service Center.
AUTOMATIC MONTHLY INVESTMENT PLAN
For making automatic investments ($50 minimum) from a designated bank
account.
AUTOMATIC WITHDRAWAL PLAN
For making automatic monthly, quarterly, semiannual or annual withdrawals of
$250 or more.
DISTRIBUTION SWEEP
For automatically reinvesting your dividend and capital-gain distributions
into another identically registered Warburg Pincus fund. Not available for IRAs.
RETIREMENT PLANS
Warburg Pincus offers a range of tax-advantaged retirement accounts,
including:
- Traditional IRAs
- Roth IRAs
- Roth Conversion IRAs
- Spousal IRAs
- Rollover IRAs
- SEP IRAs
To transfer your IRA to Warburg Pincus, use the IRA Transfer/Direct Rollover
Form. If you are opening a new IRA, you will also need to complete the Universal
IRA Application. Please consult your tax professional concerning your IRA
eligibility and tax situation.
TRANSFERS/GIFTS TO MINORS
Depending on state laws, you can set up a custodial account under the Uniform
Transfers-to-Minors Act (UTMA) or the Uniform Gifts-to-Minors Act (UGMA). Please
consult your tax professional about these types of accounts.
ACCOUNT CHANGES
Call our Shareholder Service Center to update your account records whenever
you change your address. Shareholder Services can also help you change your
account information or privileges.
6
<PAGE> 9
OTHER POLICIES
TRANSACTION DETAILS
You are entitled to capital-gain and earned dividend distributions as soon as
your purchase order is executed. For the Intermediate Maturity Government, New
York Intermediate Municipal and Fixed Income Funds and the Money Market Funds,
you begin to earn dividend distributions the business day after your purchase
order is executed. However, if we receive your purchase order and payment to
purchase shares of a Money Market Fund before 12 p.m. (noon), you begin to earn
dividend distributions on that day.
Your purchase order will be canceled and you may be liable for losses or fees
incurred by the fund if:
- your investment check or ACH transfer does not clear
- you place a telephone order by 4 p.m. ET and we do not receive your wire that
day
If you wire money without first calling Shareholder Services to place an
order, and your wire arrives after the close of regular trading on the NYSE,
then your order will not be executed until the end of the next business day. In
the meantime, your payment will be held uninvested. Your bank or other
financial-services firm may charge a fee to send or receive wire transfers.
While we monitor telephone servicing resources carefully, during periods of
significant economic or market change it may be difficult to place orders by
telephone.
Uncashed redemption or distribution checks do not earn interest.
SPECIAL SITUATIONS
A fund reserves the right to:
- refuse any purchase or exchange request, including those from any person or
group who, in the fund's view, is likely to engage in excessive trading
- change or discontinue its exchange privilege after 30 days' notice to current
investors, or temporarily suspend this privilege during unusual market
conditions
- change its minimum investment amounts after 15 days' notice to current
investors of any increases
- charge a wire-redemption fee
- make a "redemption in kind"--payment in portfolio securities rather than
cash--for certain large redemption amounts that could hurt fund operations
- suspend redemptions or postpone payment dates as permitted by the Investment
Company Act of 1940 (such as during periods other than weekends or holidays
when the NYSE is closed or trading on the NYSE is restricted, or any other
time that the SEC permits)
- modify or waive its minimum investment requirements for employees and clients
of its adviser, sub-adviser, distributor and their affiliates and, for the
Long-Short Funds, investments through certain financial-services firms
($10,000 minimum) and through retirement plan programs (no minimum)
- stop offering its shares for a period of time (such as when management
believes that a substantial increase in assets could adversely affect it)
800-WARBURG (800-927-2874)
MONDAY - FRIDAY, 8 A.M. - 8 P.M. ET SATURDAY, 8 A.M. - 4 P.M. ET
7
<PAGE> 10
[WARBURG PINCUS FUNDS LOGO]
P.O. BOX 9030, BOSTON, MA 02205-9030
800-WARBURG (800-927-2874) B www.warburg.com
CREDIT SUISSE ASSET MANAGEMENT SECURITIES, INC.,DISTRIBUTOR. WPCOM-31-1298Dc
<PAGE> 11
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 22, 1999
AS REVISED JULY 6, 1999
WARBURG PINCUS MAJOR FOREIGN MARKETS FUND
WARBURG PINCUS INTERNATIONAL EQUITY FUND
WARBURG PINCUS INTERNATIONAL SMALL COMPANY FUND
WARBURG PINCUS EMERGING MARKETS FUND
WARBURG PINCUS GLOBAL POST-VENTURE CAPITAL FUND
This combined Statement of Additional Information provides information about
Warburg Pincus Major Foreign Markets Fund (the "Major Foreign Markets Fund"),
Warburg Pincus International Equity Fund (the "International Equity
Fund"), Warburg Pincus International Small Company Fund (the "International
Small Company Fund"), Warburg Pincus Emerging Markets Fund (the "Emerging
Markets Fund") and Warburg Pincus Global Post-Venture Capital Fund (the "Global
Post-Venture Capital Fund") (collectively, the "Funds") that supplements
information in the combined Prospectus for the Common Shares of the Funds and
the Prospectuses for the Advisor Shares of the International Equity Fund, the
Emerging Markets Fund and the Global Post-Venture Capital Fund, each dated
February 22, 1999, as amended or supplemented from time to time (collectively,
the "Prospectus").
Each Fund's audited Annual Report dated October 31, 1998, which either
accompanies this Statement of Additional Information or has previously been
provided to the investor to whom this Statement of Additional Information is
being sent, is incorporated herein by reference.
This Statement of Additional Information is not itself a prospectus and no
investment in shares of the Funds should be made solely upon the information
contained herein. Copies of the Prospectus, Annual Reports and information
regarding each Fund's current performance can be obtained by writing or
telephoning:
<TABLE>
<CAPTION>
Common Shares Advisor Shares
------------- --------------
<S> <C>
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
</TABLE>
<PAGE> 12
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
INVESTMENT OBJECTIVES AND POLICIES.................................................................................1
Options on Securities and Securities Indices and Currency Exchange Transactions..............................4
Securities Options.....................................................................................4
Securities Index Options...............................................................................7
OTC Options............................................................................................7
Futures Activities.....................................................................................8
Futures Contracts................................................................................8
Options on Futures Contracts.....................................................................9
Currency Exchange Transactions........................................................................10
Forward Currency Contracts......................................................................10
Currency Options................................................................................10
Currency Hedging................................................................................11
Swaps.................................................................................................11
Hedging Generally.....................................................................................12
Asset Coverage for Forward Contracts, Options, Futures, Options on Futures and Swaps..................13
Additional Information on Other Investment Practices........................................................14
U.S. Government Securities..................................................................................14
Money Market Obligations....................................................................................15
Repurchase Agreements.................................................................................15
Money Market Mutual Funds.............................................................................15
Convertible Securities......................................................................................16
Debt Securities.............................................................................................16
Below Investment Grade Securities.....................................................................17
Structured Securities.......................................................................................18
Mortgage-Backed Securities............................................................................18
Asset-Backed Securities...............................................................................19
Structured Notes, Bonds or Debentures.................................................................20
Loan Participations and Assignments...................................................................20
REITs.......................................................................................................21
Securities of Other Investment Companies....................................................................21
Lending of Portfolio Securities.............................................................................21
Foreign Investments.........................................................................................22
Foreign Currency Exchange.............................................................................22
Euro Conversion.......................................................................................23
Information...........................................................................................23
Political Instability.................................................................................23
Foreign Markets.......................................................................................24
Increased Expenses....................................................................................24
Foreign Debt Securities...............................................................................24
Sovereign Debt........................................................................................25
Depositary Receipts...................................................................................26
</TABLE>
<PAGE> 13
<TABLE>
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Page
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<S> <C>
Privatizations........................................................................................26
Brady Bonds...........................................................................................26
Emerging Markets......................................................................................27
Japanese Investments........................................................................................27
Domestic Politics.....................................................................................28
Economic Background...................................................................................28
Economic Trends.......................................................................................29
Currency Fluctuation..................................................................................31
Securities Markets....................................................................................32
Other Factors.........................................................................................33
Short Sales.................................................................................................33
Short Sales "Against the Box................................................................................33
Warrants....................................................................................................34
Non-Publicly Traded and Illiquid Securities.................................................................35
Rule 144A Securities..................................................................................36
Borrowing...................................................................................................36
Stand-By Commitments........................................................................................37
Reverse Repurchase Agreements...............................................................................37
When-Issued Securities and Delayed-Delivery Transactions....................................................38
Emerging Growth and Small Companies; Unseasoned Issuers.....................................................39
Dollar Rolls................................................................................................39
Temporary Defensive Strategies..............................................................................40
Debt Securities.......................................................................................40
Money Market Obligations..............................................................................40
Non-Diversified Status (Emerging Markets Fund Only)...................................................40
Strategies Available to the Global Post-Venture Capital Fund Only...........................................40
Private Fund Investments....................................................................................40
Other Strategies............................................................................................42
INVESTMENT RESTRICTIONS...........................................................................................42
All Funds...................................................................................................42
Major Foreign Markets Fund..................................................................................42
International Equity Fund...................................................................................44
International Small Company Fund............................................................................46
Emerging Markets Fund.......................................................................................47
Global Post-Venture Capital Fund............................................................................49
PORTFOLIO VALUATION...............................................................................................51
PORTFOLIO TRANSACTIONS............................................................................................52
PORTFOLIO TURNOVER................................................................................................55
MANAGEMENT OF THE FUNDS...........................................................................................56
Officers and Board of Directors.............................................................................56
Directors' Total Compensation...............................................................................60
Portfolio Managers of the Funds.............................................................................64
Major Foreign Markets Fund............................................................................64
International Small Company Fund......................................................................66
</TABLE>
(ii)
<PAGE> 14
<TABLE>
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Page
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International Equity Fund and Emerging Markets Fund...................................................66
Global Post-Venture Capital Fund......................................................................67
Investment Advisers and Co-Administrators...................................................................67
Custodians and Transfer Agent...............................................................................71
Organization of the Funds...................................................................................71
Distribution and Shareholder Servicing......................................................................72
Distributor...........................................................................................73
Common Shares.........................................................................................73
Advisor Shares........................................................................................74
General...............................................................................................75
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION....................................................................75
Automatic Cash Withdrawal Plan..............................................................................76
EXCHANGE PRIVILEGE................................................................................................76
ADDITIONAL INFORMATION CONCERNING TAXES...........................................................................77
The Funds and Their Investments.............................................................................77
Passive Foreign Investment Companies........................................................................79
Dividends and Distributions.................................................................................80
Sales of Shares.............................................................................................81
Foreign Taxes...............................................................................................81
Backup Withholding..........................................................................................81
Notices.....................................................................................................82
Other Taxation..............................................................................................82
DETERMINATION OF PERFORMANCE......................................................................................82
TOTAL RETURN......................................................................................................82
INDEPENDENT ACCOUNTANTS AND COUNSEL...............................................................................87
MISCELLANEOUS.....................................................................................................87
FINANCIAL STATEMENTS..............................................................................................87
APPENDIX - DESCRIPTION OF RATINGS................................................................................A-1
</TABLE>
(iii)
<PAGE> 15
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each Fund's
investment objective and policies in the Prospectus. There are no assurances
that the Funds will achieve their investment objectives.
Major Foreign Markets Fund. The investment objective of the Major Foreign
Markets Fund is long-term capital appreciation, which it seeks to achieve by
investing, under normal market conditions, at least 65% of its total assets in
securities of issuers, wherever organized, having their principal business
activities and interests in countries considered to be major foreign securities
markets ("Major Foreign Markets").
Determinations as to whether an issuer has its principal business
activities and interests in a Major Foreign Market will be made by Credit Suisse
Asset Management, LLC ("CSAM"), based on publicly available information and
inquiries made to the issuers. In making such determinations, CSAM will consider
the following factors: (i) whether the issuer's principal securities trading
market is in a Major Foreign Market; (ii) whether the issuer derives at least
50% of its revenues or earnings, either alone or on a consolidated basis, from
goods produced or sold, investments made or services performed in a Major
Foreign Markets, or has at least 50% of its total or net assets situated in one
or more Major Foreign Markets; or (iii) whether the issuer is organized under
the laws of, and has a principal office in, a Major Foreign Market.
International Equity Fund. The investment objective of the International
Equity Fund is long-term capital appreciation, which it seeks to achieve by
investing in international equity securities that are considered by CSAM to have
above-average potential for appreciation.
International Small Company Fund. The investment objective of the
International Small Company Fund is capital appreciation, which it seeks to
achieve by investing in a portfolio of equity securities of small-sized
companies, wherever organized, that in CSAM's judgment have their principal
business activities and interests outside of the U.S. The Fund will invest
primarily in companies whose securities are traded on national securities
exchanges or in an organized over-the-counter ("OTC") market, such as the Japan
Securities Dealers Association Automated Quotation Systems ("JASDAQ"), the
European Association of Securities Dealers Automated Quotation System ("EASDAQ")
and the U.K. Alternative Investment Market ("AIM").
In appropriate circumstances, such as when a direct investment by the
International Small Company Fund in the securities of a particular country
cannot be made or when the securities of an investment company are more liquid
than the underlying portfolio securities, the Fund may, consistent with the
provisions of the Investment Company Act of 1940, as amended (the "1940 Act"),
invest in the securities of closed-end investment companies that invest in
foreign securities. As a shareholder in a closed-end investment company, the
Fund will bear its ratable share of the investment company's expenses, including
<PAGE> 16
management fees, and will remain subject to payment of the Fund's administration
fees and other expenses with respect to assets so invested.
Emerging Markets Fund. The investment objective of the Emerging Markets
Fund is growth of capital, which it seeks to achieve by investing primarily in
equity securities of non-U.S. issuers consisting of companies in emerging
securities markets ("Emerging Markets"). The Fund will not necessarily seek to
diversify investments on a geographical basis or on the basis of the level of
economic development of any particular country and the Emerging Markets in which
the Fund invests will vary from time to time. An equity security of an issuer in
an Emerging Market is defined as common stock and preferred stock (including
convertible preferred stock); bonds, notes and debentures convertible into
common or preferred stock; stock purchase warrants and rights; equity interests
in trusts and partnerships; and depositary receipts of an issuer: (i) the
principal securities trading market for which is in an Emerging Market; (ii)
which derives at least 50% of its revenues or earnings, either alone or on a
consolidated basis, from goods produced or sold, investments made or services
performed in an Emerging Market, or which has at least 50% of its total or net
assets situated in one or more Emerging Markets; or (iii) that is organized
under the laws of, and with a principal office in, an Emerging Market.
Determinations as to whether an issuer is an Emerging Markets issuer will be
made by CSAM, based on publicly available information and inquiries made to the
issuers.
Among the countries which CSAM currently considers to be Emerging Markets
are the following: Algeria, Angola, Antigua, Argentina, Armenia, Azerbaijan,
Bangladesh, Barbuda, Barbados, Belarus, Belize, Bhutan, Bolivia, Botswana,
Brazil, Bulgaria, Cambodia, Chile, People's Republic of China, Republic of China
(Taiwan), Colombia, Cyprus, Czech Republic, Dominica, Ecuador, Egypt, Estonia,
Georgia, Ghana, Greece, Grenada, Guyana, Hong Kong, Hungary, India, Indonesia,
Israel, Ivory Cost, Jamaica, Jordan, Kazakhstan, Kenya, Republic of Korea (South
Korea), Latvia, Lebanon, Lithuania, Malawi, Malaysia, Mauritius, Mexico,
Moldova, Mongolia, Montserrat, Morocco, Mozambique, Myanmar (Burma), Namibia,
Nepal, Nigeria, Pakistan, Panama, Papua New Guinea, Paraguay, Peru, Philippines,
Poland, Portugal, Romania, Russia, Saudi Arabia, Singapore, Slovakia, Slovenia,
South Africa, Sri Lanka, St. Kitts and Nevis, St. Lucia, St. Vincent and the
Grenadines, Swaziland, Tanzania, Thailand, Trinidad and Tobago, Tunisia, Turkey,
Turkmenistan, Uganda, Ukraine, Uruguay, Uzbekistan, Venezuela, Vietnam,
Yugoslavia, Zambia and Zimbabwe. Among the countries that will not be considered
Emerging Markets are: Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Ireland, Italy, Japan, Luxembourg, The Netherlands, New
Zealand, Norway, Spain, Sweden, Switzerland, the United Kingdom and the United
States.
The Emerging Markets Fund may invest in securities of companies of any
size, whether traded on or off a national securities exchange. The Fund's
holdings may include emerging growth companies, which are small- or medium-sized
companies that have passed their start-up phase and that show positive earnings
and prospects for achieving profit and gain in a relatively short period of
time.
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In appropriate circumstances, such as when a direct investment by the
Emerging Markets Fund in the securities of a particular country cannot be made
or when the securities of an investment company are more liquid than the
underlying portfolio securities, the Fund may, consistent with the provisions of
the 1940 Act, invest in the securities of closed-end investment companies that
invest in foreign securities. As a shareholder in a closed-end investment
company, the Fund will bear its ratable share of the investment company's
expenses, including management fees, and will remain subject to payment of the
Fund's administration fees and other expenses with respect to assets so
invested.
Global Post-Venture Capital Fund. The investment objective of the Global
Post-Venture Capital Fund is long-term growth of capital, which it seeks to
achieve by investing primarily in equity securities of U.S. and foreign issuers
considered by CSAM to be in their post-venture capital stage of development. The
Fund pursues an aggressive investment strategy. A post-venture capital company
will be considered to be located in the country where (i) the company is
organized, (ii) where its principal activities are conducted and where at least
50% of its revenues or profits from goods produced and sold are derived,
investments are made or services are performed, or where at least 50% of its
total or net assets are situated; or (iii) where the principal trading market
for the company's securities is located. The Fund intends to invest in
post-venture capital companies, traded on national securities exchanges and in
OTC markets and other public markets in various developed countries as well as
emerging markets. Due to the nature of the venture-capital to post-venture
cycle, the Fund anticipates that the average market capitalization of companies
in which the Fund invests will be less than $1 billion at the time of
investment. CSAM believes that venture capital participation in a company's
capital structure can lead to revenue/earnings growth rates above those of
older, public companies such as those in the Dow Jones Industrial Average, the
Fortune 500 or the Morgan Stanley Capital International Europe, Australasia, Far
East ("EAFE") Index. Venture capitalists finance start-up companies, companies
in the early stages of developing new products or services and companies
undergoing a restructuring or recapitalization, since these companies may not
have access to conventional forms of financing (such as bank loans or public
issuances of stock). Venture capitalists may hold substantial positions in
companies that may have been acquired at prices significantly below the initial
public offering ("IPO") price. This may create a potential adverse impact in the
short-term on the market price of a company's stock due to sales in the open
market by venture capitalists or others who acquired the stock at lower prices
prior to the company's IPO. CSAM will consider the impact of such sales in
selecting post-venture capital investments. Venture capitalists may be
individuals or funds organized by venture capitalists which are typically
offered only to large institutions, such as pension funds and endowments, and
certain accredited investors. Outside of the U.S., venture capitalists may also
consist of merchant banks and other banking institutions that provide venture
capital financing in a manner similar to U.S. venture capitalists. Venture
capital participation in a company is often reduced when the company engages in
an IPO of its securities or when it is involved in a merger, tender offer or
acquisition.
