<PAGE> 1
SUPPLEMENT TO THE PROSPECTUSES
WARBURG PINCUS FUNDS
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 is 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.
Dated: July 6, 1999
<PAGE> 2
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> 3
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> 4
<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> 5
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> 6
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>
<S> <C>
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> 7
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> 8
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> 9
[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> 10
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 22, 1999
AS REVISED JULY 6, 1999
WARBURG PINCUS FIXED INCOME FUND
WARBURG PINCUS GLOBAL FIXED INCOME FUND
WARBURG PINCUS INTERMEDIATE MATURITY GOVERNMENT FUND
WARBURG PINCUS NEW YORK INTERMEDIATE MUNICIPAL FUND
This combined Statement of Additional Information provides information about
Warburg Pincus Fixed Income Fund (the "Fixed Income Fund"), Warburg Pincus
Intermediate Maturity Government Fund (the "Intermediate Government Fund"),
Warburg Pincus New York Intermediate Municipal Fund (the "New York Municipal
Fund") and Warburg Pincus Global Fixed Income Fund (the "Global Fixed Income
Fund") (each a "Fund" and collectively, the "Funds") that supplements
information contained in the combined Prospectus for the Common Shares and the
combined Prospectus for the Advisor Shares of the Funds, each dated February 22,
1999.
Each Fund's audited annual report dated October 31, 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 a prospectus and should be read
in conjunction with the Prospectuses. Copies of the Prospectuses and the annual
report can be obtained by writing or telephoning:
Common Shares: Advisor Shares:
Warburg Pincus Funds Warburg Pincus Advisor Funds
P.O. Box 9030 P.O. Box 9030
Boston, MA 02205-9030 Boston, MA 02205-9030
800-WARBURG Attn: Institutional Services
800-222-8977
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES................................................................................1
Options on Securities and Securities Indices and Currency Exchange Transactions..........................1
Securities Options..............................................................................1
Securities Index Options........................................................................4
OTC Options.....................................................................................5
Currency Exchange Transactions..................................................................5
Hedging Generally...............................................................................7
Asset Coverage for Forward Contracts, Options, Futures and Options on Futures...................8
Futures Activities.......................................................................................9
Money Market Obligations................................................................................11
Convertible Securities..................................................................................12
Structured Securities...................................................................................12
Interest Rate, Index, Mortgage and Currency Swaps; Interest Rate Caps, Floors and Collars...............16
Foreign Investments.....................................................................................17
U.S. Government Securities..............................................................................20
Government Trust Certificates...........................................................................20
Municipal Obligations...................................................................................21
Alternative Minimum Tax Bonds...........................................................................22
Securities of Other Investment Companies................................................................22
Below Investment Grade Securities.......................................................................23
Lending Portfolio Securities............................................................................24
Repurchase Agreements...................................................................................25
Reverse Repurchase Agreements and Dollar Rolls..........................................................25
Zero Coupon Securities..................................................................................26
Government Zero Coupon Securities.......................................................................26
Short Sales.............................................................................................27
Emerging Growth and Smaller Capitalization Companies; Unseasoned Issuers................................27
Variable Rate and Master Demand Notes...................................................................28
When-Issued Securities and Delayed-Delivery Transactions................................................29
Stand-By Commitment Agreements..........................................................................29
REITs ..................................................................................................30
Warrants................................................................................................30
Non-Publicly Traded and Illiquid Securities.............................................................31
Borrowing...............................................................................................32
Non-Diversified Status..................................................................................33
Taxable Investments.....................................................................................33
INVESTMENT RESTRICTIONS..........................................................................................34
Fixed Income Fund.......................................................................................34
Global Fixed Income Fund................................................................................36
</TABLE>
<PAGE> 12
<TABLE>
<CAPTION>
<S> <C>
Intermediate Government Fund............................................................................37
New York Municipal Fund.................................................................................39
PORTFOLIO VALUATION..............................................................................................41
PORTFOLIO TRANSACTIONS...........................................................................................42
PORTFOLIO TURNOVER...............................................................................................44
SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL OBLIGATIONS................................................45
State Economy...........................................................................................46
State Budget............................................................................................46
Recent Financial Results................................................................................50
Debt Limits and Outstanding Debt........................................................................50
Litigation..............................................................................................53
Authorities.............................................................................................54
New York City and Other Localities......................................................................54
Year 2000 Compliance....................................................................................59
MANAGEMENT OF THE FUNDS..........................................................................................59
Officers and Boards of Directors/Trustees...............................................................59
Directors'/Trustees' Compensation.......................................................................64
Portfolio Managers of the Funds.........................................................................65
Investment Adviser and Co-Administrators................................................................66
Custodian and Transfer Agent............................................................................67
Organization of the Funds...............................................................................68
Distribution and Shareholder Servicing..................................................................70
General ............................................................................................71
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...................................................................71
Automatic Cash Withdrawal Plan..........................................................................72
EXCHANGE PRIVILEGE...............................................................................................72
ADDITIONAL INFORMATION CONCERNING TAXES..........................................................................72
The Funds and Their Investments.........................................................................73
Special Tax Matters Regarding the Fixed Income Fund, Global Fixed Income Fund and Intermediate
Government Fund.........................................................................................75
Special Tax Considerations Regarding the Intermediate Government Fund...................................75
Special Tax Considerations Regarding the New York Municipal Fund........................................75
Passive Foreign Investment Companies....................................................................77
Dividends and Distributions.............................................................................78
Sales of Shares.........................................................................................79
Foreign Taxes...........................................................................................79
Backup Withholding......................................................................................80
Notices.................................................................................................80
Other Taxation..........................................................................................80
DETERMINATION OF PERFORMANCE.....................................................................................80
INDEPENDENT ACCOUNTANTS AND COUNSEL..............................................................................84
MISCELLANEOUS....................................................................................................85
FINANCIAL STATEMENTS.............................................................................................87
APPENDIX - DESCRIPTION OF RATINGS...............................................................................A-1
</TABLE>
ii
<PAGE> 13
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each
Fund's investment objective and policies in the Prospectuses. There are no
assurances that the Funds will achieve their investment objectives.
The investment objectives of the Fixed Income Fund are to
generate high current income consistent with reasonable risk and, secondarily,
capital appreciation.
The investment objective of the Global Fixed Income Fund is to
maximize total investment return consistent with prudent investment management,
consisting of a combination of interest income, currency gains and capital
appreciation.
The investment objective of the Intermediate Government Fund
is to achieve as high a level of current income as is consistent with the
preservation of capital.
The investment objective of the New York Municipal Fund is to
maximize current interest income exempt from federal income tax and New York
State and New York City personal income taxes to the extent consistent with
prudent investment management and the preservation of capital.
Unless otherwise indicated, all of the Funds are permitted to
engage in the following investment strategies, subject to any percentage
limitations set forth below. Any percentage limitation on a Fund's ability to
invest in debt securities will not be applicable during periods when the Fund
pursues a temporary defensive strategy as discussed below.
The Funds are not obligated to pursue any of the following
strategies and do not represent that these techniques are available now or will
be available at any time in the future.
Options on Securities and Securities Indices and Currency
Exchange Transactions
The Funds may purchase and write (sell) options on securities,
securities indices and currencies for hedging purposes or to increase total
return. Up to 25% of the Fund's total assets may be at risk in connection with
investing in options on securities, securities indices and, if applicable,
currencies. The amount of assets considered to be "at risk" in these
transactions is, in the case of purchasing options, the amount of the premium
paid, and, in the case of writing options, the value of the underlying
obligation.
Securities Options. Each Fund may write covered put and call
options on stock and debt securities and each Fund may purchase such options
that are traded on foreign and U.S. exchanges, as well as over-the-counter
("OTC") options. A Fund realizes fees (referred to as "premiums") for granting
the rights evidenced by the options it has written. A put option embodies the
right of its purchaser to compel the writer of the option to purchase from the
option holder an underlying security at a specified price for a specified time
period or at a specified time. In contrast, a call option embodies the right of
its purchaser to compel the
<PAGE> 14
writer of the option to sell to the option holder an underlying security at a
specified price for a specified time period or at a specified time.
The potential loss associated with purchasing an option is
limited to the premium paid, and the premium would partially offset any gains
achieved from its use. However, for an option writer the exposure to adverse
price movements in the underlying security or index is potentially unlimited
during the exercise period. Writing securities options may result in substantial
losses to a Fund, force the sale or purchase of portfolio securities at
inopportune times or at less advantageous prices, limit the amount of
appreciation the Fund could realize on its investments or require the Fund to
hold securities it would otherwise sell.