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Unless otherwise indicated, all of the Funds are permitted, but not
obligated to, engage in the following investment strategies, subject to any
percentage limitations set forth below.
The Funds 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
Each Fund may purchase and write (sell) covered or collateralized options
on securities, securities indices and currencies for hedging purposes or to
increase total return. Up to 25% of each Fund's total assets may be at risk in
connection with these strategies. The amount of assets considered to be "at
risk" is, in the case of purchasing options, the amount of 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 OTC options. A Fund realizes
fees (referred to as "premiums") for granting the rights evidenced by the
options it has written. A put option embodies the right of its purchaser to
compel the writer of the option to purchase from the option holder an underlying
security at a specified price for a specified time period or at a specified
time. In contrast, a call option embodies the right of its purchaser to compel
the writer of the option to sell to the option holder an underlying security at
a specified price for a specified time period or at a specified time.
The potential loss associated with purchasing an option is limited to the
premium paid, and the premium would partially offset any gains achieved from its
use. However, for an option writer the exposure to adverse price movements in
the underlying security or index is potentially unlimited during the exercise
period. Writing securities options may result in substantial losses to a Fund,
force the sale or purchase of portfolio securities at inopportune times or at
less advantageous prices, limit the amount of appreciation the Fund could
realize on its investments or require the Fund to hold securities its would
otherwise sell.
The principal reason for writing covered options on a security is to
attempt to realize, through the receipt of premiums, a greater return than would
be realized on the securities alone. In return for a premium, a Fund as the
writer of a covered call option forfeits the right to any appreciation in the
value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). A Fund that
writes call options retains the risk of an increase in the price of the
underlying security. The size of the premiums that 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
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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 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, the 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 a Fund writes
covered call options on mortgage-backed securities, the mortgage-backed
securities that it holds as cover may, because of scheduled amortization or
unscheduled prepayments, cease to be sufficient cover. If this occurs, the Fund
will compensate for the decline in the value of the cover by purchasing an
appropriate additional amount of mortgage-backed securities.
Options written by a Fund will normally have expiration dates between one
and nine months from the date written. The exercise price of the options may be
below, equal to or above the market values of the underlying securities at the
times the options are written. In the case of call options, these exercise
prices are referred to as "in-the-money," "at-the-money" and "out-of-the-money,"
respectively. A Fund may write (i) in-the-money call options when 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, a 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
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purchased or written, respectively, of options of the same series) in which a
Fund may realize a profit or loss from the sale. An option position may be
closed out only where there exists a secondary market for an option of the same
series on a recognized securities exchange or in the OTC market. When a Fund has
purchased an option and engages in a closing sale transaction, whether the Fund
realizes a profit or loss will depend upon whether the amount received in the
closing sale transaction is more or less than the premium the Fund initially
paid for the original option plus the related transaction costs. Similarly, in
cases where a Fund has written an option, it will realize a profit if the cost
of the closing purchase transaction is less than the premium received upon
writing the original option and will incur a loss if the cost of the closing
purchase transaction exceeds the premium received upon writing the original
option. A Fund may engage in a closing purchase transaction to realize a profit,
to prevent an underlying security with respect to which it has written an option
from being called or put or, in the case of a call option, to unfreeze an
underlying security (thereby permitting its sale or the writing of a new option
on the security prior to the outstanding option's expiration). The 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 a Fund as the writer of an option
continues, the Fund may be assigned an exercise notice by the broker-dealer
through which the option was sold, requiring the Fund to deliver the underlying
security against payment of the exercise price. This obligation terminates when
the option expires or a Fund effects a closing purchase transaction. A Fund
cannot effect a closing purchase transaction with respect to an option once it
has been assigned an exercise notice.
There is no assurance that sufficient trading interest will exist to
create a liquid secondary market on a securities exchange for any particular
option or at any particular time, and for some options no such secondary market
may exist. A liquid secondary market in an option may cease to exist for a
variety of reasons. In the past, for example, higher than anticipated trading
activity or order flow or other unforeseen events have at times rendered certain
of the facilities of the Clearing Corporation and various securities exchanges
inadequate and resulted in the institution of special procedures, such as
trading rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that similar
events, or events that may otherwise interfere with the timely execution of
customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. Moreover, a Fund's ability to
terminate options positions established in the OTC market may be more limited
than for exchange-traded options and may also involve the risk that securities
dealers participating in OTC transactions would fail to meet their obligations
to the Fund. The Funds, however, intend to purchase OTC options only from
dealers whose debt securities, as determined by CSAM, are considered to be
investment grade. If, as a covered call option writer, the 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
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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 a Fund 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 the Fund will be able to purchase on a particular security.
Securities Index Options. Each Fund may purchase and write
exchange-listed and OTC put and call options on securities indices. 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 stock at a specified price, an option on a securities index gives the holder
the right to receive a cash "exercise settlement amount" equal to (a) the
amount, if any, by which the fixed exercise price of the option exceeds (in the
case of a put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (b) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the securities index upon which the option is based being greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
index and the exercise price of the option times a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Securities index options may be offset by entering into
closing transactions as described above for securities options.
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 a 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 a Fund writes a dealer
option, it generally will be able to close out the option
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prior to its expiration only by entering into a closing purchase transaction
with the dealer to which the Fund originally wrote the option. Although a 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 the Fund.
Until a 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 a Fund's ability to sell portfolio
securities at a time when such sale might be advantageous.
Futures Activities. Each Fund may enter into futures contracts on
securities, securities indices, foreign currencies and interest rates, and
purchase and write (sell) related options traded on exchanges designated by the
Commodity Futures Trading Commission (the "CFTC") or, if consistent with CFTC
regulations, on foreign exchanges for hedging purposes or to increase total
return. These futures contracts are standardized contracts for the future
delivery of a non-U.S. currency, an interest rate sensitive security or, in the
case of index futures contracts or certain other futures contracts, a cash
settlement with reference to a specified multiplier times the change in the
index. An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract.
Aggregate initial margin and premiums required to establish positions
other than those considered by the CFTC to be "bona fide hedging" will not
exceed 5% of a Fund's net asset value, after taking into account unrealized
profits and unrealized losses on any such contracts.
A Fund reserves the right to engage in transactions involving futures
contracts and options on futures contracts to the extent allowed by CFTC
regulations in effect from time to time and in accordance with the Fund's
policies. There is no overall limit on the percentage of Fund assets that may be
at risk with respect to futures activities.
Futures Contracts. A foreign currency futures contract provides for the
future sale by one party and the purchase by the other party of a certain amount
of a specified non-U.S. currency at a specified price, date, time and place. An
interest rate futures contract provides for the future sale by one party and the
purchase by the other party of a certain amount of a specific interest rate
sensitive financial instrument (debt security) at a specified price, date, time
and place. Securities indexes are capitalization weighted indexes which reflect
the market value of the securities represented in the indexes. An index futures
contract is an agreement to be settled by delivery of an amount of cash equal to
a specified multiplier times the difference between the value of the index at
the close of the last trading day on the contract and the price at which the
agreement is made.
No consideration is paid or received by a Fund upon entering into a
futures contract. Instead, the Fund is required to deposit in a segregated
account with its custodian an amount of cash or liquid securities acceptable to
the broker, equal to approximately 1% to 10% of the contract amount (this amount
is subject to change by the exchange on which the
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contract is traded, and brokers may charge a higher amount). This amount is
known as "initial margin" and is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Fund upon termination of
the futures contract, assuming all contractual obligations have been satisfied.
The broker will have access to amounts in the margin account if the Fund fails
to meet its contractual obligations. Subsequent payments, known as "variation
margin," to and from the broker, will be made daily as the financial instrument
or securities index underlying the futures contract fluctuates, making the long
and short positions in the futures contract more or less valuable, a process
known as "marking-to-market." A Fund will also incur brokerage costs in
connection with entering into futures transactions.
At any time prior to the expiration of a futures contract, a Fund may
elect to close the position by taking an opposite position, which will operate
to terminate the Fund's existing position in the contract. Positions in futures
contracts and options on futures contracts (described below) may be closed out
only on the exchange on which they were entered into (or through a linked
exchange). No secondary market for such contracts exists. Although the Funds 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, a 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 a
Fund may realize a loss on a futures contract or option that is not offset by an
increase in the value of the hedged position. Losses incurred in futures
transactions and the costs of these transactions will affect a Fund's
performance.
Options on Futures Contracts. 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 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
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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.
Currency Exchange Transactions. 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. 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 contracts (as described above), (iii)
through entering into forward contracts to purchase or sell currency or (iv) by
purchasing exchange-traded currency options. Risks associated with currency
forward contracts and purchasing currency options are similar to those described
herein for futures contracts and securities and stock index options. In
addition, the use of currency transactions could result in losses from the
imposition of foreign exchange controls, suspension of settlement or other
governmental actions or unexpected events.
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. The Funds may purchase exchange-traded put and call
options on foreign currencies. Put options convey the right to sell the
underlying currency at a price which is anticipated to be higher than the spot
price of the currency at the time the option is exercised. Call options convey
the right to buy the underlying currency at a price which is expected to be
lower than the spot price of the currency at the time the option is exercised.
Currency Hedging. A Fund's currency hedging will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the
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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. A Fund may not 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,
a 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 could offset, at least partially, the effects of
the adverse movements in exchange rates. The benefit to a Fund derived from
purchases of currency options, like the benefit derived from other types of
options, will be reduced by premiums and other transaction costs. Because
transactions in currency exchange are generally conducted on a principal basis,
no fees or commissions are generally involved. Currency hedging involves some of
the same risks and considerations as other transactions with similar
instruments. Although currency hedges limit the risk of loss due to a decline in
the value of a hedged currency, at the same time, they also limit any potential
gain that might result should the value of the currency increase. If a
devaluation is generally anticipated, a Fund may not be able to contract to sell
a currency at a price above the devaluation level it anticipates.
While the values of currency futures and options on futures, forward
currency contracts and currency options may be expected to correlate with
exchange rates, they will not reflect other factors that may affect the value of
a Fund's investments and a currency hedge may not be entirely successful in
mitigating changes in the value of the Fund's investments denominated in that
currency. A currency hedge, for example, should protect a Yen-denominated bond
against a decline in the Yen, but will not protect a Fund against a price
decline if the issuer's creditworthiness deteriorates.
Swaps. Each Fund may enter into swaps relating to indexes, currencies,
interest rates, equity and debt interests of foreign issuers without limit. A
swap transaction is an agreement between a Fund and a counterparty to act in
accordance with the terms of the swap contract. Index swaps involve the exchange
by a Fund with another party of the respective amounts payable with respect to a
notional principal amount related to one or more indexes. Currency swaps involve
the exchange of cash flows on a notional amount of two or more currencies based
on their relative future values. An equity swap is an agreement to exchange
streams of payments computed by reference to a notional amount based on the
performance of a basket of stocks or a single stock. Each Fund may enter into
these transactions to preserve a
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return or spread on a particular investment or portion of its assets, to protect
against currency fluctuations, as a duration management technique or to protect
against any increase in the price of securities a Fund anticipates purchasing at
a later date. Each Fund may also use these transactions for speculative
purposes, such as to obtain the price performance of a security without actually
purchasing the security in circumstances, for example, the subject security is
illiquid, is unavailable for direct investment or available only on less
attractive terms. Swaps have risks associated with them including possible
default by the counterparty to the transaction, illiquidity and, where swaps are
used as hedges, the risk that the use of a swap could result in losses greater
than if the swap had not been employed
A Fund will usually enter into swaps on a net basis (i.e. the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the agreement, with a Fund receiving or paying, as the case may be,
only the net amount of the two payments). Swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to swaps is limited to the net amount of payments that a Fund is
contractually obligated to make. If the counterparty to a swap defaults, a
Fund's risk of loss consists of the net amount of payments that a Fund is
contractually entitled to receive. Where swaps are entered into for good faith
hedging purposes, CSAM believes such obligations do not constitute senior
securities under the 1940 Act and, accordingly, will not treat them as being
subject to a Fund's borrowing restrictions. Where swaps are entered into for
other than hedging purposes, a Fund will segregate an amount of cash or liquid
securities having a value equal to the accrued excess of its obligations over
entitlements with respect to each swap on a daily basis.
Hedging Generally. In addition to entering into options, futures and
currency exchange transactions for other purposes, including generating current
income to offset expenses or increase return, 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, futures and currency exchange
transactions for hedging purposes could limit any potential gain from an
increase in the value of the position hedged. In addition, the movement in the
portfolio position hedged may not be of the same magnitude as movement in the
hedge. With respect to futures contracts, since the value of portfolio
securities will far exceed the value of the futures contracts sold by a Fund, an
increase in the value of the futures contracts could only mitigate, but not
totally offset, the decline in the value of the Fund's assets.
In hedging transactions based on an index, whether a Fund will realize a
gain or loss depends upon movements in the level of securities prices in the
stock market generally or, in the case of certain indexes, in an industry or
market segment, rather than movements in the price of a particular security. The
risk of imperfect correlation increases as the composition of a Fund's portfolio
varies from the composition of the index. In an effort to compensate for
imperfect correlation of relative movements in the hedged position and the
hedge, a Fund's hedge positions may be in a greater or lesser dollar amount than
the dollar amount of the hedged position. Such "over hedging" or "under hedging"
may adversely affect a Fund's net
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investment results if market movements are not as anticipated when the hedge is
established. Securities index futures transactions may be subject to additional
correlation risks. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which would distort the normal relationship between the
securities index and futures markets. Secondly, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market also may cause temporary
price distortions. Because of the possibility of price distortions in the
futures market and the imperfect correlation between movements in a 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 currencies, interest rates or securities
markets, as the case may be, and to predict correctly movements in the
directions of the hedge and the hedged position and the correlation between
them, which predictions could prove to be inaccurate. This requires different
skills and techniques than predicting changes in the price of individual
securities, and there can be no assurance that the use of these strategies will
be successful. Even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior or trends. Losses incurred in hedging
transactions and the costs of these transactions will affect a Fund's
performance.
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 Fund is also
subject to the risk of a default by a counterparty to an off-exchange
transaction.
Asset Coverage for Forward Contracts, Options, Futures, Options on
Futures and Swaps. Each Fund will comply with guidelines established by the
Securities and Exchange Commission (the "SEC") and other applicable regulatory
bodies with respect to coverage of options written by a Fund on securities and
indexes; currency, interest rate and security index futures contracts and
options on these futures contracts; and forward currency 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 or financial instrument
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.
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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 a Fund 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 a Fund may require the Fund to
segregate assets (as described above) equal to the exercise price. A 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 a Fund holds a
futures contract, the Fund could purchase a put option on the same futures
contract with a strike price as high or higher than the price of the contract
held. A 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.
Additional Information on Other Investment Practices.
U.S. Government Securities. The obligations issued or guaranteed by the
U.S. government in which a Fund may invest include: direct obligations of the
U.S. Treasury and obligations issued by U.S. government agencies and
instrumentalities. Included among direct obligations of the U.S. are Treasury
Bills, Treasury Notes and Treasury Bonds, which differ in terms of their
interest rates, maturities and dates of issuance. Treasury Bills have maturities
of less than one year, Treasury Notes have maturities of one to 10 years and
Treasury Bonds generally have maturities of greater than 10 years at the date of
issuance. Included among the obligations issued by agencies and
instrumentalities of the U.S. are: instruments that are supported by the full
faith and credit of the U.S. (such as certificates issued by the Government
National Mortgage Association ("GNMA")); instruments that are supported by the
right of the issuer to borrow from the U.S. Treasury (such as securities of
Federal Home Loan Banks); and instruments that are supported by the credit of
the instrumentality (such as Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC") bonds).
Other U.S. government securities the Funds may invest in include
securities issued or guaranteed by the Federal Housing Administration, Farmers
Home Loan Administration, Export-Import Bank of the U.S., Small Business
Administration, General Services Administration, Central Bank for Cooperatives,
Federal Farm Credit Banks, Federal Intermediate Credit Banks, Federal Land
Banks, Maritime Administration, Tennessee Valley Authority, District of Columbia
Armory Board and Student Loan Marketing Association. Because the U.S. government
is not obligated by law to provide support to an instrumentality it sponsors, a
Fund will invest in obligations issued by such an instrumentality only if CSAM
determines that the credit risk with respect to the instrumentality does not
make its securities unsuitable for investment by the Fund.
Money Market Obligations. Each Fund is authorized to invest, under normal
market conditions up to 20% of its total assets in domestic and foreign
short-term (one year or less remaining to maturity) money market obligations and
(with the exception of the Major
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Foreign Markets Fund) medium-term (five years or less remaining to maturity)
money market obligations. Money market instruments consist of obligations issued
or guaranteed by the U.S. government or a foreign government, their agencies or
instrumentalities; 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;
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; and repurchase agreements with respect to the foregoing.
Repurchase Agreements. Each Fund may invest in repurchase agreement
transactions with member banks of the Federal Reserve System and certain
non-bank dealers. Repurchase agreements are contracts under which the buyer of a
security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under the terms of a typical repurchase agreement, a
Fund would acquire any underlying security for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the underlying
securities will at all times be at least equal to the total amount of the
purchase obligation, including interest. The Fund bears a risk of loss in the
event that the other party to a repurchase agreement defaults on its obligations
or becomes bankrupt and the Fund is delayed or prevented from exercising its
right to dispose of the collateral securities, including the risk of a possible
decline in the value of the underlying securities during the period while the
Fund seeks to assert this right. CSAM, acting under the supervision of each
Fund's Board of Directors, 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.
Money Market Mutual Funds. Where CSAM believes that it would be
beneficial to a Fund and appropriate considering the factors of return and
liquidity, a Fund may invest up to 5% of its net 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 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. 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 administration fees, including management fees and other expenses with
respect to assets so invested.
Convertible Securities. Convertible securities in which a Fund may
invest, including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an investor
to benefit from increases in the market price of the underlying common stock.
Convertible securities provide higher yields than the underlying
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equity securities, but generally offer lower yields than non-convertible
securities of similar quality. The value of convertible securities fluctuates in
relation to changes in interest rates like bonds and, in addition, fluctuates in
relation to the underlying common stock. Subsequent to purchase by a Fund,
convertible securities may cease to be rated or a rating may be reduced. Neither
event will require sale of such securities, although CSAM will consider such
event in its determination of whether the Fund should continue to hold the
securities.
Debt Securities. Each Fund may invest with respect to up to 35% of its
total assets in investment grade debt securities (other than money market
obligations). Each Fund may also invest to a limited extent in zero coupon
securities. See "Additional Information Concerning Taxes" for a discussion of
the tax consequences to shareholders of a Fund that invests in zero coupon
securities. A security will be deemed to be investment grade if it is rated
within the four highest grades by Moody's, S&P or, if unrated, is determined to
be of comparable quality by CSAM. Bonds rated in the fourth highest grade have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. Debt obligations
of corporations in which the Funds may invest include corporate bonds,
debentures, debentures convertible into common stocks and notes. Debt securities
convertible into common stock and certain preferred stocks may have risks
similar to those described below. The interest income to be derived may be
considered as one factor in selecting debt securities for investment by CSAM.