The principal reason for writing covered options on a security
is to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. In return for a premium, a Fund as
the writer of a covered call option forfeits the right to any appreciation in
the value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). A Fund that
writes call options retains the risk of a decline in the price of the underlying
security. The size of the premiums that a Fund may receive may be adversely
affected as new or existing institutions, including other investment companies,
engage in or increase their option-writing activities.
If security prices rise, a put writer would generally expect
to profit, although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that the
writer will also profit, because it should be able to close out the option at a
lower price. If security prices decline, the put writer would expect to suffer a
loss. This loss may be less than the loss from purchasing the underlying
instrument directly to the extent that the premium received offsets the effects
of the decline.
In the case of options written by a Fund that are deemed
covered by virtue of the Fund's holding convertible or exchangeable preferred
stock or debt securities, the time required to convert or exchange and obtain
physical delivery of the underlying common stock with respect to which the Fund
has written options may exceed the time within which the Fund must make delivery
in accordance with an exercise notice. In these instances, a Fund may purchase
or temporarily borrow the underlying securities for purposes of physical
delivery. By so doing, the Fund will not bear any market risk, since the Fund
will have the absolute right to receive from the issuer of the underlying
security an equal number of shares to replace the borrowed securities, but the
Fund may incur additional transaction costs or interest expenses in connection
with any such purchase or borrowing.
Additional risks exist with respect to certain of the
securities for which a Fund may write covered call options. For example, if the
Fund writes covered call options on mortgage-backed securities, the
mortgage-backed securities that it holds as cover may, because of scheduled
amortization or unscheduled prepayments, cease to be sufficient cover. If this
occurs, the Fund will compensate for the decline in the value of the cover by
purchasing an appropriate additional amount of mortgage-backed securities.
2
<PAGE> 15
Options written by a Fund will normally have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. A Fund may write (i) in-the-money call options
when Credit Suisse Asset Management, LLC, each Fund's investment adviser
("CSAM"), expects that the price of the underlying security will remain flat or
decline moderately during the option period, (ii) at-the-money call options when
CSAM expects that the price of the underlying security will remain flat or
advance moderately during the option period and (iii) out-of-the-money call
options when CSAM expects that the premiums received from writing the call
option plus the appreciation in market price of the underlying security up to
the exercise price will be greater than the appreciation in the price of the
underlying security alone. In any of the preceding situations, if the market
price of the underlying security declines and the security is sold at this lower
price, the amount of any realized loss will be offset wholly or in part by the
premium received. Out-of-the-money, at-the-money and in-the-money put options
(the reverse of call options as to the relation of exercise price to market
price) may be used in the same market environments that such call options are
used in equivalent transactions. To secure its obligation to deliver the
underlying security when it writes a call option, the Fund will be required to
deposit in escrow the underlying security or other assets in accordance with the
rules of the Options Clearing Corporation (the "Clearing Corporation") and of
the securities exchange on which the option is written.
Prior to their expirations, put and call options may be sold
in closing sale or purchase transactions (sales or purchases by a Fund prior to
the exercise of options that it has purchased or written, respectively, of
options of the same series) in which the Fund may realize a profit or loss from
the sale. An option position may be closed out only where there exists a
secondary market for an option of the same series on a recognized securities
exchange or in the OTC market. When a Fund has purchased an option and engages
in a closing sale transaction, whether the Fund realizes a profit or loss will
depend upon whether the amount received in the closing sale transaction is more
or less than the premium the Fund initially paid for the original option plus
the related transaction costs. Similarly, in cases where a Fund has written an
option, it will realize a profit if the cost of the closing purchase transaction
is less than the premium received upon writing the original option and will
incur a loss if the cost of the closing purchase transaction exceeds the premium
received upon writing the original option. The Fund may engage in a closing
purchase transaction to realize a profit, to prevent an underlying security with
respect to which it has written an option from being called or put or, in the
case of a call option, to unfreeze an underlying security (thereby permitting
its sale or the writing of a new option on the security prior to the outstanding
option's expiration). The obligation of a Fund under an option it has written
would be terminated by a closing purchase transaction (a Fund would not be
deemed to own an option as a result of the transaction). So long as the
obligation of the Fund as the writer of an option continues, the Fund may be
assigned an exercise notice by the broker-dealer through which the option was
sold, requiring the Fund to deliver the underlying security against payment of
the exercise price. This obligation terminates when the option expires or the
Fund effects a closing
3
<PAGE> 16
purchase transaction. The Fund cannot effect a closing purchase transaction with
respect to an option once it has been assigned an exercise notice.