The market value of debt obligations may be expected to vary depending upon,
among other factors, interest rates, the ability of the issuer to repay
principal and interest, any change in investment rating and general economic
conditions. Because the market value of debt obligations can be expected to vary
inversely to changes in prevailing interest rates, investing in debt obligations
may provide an opportunity for capital appreciation when interest rates are
expected to decline. The success of such a strategy is dependent upon CSAM's
ability to accurately forecast changes in interest rates. Subsequent to its
purchase by a Fund, an issue of securities may cease to be rated or its rating
may be reduced below the minimum required for purchase by the Fund. Neither
event will require sale of such securities, although CSAM will consider such
event in its determination of whether the Fund should continue to hold the
securities. 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.
Below Investment Grade Securities. Each Fund may (with respect to the
Emerging Markets Fund up to 35% of its net assets) invest up to 5% of its total
assets in debt securities (including convertible debt securities) rated below
investment grade and as low as C by Moody's or D by S&P, or in unrated
securities considered to be of equivalent quality. Debt securities held by a
Private Fund (as defined below) in which the Global Post-Venture Capital Fund
invests will tend to be rated below investment grade and may be rated as low as
C by Moody's or D by S&P. A security will be deemed to be investment grade if it
is rated below the four highest grades by Moody's or S&P or, if unrated, is
determined to be a comparable quality by CSAM. A Fund's holdings of debt
securities rated below investment grade (commonly referred to as "junk bonds")
may be rated as low as C by Moody's or D by S&P at the time of purchase, or may
be unrated securities considered to be of equivalent
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quality. Securities that are rated C by Moody's comprise 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. Bonds rated below investment grade may
have speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. Investors should
be aware that ratings are relative and subjective and are not absolute standards
of quality.
Securities rated below investment grade and comparable unrated
securities: (i) will likely have some quality and protective characteristics
that, in the judgment of the rating organizations, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (ii) are
predominately speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation.
While the market values of medium- and lower-rated securities and unrated
securities of comparable quality tend to react less to fluctuations in interest
rate levels than do those of higher-rated securities, the market values of
certain of these securities also tend to be more sensitive to individual
corporate developments and changes in economic conditions than higher-quality
securities. In addition, medium- and lower-rated securities and comparable
unrated securities generally present a higher degree of credit risk. Issuers of
medium- and lower-rated securities and unrated securities are often highly
leveraged and may not have more traditional methods of financing available to
them so that their ability to service their obligations during an economic
downturn or during sustained periods of rising interest rates may be impaired.
Investors should be aware that ratings are relative and subjective and are not
absolute standards of quality. The risk of loss due to default by such issuers
is significantly greater because medium- and lower-rated securities and unrated
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness.
An economic recession could disrupt severely the market for such
securities and may adversely affect the value of such securities and the ability
of the issuers of such securities to repay principal and pay interest thereon. A
Fund may have difficulty disposing of certain of these securities because there
may be a thin trading market. Because there is no established retail secondary
market for many of these securities, the Funds anticipate that these securities
could be sold only to a limited number of dealers or institutional investors. To
the extent a secondary trading market for these securities does exist, it
generally is not as liquid as the secondary market for higher-rated securities.
The lack of a liquid secondary market, as well as adverse publicity and investor
perception with respect to these securities, may have an adverse impact on
market price and a Fund's ability to dispose of particular issues when necessary
to meet the Fund's liquidity needs or in response to a specific economic event
such as a deterioration in the creditworthiness of the issuer. The lack of a
liquid secondary market for certain securities also may make it more difficult
for a Fund to obtain accurate market quotations for purposes of valuing the Fund
and calculating its net asset value.
The market value of securities in medium- and lower-rated categories is
also more volatile than that of higher quality securities. Factors adversely
impacting the market
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value of these securities will adversely impact a Fund's net asset value. A Fund
will rely on the judgment, analysis and experience of CSAM in evaluating the
creditworthiness of an issuer. In this evaluation, in addition to relying on
ratings assigned by Moody's or S&P, 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. Interest rate trends and specific
developments which may affect individual issuers will also be analyzed.
Subsequent to its purchase by a Fund, an issue of securities may cease to be
rated or its rating may be reduced. Neither event will require sale of such
securities, although CSAM will consider such event in its determination of
whether a Fund should continue to hold the securities. Normally, medium- and
lower-rated and comparable unrated securities are not intended for short-term
investment. A Fund may incur additional expenses to the extent it is required to
seek recovery upon a default in the payment of principal or interest on its
portfolio holdings of such securities. At times, adverse publicity regarding
lower-rated securities has depressed the prices for such securities to some
extent.
Structured Securities. The Funds may purchase any type of publicly traded
or privately negotiated fixed income security, including mortgage - and asset -
backed securities, structured notes, bonds or debentures, and assignments of and
participations in loans.
Mortgage-Backed Securities. Each Fund may invest in mortgage-backed
securities sponsored by U.S. and foreign issuers as well as non-governmental
issuers. Non-government issued mortgage-backed securities may offer higher
yields than those issued by government entities, but may be subject to greater
price fluctuations. Mortgage-backed securities represent direct or indirect
participations in, or are secured by and payable from, mortgage loans secured by
real property. The mortgages backing these securities include, among other
mortgage instruments, conventional 30-year fixed-rate mortgages, 15-year
fixed-rate mortgages, graduated payment mortgages and adjustable rate mortgages.
Although there may be government or private guarantees on the payment of
interest and principal of these securities, the guarantees do not extend to the
securities' yield or value, which are likely to vary inversely with fluctuations
in interest rates, nor do the guarantees extend to the yield or value of the
Fund's shares. These securities generally are "pass-through" instruments,
through which the holders receive a share of all interest and principal payments
from the mortgages underlying the securities, net of certain fees. Some
mortgage-backed securities, such as collateralized mortgage obligations
("CMOs"), make payments of both principal and interest at a variety of
intervals; others make semiannual interest payments at a predetermined rate and
repay principal at maturity (like a typical bond).
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. The occurrence of mortgage prepayments is affected by various
factors, including the level of interest rates, general economic conditions, the
location, scheduled maturity and age of the mortgage and other social and
demographic conditions. Because prepayment rates of individual pools vary
widely, it is not
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possible to predict accurately the average life of a particular pool. At
present, pools, particularly those with loans with other maturities or different
characteristics, are priced on an assumption of average life determined for each
pool. In periods of falling interest rates, the rate of prepayment tends to
increase, thereby shortening the actual average life of a pool of
mortgage-backed securities. Conversely, in periods of rising rates the rate of
prepayment tends to decrease, thereby lengthening the actual average life of the
pool. However, these effects may not be present, or may differ in degree, if the
mortgage loans in the pools have adjustable interest rates or other special
payment terms, such as a prepayment charge. Actual prepayment experience may
cause the yield of mortgage-backed securities to differ from the assumed average
life yield. Reinvestment of prepayments may occur at higher or lower interest
rates than the original investment, thus affecting a Fund's yield.
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. Each Fund may invest in U.S. and foreign
governmental and private asset-backed securities. Asset-backed securities, which
represent participations in, or are secured by and payable from, pools of
consumer loans on 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 ultimately depend on payments in
respect of the underlying loans by individuals and 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 a Fund may invest. Automobile receivables generally
are secured by automobiles. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
asset-backed securities. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in the underlying automobiles. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities. Credit card receivables are
generally unsecured, and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. In addition, there
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is no assurance that the security interest in the collateral can be realized.
The remaining maturity of any asset-backed security a Fund invests in will be
397 days or less. A Fund may purchase asset-backed securities that are unrated.
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.
Loan Participations and Assignments. The Funds may invest in fixed and
floating rate loans ("Loans") arranged through private negotiations between a
foreign government and one or more financial institutions ("Lenders"). The
majority of a Fund's investments in Loans are expected to be in the form of
participations in Loans ("Participants") and assignments of portions of Loans
from third parties ("Assignments"). Participations typically will result in a
Fund having a contractual relationship only with the Lender, not with the
borrower. A participating Fund will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In connection with purchasing Participations, a Fund
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the Loan ("Loan Agreement"), nor any
rights of set-off against the borrower, and a Fund may not directly benefit from
any collateral supporting the Loan in which it has purchased the Participation.
As a result, a participating 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, a Fund may be treated as a
general creditor of the Lender and may not benefit from any set-off between the
Lender and the borrower. A Fund will acquire Participations only if the Lender
interpositioned between a Fund and the borrower is determined by the Adviser to
be creditworthy. A Fund's rights and obligations as the purchaser of an
Assignment may differ from, and be more limited than, those held by the
assigning Lender. The lack of a liquid secondary market for both Participations
and Assignments will have an adverse impact on the value of such securities and
on a Fund's ability to dispose of Participations or Assignments. 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 a
Fund's portfolio and calculating its net asset value.
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REITs. Each 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, amended (the "Code"). By investing in a REIT, a Fund 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.
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, a 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.
Lending of Portfolio Securities. Each Fund may lend portfolio securities
to brokers, dealers and other financial organizations that meet capital and
other credit requirements or other criteria established by the Fund's Board of
Directors. These loans, if and when made, may not exceed 33 1/3% of each Fund's
total assets taken at value (including the loan collateral). A Fund will not
lend portfolio securities to its investment adviser, any sub-investment adviser
or their 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. A 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;
21
<PAGE> 36
(iii) the Fund must be able to terminate the loan at any time; (iv) the Fund
must receive reasonable interest on the loan, as well as any dividends, interest
or other distributions on the loaned securities and any increase in market
value; (v) the Fund may pay only reasonable custodian fees in connection with
the loan; and (vi) voting rights on the loaned securities may pass to the
borrower, provided, however, that if a material event adversely affecting the
investment occurs, the Board must terminate the loan and regain the right to
vote the securities. Loan agreements involve certain risks in the event of
default or insolvency of the other party including possible delays or
restrictions upon a Fund's ability to recover the loaned securities or dispose
of the collateral for the loan.
Foreign Investments. Each Fund may invest its assets in the securities of
foreign issuers. Investors should recognize that investing in foreign companies
involves certain risks, including those discussed below, which are in addition
to those associated with investing in U.S. issuers. Individual foreign economies
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency, and balance of payments positions. A Fund may invest
in securities of foreign governments (or agencies or instrumentalities thereof),
and many, if not all, of the foregoing considerations apply to such investments
as well.
Foreign Currency Exchange. Since the Funds will invest in securities
denominated in currencies other than the U.S. dollar, and since a Fund may
temporarily hold funds in bank deposits or other money market investments
denominated in foreign currencies, a Fund's investments in foreign companies 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's assets denominated in
that foreign currency. Changes in foreign currency exchange rates may also
affect the value of dividends and interest earned, gains and losses realized on
the sale of securities and net investment income and gains, if any, to be
distributed to shareholders by a Fund. Unless otherwise contracted, the rate of
exchange between the U.S. dollar and other currencies is determined by the
forces of supply and demand in the foreign exchange markets. Changes in the
exchange rate may result over time from the interaction of many factors directly
or indirectly affecting economic and political conditions in the U.S. and a
particular foreign country, including economic and political developments in
other countries. 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. 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 valuation of foreign currencies against the U.S. dollar,
particularly the forward market in foreign exchange, currency options and
currency futures.
22
<PAGE> 37
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 presents 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 and 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. The majority 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 the securities and about the foreign company or government
issuing them than is available about a domestic company or government entity.
Foreign companies are generally subject to financial reporting standards,
practices and requirements that are either not uniform or less rigorous than
those applicable to U.S. companies.
Political Instability. With respect to some foreign countries, there is
the possibility of expropriation, nationalization, or confiscatory taxation and
limitations on the use or removal of funds or other assets of a Fund, including
the withholding of dividends. Political or social instability, or domestic
developments could affect U.S. investments in those and neighboring countries.
Foreign Markets. Securities of some foreign companies are less liquid and
their prices are more volatile than securities of comparable U.S. companies.
Certain foreign countries are known to experience long delays between the trade
and settlement dates of securities purchased or sold which may result in
increased exposure to market and foreign exchange fluctuations and increased
illiquidity.
Increased Expenses. The operating expenses of a Fund, to the extent it
invests in foreign securities, may be higher than that of an investment company
investing exclusively in U.S. securities, since the expenses of the Fund, such
as the 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, may be higher than those costs incurred by
investment companies not investing in foreign securities. In addition, foreign
securities may be subject to foreign government taxes that would reduce the net
yield on such securities.
Foreign Debt Securities. Each Fund may invest up to 35% of its assets in
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
23
<PAGE> 38
denominated currencies against the U.S. dollar, which have had a substantial
impact on investment in foreign fixed-income securities. The relative
performance of various countries' fixed-income markets historically has
reflected wide variations relating to the unique characteristics of each
country's economy. Year-to-year fluctuations in certain markets have been
significant, and negative returns have been experienced in various markets from
time to time.
The foreign government securities in which the Funds may invest generally
consist of obligations issued or backed by national, state or provincial
governments or similar political subdivisions or central banks in foreign
countries. Foreign government securities also include debt obligations of
supranational entities, which include international organizations designated or
backed by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples include the International Bank for Reconstruction and Development (the
"World Bank"), the European Coal and Steel Community, the Asian Development Bank
and the InterAmerican Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt securities
of quasi-governmental agencies are issued by entities owned by either a
national, state or equivalent government or are obligations of a political unit
that is not backed by the national government's full faith and credit and
general taxing powers. An example of a multinational currency unit is the
European Currency Unit ("ECU"). An ECU represents specified amounts of the
currencies of certain member states of the European Economic Community. The
specific amounts of currencies comprising the ECU may be adjusted by the Council
of Ministers of the European Union to reflect changes in relative values of the
underlying currencies.
Sovereign Debt. Investments in sovereign debt involve special risks. The
issuer of the debt or the governmental authorities that control the repayment of
the debt may be unable or unwilling to repay principal or interest when due in
accordance with the terms of such debt, and a Fund may have limited legal
recourse in the event of a default.
Sovereign debt differs from debt obligations issued by private entities
in that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore somewhat limited. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt obligations, are of considerable significance. Also, there can be no
assurance that the holders of commercial bank loans to the same sovereign entity
may not contest payments to the holders of sovereign debt in the event of
default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which a
24
<PAGE> 39
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local government
or agency.
The occurrence of political, social or diplomatic changes in one or more
of the countries issuing sovereign debt could adversely affect a Fund's
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their sovereign debt. While CSAM intends to manage the Funds in a manner that
will minimize the exposure to such risks, there can be no assurance that adverse
political changes will not cause a Fund to suffer a loss of interest or
principal on any of its holdings.
Investors should also be aware that certain sovereign debt instruments in
which a Fund may invest involve great risk. Sovereign debt issued by issuers in
many emerging markets generally is deemed to be the equivalent in terms of
quality to securities rated below investment grade by Moody's and S&P. Such
securities are regarded as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligations and involve major risk exposure to adverse conditions.
Some of such sovereign debt, which may not be paying interest currently or may
be in payment default, may be comparable to securities rated "D" by S&P or "C"
by Moody's. A Fund may have difficulty disposing of certain sovereign debt
obligations because there may be a limited trading market for such securities.
Because there is no liquid secondary market for many of these securities, the
Funds anticipate that such securities could be sold only to a limited number of
dealers or institutional investors. The lack of a liquid secondary market may
have an adverse impact on the market price of such securities and a Fund's
ability to dispose of particular issues when necessary to meet a Fund's
liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities also may make it more difficult for a
Fund to obtain accurate market quotations for purposes of valuing a Fund's
portfolio and calculating its net asset value. When and if available, fixed
income securities may be purchased by a Fund at a discount from face value.
However, the Funds do not intend to hold such securities to maturity for the
purpose of achieving potential capital gains, unless current yields on these
securities remain attractive. From time to time, a Fund may purchase securities
not paying interest at the time acquired if, in the opinion of CSAM, such
securities have the potential for future income or capital appreciation.
Depositary Receipts. The 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"). Certain of the risks relating to investments in foreign
securities may be involved with respect to investments in ADRs, EDRs and 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
25
<PAGE> 40
referred to as Global Depository Receipts ("GDRs"), are receipts issued outside
the U.S. EDRs (CDRs) and IDRs (GDRs) are typically issued by non-U.S. banks and
trust companies that evidence ownership of either foreign or domestic
securities. Generally, ADRs in registered form are designed for use in U.S.
securities markets, and EDRs (CDRs) and IDRs (GDRs) in bearer form are designed
for use in European securities markets and non-U.S. securities markets,
respectively.
Privatizations. Each Fund may invest in privatizations (i.e. foreign
government programs of selling interests in government-owned or controlled
enterprises). The Major Foreign Markets Fund, the International Equity Fund, the
International Small Company Fund and the Emerging Markets Fund could invest to a
significant extent in Privatizations. 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. Each Fund may invest in so-called "Brady Bonds," which are
securities created through the exchange of existing commercial bank loans to
public and private entities for new bonds in connection with debt restructurings
under a debt restructuring plan announced by former U.S. Secretary of the
Treasury Nicholas F. Brady. The Major Foreign Markets Fund, the International
Equity Fund, the International Small Company Fund and the Emerging Markets Fund
could invest to a significant extent in Brady Bonds. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (primarily
the U.S. dollar) and are currently actively traded in the OTC secondary market
for debt instruments. Brady Bonds have been issued only recently and therefore
do not have a long payment history. In light of the history of commercial bank
loan defaults by Latin American public and private entities, investments in
Brady Bonds may be viewed as speculative.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate
par bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payment on these Brady Bonds generally are collateralized by
cash or securities in the amount that, in the case of fixed rate bonds, is equal
to at least one year of rolling interest payments or, in the case of floating
rate bonds, initially is equal to at least one year's rolling interest payments
based on the applicable interest rate at that time and is adjusted at regular
intervals thereafter.
Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk").
Emerging Markets. Each Fund may (in the case of the Major Foreign Markets
Fund, with respect to up to 10% of its net assets, and in the case of the
International Small Company Fund, up to 25% of its net assets) invest in
securities of issuers located in "emerging markets" (less developed countries
located outside of the U.S.). Investing in emerging markets involves not only
the risks described above with respect to investing in foreign securities, but
also other risks, including exposure to economic structures that are generally
26
<PAGE> 41
less diverse and mature than, and to political systems that can be expected to
have less stability than, those of developed countries. For example, many
investments in emerging markets experienced significant declines in value due to
political and currency volatility in emerging markets countries during the
latter part of 1997 and the first half of 1998. Other characteristics of
emerging markets that may affect investment include certain national policies
that may restrict investment by foreigners in issuers or industries deemed
sensitive to relevant national interests and the absence of developed structures
governing private and foreign investments and private property. The typically
small size of the markets of securities of issuers located in emerging markets
and the possibility of a low or nonexistent volume of trading in those
securities may also result in a lack of liquidity and in price volatility of
those securities.
Japanese Investments. Because the International Equity and Major Foreign
Markets Funds may from time to time have large positions in Japanese securities
and the International Small Company Fund may also invest in Japanese securities,
these Funds may be subject to general economic and political conditions in
Japan. These conditions include future political and economic developments, the
possible imposition of, or changes in, exchange controls or other Japanese
governmental laws or restrictions applicable to such investments, diplomatic
developments, political or social unrest and natural disasters
Securities in Japan are denominated and quoted in "yen." Yen are fully
convertible and transferable based on floating exchange rates. In determining
the net asset value of shares of the Fund, assets or liabilities initially
expressed in terms of Japanese yen will be translated into U.S. dollars at the
current selling rate of Japanese yen against U.S. dollars. As a result, the
value of the Fund's assets as measured in U.S. dollars may be affected favorably
or unfavorably by fluctuations in the value of Japanese yen relative to the U.S.
dollar.
The decline in the Japanese securities markets since 1989 has contributed
to a weakness in the Japanese economy, and the impact of a further decline
cannot be ascertained. The common stocks of many Japanese companies continue to
trade at high price-earnings ratios in comparison with those in the U.S., even
after the recent market decline. Differences in accounting methods make it
difficult to compare the earnings of Japanese companies with those of companies
in other countries, especially the U.S.
THE INFORMATION SET FORTH IN THIS SECTION HAS BEEN EXTRACTED FROM VARIOUS
GOVERNMENTAL PUBLICATIONS AND OTHER SOURCES. THE FUNDS MAKE NO REPRESENTATION AS
TO THE ACCURACY OF THE INFORMATION, NOR HAVE THE FUNDS ATTEMPTED TO VERIFY IT.
FURTHERMORE, NO REPRESENTATION IS MADE THAT ANY CORRELATION EXISTS BETWEEN JAPAN
OR ITS ECONOMY IN GENERAL AND THE PERFORMANCE OF EACH FUND.
Domestic Politics
Japan has a parliamentary form of government. The legislative power is
vested in the Japanese Diet, which consists of a House of Representatives (lower
house) and a House of Councillors (upper house). Various political parties are
represented in the Diet, including
27
<PAGE> 42
the conservative Liberal Democratic Party ("LDP"), which until August 1993, had
been in power nationally since its formation in 1955. The LDP ceased to have a
majority of the lower house in June 1993, when certain members of the lower
house left the LDP and formed two new political parties. After several years of
political unrest, the LDP elected Ryutaro Hashimoto in August 1995, the minister
for international trade and industry, as its new leader, and in January 1996, he
became prime minister. Mr. Hashimoto dissolved the Diet and called a general
election in October 1996, in which the LDP won 239 of the 500 lower-house seats.
As a result, LDP members filled all the new cabinet seats for the first time in
three years. The LDP, along with its former coalition partners (the Social
Democratic Party and Shinto Sakigake) agreed to continue to work together, but
only in loose alliance. Meanwhile, many dissatisfied Diet members from the main
opposition party have left the party to join the LDP. By September 1997, enough
Diet members from the main opposition party and other parties had defected to
the LDP for the LDP to regain its simple majority in the lower house. In August
of 1998, Keizo Obuchi, foreign minister under Hashimoto, was elected to the
office of prime minister. Japan's continuing political instability may hamper
its ability to establish and maintain effective economic and fiscal policies,
and recent and future political developments may lead to changes in policy that
might adversely affect the Funds' investments.
Economic Background
Generally. Since the end of World War II, Japan has experienced
significant economic development. Since the mid-1980's, Japan has become a major
creditor nation. With the exception of the periods associated with the oil
crises of the 1970's, Japan has generally experienced very low levels of
inflation. There is no guarantee, however, that these favorable trends will
continue.
The Japanese government has called for a transformation of the economy
away from its high dependency on export-led growth towards greater stimulation
of the domestic economy. In addition, there has been a move toward more economic
liberalization and discounting in the consumer sector. These shifts have already
begun to take place and may cause disruption in the Japanese economy.
Strains in the system have also been one of the major causes of Japan's
economic weakness. The non-performing loans of financial institutions have
hampered their ability to take on risk, thus obstructing the flow of funds into
capital outlays as well as equities. The large commercial banks are having to
bear a heavy burden of the bad-debt problem (e.g., in accepting write-offs of
loans they have extended to distressed smaller institutions, in recapitalizing
failed institutions and in stepping up contributions to the Deposit Insurance
Corporation, an organization jointly established in 1971 by the government and
private financial institutions to protect depositors). While the banking system
appears to be making some progress in its attempt to deal with non-performing
assets, it is extremely difficult to gauge the true extent of the bad-debt
problem which could lead to a crisis in the banking system.
Japan's economy is a market economy in which industry and commerce are
predominantly privately owned and operated. However, the Japanese government is
involved
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<PAGE> 43
in establishing and meeting objectives for developing the economy and improving
the standard of living of the Japanese people.
Japan is largely dependent upon foreign economies for raw materials. For
instance, almost all of its oil is imported, the majority from the Middle East.
In the past, oil prices have had a major impact on the domestic economy, but
more recently Japan has worked to reduce its dependence on oil by encouraging
energy conservation and use of alternative fuels. In addition, a restructuring
of industry, with emphasis shifting from basic industries to processing and
assembly-type industries, has contributed to the reduction of oil consumption.
However, there is no guarantee this favorable trend will continue.
Economic Trends. The following tables set forth Japan's gross domestic
product and certain other economic indicators for the years shown.
GROSS DOMESTIC PRODUCT (GDP)
(yen in billions)
<TABLE>
<CAPTION>
1998* 1997 1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consumption Expenditures
Private.............. Yen303,050 Yen308,472 Yen299,440 Yen290,515 Yen286,154 Yen278,703 Yen272,294 Yen261,891
Government........... 50,083 50,239 48,969 47,555 45,743 44,771 43,262 41,356
Gross Fixed
Capital Formation.... 133,044 143,217 148,190 136,792 137,291 140,433 143,525 143,998
Increase (Decrease) in
Stocks............... 914 828 1,058 947 50 620 1,489 3,453
Exports of Goods and
Services................ 56,355 55,979 49,598 45,393 44,410 44,197 47,384 46,723
Imports of Goods and
Services................ 46,753 51,331 46,900 38,272 34,387 33,343 36,891 39,121
GDP (Expenditures)...... 499,191 507,403 500,356 482,930 479,260 475,381 471,064 458,299
Change in GDP from
Preceding Year.......... (1.6)% 1.4% 3.6% 0.8% 0.8% 0.9% 2.8% 6.6%
</TABLE>
<TABLE>
<CAPTION>
1990
----
<S> <C>
Consumption Expenditures
Private.............. Yen249,288
Government........... 38,807
Gross Fixed
Capital Formation.... 136,467
Increase (Decrease) in
Stocks............... 2,430
Exports of Goods and
Services................ 45,920
Imports of Goods and
Services................ 42,872
GDP (Expenditures)...... 430,040
Change in GDP from
Preceding Year.......... --
</TABLE>
Source: International Monetary Fund, International Financial Statistics
- ------------------
* Average of the first and second quarters of 1998.
29
<PAGE> 44
<TABLE>
<CAPTION>
WHOLESALE PRICE INDEX CONSUMER PRICE INDEX
(Base Year: 1990) (Base Year: 1990)
All Change from Change from
Year Commodities Preceding Year General Preceding Year
---- ----------- -------------- ------- --------------
<S> <C> <C> <C> <C>
1990 100.0 -- 100.0 --
1991 100.2 0.2 103.3 3.3
1992 98.7 (1.5) 105.1 1.8
1993 95.0 (3.7) 106.4 1.3
1994 93.0 (2.0) 107.1 0.7
1995 92.2 (0.8) 107.0 (0.1)
1996 92.3 0.1 107.2 0.2
1997 93.7 1.4 109.0 0.5
1998 91.7* (2.0) 109.6** 0.6
Source: International Monetary Fund, Source: International Monetary Fund,
International Financial Statistics International Financial Statistics
</TABLE>
- ------------------
* Average of the first eleven months of 1998.
** Average of the first ten months of 1998.
Currency Fluctuation. Investments by a Fund in Japanese securities will
be denominated in yen and most income received by these Funds from such
investments will be in yen. However, the Funds' net asset value will be
reported, and distributions will be made, in U.S. dollars. Therefore, a decline
in the value of the yen relative to the U.S. dollar could have an adverse effect
on the value of a Fund's Japanese investments. The following table presents the
average exchange rates of Japanese yen for U.S. dollars for the years shown:
AVERAGE CURRENCY EXCHANGE RATES
<TABLE>
<CAPTION>
Year Yen Per U.S. Dollar
---- -------------------
<S> <C>
1990 144.79
1991 134.71
1992 126.65
1993 111.20
1994 102.21
1995 94.06
1996 108.78
1997 120.99
1998 139.11*
</TABLE>
Source: International Monetary Fund, International Financial Statistics
- ------------------
* Average of the first eleven months of 1998.
30
<PAGE> 45
Securities Markets
The Exchange Market. The Japanese exchange market is a highly
systematized, government regulated market currently consisting of eight stock
exchanges. The three main Japanese Exchanges (Tokyo, Osaka and Nagoya) are
comprised of First and Second Sections. The First Sections have more stringent
listing standards with respect to a company's number of years in existence,
number of outstanding shares and trading volume and, accordingly, list larger,
more established companies than the Second Sections. The Tokyo Stock Exchange
("TSE") is the largest exchange and, as of December 31, 1998, the First Section
of the TSE listed 1,340 companies with market capitalization of approximately
267.8 trillion yen (approximately $2.3 trillion as of such date). The Second
Sections of the main Japanese Exchanges generally list smaller, less capitalized
companies than those traded on the First Sections. As of December 31, 1998, the
Second Section of the TSE listed 498 companies with market capitalization of
approximately 7.4 trillion yen (approximately $64 billion as of such date).
The OTC Market. The Japanese OTC market ("JASDAQ") is less systematized
than the stock exchanges. Trading of equity securities through the JASDAQ market
is conducted by securities firms in Japan, primarily through an organization
which acts as a "matching agent," as opposed to a recognized stock exchange.
Consequently, securities traded through JASDAQ may, from time to time, and
especially in falling markets, become illiquid and experience short-term price
volatility and wide spreads between bid and offer prices. This combination of
limited liquidity and price volatility may have an adverse effect on the
investment performance of a Fund. In periods of rapid price increases, the
limited liquidity of JASDAQ restricts a Fund's ability to adjust its portfolio
quickly in order to take full advantage of a significant market increase, and
conversely, during periods of rapid price declines, it restricts the ability of
a Fund to dispose of securities quickly in order to realize gains previously
made or to limit losses on securities held in its portfolio. In addition,
although JASDAQ has generally experienced sustained growth in aggregate market
capitalization and trading volume, there have been periods in which aggregate
market capitalization and trading volume have declined.
As of December 31, 1998, 868 issues were traded through JASDAQ, having an
aggregate market capitalization in excess of 7.7 trillion yen (approximately
$67.8 billion as of such date). The entry requirements for JASDAQ were amended
on December 1, 1998. As of February 22, 1999, there was no English translation
of the amendments available. JASDAQ has generally attracted small growth
companies or companies whose major shareholders wish to sell only a small
portion of the company's equity.
Market Risks. Although the market for Japanese equities traded on the
First Section of the TSE is substantial in terms of trading volume and
liquidity, the TSE has nonetheless exhibited significant market volatility in
the past several years. With respect to the OTC market, trades of certain stocks
may not be effected on days when the matching of buy and sell orders for such
stocks does not occur. The liquidity of the Japanese OTC market, as well as that
of the Second Sections of the exchanges, although increasing in recent years, is
limited by the small number of publicly held shares which trade on a regular
basis. Overall,
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<PAGE> 46
Japanese securities markets have declined significantly since 1989 which has
contributed to a weakness in the Japanese economy and the impact of a further
decline cannot be ascertained.
Other Factors
The islands of Japan lie in the western Pacific Ocean, off the eastern
coast of the continent of Asia. Japan has in the past experienced earthquakes
and tidal waves of varying degrees of severity, and the risks of such phenomena,
and the damage resulting therefrom, continue to exist. The long-term economic
effects of such geological factors on the Japanese economy as a whole, and on
the Fund's investments, cannot be predicted. In addition, Japan has one of the
world's highest population densities. A significant percentage of the total
population of Japan is concentrated in the metropolitan areas of Tokyo,
Yokohama, Osaka and Nagoya.
Short Sales. The International Small Company Fund and the Global
Post-Venture Capital Fund may from time to time sell securities short. A short
sale is a transaction in which the Fund sells securities it does not own in
anticipation of a decline in the market price of the securities. The current
market value of the securities sold short (excluding short sales "against the
box") will not exceed 10% of each Fund's net assets.
To deliver the securities to the buyer, the Fund must arrange through a
broker to borrow the securities and, in so doing, the Fund becomes obligated to
replace the securities borrowed at their market price at the time of
replacement, whatever that price may be. The Fund will make a profit or incur a
loss as a result of a short sale depending on whether the price of the
securities decreases or increases between the date of the short sale and the
date on which the Fund purchases the security to replace the borrowed securities
that have been sold. The amount of any loss would be increased (and any gain
decreased) by any premium or interest the Fund is required to pay in connection
with a short sale.
The Fund's obligation to replace the securities borrowed in connection
with a short sale will be secured by cash or liquid securities deposited as
collateral with the broker. In addition, the Fund will place in a segregated
account with its custodian or a qualified subcustodian an amount of cash or
liquid securities equal to the difference, if any, between (i) the market value
of the securities sold at the time they were sold short and (ii) any cash or
liquid securities deposited as collateral with the broker in connection with the
short sale (not including the proceeds of the short sale). Until it replaces the
borrowed securities, a Fund will maintain the segregated account daily at a
level so that (a) the amount deposited in the account plus the amount deposited
with the broker (not including the proceeds from the short sale) will equal the
current market value of the securities sold short and (b) the amount deposited
in the account plus the amount deposited with the broker (not including the
proceeds from the short sale) will not be less than the market value of the
securities at the time they were sold short.
Short Sales "Against the Box". With the exception of the International
Equity Fund, each Fund may use up to 10% of its net assets (taken at current
value) as collateral for short sales against the box. In a short sale, a Fund
sells a borrowed security and has a corresponding obligation to the lender to
return the identical security. The seller does not
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immediately deliver the securities sold and is said to have a short position in
those securities until delivery occurs. A Fund may engage in a short sale if at
the time of the short sale the Fund owns or has the right to obtain without
additional cost an equal amount of the security being sold short. This
investment technique is known as a short sale "against the box." It may be
entered into by a Fund to, for example, lock in a sale price for a security the
Fund does not wish to sell immediately. If a Fund engages in a short sale, the
collateral for the short position will be segregated in an account with the
Fund's custodian or qualified sub-custodian.
The Funds do not intend to engage in short sales against the box for
investment purposes. Each 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 a
Fund will endeavor to offset these costs with the income from the investment of
the cash proceeds of short sales.
If a Fund effects a short sale of securities at a time when it has an
unrealized gain on the securities, it may be required to recognize that gain as
if it had actually sold the securities (as a "constructive sale") on the date it
effects the short sale. However, such constructive sale treatment may not apply
if 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.
Warrants. Each Fund may invest up to 10% of its net assets (in the case
of the Major Foreign Markets and Global Post-Venture Capital Funds, up to 10% of
total assets) in warrants. Warrants are securities that give the holder the
right, but not the obligation to purchase equity issues of the company issuing
the warrants, or a related company, at a fixed price either on a date certain or
during a set period. A Fund may invest in warrants to purchase equity securities
consisting of common and preferred stock. The equity security underlying a
warrant is authorized 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. At the time of issue, the cost of a warrant is
substantially less than the cost of the underlying security itself, and price
movements in the underlying security are generally magnified in the price
movements of the warrant. This leveraging effect enables the investor to gain
exposure to the underlying security with a relatively low capital investment.
This leveraging increases an investor's risk, however, in the event of a decline
in the value of the underlying security and can result in a complete loss of the
amount invested in the warrant. In addition, the price of a warrant tends to be
more volatile than, and may not correlate exactly to, the price of the
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underlying security. If the market price of the underlying security is below the
exercise price of the warrant on its expiration date, the warrant will generally
expire without value. 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. Each Fund may not invest
more than 15% of its net assets (10% of total assets in the case of the
International Equity Fund) in non-publicly traded and illiquid securities,
including securities that are illiquid by virtue of the absence of a readily
available market, time deposits maturing in more than seven days, certain Rule
144A Securities (as defined below), Private Funds (in the case of the Global
Post-Venture Capital Fund), and repurchase agreements which have a maturity of
longer than seven days. Securities that have legal or contractual restrictions
on resale but have a readily available market are not considered illiquid for
purposes of this limitation. Repurchase agreements subject to demand are deemed
to have a maturity equal to the notice period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Non-publicly traded securities (including Rule 144A Securities
and, with respect to the Global Post-Venture Capital Fund, Private Funds) 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. 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 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. 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
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fact that there are contractual or legal restrictions on resale to the general
public or to certain institutions may not be indicative of the liquidity of such
investments.
Rule 144A Securities. Rule 144A under the Securities Act adopted by the
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 commercial paper will expand further as a result of this
regulation and use of automated systems for the trading, clearance and
settlement of unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of Securities Dealers,
Inc.
An investment in Rule 144A Securities will be considered illiquid and
therefore subject to the Fund's limit on the purchase of illiquid securities
unless the Board or its delegates determines that the Rule 144A Securities are
liquid. In reaching liquidity decisions, the Board and its delegates may
consider, inter alia, the following factors: (i) the unregistered nature of the
security; (ii) the frequency of trades and quotes for the security; (iii) the
number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (iv) dealer undertakings to make a market in the
security and (v) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer).
Investing in Rule 144A Securities could have the effect of increasing the
level of illiquidity in the Funds to the extent that qualified institutional
buyers are unavailable or uninterested in purchasing such securities from the
Funds. The Boards may adopt guidelines and delegate to CSAM the daily function
of determining and monitoring the liquidity of Rule 144A Securities, although
each Board will retain ultimate responsibility for any 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, so long as there is asset
coverage of at least 300% for all borrowings of the Fund and each Fund may
pledge its assets to the extent necessary to secure permitted borrowings (up to
10% of its total assets in the case of the International Equity Fund).
Additional investments (including roll-overs) will not be made when borrowings
(including reverse repurchase agreements) exceed 5% of a Fund's total assets
(net assets in the case of the Global Post-Venture Capital Fund). Although the
principal of such borrowings will be fixed, the Fund's assets may change in
value during the time the borrowing is outstanding. Each Fund expects that some
of its borrowings may be made on a secured basis. In such situations, either the
custodian will segregate the pledged assets for the benefit of the lender or
arrangements will be made with a suitable subcustodian, which may include the
lender.
Stand-By Commitments. The Major Foreign Markets Fund, the Emerging
Markets Fund, the International Small Company Fund and the Global Post-Venture
Capital
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Fund may invest in stand-by commitments with respect to securities held in their
portfolios. Under a stand-by commitment, a dealer agrees to purchase at a Fund's
option specified securities at a specified price. A Fund's right to exercise
stand-by commitments is unconditional and unqualified. Stand-by commitments
acquired by a Fund may also be referred to as "put" options. A stand-by
commitment is not transferable by a Fund, although a 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, the Funds 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. A 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) a 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 a Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date during that period.
Each Fund expects that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a 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 a Fund's portfolio will not
exceed 1/2 of 1% of the value of a Fund's total assets calculated immediately
after each stand-by commitment is acquired.
The acquisition of a stand-by commitment would not affect the valuation
or assumed maturity of the underlying securities. Stand-by commitments acquired
by a Fund would be valued at zero in determining net asset value. Where a 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 a Fund. Stand-by commitments would not affect the
average weighted maturity of a Fund's portfolio.