There is no assurance that sufficient trading interest will
exist to create a liquid secondary market on a securities exchange for any
particular option or at any particular time, and for some options no such
secondary market may exist. A liquid secondary market in an option may cease to
exist for a variety of reasons. In the past, for example, higher than
anticipated trading activity or order flow or other unforeseen events have at
times rendered certain of the facilities of the Clearing Corporation and various
securities exchanges inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of orders
or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. Moreover,
a Fund's ability to terminate options positions established in the OTC market
may be more limited than for exchange-traded options and may also involve the
risk that securities dealers participating in OTC transactions would fail to
meet their obligations to the Fund. The Fund, however, intends to purchase OTC
options only from dealers whose debt securities, as determined by CSAM, are
considered to be investment grade. If, as a covered call option writer, a Fund
is unable to effect a closing purchase transaction in a secondary market, it
will not be able to sell the underlying security and would continue to be at
market risk on the security.
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class which may be held
or written, or exercised within certain time periods by an investor or group of
investors acting in concert (regardless of whether the options are written on
the same or different securities exchanges or are held, written or exercised in
one or more accounts or through one or more brokers). It is possible that the
Funds and other clients of CSAM and certain of its affiliates may be considered
to be such a group. A securities exchange may order the liquidation of positions
found to be in violation of these limits and it may impose certain other
sanctions. These limits may restrict the number of options a Fund will be able
to purchase on a particular security.
Securities Index Options. A Fund may purchase and write
exchange-listed and OTC put and call options on securities indexes. A securities
index measures the movement of a certain group of securities by assigning
relative values to the securities included in the index, fluctuating with
changes in the market values of the securities included in the index. Some
securities index options are based on a broad market index, such as the NYSE
Composite Index, or a narrower market index such as the Standard & Poor's 100.
Indexes may also be based on a particular industry or market segment.
Options on securities indexes are similar to options on
securities except that (i) the expiration cycles of securities index options are
monthly, while those of securities options are currently quarterly, and (ii) the
delivery requirements are different. Instead of giving the right to take or make
delivery of securities at a specified price, an option on a securities index
gives the holder the right to receive a cash "exercise settlement amount" equal
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<PAGE> 17
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 the Fund were
to purchase a dealer option, however, it would rely on the dealer from whom it
purchased the option to perform if the option were exercised. If the dealer
fails to honor the exercise of the option by a Fund, the Fund would lose the
premium it paid for the option and the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid
market while OTC or dealer options do not. Consequently, a Fund will generally
be able to realize the value of a dealer option it has purchased only by
exercising it or reselling it to the dealer who issued it. Similarly, when the
Fund writes a dealer option, it generally will be able to close out the option
prior to its expiration only by entering into a closing purchase transaction
with the dealer to which the Fund originally wrote the option. Although the Fund
will seek to enter into dealer options only with dealers who will agree to and
that are expected to be capable of entering into closing transactions with the
Fund, there can be no assurance that the Fund will be able to liquidate a dealer
option at a favorable price at any time prior to expiration. The inability to
enter into a closing transaction may result in material losses to a Fund. Until
the Fund, as a covered OTC call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) used to cover the written option until the option expires or is
exercised. This requirement may impair the Fund's ability to sell portfolio
securities or, with respect to currency options, currencies at a time when such
sale might be advantageous.
Currency Exchange Transactions. (Fixed Income and Global Fixed
Income Funds only) The value in U.S. dollars of the assets of a Fund that are
invested in foreign securities may be affected favorably or unfavorably by a
variety of factors not applicable to investment in U.S. securities, and the Fund
may incur costs in connection with conversion between various currencies.
Currency exchange transactions may be from any non-U.S. currency into U.S.
dollars or into other appropriate currencies. A Fund will conduct its currency
exchange transactions (i) on a spot (i.e., cash) basis at the rate prevailing in
the
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<PAGE> 18
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.
Forward Currency Contracts. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract as agreed
upon by the parties, at a price set at the time of the contract. These contracts
are entered into in the interbank market conducted directly between currency
traders (usually large commercial banks and brokers) and their customers.
Forward currency contracts are similar to currency futures contracts, except
that futures contracts are traded on commodities exchanges and are standardized
as to contract size and delivery date.