Reverse Repurchase Agreements. With the exception of the International
Equity Fund, each Fund may enter into reverse repurchase agreements with member
banks of the Federal Reserve System and certain non-bank dealers, although none
of the Funds intend to enter into reverse repurchase agreements in the coming
year. 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
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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. Reverse repurchase agreements involve the
risk that the market value of the securities retained in lieu of sale may
decline below the price of the securities the Fund has sold but is obligated to
repurchase. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, such buyer or its trustee
or receiver may receive an extension of time to determine whether to enforce a
Fund's obligation to repurchase the securities, and the Fund's use of the
proceeds of the reverse repurchase agreement may effectively be restricted
pending such decision.
When-Issued Securities and Delayed-Delivery Transactions. Each Fund may
utilize up to 20% of its total 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).
In these transactions, payment for and delivery of the securities occur beyond
the regular settlement dates, normally within 30-45 days after the transaction.
The Funds will 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 and delayed-delivery 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-issued securities may include securities purchased on a "when, as
and if issued" basis, under which the issuance of the security depends on the
occurrence of a subsequent event, such as approval of a merger, corporate
reorganization or debt restructuring.
When a Fund agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash or certain liquid securities that
are acceptable as collateral to the appropriate regulatory authority equal to
the amount of the commitment in a segregated account. Normally, the custodian
will set aside portfolio securities to satisfy a purchase commitment, and in
such a case, a Fund may be required subsequently to place additional assets in
the segregated account in order to ensure that the value of the account remains
equal to the amount of the Fund's commitment. It may be expected that a Fund's
net assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash. When
a Fund engages in when-issued or delayed-delivery transactions, it relies on the
other party to consummate the trade. Failure of the seller to do so may result
in a Fund's incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
Emerging Growth and Small Companies; Unseasoned Issuers. Each Fund may
invest its assets in the securities of Emerging Growth, Small Companies and
unseasoned issuers. Investments in emerging growth and small-sized companies, as
well as companies with continuous operations of less than three years
("unseasoned issuers"), which may include
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foreign securities, involve considerations that are not applicable to investing
in securities of established, larger-capitalization issuers, including reduced
and less reliable information about issuers and markets, less stringent
financial disclosure requirements and accounting standards, illiquidity of
securities and markets, higher brokerage commissions and fees and greater market
risk in general. In addition, securities of emerging growth and small-sized
companies and unseasoned issuers may involve greater risks since these
securities may have limited marketability and, thus, may be more volatile.
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 these companies offers potential for
above-average returns if the companies are successful, the risk exists that the
companies will not succeed and the prices of the companies' shares could
significantly decline in value. Therefore, an investment in the Funds 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. Each Fund may invest in "special situation
companies." "Special situation companies" are involved in an actual or
prospective acquisition or consolidation; reorganization; recapitalization;
merger, liquidation or 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, may provide an attractive investment
opportunity. 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.
Dollar Rolls. With the exception of the International Equity Fund, each
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, the Fund would forego
principal and interest paid on such securities. The Fund would be compensated by
the difference between the current sale 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 the 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.
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Temporary Defensive Strategies.
Debt Securities. When CSAM believes that a defensive posture is
warranted, each Fund may invest temporarily without limit in investment grade
debt obligations and in domestic and foreign money market obligations, including
repurchase agreements.
Money Market Obligations. Each Fund, for temporary defensive purposes,
may invest in domestic and foreign short-term (one year or less remaining to
maturity) and medium-term (five years or less remaining to maturity) money
market obligations without limit.
Non-Diversified Status (Emerging Markets Fund Only). The Emerging Markets Fund
is classified as a non-diversified investment company under the 1940 Act, which
means that the Fund is not limited by the 1940 Act in the proportion of its
assets that it may invest in the obligations of a single issuer. As a
non-diversified investment company, the Fund may invest a greater proportion of
its assets in the obligations of a small number of issuers and, as a result, may
be subject to greater risk with respect to portfolio securities. To the extent
that the Fund assumes large positions in the securities of a small number of
issuers, its return may fluctuate to a greater extent than that of a diversified
company as a result of changes in the financial condition or in the market's
assessment of the issuers.
The Fund's investments will be limited, however, in order to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"). To qualify, the Fund will comply with certain
requirements, including limiting its investments so that at the close of each
quarter of the taxable year (i) not more than 25% of the market value of its
total assets will be invested in the securities of a single issuer, and (ii)
with respect to 50% of the market value of its total assets, not more than 5% of
the market value of its total assets will be invested in the securities of a
single issuer and the Fund will not own more than 10% of the outstanding voting
securities of a single issuer.
Strategies Available to the Global Post-Venture Capital Fund Only
Private Fund Investments. Up to 10% of the Fund's net assets may be
invested in U.S. or foreign private limited partnerships or other investment
funds ("Private Funds") that themselves invest in equity or debt securities of
(a) companies in the venture capital or post-venture capital stages of
development or (b) companies engaged in special situations or changes in
corporate control, including buyouts. In selecting Private Funds for investment,
Abbott attempts to invest in a mix of Private Funds that will provide an above
average internal rate of return (i.e., the discount rate at which the present
value of an investment's future cash inflows (dividend income and capital gains)
are equal to the cost of the investment). CSAM believes that the Fund's
investments in Private Funds offer individual investors a unique opportunity to
participate in venture capital and other private investment funds, providing
access to investment opportunities typically available only to large
institutions and accredited investors. Although the Fund's investments in
Private Funds are limited to a maximum of 10% of the Fund's assets, these
investments are highly speculative and volatile and may
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produce gains or losses in this portion of the Fund that exceed those of the
Fund's other holdings and of more mature companies generally.
Because Private Funds generally are investment companies for purposes of
the 1940 Act, the Fund's ability to invest in them will be limited. In addition,
Fund shareholders will remain subject to the Fund's expenses while also bearing
their pro rata share of the operating expenses of the Private Funds. The ability
of the Fund to dispose of interests in Private Funds is very limited and will
involve certain risks. In valuing the Fund's holdings of interests in Private
Funds, the Fund will be relying on the most recent reports provided by the
Private Funds themselves prior to calculation of the Fund's net asset value.
These reports, which are provided on an infrequent basis, often depend on the
subjective valuations of the managers of the Private Funds and, in addition,
would not generally reflect positive or negative subsequent developments
affecting companies held by the Private Fund. Debt securities held by a Private
Fund will tend to be rated below investment grade and may be rated as low as C
by Moody's or D by S&P. Securities in these rating categories are in payment
default or have extremely poor prospects of attaining any investment standing.
Although investments in Private Funds offer the opportunity for
significant capital gains, these investments involve a high degree of business
and financial risk that can result in substantial losses in the portion of a
Fund's portfolio invested in these investments. Among these are the risks
associated with investment in companies in an early stage of development or with
little or no operating history, companies operating at a loss or with
substantial variation in operation results from period to period, companies with
the need for substantial additional capital to support expansion or to maintain
a competitive position, or companies with significant financial leverage. Such
companies may also face intense competition from others including those with
greater financial resources or more extensive development, manufacturing,
distribution or other attributes, over which the Fund will have no control.
Interests in the Private Funds in which a Fund may invest will be subject
to substantial restrictions on transfer and, in some instances, may be
non-transferable for a period of years. Private Funds may participate in only a
limited number of investments and, as a consequence, the return of a particular
Private Fund may be substantially adversely affected by the unfavorable
performance of even a single investment. Certain of the Private Funds in which
the Fund may invest may pay their investment managers a fee based on the
performance of the Fund, which may create an incentive for the manager to make
investments that are riskier or more speculative than would be the case if the
manager was paid a fixed fee. Private Funds are not registered under the 1940
Act and, consequently, are not subject to the restrictions on affiliated
transactions and other protections applicable to regulated investment companies.
The valuation of companies held by Private Funds, the securities of which are
generally unlisted and illiquid, may be very difficult and will often depend on
the subjective valuation of the managers of the Private Funds, which may prove
to be inaccurate. Inaccurate valuations of a Private Fund's portfolio holdings
may affect the Fund's net asset value calculations. Private Funds in which the
Fund invests will not borrow to increase the amount of assets available for
investment or otherwise engage in leverage.
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The Fund may also hold non-publicly traded equity securities of companies
in the venture capital and post-venture capital stages of development, such as
those of closely-held companies or private placements of public companies. The
portion of the Fund's assets invested in these non-publicly traded securities
will vary over time depending on investment opportunities and other factors. The
Fund's illiquid assets, including Private Funds and other non-publicly traded
securities, may not exceed 15% of the Fund's net assets.
Other Strategies. The Fund will invest in securities of post-venture
capital companies that are traded on a national securities exchange or in an
organized OTC market, such as The Nasdaq Stock Market, Inc., JASDAQ, EASDAQ and
AIM. The Fund may invest, directly or through Private Funds, in securities of
issuers engaged at the time of purchase in "special situations," such as a
restructuring or recapitalization; an acquisition, consolidation, merger or
tender offer; a change in corporate control or investment by a venture
capitalist. For temporary defensive purposes, such as during times of
international political or economic uncertainty, all of the Fund's investments
may be made temporarily in the U.S.
INVESTMENT RESTRICTIONS
All Funds. Certain investment limitations of each Fund may not be changed
without the affirmative vote of the holders of a majority of the Fund's
outstanding shares ("Fundamental Restrictions"). Such majority is defined as the
lesser of (i) 67% or more of the shares present at the meeting, if the holders
of more than 50% of the outstanding shares of the Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding shares.
Major Foreign Markets Fund. The investment limitations numbered 1 through
9 may not be changed without the affirmative vote of the holders of a majority
of the Fund's outstanding shares. Investment limitations 10 through 14 may be
changed by a vote of the Board at any time. The Major Foreign Markets 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 at the time of such borrowing. 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. 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
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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.
4. 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.
5. 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.
6. Purchase or sell real estate or invest in oil, gas or mineral
exploration or development programs, 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.
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,
purchase and sell currencies on a forward commitment or delayed-delivery basis
and enter into stand-by commitments.
9. Issue any senior security except as permitted in the Fund's investment
limitations.
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 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 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.
42
<PAGE> 57
14. Make short sales of securities or maintain a short position, except
that the Fund may maintain short positions in forward currency contracts,
options and futures contracts and make short sales "against the box."
If a percentage restriction (other than the percentage limitation set
forth in No. 1 and No. 12 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 the Fund's assets will
not constitute a violation of such restriction.
International Equity Fund. The investment limitations numbered 1 through
11 are Fundamental Restrictions. Investment limitations 12 through 14 may be
changed by a vote of the Board at any time. The International Equity Fund may
not:
1. Borrow money or issue senior securities except that the Fund may (a)
borrow from banks for temporary or emergency purposes, and not for leveraging,
and then in amounts not in excess of 30% of the value of the Fund's total assets
at the time of such borrowing and (b) enter into futures contracts; or mortgage,
pledge or hypothecate any assets except in connection with any bank borrowing
and in amounts not in excess of the lesser of the dollar amounts borrowed or 10%
of the value of the Fund's total assets at the time of such borrowing. Whenever
borrowings described in (a) exceed 5% of the value of the Fund's total assets,
the Fund will not make any investments (including roll-overs). For purposes of
this restriction, (a) the deposit of assets in escrow in connection with the
purchase of securities on a when-issued or delayed-delivery basis and (b)
collateral arrangements with respect to initial or variation margin for futures
contracts will not be deemed to be pledges of the Fund's assets.
2. 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.
3. 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.
4. Make loans, except that the Fund may purchase or hold publicly
distributed fixed-income securities, lend portfolio securities and enter into
repurchase agreements.
5. Underwrite any issue of securities except to the extent that the
investment in restricted securities and the purchase of fixed-income securities
directly from the issuer thereof in accordance with the Fund's investment
objective, policies and limitations may be deemed to be underwriting.
6. Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts, or invest in oil, gas or mineral exploration
or development programs, except that the Fund may invest in (a) fixed-income
securities secured
43
<PAGE> 58
by real estate, mortgages or interests therein, (b) securities of companies that
invest in or sponsor oil, gas or mineral exploration or development programs and
(c) futures contracts and related options. The entry into forward foreign
currency exchange contracts is not and shall not be deemed to involve investing
in commodities.
7. Make short sales of securities or maintain a short position.
8. Purchase, write or sell puts, calls, straddles, spreads or
combinations thereof, except that the Fund may (a) purchase put and call options
on securities, (b) write covered call options on securities, (c) purchase and
write put and call options on stock indices and (d) enter into options on
futures contracts.
9. 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.
10. Purchase more than 10% of the voting securities of any one issuer,
more than 10% of the securities of any class of any one issuer or more than 10%
of the outstanding debt securities of any one issuer; provided that this
limitation shall not apply to investments in U.S. government securities.
11. 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 futures contracts or related options will
not be deemed to be a purchase of securities on margin.
12. Invest more than 10% of the value of the Fund's total 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 and (b) time deposits maturing in more than seven
calendar days shall be considered illiquid securities.
13. Invest in warrants (other than warrants acquired by the Fund as part
of a unit or attached to securities at the time of purchase) if, as a result,
the investments (valued at the lower of cost or market) would exceed 10% of the
value of the Fund's net assets.
14. Invest in oil, gas, or mineral leases.
If a percentage restriction (other than the percentage limitation set
forth in No. 1 and No. 12) is adhered to at the time of investment, a later
increase or decrease in the percentage of assets resulting from a change in the
values of portfolio securities or in the amount of the Fund's assets will not
constitute a violation of such restriction.
International Small Company Fund. The investment limitations numbered 1
through 9 may not be changed without the affirmative vote of the holders of a
majority of the
44
<PAGE> 59
Fund's outstanding shares. Investment limitations 10 through 14 may be changed
by a vote of the Board at any time. The International Small Company 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 at the time of such borrowing. For purposes of this restriction,
short sales and 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. 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.
4. Make loans, except that the Fund may purchase or hold fixed-income
securities, including structured securities, lend portfolio securities and enter
into repurchase agreements.
5. 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.
6. Purchase or sell real estate or invest in oil, gas or mineral
exploration or development programs, 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.
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
indices, and options on futures contracts, securities, currencies or indices,
and purchase and sell currencies on a forward commitment or delayed-delivery
basis and enter into stand-by commitments.
45
<PAGE> 60
9. Issue any senior security except as permitted in the Fund's investment
limitations.
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 and 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 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. Invest in warrants (other than warrants acquired by the Fund as part
of a unit or attached to securities at the time of purchase) if, as a result,
the investments (valued at the lower of cost or market) would exceed 10% of the
value of the Fund's net assets.
14. Make additional investments (including roll-overs) if the Fund's
borrowings exceed 5% of its net assets.
If a percentage restriction (other than the percentage limitation set
forth in No. 1 and No. 12) is adhered to at the time of an investment, a later
increase or decrease in the percentage of assets resulting from a change in the
values of portfolio securities or in the amount of the Fund's assets will not
constitute a violation of such restriction.
Emerging Markets Fund. The investment limitations numbered 1 through 9
are Fundamental Restrictions. Investment limitations 10 through 14 may be
changed by a vote of the Board at any time. The Emerging Markets 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 at the time of such borrowing. 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
46
<PAGE> 61
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, 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
that the Fund may maintain short positions in forward currency contracts,
options, futures contracts and options on futures contracts and may enter into
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,
purchase and sell currencies on a forward commitment or delayed-delivery basis
and enter into stand-by commitments.
9. Issue any senior security except as permitted in the Fund's investment
limitations.
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 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 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
47
<PAGE> 62
readily available market quotations. For purposes of this limitation, repurchase
agreements with maturities greater than seven days shall be considered illiquid
securities.
13. Invest in warrants (other than warrants acquired by the Fund as part
of a unit or attached to securities at the time of purchase) if, as a result,
the investments (valued at the lower of cost or market) would exceed 10% of the
value of the Fund's net assets.
14. Make additional investments (including roll-overs) if the Fund's
borrowings exceed 5% of its net assets.
If a percentage restriction (other than the percentage limitation set
forth in No. 1 and No. 12) is adhered to at the time of investment, a later
increase or decrease in the percentage of assets resulting from a change in the
values of portfolio securities or in the amount of the Fund's assets will not
constitute a violation of such restriction.
Global Post-Venture Capital Fund. The investment limitations numbered 1
through 9 are Fundamental Restrictions. Investment limitations 10 through 13 may
be changed by a vote of the Board at any time. The Global Post-Venture Capital
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 at the time of such borrowing. 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. 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.
4. 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.
5. 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.
48
<PAGE> 63
6. Purchase or sell real estate or invest in oil, gas or mineral
exploration or development programs, 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.
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,
purchase and sell currencies on a forward commitment or delayed-delivery basis
and enter into stand-by commitments.
9. Issue any senior security except as permitted in the Fund's investment
limitations.
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 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 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.
If a percentage restriction (other than the percentage limitation set
forth in No. 1 and No. 12) is adhered to at the time of investment, a later
increase or decrease in the percentage of assets resulting from a change in the
values of portfolio securities or in the amount of the Fund's assets will not
constitute a violation of such restriction.
PORTFOLIO VALUATION
The following is a description of the procedures used by the Funds in
valuing their assets.
49
<PAGE> 64
Securities listed on a U.S. securities exchange (including securities
traded through the Nasdaq National Market System) or foreign securities exchange
or traded in an OTC market will be valued at the most recent sale as of the time
the valuation is made or, in the absence of sales, at the mean between the
highest bid and lowest asked quotations. If there are no such quotations, the
value of the securities will be taken to be the most recent bid quotation on the
exchange or market. Options contracts will be valued similarly. Futures
contracts will be valued at the most recent settlement price at the time of
valuation. A security which is listed or traded on more than one exchange is
valued at the quotation on the exchange determined to be the primary market for
such security. The valuation of short sales of securities, which are not traded
on a national exchange, will be at the mean of bid and asked prices. In
determining the market value of portfolio investments, the 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. The Global Post-Venture Capital Fund's investments in Private Funds
will be valued initially at cost and, thereafter, in accordance with periodic
reports received by Abbott from the Private Funds (generally quarterly). Because
the issuers of securities held by Private Funds are generally not subject to the
reporting requirements of the federal securities laws, interim changes in the
value of investments in Private Funds will not generally be reflected in the
Fund's net asset value. However, CSAM will report to the Board of the Fund
information about certain holdings of Private Funds that, in its judgment, could
have a material impact on the valuation of a Private Fund. The Board of the Fund
will take these reports into account in valuing Private Funds.
Securities, options, futures contracts and other assets for which market
quotations are not available, including with respect to the Global Post-Venture
Capital Fund, Private Funds, 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, "NYSE", is open for trading).
The NYSE is currently scheduled to be closed on New Year's Day, Dr. Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day, and on the preceding Friday
or subsequent Monday when one of these holidays falls on a Saturday or Sunday,
respectively. In addition, securities trading in a particular country or
countries may
50
<PAGE> 65
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. Events affecting the values of portfolio securities
that occur between the time their prices are determined and the close of regular
trading on the NYSE will not be reflected in the Fund's calculation of net asset
value unless the Board or its delegates deems that the particular event would
materially affect net asset value, in which case an adjustment may be made. 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 (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 objective.
Purchases and sales of newly issued portfolio securities are usually principal
transactions without brokerage commissions effected directly with the issuer or
with an underwriter acting as principal. Other purchases and sales may be
effected on a securities exchange or OTC, 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. Purchases
of Private Funds through a broker or placement agent may also involve a
commission or other fee. There is generally no stated commission in the case of
securities traded in domestic or foreign OTC markets, but the price of
securities traded in OTC markets includes an undisclosed commission or mark-up.