At or before the maturity of a forward contract, a Fund may
either sell a portfolio security and make delivery of the currency, or retain
the security and fully or partially offset its contractual obligation to deliver
the currency by negotiating with its trading partner to enter into an offsetting
transaction. If a Fund retains the portfolio security and engages in an
offsetting transaction, the Fund, at the time of execution of the offsetting
transaction, will incur a gain or a loss to the extent that movement has
occurred in forward contract prices.
Currency Options. A Fund may purchase exchange-traded put and
call options on foreign currencies. Put options convey the right to sell the
underlying currency at a price which is anticipated to be higher than the spot
price of the currency at the time the option is exercised. Call options convey
the right to buy the underlying currency at a price which is expected to be
lower than the spot price of the currency at the time the option is exercised.
Currency Hedging. A Fund's currency hedging will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward currency with respect to
specific receivables or payables of the Fund generally accruing in connection
with the purchase or sale of its portfolio securities. Position hedging is the
sale of forward currency with respect to portfolio security positions. No Fund
may position hedge to an extent greater than the aggregate market value (at the
time of entering into the hedge) of the hedged securities.
A decline in the U.S. dollar value of a foreign currency in
which a Fund's securities are denominated will reduce the U.S. dollar value of
the securities, even if their value in the foreign currency remains constant.
The use of currency hedges does not eliminate fluctuations in the underlying
prices of the securities, but it does establish a rate of exchange that can be
achieved in the future. For example, in order to protect against diminutions in
the U.S. dollar value of non-dollar denominated securities it holds, a Fund may
purchase foreign currency put options. If the value of the foreign currency does
decline, the Fund will have the right to sell the currency for a fixed amount in
dollars and will thereby offset, in whole or in part, the adverse effect on the
U.S. dollar value of its securities that otherwise would have resulted.
Conversely, if a rise in the U.S. dollar value of a currency in which securities
to be
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<PAGE> 19
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 the Fund derived from
purchases of currency options, like the benefit derived from other types of
options, will be reduced by premiums and other transaction costs. Because
transactions in currency exchange are generally conducted on a principal basis,
no fees or commissions are generally involved. Currency hedging involves some of
the same risks and considerations as other transactions with similar
instruments. Although currency hedges limit the risk of loss due to a decline in
the value of a hedged currency, at the same time, they also limit any potential
gain that might result should the value of the currency increase. If a
devaluation is generally anticipated, the Fund may not be able to contract to
sell a currency at a price above the devaluation level it anticipates.
While the values of currency futures and options on futures,
forward currency contracts and currency options may be expected to correlate
with exchange rates, they will not reflect other factors that may affect the
value of a Fund's investments and a currency hedge may not be entirely
successful in mitigating changes in the value of the Fund's investments
denominated in that currency. A currency hedge, for example, should protect a
Yen-denominated bond against a decline in the Yen, but will not protect the Fund
against a price decline if the issuer's creditworthiness deteriorates.
Hedging Generally. In addition to entering into options and
futures transactions for other purposes, including generating current income to
offset expenses or increase return, a Fund may enter into these transactions as
hedges to reduce investment risk, generally by making an investment expected to
move in the opposite direction of a portfolio position. A hedge is designed to
offset a loss in a portfolio position with a gain in the hedged position; at the
same time, however, a properly correlated hedge will result in a gain in the
portfolio position being offset by a loss in the hedged position. As a result,
the use of options and futures transactions for hedging purposes could limit any
potential gain from an increase in the value of the position hedged. In
addition, the movement in the portfolio position hedged may not be of the same
magnitude as movement in the hedge. With respect to futures contracts, since the
value of portfolio securities will far exceed the value of the futures contracts
sold by a Fund, an increase in the value of the futures contracts could only
mitigate, but not totally offset, the decline in the value of the Fund's assets.
In hedging transactions based on an index, whether a Fund will
realize a gain or loss depends upon movements in the level of securities prices
in the stock market generally or, in the case of certain indexes, in an industry
or market segment, rather than movements in the price of a particular security.
The risk of imperfect correlation increases as the composition of the Fund's
portfolio varies from the composition of the index. In an effort to compensate
for imperfect correlation of relative movements in the hedged position and the
hedge, the Fund's hedge positions may be in a greater or lesser dollar amount
than the dollar amount of the hedged position. Such "over hedging" or "under
hedging" may adversely affect a Fund's net investment results if market
movements are not as anticipated when the hedge is established. Securities index
futures transactions may be subject to additional correlation risks. First, all
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<PAGE> 20
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 the securities index and movements in the price
of securities index futures, a correct forecast of general market trends by CSAM
still may not result in a successful hedging transaction.