U.S. Government securities are generally purchased from underwriters or dealers,
although certain newly issued U.S. Government Securities may be purchased
directly from the U.S. Treasury or from the issuing agency or instrumentality.
No brokerage commissions are typically paid on purchases and sales of U.S.
Government Securities.
Except for Private Funds managed by Abbott (with respect to the Global
Post-Venture Capital Fund), 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.
51
<PAGE> 66
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 a 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 due to brokerage business on
behalf of the Funds may be useful to CSAM in serving its other clients and,
conversely, 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
Funds. 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 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. For the fiscal year
ended October 31, 1998, $9,749.88, $867,683.19, $9.00, $8,276.36 and $1,448.00
of total brokerage commissions was paid by the Major Foreign Markets Fund, the
International Equity Fund, the International Small Company Fund, the Emerging
Markets Fund and the Global Post-Venture Capital Fund, respectively, to brokers
and dealers who provided such research and other services.
The following table details amounts paid by each Fund in commissions to
broker-dealers for execution of portfolio transactions during the indicated
fiscal years or periods ended October 31.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
FUND 1996 1997 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Major Foreign Markets Fund N/A $19,273 (1) $192,591 (2)
- ------------------------------------------------------------------------------------------------
International Equity Fund $8,400,700 $12,784,100(3) $13,044,983
- ------------------------------------------------------------------------------------------------
International Small Company Fund N/A N/A $5,459
- ------------------------------------------------------------------------------------------------
Emerging Markets Fund $1,416,683 $2,287,575 (3) $1,052,556(4)
- ------------------------------------------------------------------------------------------------
Global Post-Venture Capital Fund $3,819 $15,386 (2) $15,541
- ------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 67
(1) During the period March 31, 1997 (commencement of operations) through
October 31, 1997; commissions paid by the Warburg, Pincus Institutional
Fund, Inc. on behalf of the Managed EAFE(R) Countries Portfolio.
(2) The increased size in commissions payments in the 1998 fiscal year (with
respect to the Major Foreign Markets Fund) and in the 1996 and 1997
fiscal years (with respect to the Global Post-Venture Capital Fund) was
attributable to the increased size of those Funds and increased equity
investments.
(3) The increase in brokerage commissions paid by the International Equity
and Emerging Markets Funds in 1997 was a result of sharp increases in the
volume of share-related activity as the Funds experienced large inflows
or outflows of capital, as the case may be.
(4) The decrease in brokerage commissions paid by the Emerging Markets Fund
in 1998 was a result of fluctuations in the net asset value of the Fund.
The table below shows the amount of outstanding repurchase agreements
that each Fund had, as of October 31, 1998, with State Street Bank & Co., one of
the regular broker-dealers of each Fund.
<TABLE>
<S> <C>
- -------------------------------------------------------------
Major Foreign Markets Fund $4,736,000
- -------------------------------------------------------------
International Equity Fund $139,336,000
- -------------------------------------------------------------
International Small Company Fund $201,000
- -------------------------------------------------------------
Emerging Markets Fund $3,968,000
- -------------------------------------------------------------
Global Post-Venture Capital Fund $178,000
- -------------------------------------------------------------
</TABLE>
Investment decisions for a Fund concerning specific portfolio securities
are made independently from those for other clients advised by CSAM or, in the
case of the Global Post-Venture Capital Fund, Abbott. 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 or Abbott, as the case may be,
believes to be equitable to each client, including the Funds. In some instances,
this investment procedure may adversely affect the price paid or received by the
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, Abbott (in the case of the Global
Post-Venture Capital Fund) 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.
53
<PAGE> 68
Transactions for a Fund may be effected on foreign securities exchanges.
In transactions for securities not actively traded on a foreign securities
exchange, the Fund will deal directly with the dealers who make a market in the
securities involved, except in those circumstances where better prices and
execution are available elsewhere. Such dealers usually are acting as principal
for their own account. On occasion, securities may be purchased directly from
the issuer. Such portfolio securities are generally traded on a net basis and do
not normally involve brokerage commissions. Securities firms may receive
brokerage commissions on certain portfolio transactions, including options,
futures and options on futures transactions and the purchase and sale of
underlying securities upon exercise of options.
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 a Fund could result in high
portfolio turnover. For example, options on securities may be sold in
anticipation of a decline in the price of the underlying security (market
decline) or purchased in anticipation of a rise in the price of the underlying
security (market rise) and later sold. To the extent that its portfolio is
traded for the short-term, a Fund will be engaged essentially in trading
activities based on short-term considerations affecting the value of an issuer's
stock instead of long-term investments based on fundamental valuation of
securities. Because of this policy, portfolio securities may be sold without
regard to the length of time for which they have been held.
It is not possible to predict the Funds' portfolio turnover rates. High
portfolio turnover rates (100% or more) may result in higher brokerage
commissions, dealer markups or underwriting commissions as well as other
transaction costs. In addition, gains realized from portfolio turnover may be
taxable to shareholders.
MANAGEMENT OF THE FUNDS
Officers and Board of Directors
The business and affairs of each Fund are managed by the Board of
Directors in accordance with the laws of the State of Maryland. Each Board
elects officers who are responsible for the day-to-day operations of a Fund and
who execute policies authorized by the
54
<PAGE> 69
Board. Under each Fund's Charter, a Board may classify or reclassify any
unissued shares of the Funds into one or more additional classes by setting or
changing in any one or more respects their relative rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption. A Board may similarly classify or reclassify any class
of its shares into one or more series and, without shareholder approval, may
increase the number of authorized shares of the Funds.
The names (and ages) of each Fund's Directors and officers, their
addresses, present positions and principal occupations during the past five
years and other affiliations are set forth below.
<TABLE>
<S> <C>
Richard H. Francis (67) Director/Trustee
40 Grosvenor Road Currently retired; Executive Vice President and
Short Hills, New Jersey 07078 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 Director of
P.O. Box 483 Fritz Broadcasting, Inc. and Fritz
Wilson, Wyoming 83014 Communications (developers and operators of
radio stations); Director of Advo, Inc. (direct
mail advertising); Director/Trustee of other
Warburg Pincus Funds.
Jeffrey E. Garten (52) Director/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 Funds.
</TABLE>
55
<PAGE> 70
<TABLE>
<S> <C>
James S. Pasman, Jr. (68) Director/Trustee
29 The Trillium Currently retired; President and Chief Operating
Pittsburgh, Pennsylvania 15238 Officer of National InterGroup, Inc. from April
1989 to March 1991; Chairman of Permian Oil
Co. from April 1989 to March 1991; Director of
Education Management Corp., Tyco
International Ltd.; Trustee, BT Insurance Funds
Trust; Director/Trustee of other Warburg Pincus Funds
and other CSAM-advised investment companies.
William W. Priest* (57) Chairman of the Board
153 East 53rd Street Chairman- Management Committee, Chief
New York, New York 10022 Executive Officer and Managing Director of
CSAM (U.S.) since 1990; Director of TIG
Holdings, Inc.; Director/Trustee of other
Warburg Pincus Funds and other CSAM-advised
investment companies.
Steven N. Rappaport (50) Director/Trustee
c/o Loanet, Inc. President of Loanet, Inc. since 1997; Executive
153 East 53rd Street, Vice President of Loanet, Inc. from 1994 to
Suite 5500 1997; Director, President, North American
New York, New York 10022 Operations, and former Executive Vice President
from 1992 to 1993 of Worldwide Operations of
Metallurg Inc.; Executive Vice President,
Telerate, Inc. from 1987 to 1992; Partner in the
law firm of Hartman & Craven until 1987;
Director/Trustee of other Warburg Pincus Funds
and other CSAM-advised investment companies.
Arnold M. Reichman* (51) Vice Chairman of the Board
466 Lexington Avenue Managing Director and Chief Operating Officer
New York, New York 10017-3147 of CSAM; Associated with CSAM since CSAM acquired
the Funds' predecessor adviser in July 1999;
with the predecessor adviser since 1984; Officer
of CSAMSI; Director of The RBB Fund, Inc.; Director/Trustee
of other Warburg Pincus Funds.
</TABLE>
- --------------------
* Indicates a Director/Trustee who is an "interested person" of the Fund as
defined in the 1940 Act.
56
<PAGE> 71
<TABLE>
<S> <C>
Alexander B. Trowbridge (69) Director/Trustee
1317 F Street, N.W., 5th Floor Currently retired; President of Trowbridge
Washington, DC 20004 Partners, Inc. (business consulting) from January
1990 to November 1996; Director or Trustee of
New England Mutual Life Insurance Co., ICOS
Corporation (biopharmaceuticals), IRI
International (energy services), The Rouse
Company (real estate development), Harris Corp.
(electronics and communications equipment),
The Gillette Co. (personal care products) and
Sunoco, Inc. (petroleum refining and marketing);
Director/Trustee of other Warburg Pincus Funds.
Eugene L. Podsiadlo (42) President
466 Lexington Avenue Managing Director of CSAM; Associated with
New York, New York 10017-3147 CSAM since CSAM acquired the Funds'
predecessor adviser in July 1999; with the
predecessor adviser since 1991; Vice President
of Citibank, N.A. from 1987 to 1991; Officer of
CSAMSI and of other Warburg Pincus Funds.
Hal Liebes, Esq. (35) Vice President and Secretary
153 East 53rd Street Director and General Counsel of CSAM;
New York, New York 10022 Associated with CSAM since 1995; Associated
with CS First Boston Investment Management
from 1994 to 1995; Associated with Division of
Enforcement, U.S. Securities and Exchange
Commission from 1991 to 1994; Officer of
CSAMSI and other Warburg Pincus Funds.
Michael A. Pignataro (39) 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 1986; Officer of other Warburg
Pincus Funds.
</TABLE>
57
<PAGE> 72
<TABLE>
<S> <C>
Janna Manes (31) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel of CSAM;
New York, New York 10017-3147 Associated with CSAM since CSAM acquired
the Funds' predecessor adviser in July 1999;
with the predecessor adviser since 1996;
Associated with the law firm of Willkie Farr &
Gallagher from 1993 to 1996; Officer of other
Warburg Pincus Funds.
Stuart J. Cohen, Esq. (30) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel of CSAM;
New York, New York 10017-3147 Associated with CSAM since CSAM acquired
the Funds' predecessor adviser in July 1999;
with the predecessor adviser since 1997;
Associated with the law firm of Gordon Altman
Butowsky Weitzen Shalov & Wein from 1995 to
1997; Officer of other Warburg Pincus Funds.
Rocco A. DelGuercio (36) Assistant Treasurer
153 East 53rd Street Assistant Vice President and Administrative
New York, New York 10022 Officer of CSAM; Associated with CSAM since
June 1996; Assistant Treasurer, Bankers Trust
Corp. -- Fund Administration from March 1994
to June 1996; Mutual Fund Accounting
Supervisor, Dreyfus Corporation from April
1987 to March 1994; Officer of other Warburg
Pincus Funds.
</TABLE>
No employee of CSAM, PFPC Inc., 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
the following annual and per-meeting fees:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Fee for Each
Fee for Each Audit Committee
Fund Annual Fee Meeting Attended Meeting Attended
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Major Foreign Markets Fund $ 500 $250 $400 *
- ----------------------------------------------------------------------------------------------------------------------
International Equity Fund $1,000 $250 $400 *
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE> 73
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Fee for Each
Fee for Each Audit Committee
Fund Annual Fee Meeting Attended Meeting Attended
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Small Company Fund $ 500 $250 $400 *
- ----------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund $ 500 $250 $400 *
- ----------------------------------------------------------------------------------------------------------------------
Global Post-Venture Capital Fund $ 500 $250 $400 *
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Alexander B. Trowbridge received $500 per fund serving as chairman of the
Audit Committee.
Each Director is reimbursed for expenses incurred in connection with
attendance at Board meetings.
Directors' Total Compensation
- -----------------------------
(for the fiscal period ended October 31, 1998);
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL GLOBAL ALL INVESTMENT
EMERGING INTERNATIONAL SMALL COMPANY MAJOR FOREIGN POST-VENTURE COMPANIES IN WARBURG
NAME OF DIRECTOR/TRUSTEE MARKETS FUND EQUITY FUND FUND MARKETS FUND CAPITAL FUND PINCUS FUND COMPLEX
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William W. Priest** None None None None None None
- ------------------------------------------------------------------------------------------------------------------------------------
Arnold M. Reichman** None None None None None None
- ------------------------------------------------------------------------------------------------------------------------------------
Richard N. Cooper*** $1.900 $2,400 $500 $1,900 $1,900 $56,600
- ------------------------------------------------------------------------------------------------------------------------------------
Donald J. Donahue*** $475 $600 None $475 $475 $13,525
- ------------------------------------------------------------------------------------------------------------------------------------
Richard H. Francis**** None None None None None None
- ------------------------------------------------------------------------------------------------------------------------------------
Jack W. Fritz $2,150 $2,650 $500 $2,150 $2,150 $63,100
- ------------------------------------------------------------------------------------------------------------------------------------
Jeffrey E. Garten**** $1,675 $2,050 $500 $1,675 $1,675 $49,325
- ------------------------------------------------------------------------------------------------------------------------------------
Thomas A. Melfe*** $2,150 $2,650 $500 $2,150 $2,150 $60,700
- ------------------------------------------------------------------------------------------------------------------------------------
James S. Pasman, Jr. **** None None None None None None
- ------------------------------------------------------------------------------------------------------------------------------------
Steven N. Rappaport**** None None None None None None
- ------------------------------------------------------------------------------------------------------------------------------------
Alexander B. Trowbridge $2,250 $2,750 $500 $2,250 $2,250 $64,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Each Director/Trustee serves as a Director or Trustee of 39 investment
companies in the Warburg Pincus family of funds.
** Mr. Priest and Mr. Reichman receive compensation as affiliates of CSAM,
and, accordingly, receive no compensation from any Fund or any other
investment company advised by CSAM.
*** Mr. 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.
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<PAGE> 74
**** 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.
As of January 29, 1999, Directors or officers of the Funds as a group
owned less than 1% of the outstanding shares of each Fund. As of that date, the
following shareholders beneficially owned 5% or more of each Fund's outstanding
shares.
MAJOR FOREIGN MARKETS FUND
<TABLE>
<S> <C> <C>
COMMON SHARES The Northern Trust Co TTEE* 19.65%
FBO Gatx Master Trust Ret Trust
DTD 12/19/79
500 W Monroe St.
Chicago, IL 60661-3630
INTERNATIONAL EQUITY FUND
COMMON SHARES Charles Schwab & Co. Inc.* 29.08%
Special Custody Account For The Exclusive
Benefit of Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104-4122
Nat'l Financial Svcs Corp.* 9.75%
FBO Customers
Church St. Station
PO Box 3908
New York, NY 10008-3908
ADVISOR SHARES Connecticut General Life Ins. Co.* 99.66%
On Behalf Of Its Separate Account
55F c/o Melissa Spencer M110
CIGNA Corp PO Box 2975
Hartford, CT 06104-2975
INTERNATIONAL SMALL COMPANY FUND
COMMON SHARES Warburg Pincus Asset Mgmt 34.40%
Attn: Stephen Distler
466 Lexington Ave., 10th Fl.
New York, NY 10017-3140
Fox And Co 7.19%
P.O. Box 976
New York, NY 10268-0976
</TABLE>
60
<PAGE> 75
<TABLE>
<S> <C> <C>
Guarantee & Trust Co TTE 6.73%
Stuart Goode IRA R/O
70 E. 77th St., Apt. 9A
New York, NY 10021-1811
State Street Bank And Trust 5.07%
Cust For The IRA Of
Frank J. Sebestyen III
4/24 Mercer Rd.
Armadale Victoria
3143 Australia
EMERGING MARKETS FUND
COMMON SHARES Charles Schwab & Co Inc.* 29.64%
Special Custody Account For The
Exclusive Benefit Of Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104-4122
Salomon Smith Barney Inc.* 18.39%
Book Entry Account
Attn: Matt Maesstri
333 West 34th Street
7th Floor, Mutual Fund Dept.
New York, NY 10001-2483
Nat'l Financial Svcs. Corp.* 10.55%
FBO Customers
P.O. Box 3908
Church St. Station
New York, NY 10008-3908
Photo Electronics Company LP 5.15%
1201 Market St., Ste 1601
Wilmington, DE 19801-1164
ADVISOR SHARES Nationsbanc Montgomery Secs 22.97%
112-36421-16
Attn: Mutual Funds: 4th Floor
600 Montgomery St.
San Francisco, CA 94111-2702
</TABLE>
61
<PAGE> 76
<TABLE>
<S> <C> <C>
Nationsbanc Montgomery Secs 20.26%
112-28360-16
Attn: Mutual Funds: 4th Floor
600 Montgomery St.
San Francisco, CA 94111-2702
Nationsbanc Montgomery Secs 20.08%
110-45178-16
Attn: Mutual Funds - 4th Floor
600 Montgomery Street
San Francisco, CA 94111-2702
Nationsbanc Montgomery Secs 19.14%
110-41287-13
Attn: Mutual Funds - 4th Floor
600 Montgomery Street
San Francisco, CA 94111-2702
Nationsbanc Montgomery Secs 11.48%
110-39647-12
Attn: Mutual Funds - 4th Floor
600 Montgomery Street
San Francisco, CA 94111-2702
Warburg Pincus Asset Mgmt. 5.07%
Attn: Stephen Distler
466 Lexington Ave., 10th Fl.
New York, NY 10017-3140
GLOBAL POST VENTURE CAPITAL FUND
COMMON SHARES Warburg Pincus Asset Mgmt. 31.90%
Attn: Stephen Distler
466 Lexington Ave., 10th Fl.
New York, NY 10017-3140
Charles Schwab & Co. Inc.* 7.96%
Special Custody Account For The
Exclusive Benefit Of Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104-4122
</TABLE>
62
<PAGE> 77
<TABLE>
<S> <C> <C>
Beth Dater 6.39%
555 Park Ave.
Apt. 9E
New York, NY 10021-8166
</TABLE>
*Each Fund believes these entities are not the beneficial owners of shares held
of record by them.
Portfolio Managers of the Funds
Major Foreign Markets Fund.
P. Nicholas Edwards is Co-Portfolio Manager of the Major Foreign Markets
Fund. Mr. Edwards has been associated with CSAM since CSAM acquired the Fund's
predecessor adviser in July 1999 and joined the predecessor adviser in 1995. Mr.
Edwards was a director at Jardine Fleming Investment Advisers, Tokyo from 1984
to 1995. Mr. Edwards earned M.A. degrees from Oxford University and Hiroshima
University in Japan.
Harold W. Ehrlich is Co-Portfolio Manager of the Major Foreign Markets
Fund. Mr. Ehrlich has been associated with CSAM since CSAM acquired the Fund's
predecessor adviser in July 1999 and joined the predecessor adviser in 1995. Mr.
Ehrlich was a senior vice president, portfolio manager and analyst at Templeton
Investment Counsel Inc. from 1987 to 1995. He was a research analyst and
assistant portfolio manager at Fundamental Management Corporation from 1985 to
1986, and a research analyst at First Equity Corporation of Florida from 1983 to
1985. Mr. Ehrlich earned a B.S.B.A. degree from the University of Florida and
earned his Chartered Financial Analyst designation in 1990.