A Fund will engage in hedging transactions only when deemed
advisable by CSAM, and successful use by the Fund of hedging transactions will
be subject to CSAM's ability to predict trends in currency, interest rate or
securities markets, as the case may be, and to predict correctly movements in
the directions of the hedge and the hedged position and the correlation between
them, which predictions could prove to be inaccurate. This requires different
skills and techniques than predicting changes in the price of individual
securities, and there can be no assurance that the use of these strategies will
be successful. Even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior or trends. Losses incurred in hedging
transactions and the costs of these transactions will affect the Fund's
performance.
To the extent that a Fund engages in the strategies described
above, the Fund may experience losses greater than if these strategies had not
been utilized. In addition to the risks described above, these instruments may
be illiquid and/or subject to trading limits, and the Fund may be unable to
close out a position without incurring substantial losses, if at all. The Funds
are also subject to the risk of a default by a counterparty to an off-exchange
transaction.
Asset Coverage for Forward Contracts, Options, Futures and
Options on Futures. Each Fund will comply with guidelines established by the
U.S. Securities and Exchange Commission (the "SEC") with respect to coverage of
forward currency contracts; options written by the Fund on currencies,
securities and indexes; and currency, interest rate and index futures contracts
and options on these futures contracts. These guidelines may, in certain
instances, require segregation by the Fund of cash or liquid securities with its
custodian or a designated sub-custodian to the extent the Fund's obligations
with respect to these strategies are not otherwise "covered" through ownership
of the underlying security, financial instrument or currency or by other
portfolio positions or by other means consistent with applicable regulatory
policies. Segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. As a result, there is a possibility that segregation of a large percentage
of a Fund's assets could impede portfolio management or the Fund's ability to
meet redemption requests or other current obligations.
8
<PAGE> 21
For example, a call option written by a Fund on securities may
require the Fund to hold the securities subject to the call (or securities
convertible into the securities without additional consideration) or to
segregate assets (as described above) sufficient to purchase and deliver the
securities if the call is exercised. A call option written by the Fund on an
index may require the Fund to own portfolio securities that correlate with the
index or to segregate assets (as described above) equal to the excess of the
index value over the exercise price on a current basis. A put option written by
the Fund may require the Fund to segregate assets (as described above) equal to
the exercise price. The Fund could purchase a put option if the strike price of
that option is the same or higher than the strike price of a put option sold by
the Fund. If the Fund holds a futures or forward contract, the Fund could
purchase a put option on the same futures or forward contract with a strike
price as high or higher than the price of the contract held. The Fund may enter
into fully or partially offsetting transactions so that its net position,
coupled with any segregated assets (equal to any remaining obligation), equals
its net obligation. Asset coverage may be achieved by other means when
consistent with applicable regulatory policies.
Futures Activities. A Fund may enter into foreign currency,
interest rate and securities index futures contracts and purchase and write
(sell) related options traded on exchanges designated by the Commodity Futures
Trading Commission (the "CFTC") or consistent with CFTC regulations on foreign
exchanges. These futures contracts are standardized contracts for the future
delivery of foreign currency or an interest rate sensitive security or, in the
case of stock index and certain other futures contracts, a cash settlement with
reference to a specified multiplier times the change in the specified index,
exchange rate or interest rate. An option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract. These transactions may be entered into for "bona fide hedging"
purposes as defined in CFTC regulations and other permissible purposes including
hedging against changes in the value of portfolio securities due to anticipated
changes in currency values, interest rates and/or market conditions and
increasing return. Aggregate initial margin and premiums (discussed below)
required to establish positions other than those considered to be "bona fide
hedging" by the CFTC will not exceed 5% of a Portfolio's net asset value after
taking into account unrealized profits and unrealized losses on any such
contracts it has entered into. The Funds reserve the right to engage in
transactions involving futures contracts and options on futures contracts to the
extent allowed by CFTC regulations in effect from time to time and in accordance
with a Fund's policies. There is no overall limit on the percentage of Fund
assets that may be at risk with respect to futures activities.