Vincent J. McBride is an Associate Portfolio Manager of the Major Foreign
Markets Fund. Mr. McBride has been associated with CSAM since CSAM acquired the
Fund's predecessor adviser in July 1999 and joined the predecessor adviser in
1994. Mr. McBride was an international equity analyst at Smith Barney Inc. from
1993 to 1994, and at General Electric Investment Corp. from 1992 to 1993. He was
also a portfolio manager/analyst at United Jersey Bank from 1989 to 1992 and a
portfolio manager at First Fidelity Bank from 1987 to 1989. Mr. McBride earned a
B.S. degree from the University of Delaware and an M.B.A. degree from Rutgers
University.
Nancy Nierman is an Associate Portfolio Manager of the Major Foreign
Markets Fund. Ms. Nierman has been associated with CSAM since CSAM acquired the
Fund's predecessor adviser in July 1999 and joined the predecessor adviser in
1996. She was a vice president at Fiduciary Trust Company International from
1990 to 1996 and an international equity trader at TIAA-CREF from 1985 to 1990.
She received her B.B.A. degree from Baruch College in 1985.
J.H. Cullum Clark, CFA, is an Associate Portfolio Manager of the Major
Foreign Markets Fund. Mr. Clark has been associated with CSAM since CSAM
acquired the Fund's predecessor adviser in July 1999 and joined the predecessor
adviser in 1996. Mr.
63
<PAGE> 78
Clark was an analyst and portfolio manager at Brown Brothers Harriman from 1993
to 1996 and a research assistant at the U.S. Senate Select Committee on
Intelligence from 1992 to 1993. Mr. Clark received an A.M. degree from Harvard
University and a B.A. degree from Yale University. Mr. Clark also studied at the
Stanford Inter-University Center for Japanese Language Studies in 1990.
Todd Jacobson, CFA, is an Associate Portfolio Manager and Research
Analyst of the Major Foreign Markets Fund. Mr. Jacobson has been associated with
CSAM since CSAM acquired the Fund's predecessor adviser in July 1999 and joined
the predecessor adviser in 1997. He was an analyst at Brown Brothers Harriman
from 1993 to 1997. Mr. Jacobson was also an analyst with Value Line from 1989 to
1991. Mr. Jacobson received his M.B.A. degree in Finance from the Wharton School
and his B.A. degree Phi Beta Kappa in Economics from the State University of New
York - Binghamton.
International Small Company Fund.
Harold E. Sharon is Co-Portfolio Manager of the International Small
Company Fund and manages other Warburg Pincus funds. Mr. Sharon has been
associated with CSAM since CSAM acquired the Fund's predecessor adviser in July
1999 and joined the predecessor adviser in 1998. Mr. Sharon was an executive
director and portfolio manager at CIBC Oppenheimer from 1994-1998. Mr. Sharon
was previously a Vice President and Portfolio Manager at Warburg from 1990-1994.
Mr. Sharon earned a B.S. Degree with honors from the University of Rochester and
an M.S. degree in Management from the Sloan School of Management, M.I.T.
J.H. Cullum Clark is a CFA and Co-Portfolio Manager of the International
Small Company Fund (see biography above).
International Equity Fund and Emerging Markets Fund.
P. Nicholas Edwards is Co-Portfolio Manager of the International Equity
Fund (see biography above).
Harold W. Ehrlich is Co-Portfolio Manager of the International Equity
Fund (see biography above).
Vincent J. McBride is Co-Portfolio Manager of the International Equity
Fund and the Emerging Markets Fund (see biography above).
Harold E. Sharon is Co-Portfolio Manager of the International Equity Fund
and the Emerging Markets Fund (see biography above).
Morid Kamshad is an Associate Portfolio Manager of the Emerging Markets
Fund. Mr. Kamshad has been associated with CSAM since CSAM acquired the Fund's
predecessor adviser in July 1999 and joined the predecessor adviser in 1997. He
was a senior investment manager with Pictet Asset Management from 1995 to 1997.
Mr. Morid was also
64
<PAGE> 79
an investment analyst with HSBC Asset Management from 1994 to 1995 and a
business development manager with Air Products and Chemicals - France from 1989
to 1994.
Jun Sung Kim is an Associate Portfolio Manager of the Emerging Markets
Fund. Mr. Kim has been associated with CSAM since CSAM acquired the Fund's
predecessor adviser in July 1999 and joined the predecessor adviser in 1997. He
was an investment manager with Asset Korea Ltd., Seoul from 1994 to 1995. He was
also an assistant investment manager with Koeneman Capital Management, Singapore
from 1992 to 1994.
Federico D. Laffan is an Associate Portfolio Manager of the Emerging
Markets Fund. Mr. Laffan has been associated with CSAM since CSAM acquired the
Fund's predecessor adviser in July 1999 and joined the predecessor adviser in
1997. He was a senior manager and partner with Green Cay Asset Management from
1996 to 1997 and a senior portfolio manager and director with Foreign & Colonial
Emerging Markets, London from 1990 to 1996.
Global Post-Venture Capital Fund.
Elizabeth B. Dater is a Co-Portfolio Manager of the Fund and manages
other Warburg Pincus funds. Ms. Dater has been associated with CSAM since CSAM
acquired the Fund's predecessor adviser in July 1999 and joined the predecessor
adviser in 1978. Prior to that, she was a vice president of research at
Fiduciary Trust Company of New York and an institutional sales assistant at
Lehman Brothers. Ms. Dater has been a regular panelist on Maryland Public
Television's Wall Street Week with Louis Rukeyser since 1976. Ms. Dater earned a
B.A. degree from Boston University in Massachusetts.
J.H. Cullum Clark is Co-Portfolio Manager of the Global Post-Venture
Capital Fund (see biography above).
Harold E. Sharon is Co-Portfolio Manager of the Global Post-Venture
Capital Fund (see biography above).
Raymond L. Held and Thaddeus I. Gray, Investment Managers and Managing
Directors of Abbott, manage the Global Post-Venture Capital Fund's investments
in Private Funds. Abbott also acts as sub-investment adviser for other Warburg
Pincus Funds. Prior to co-founding a predecessor of Abbott in 1986, Mr. Held had
been an investment analyst and portfolio manager at Manufacturers Hanover
Investment Corporation since 1970, before which time he had been a security
analyst with Weis, Voisin, Cannon, Inc., L.M. Rosenthal & Co., Shearson, Hammill
& Co. and Standard & Poor's Corporation. Mr. Held earned an M.B.A. from New York
University, an M.A. from Columbia University and a B.A. from Queens College.
Prior to joining a predecessor of Abbott in 1989, Mr. Gray served as an
assistant vice president at Commerzbank Capital Markets Corporation and as an
associate with Credit Commercial de France in Paris in the Corporate Finance
Department. Mr. Gray received his B.A. in History from the University of
Pennsylvania and his M.B.A. in Finance from New York University. He is also a
Chartered Financial Analyst.
65
<PAGE> 80
Investment Advisers and Co-Administrators
CSAM, located at 153 East 53rd Street, New York, New York 10022, serves
as investment adviser to each Fund pursuant to a written agreement (the
"Advisory Agreement"). CSAM is an indirect wholly-owned U.S. subsidiary of
Credit Suisse ("Credit Suisse"). 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.
Abbott, located at 50 Rowes Wharf, Suite 240, Boston, Massachusetts
02110-3328, serves as sub-investment adviser to the Global Post-Venture Capital
Fund pursuant to a written agreement. Abbott, in accordance with the investment
objective and policies of the Global Post-Venture Capital Fund, makes investment
decisions for the Fund regarding investments in Private Funds, effects
transactions in interests in Private Funds on behalf of the Fund and assists in
administrative functions relating to investments in Private Funds. Abbott is an
independent specialized investment firm with assets under management of
approximately $2.3 billion. Abbott is a registered investment adviser which
concentrates on venture capital, buyout and special situations partnership
investments. Abbott's management team provides full-service private equity
programs to clients. The predecessor firm to Abbott was organized in 1986 as a
Delaware limited partnership and converted to a Delaware limited liability
company effective July 1, 1997.
Counsellors Funds Service, Inc. ("Counsellors Service") and PFPC serve as
co-administrators to each Fund pursuant to separate written agreements.
Counsellors Service provides shareholder liaison services to each Fund including
responding to shareholder inquiries and providing information on shareholder
investments. Counsellors Service also performs a variety of other services,
including furnishing certain executive and administrative services, acting as
liaison between the Funds and their various service providers, furnishing
certain corporate secretarial services, which include preparing materials for
meetings of the Board, assisting with proxy statements and annual and semiannual
reports, assisting in the preparation of tax returns and monitoring and
developing certain compliance procedures for the Funds. As compensation, the
Common Shares of each Fund pay Counsellors Service a fee calculated at an annual
rate of .10% of the Common Shares' average daily net assets.
66
<PAGE> 81
PFPC calculates each Fund's net asset value, provides all accounting
services for each Fund and assists in related aspects of each Fund's operations.
As compensation, each Fund pays PFPC a fee calculated at an annual rate of .12%
of a Fund's first $250 million in average daily net assets, .10% of the next
$250 million in average daily net assets, .08% of the next $250 million in
average daily net assets, and .05% of average daily net assets over $750
million, subject in each case to a minimum annual fee and exclusive of
out-of-pocket expenses. PFPC has its principal offices at 400 Bellevue Parkway,
Wilmington, Delaware 19809.
CSAM and the Funds' co-administrators may voluntarily waive a portion of
their fees from time to time and temporarily limit the expenses to be borne by
the Funds.
Each class of shares of a Fund bears its proportionate share of fees
payable to CSAM, Counsellors Service 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 Fund's average daily
net assets. Each Fund's co-administrators may voluntarily waive a portion of
their fees from time to time and temporarily limit the expenses to be borne by a
Fund.
67
<PAGE> 82
For the fiscal years ended October 31, 1996, October 31, 1997 and October
31, 1998 during which a Fund had investment operations, investment advisory fees
earned by CSAM's predecessor, waivers and net advisory fees for each Fund were
as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
GROSS NET
FUND YEAR/PERIOD ENDED ADVISORY FEE WAIVER ADVISORY FEE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Major Foreign Markets Fund October 31, 1997* $12,662 $12,662 0
--------------------------------------------------------------------------------
(commenced operations on 10/24/97) October 31, 1998 $230,682 $202,603 $28,079
- ----------------------------------------------------------------------------------------------------------------------------
International Equity Fund October 31, 1996 $30,605,750 None $30,605,750
--------------------------------------------------------------------------------
October 31, 1997 $33,440,864 None $33,440,864
--------------------------------------------------------------------------------
October 31, 1998 $21,710,859 $21,710,859
- ----------------------------------------------------------------------------------------------------------------------------
International Small Company Fund October 31, 1998 $5,026 $5,026 0
(commenced operations on 4/2/98)
- ----------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund October 31, 1996 $1,789,738 $1,031,252 $758,486
--------------------------------------------------------------------------------
October 31, 1997 $3,124,684 $1,146,495 $1,978,189
--------------------------------------------------------------------------------
October 31, 1998 $1,232,557 $524,180 $708,377
- ----------------------------------------------------------------------------------------------------------------------------
Global Post-Venture Capital Fund October 31, 1996 $2,470 $2,470 0
(commenced operations on 9/30/96)
--------------------------------------------------------------------------------
October 31, 1997 $49,452 $49,452 0
--------------------------------------------------------------------------------
October 31, 1998 $43,604 $43,604 0
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
PFPC and Counsellors Service earned the following amounts in
co-administration fees (portions of fees waived, if any, noted in parenthesis).
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
FUND YEAR PFPC COUNSELLORS SERVICE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Major Foreign Markets Fund October 31, 1997* $1,899 ($1,899) $1,583 ($1,583)
--------------------------------------------------------------------------------
(commenced operations on 10/24/97) October 31, 1998 $44,290 ($27,841) $23,200
- ----------------------------------------------------------------------------------------------------------------------------
International Equity Fund October 31, 1996 $1,905,288 $3,060,575
--------------------------------------------------------------------------------
October 31, 1997 $2,047,043 $3,344,086
--------------------------------------------------------------------------------
October 31, 1998 $1,486,215 $2,171,086
- ----------------------------------------------------------------------------------------------------------------------------
International Small Company Fund October 31, 1998 $3,988 ($548) $457
(commenced operations on 4/2/98)
- ----------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund October 31, 1996 $171,815 ($71,109) $143,179
--------------------------------------------------------------------------------
October 31, 1997 $297,624 $249,975
- ----------------------------------------------------------------------------------------------------------------------------
October 31, 1998 $133,902 ($11,373) $98,604
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------
* With respect to the Managed EAFE(R)Countries Portfolio of the Warburg,
Pincus Institutional Fund, Inc. during the fiscal period from March 31,
1997 (commencement of operations) to October 31, 1997.
68
<PAGE> 83
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
FUND YEAR PFPC COUNSELLORS SERVICE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Post-Venture Capital Fund October 31, 1996 $237 ($237) $198
(commenced operations on 9/30/96)
- ----------------------------------------------------------------------------------------------------------------------------
October 31, 1997 $4,747 ($4,747) $3,956
--------------------------------------------------------------------------------
October 31, 1998 $9,320 ($4,186) $3,489
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Custodians 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 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 may delegate its duties under its Custodian
Agreement with the Fund to a wholly owned direct or indirect subsidiary of PFPC
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 Attn: Mutual Fund Custody Services, 200
Stevens Drive, Lester, Pennsylvania 19113. The principal business address of
State Street is 225 Franklin Street, Boston, Massachusetts 02110.
State Street also acts as the shareholder servicing, transfer and
dividend disbursing agent of each Fund pursuant to a Transfer Agency and Service
Agreement, under which State Street (i) issues and redeems shares of the 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
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 Major Foreign Markets Fund was incorporated on October 24, 1997 under
the laws of the State of Maryland under the name "Warburg, Pincus Managed EAFE
Countries Fund, Inc." On December 22, 1997, the Fund acquired all of the assets
and liabilities of the
69
<PAGE> 84
Managed EAFE(R) Countries Portfolio of Warburg, Pincus Institutional Fund, Inc.
On February 9, 1998, the Fund changed its name to "Warburg, Pincus Major Foreign
Markets Fund, Inc." The International Equity Fund was incorporated on February
9, 1989 under the laws of the State of Maryland under the name "Counsellors
International Equity Fund, Inc." On October 27, 1995, the Fund amended its
Charter to change its name to "Warburg, Pincus International Equity Fund, Inc."
The International Small Company Fund was incorporated on April 2, 1998 under the
laws of the State of Maryland under the name "Warburg, Pincus International
Small Company Fund, Inc." The Emerging Markets Fund was incorporated on December
23, 1993 under the laws of the State of Maryland under the name "Warburg, Pincus
Emerging Markets Fund, Inc." The Global Post-Venture Capital Fund was
incorporated on July 16, 1996 under the laws of the State of Maryland under the
name "Warburg, Pincus Global Post-Venture Capital Fund, Inc."
Each Fund (with the exception of the Major Foreign Markets Fund and the
International Small Company Fund) currently offers two classes of shares, Common
Shares and Advisor Shares. Unless otherwise indicated, references to a "Fund"
apply to each class of shares of that Fund.
With the exception of the Emerging Markets Fund which is non-diversified,
each Fund is a diversified, open-end investment management company.
Each Fund's charter authorizes the Board to issue three billion full and
fractional shares of common stock, $.001 par value per share, of which one
billion shares are designated "Common Shares" and two billion shares are
designated "Advisor Shares". The Major Foreign Markets Fund and the
International Small Company Fund currently offer only Common Shares.
All shareholders of the 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 can elect all Directors. 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.
Distribution and Shareholder Servicing
70
<PAGE> 85
Distributor. CSAMSI serves as the Funds' distributor. CSAMSI's principal
business address is 466 Lexington Avenue, New York, New York 10017-3147.
Common Shares. With the exception of the International Equity Fund, each
Fund has entered into a Shareholder Servicing and Distribution Plan (the "Common
Shares 12b-1 Plan"), pursuant to Rule 12b-1 under the 1940 Act, pursuant to
which the Fund pays CSAMSI, in consideration for Services (as defined below), a
fee calculated at an annual rate of .25% of the average daily net assets of the
Common Shares of the Fund. Services performed by CSAMSI include (i) the sale of
the Common Shares, as set forth in the Common Shares 12b-1 Plan ("Selling
Services"), (ii) ongoing servicing and/or maintenance of the accounts of Common
Shareholders of the Fund, as set forth in the Common Shares 12b-1 Plan
("Shareholder Services"), and (iii) sub-transfer agency services, subaccounting
services or administrative services related to the sale of the Common Shares, as
set forth in the Common Shares 12b-1 Plan ("Administrative Services" and
collectively with Selling Services and Administrative Services, "Services")
including, without limitation, (a) payments reflecting an allocation of overhead
and other office expenses of CSAMSI related to providing Services; (b) payments
made to, and reimbursement of expenses of, persons who provide support services
in connection with the distribution of the Common Shares including, but not
limited to, office space and equipment, telephone facilities, answering routine
inquiries regarding the Fund, and providing any other Shareholder Services; (c)
payments made to compensate selected dealers or other authorized persons for
providing any Services; (d) costs relating to the formulation and implementation
of marketing and promotional activities for the Common Shares, including, but
not limited to, direct mail promotions and television, radio, newspaper,
magazine and other mass media advertising, and related travel and entertainment
expenses; (e) costs of printing and distributing prospectuses, statements of
additional information and reports of the Fund to prospective shareholders of
the Fund; and (f) costs involved in obtaining whatever information, analyses and
reports with respect to marketing and promotional activities that the Fund may,
from time to time, deem advisable.
Pursuant to the Common Shares 12b-1 Plan, CSAMSI provides the Board with
periodic reports of amounts expended under the 12b-1 Plan and the purpose for
which the expenditures were made.
For the period or year ended October 31, 1998, the Funds' Common Shares
paid the following amounts pursuant to the Common Shares 12b-1 Plan, all of
which was spent on advertising, marketing communications and public relations.
<TABLE>
<CAPTION>
- ----------------------------------------------------
FUND PAYMENT
- ----------------------------------------------------
<S> <C>
Major Foreign Markets Fund $2,142
- ----------------------------------------------------
International Small Company Fund $1,143
- ----------------------------------------------------
Emerging Markets Fund $246,045
- ----------------------------------------------------
Global Post-Venture Capital Fund $8,718
- ----------------------------------------------------
</TABLE>
71
<PAGE> 86
Each Fund has authorized certain broker-dealers, financial institutions,
recordkeeping organizations and other industry professionals (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 up to .40% of the
average annual value of accounts with the Funds maintained by such Service
Organizations (the "Service Fee"). 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 relationships
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. The Funds may, enter 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 "Advisor Shares 12b-1 Plan") pursuant to Rule 12b-1 under the 1940 Act,
pursuant to which the Fund pays in consideration for services, a fee calculated
at an annual rate of .50% of the average daily net assets of the Advisor Shares
of the Fund. The Advisor Shares 12b-1 Plan requires the Board, at least
quarterly, to receive and review written reports of amounts expended under the
Advisor Shares 12b-1 Plan and the purposes for which such expenditures were
made. The Funds' Advisor Shares paid Institutions the following fees for the
years or periods ended October 31, 1998, all of which were paid to Institutions:
<TABLE>
<CAPTION>
- ------------------------------------------------------
FUND PAYMENT
- ------------------------------------------------------
<S> <C>
International Equity Fund $1,982,695
- ------------------------------------------------------
Emerging Markets Fund $1,242
- ------------------------------------------------------
Global Post-Venture Capital Fund $6
- ------------------------------------------------------
</TABLE>
Certain Institutions may receive additional fees from the CSAMSI, CSAM or
their affiliates for providing supplemental services in connection with
investments in the Funds. Institutions may also be reimbursed for marketing
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 schedules of the Institutions. 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 Funds or their shareholders.
An Institution with which a Fund has entered into an Agreement with
respect to its Advisor Shares 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
72
<PAGE> 87
percentage of assets in the account or of the dividend 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 the 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 Funds' distributor upon request. No preference will be shown in the
selection of Fund portfolio investments for the instruments of Institutions.
General. The Common Shares 12b-1 Plan and the Advisor Shares 12b-1 Plan
will continue in effect for so long as their continuance is specifically
approved at least annually by the Board, including a majority of the Directors
who are not interested persons of the Fund and who have no direct or indirect
financial interest in the operation of the Distribution Plans or the 12b-1 Plan
("Independent Directors"). Any material amendment of the Common Shares 12b-1
Plan and the Advisor Shares 12b-1 Plan would require the approval of the Board
in the same manner. Neither the Common Shares 12b-1 Plan nor the Advisor Shares
12b-1 Plan may be amended to increase materially the amount to be spent
thereunder without shareholder approval of the relevant class of shares. The
Common Shares 12b-1 Plan and the Advisor Shares 12b-1 Plan may be terminated at
any time, without penalty, by vote of a majority of the Independent Directors or
by a vote of a majority of the outstanding voting securities of the relevant
class of 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. (A Fund 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 Funds will 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.
73
<PAGE> 88
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 a 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 Warburg Pincus fund at their
respective net asset values. An Advisor Shareholder may exchange Advisor Shares
of a Fund for Advisor Shares of another Warburg Pincus fund at their respective
net asset values. If an exchange request is received by Warburg Pincus Funds or
their agent prior to the close of regular trading on the NYSE, the exchange will
be made at each Fund's net asset value determined at the end of that business
day. Exchanges will be effected without a sales charge but must satisfy the
minimum dollar amount necessary for new purchases. The Fund may refuse exchange
purchases at any time without prior notice.
The exchange privilege is available to shareholders residing in any state
in which the Shares being acquired may legally be sold. When an investor effects
an exchange of shares, the exchange is treated for federal income tax purposes
as a redemption. Therefore, the investor may realize a taxable gain or loss in
connection with the exchange. Investors wishing to exchange Shares of a Fund for
Shares in another Warburg Pincus fund should review the prospectus of the other
fund prior to making an exchange. For further information regarding the exchange
privilege or to obtain a current prospectus for another Warburg Pincus fund, an
investor should contact Warburg Pincus Funds at 800-222-8977.
The Funds reserve the right to refuse exchange purchases by any person or
group if, in CSAM's judgment, a Fund would be unable to invest the money
effectively in accordance with its investment objective and policies, or would
otherwise potentially be adversely affected. Examples of when an exchange
purchase could be refused are when the Fund receives or anticipates receiving
large exchange orders at or about the same time and/or when a pattern of
exchanges within a short period of time (often associated with a "market timing"
strategy) is discerned. The Funds reserve the right to terminate or modify the
exchange privilege at any time upon 30 days' notice to shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is a summary of the material United States federal income
tax considerations regarding the purchase, ownership and disposition of shares
in 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.
74
<PAGE> 89
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, the Fund
must, among other things: (a) derive at least 90% of its gross income in each
taxable year from dividends, interest, payments with respect to securities,
loans and gains from the sale or other disposition of stock or securities or
foreign currencies, or other income (including, but not limited to, gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; and (b) diversify its
holdings so that, at the end of each quarter of the Fund's taxable year, (i) at
least 50% of the market value of the Fund's assets is represented by cash,
securities of other regulated investment companies, United States government
securities and other securities, with such other securities limited, in respect
of any one issuer, to an amount not greater than 5% of the Fund's assets and not
greater than 10% of the outstanding voting securities of such issuer and (ii)
not more than 25% of the value of its assets is invested in the securities
(other than U.S. 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. The Fund expects that all of its
foreign currency gains will be directly related to its principal business of
investing in stocks and securities.
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. Any dividend declared by a Fund in October, November or December of
any calendar year and payable to shareholders of record on a specified date in
such a month shall be deemed to have been received by each shareholder on
December 31 of such calendar year and to have been paid by the Fund not later
than such December 31, provided that such dividend is actually paid by the Fund
during January of the following calendar year.
Each Fund intends to distribute annually to its shareholders
substantially all of its investment company taxable income. The Board of 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 States federal income tax purposes, as long-term
capital gains, their proportionate shares of the undistributed amount, (b) will
be entitled to credit their
75
<PAGE> 90
proportionate shares of the 35% tax paid by the Fund on the undistributed amount
against their United States federal income tax liabilities, if any, and to claim
refunds to the extent their credits exceed their liabilities, if any, and (c)
will be entitled to increase their tax basis, for United States federal income
tax purposes, in their shares by an amount equal to 65% of the amount of
undistributed capital gains included in the shareholder's income. Organizations
or persons not subject to federal income tax on such capital gains will be
entitled to a refund of their pro rata share of such taxes paid by the Fund upon
filing appropriate returns or claims for refund with the Internal Revenue
Service (the "IRS").
The Code imposes a 4% nondeductible excise tax on 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 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, 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.
A Fund's short sales against the box, if any, and transactions in foreign
currencies, forward contracts, options and futures contracts (including options
and futures contracts on foreign currencies) will be subject to special
provisions of the Code that, among other things, may affect the character of
gains and losses realized by the Fund (i.e., may affect
76
<PAGE> 91
whether gains or losses are ordinary or capital), accelerate recognition of
income to the Fund and defer Fund losses. These rules could therefore affect the
character, amount and timing of distributions to shareholders. These provisions
also (a) will require the Fund to mark-to-market certain types of the positions
in its portfolio (i.e., treat them as if they were closed out) and (b) may cause
the Fund to recognize income without receiving cash with which to pay dividends
or make distributions in amounts necessary to satisfy the distribution
requirements for avoiding income and excise taxes. Each Fund will monitor its
transactions, will make the appropriate tax elections and will make the
appropriate entries in its books and records when it engages in a short sale
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.
A Fund's investments in zero coupon securities, if any, may create
special tax consequences. Zero coupon securities do not make interest payments,
although a portion of the difference between zero coupon security's face value
and its purchase price is imputed as income to the Fund each year even though
the Fund receives no cash distribution until maturity. Under the U.S. federal
tax laws, the Fund will not be subject to tax on this income if it pays
dividends to its shareholders substantially equal to all the income received
from, or imputed with respect to, its investments during the year, including its
zero coupon securities. These dividends ordinarily will constitute taxable
income to the shareholders of the Fund.
Passive Foreign Investment Companies.
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 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
77
<PAGE> 92
"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).
Shareholders receiving dividends or distributions in the form of
additional shares should be treated for United States federal income tax
purposes as receiving a distribution in the amount equal to the amount of money
that the shareholders receiving cash dividends or distributions will receive,
and should have a cost basis in the shares received equal to such amount.
Investors considering buying shares just prior to a dividend or capital
gain distribution should be aware that, although the price of shares just
purchased at that time may reflect the amount of the forthcoming distribution,
such dividend or distribution may nevertheless be taxable to them.
If a Fund is the holder of record of any stock on the record date for any
dividends payable with respect to such stock, such dividends are included in the
Fund's gross income not as of the date received but as of the later of (a) the
date such stock became ex-dividend with respect to such dividends (i.e., the
date on which a buyer of the stock would not be entitled to receive the
declared, but unpaid, dividends) or (b) the date the Fund acquired such stock.
Accordingly, in order to satisfy its income distribution requirements, the Fund
may be required to pay dividends based on anticipated earnings, and shareholders
may receive dividends in an earlier year than would otherwise be the case.
Sales of Shares.
Upon the sale or exchange of his shares, a shareholder will realize a
taxable gain or loss equal to the difference between the amount realized and his
basis in his shares. Such gain or loss will be treated as capital gain or loss,
if the shares are capital assets in the shareholder's hands, and will be
long-term capital gain or loss if the shares are held for more than one year and
short-term capital gain or loss if the shares are held for one year or less. Any
loss realized on a sale or exchange will be disallowed to the extent the shares
disposed of
78
<PAGE> 93
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.
A Fund may elect for U.S. income tax purposes to treat foreign income
taxes paid by it as paid by its shareholders if: (i) the Fund qualifies as a
regulated investment company, (ii) certain asset and distribution requirements
are satisfied, and (iii) more than 50% of the Fund's total assets at the close
of its fiscal year consists of stock or securities of foreign corporations. A
Fund may qualify for and make this election in some, but not necessarily all, of
its taxable years. If a Fund were to make an election, shareholders of the Fund
would be required to take into account an amount equal to their pro rata
portions of such foreign taxes in computing their taxable income and then treat
an amount equal to those foreign taxes as a U.S. federal income tax deduction or
as a foreign tax credit against their U.S. federal income taxes. Shortly after
any year for which it makes such an election, a Fund will report to its
shareholders the amount per share of such foreign income tax that must be
included in each shareholder's gross income and the amount which will be
available for the deduction or credit. No deduction for foreign taxes may be
claimed by a shareholder who does not itemize deductions. Certain limitations
will be imposed on the extent to which the credit (but not the deduction) for
foreign taxes may be claimed.
Backup Withholding.
A Fund may be required to withhold, for United States federal income tax
purposes, 31% of the dividends, distributions and redemption proceeds payable to
shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the IRS that they are subject to backup withholding. Certain
shareholders are exempt from backup withholding. Backup withholding is not an
additional tax and any amount withheld may be credited against a shareholder's
United States federal income tax liabilities.
Notices.
Shareholders will be notified annually by 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
79
<PAGE> 94
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
THE 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 A 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):
TOTAL RETURN
COMMON SHARES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
FROM COMMENCEMENT OF
OPERATIONS OR TEN YEAR
FUND ONE-YEAR FIVE-YEAR (COMMENCEMENT DATE)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Major Foreign Markets Fund 2.26% (1.26%) N/A 8.06% (6.21%)
(3/31/97)
- --------------------------------------------------------------------------------------------------------------
International Equity Fund -6.11% 5.05% 9.48%
(5/2/89)
- --------------------------------------------------------------------------------------------------------------
International Small Company Fund N/A N/A -13.90% (-17.60%)
(4/2/98)
- --------------------------------------------------------------------------------------------------------------
Emerging Markets Fund -35.95% (-36.47%) N/A -8.55% (-9.86%)
(12/30/94)
- --------------------------------------------------------------------------------------------------------------
Global Post-Venture Capital Fund -1.91% (-5.98) N/A 4.38% (-2.24%)
(9/30/96)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
+Non-annualized.
80
<PAGE> 95
ADVISOR SHARES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
FROM COMMENCEMENT OF
OPERATIONS
FUND ONE-YEAR FIVE-YEAR (COMMENCEMENT DATE)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Equity Fund -6.49% 4.60% 6.99%
(4/5/91)
- --------------------------------------------------------------------------------------------------------------
Emerging Markets Fund -37.71% (-41.22%) N/A -9.34% (-12.67%)
(12/30/94)
- --------------------------------------------------------------------------------------------------------------
Global Post-Venture Fund -2.31% (-54.34%) N/A 4.00% (-8.61%)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
+Non-annualized.
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 of an initial $1,000 investment over the
period and assumes that all dividends and distributions are reinvested during
the period. Investors should note that this performance may not be
representative of a 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).
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<PAGE> 96
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.
The performance of a class of 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 is based on
historical earnings and is 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, a 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 a Fund's total return, 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.
CSAM believes that a diversified portfolio of international equity
securities, when combined with a similarly diversified portfolio of domestic
equity securities, tends to have a lower volatility than a portfolio composed
entirely of domestic securities. Furthermore, international equities have been
shown to reduce volatility in single asset portfolios regardless of whether the
investments are in all domestic equities or all domestic fixed-income
instruments, and research indicates that volatility can be significantly
decreased when international equities are added.
To illustrate this point, the performance of international equity
securities, as measured by the EAFE Index has equaled or exceeded that of
domestic equity securities, as measured by the S&P 500 Index in 14 of the last
26 years. The following table compares annual total returns of the EAFE Index
and the S&P 500 Index for the calendar years shown.
82
<PAGE> 97
EAFE INDEX VS. S&P 500 INDEX
1972-1998
ANNUAL TOTAL RETURN+
<TABLE>
<CAPTION>
YEAR EAFE INDEX S&P 500 INDEX
---- ---------- -------------
<S> <C> <C>
1972* 33.28 15.63
1973* -16.82 -17.37
1974* -25.60 -29.72
1975 31.21 31.55
1976 -.36 19.15
1977* 14.61 -11.50
1978* 28.91 1.06
1979 1.82 12.31
1980 19.01 25.77
1981* -4.85 -9.73
1982 -4.63 14.76
1983* 20.91 17.27
1984* 5.02 1.40
1985* 52.97 26.33
1986* 66.80 14.62
1987* 23.18 2.03
1988* 26.66 12.40
1989 9.22 27.25
1990 -24.71 -6.56
1991 10.19 26.31
1992 -13.89 4.46
1993* 30.49 7.06
1994* 6.24 -1.54
1995 9.42 34.11
1996 4.40 20.26
1997 0.24 31.01
1998 18.29 26.23
</TABLE>
- --------------------
+ Without reinvestment of dividends.
* The EAFE Index has outperformed the S&P 500 Index [14] out of the last 27
years.
The quoted performance information shown above is not intended to
indicate the future performance of the Funds.
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 or as set forth in the
publications listed below; (ii) in the case of the Major Foreign Markets Fund,
the Morgan Stanley Capital International Europe, Australasia, and Far East
("EAFE") Index, the Salomon Russell Global Equity Index, the FT-Actuaries World
Indices (jointly compiled by the Financial Times, Ltd., Goldman, Sachs &
83
<PAGE> 98
Co. and NatWest Securities Ltd.) and the S&P 500 Index; in the case of the
International Equity Fund, the Morgan Stanley Capital International All Country
World Excluding the U.S. Index and/or other indexes prepared by Morgan Stanley
relating to securities represented in the Fund, the Salomon Russell Global
Equity Index, the FT-Actuaries World Indices (jointly compiled by The Financial
Times, Ltd., Goldman, Sachs & Co. and NatWest Securities Ltd.) and the S&P 500
Index; in the case of the International Small Company Fund, the Morgan Stanley
Capital International EAFE(R) Small Cap Index and/or other indexes prepared by
Morgan Stanley that are appropriate benchmarks for securities represented in the
Fund; in the case of the Emerging Markets Fund, with the IFC Emerging Market
Free Index, the IFC Investible Index, the Lipper Emerging Markets Funds Index or
the Morgan Stanley Capital International Emerging Markets Index; and in the case
of the Global Post-Venture Capital Fund, with the Venture Capital 100 Index
(compiled by Venture Capital Journal), appropriate indexes prepared by Frank
Russell Company relating to securities represented in the Fund, the Lipper
Global Funds Index, the Morgan Stanley Capital International EAFE Index, the
Morgan Stanley Capital International World Index, the Salomon Russell Global
Equity Index, the FT-Actuaries World Indices (jointly compiled by The Financial
Times, Ltd., Goldman, Sachs & Co. and NatWest Securities Ltd.) and the S&P 500
Index, all of which are unmanaged indexes of common stocks; or (iii) other
appropriate indexes of investment securities or with data developed by CSAM
derived from such indexes. A Fund may include evaluations of the Fund published
by nationally recognized ranking services and by financial publications that are
nationally recognized, such as Barron's, Business Week, Financial Times, Forbes,
Fortune, Inc., Institutional Investor, Investor's Business Daily, Money,
Morningstar, Mutual Fund Magazine, Smart Money, The Wall Street Journal and
Worth. Morningstar, Inc. rates funds in broad categories based on risk/reward
analyses over 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.
Advertising or supplemental sales literature relating to the
International Equity Fund may describe the percentage decline from all-time high
levels for certain foreign stock markets. It may also describe how the Fund
differs from the various indices in composition. Sales literature and
advertising may also discuss trends in the economy and corporate structure in
Japan, including the contrast between the sales growth, profit growth,
price/earnings ratios, and return on equity (ROE) of companies; it may discuss
the cultural changes taking place among consumers in Japan, including increasing
cost-consciousness and accumulation of purchasing power and wealth among
Japanese consumers, and the ability of new companies to take advantage of these
trends. The sales literature for the Fund may also discuss current statistics
and projections of the volume, market capitalization, sector weightings and
number of issues traded on Japanese exchanges and in Japanese OTC markets, and
may include graphs of such statistics in advertising and other sales literature.
Advertising or supplemental sales literature relating to the Global Post-Venture
Capital Fund may also discuss characteristics of venture capital financed
companies and the benefits expected to be achieved from investing in these
companies.
84
<PAGE> 99
In reports, investor communications or advertisements, each Fund may
include: (i) its total return performance; (ii) its performance compared with
various indexes or other mutual funds; (iii) published evaluations by nationally
recognized ranking services and financial publications; (iv) descriptions and
updates concerning its strategies and portfolio investments; (v) its goals, risk
factors and expenses compared with other mutual funds; (vi) analysis of its
investments by industry, country, credit quality and other characteristics;
(vii) a discussion of the risk/return continuum relating to different
investments; (viii) the potential impact of adding foreign stocks to a domestic
portfolio; (ix) the general biography or work experience of the portfolio
managers of the Funds; (x) portfolio manager commentary or market updates; (xi)
discussion of macroeconomic factors affecting the Fund and its investments;
(xii) research methodology underlying stock selection or a Fund's investment
objective; and (xiii) other information of interest to investors.
INDEPENDENT ACCOUNTANTS AND COUNSEL
PricewaterhouseCoopers LLP ("PwC"), with principal offices at 2400 Eleven
Penn Center, Philadelphia, Pennsylvania 19103, serves as independent accountants
for each Fund. The financial statements for the Funds that are incorporated by
reference in this Statement of Additional Information have been audited by PwC
and have been included herein by reference in reliance upon the report of such
firm of independent accountants given upon their authority as experts in
accounting and auditing.
Willkie Farr & Gallagher serves as counsel for each Fund and provides
legal services from time to time for CSAM 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.
FINANCIAL STATEMENTS
Each Fund's audited Annual Report dated October 31, 1998, 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.
85
<PAGE> 100
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 Services, 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.
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.
A-1
<PAGE> 101
Corporate Bond and Municipal Obligations Ratings
The following summarizes the ratings used by S&P for corporate bonds and
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 it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB - This is the lowest investment grade. Debt rated BBB is regarded as
having an adequate capacity to pay interest and repay principal. Although it
normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for bonds in higher
rated categories.
BB, B, CCC, CC and C - Debt rated BB and B are regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB represents a lower
degree of speculation than B, and CCC the highest degree of speculation. While
such bonds will likely have 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.
A-2
<PAGE> 102
CC - This rating is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
Additionally, the rating CI is reserved for income bonds on which no
interest is being paid. Such debt is rated between debt rated C and debt rated
D.
To provide more detailed indications of credit quality, the ratings may
be modified by the addition of a plus or minus sign to show relative standing
within this major rating category.
D - Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The following summarizes the ratings used by Moody's for corporate bonds
and Municipal Obligations:
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
A-3
<PAGE> 103
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-4