Futures Contracts. (The Intermediate Government and New York
Municipal Funds may not engage in foreign currency futures transactions.) A
foreign currency futures contract provides for the future sale by one party and
the purchase by the other party of a certain amount of a specified non-U.S.
currency at a specified price, date, time and place. An interest rate futures
contract provides for the future sale by one party and the purchase by the other
party of a certain amount of a specific interest rate sensitive financial
instrument (debt security) at a specified price, date, time and place.
Securities indexes are capitalization weighted indexes which reflect the market
value of the securities represented in the indexes. A
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<PAGE> 22
securities index futures contract is an agreement to be settled by delivery of
an amount of cash equal to a specified multiplier times the difference between
the value of the index at the close of the last trading day on the contract and
the price at which the agreement is made.
No consideration is paid or received by a Fund upon entering
into a futures contract. Instead, the Fund is required to segregate with its
custodian an amount of cash or securities acceptable to the broker equal to
approximately 1% to 10% of the contract amount (this amount is subject to change
by the exchange on which the contract is traded, and brokers may charge a higher
amount). This amount is known as "initial margin" and is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
Fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied. The broker will have access to amounts in the
margin account if a Fund fails to meet its contractual obligations. Subsequent
payments, known as "variation margin," to and from the broker, will be made
daily as the currency, financial instrument or securities index underlying the
futures contract fluctuates, making the long and short positions in the futures
contract more or less valuable, a process known as "marking-to-market." The Fund
will also incur brokerage costs in connection with entering into futures
transactions.
At any time prior to the expiration of a futures contract, a
Fund may elect to close the position by taking an opposite position, which will
operate to terminate the Fund's existing position in the contract. Positions in
futures contracts and options on futures contracts (described below) may be
closed out only on the exchange on which they were entered into (or through a
linked exchange). No secondary market for such contracts exists. Although the
Fund may enter into futures contracts only if there is an active market for such
contracts, there is no assurance that an active market will exist at any
particular time. Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the day. It is possible that futures contract prices could move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions at an advantageous
price and subjecting a Fund to substantial losses. In such event, and in the
event of adverse price movements, the Fund would be required to make daily cash
payments of variation margin. In such situations, if a Fund had insufficient
cash, it might have to sell securities to meet daily variation margin
requirements at a time when it would be disadvantageous to do so. In addition,
if the transaction is entered into for hedging purposes, in such circumstances
the Fund may realize a loss on a futures contract or option that is not offset
by an increase in the value of the hedged position. Losses incurred in futures
transactions and the costs of these transactions will affect the Fund's
performance.
Options on Futures Contracts. (The Intermediate Government and
New York Municipal Funds may not purchase or write options on foreign currency.)
A Fund may purchase and write put and call options on foreign currency, interest
rate and stock index futures contracts and may enter into closing transactions
with respect to such options to terminate existing positions. There is no
guarantee that such closing transactions can be
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<PAGE> 23
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 less than, in the case of a put, the exercise price of the option on the
futures contract. The potential loss related to the purchase of an option on a
futures contract is limited to the premium paid for the option (plus transaction
costs). Because the value of the option is fixed at the point of sale, there are
no daily cash payments by the purchaser to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of a Fund.
Money Market Obligations. Each Fund is authorized to invest,
under normal conditions, up to 35% of its total assets in short-term money
market obligations having remaining maturities of less than one year at the time
of purchase. These short-term instruments consist of obligations issued or
guaranteed by the United States government, its agencies or instrumentalities
("Government Securities"); bank obligations (including certificates of deposit,
time deposits and bankers' acceptances of domestic or foreign banks, domestic
savings and loans and similar institutions) that are high quality investments
or, if unrated, deemed by CSAM to be high quality investments; commercial paper
rated no lower than A-2 by Standard & Poor's Ratings Services ("S&P") or Prime-2
by Moody's Investors Service, Inc. ("Moody's") or the equivalent from another
major rating service or, if unrated, of an issuer having an outstanding,
unsecured debt issue then rated within the three highest rating categories; in
the case of the Fixed Income Fund and the Global Fixed Income Fund, obligations
of foreign governments, their agencies or instrumentalities; and repurchase
agreements with respect to portfolio securities. The short-term money market
obligations in which the New York Municipal Fund is authorized to invest
generally will be tax-exempt obligations; however, the Fund may invest in
taxable obligations when suitable tax-exempt obligations are unavailable or to
maintain liquidity for meeting anticipated redemptions and paying operating
expenses. Tax-exempt money market obligations in which the New York Municipal
Fund may invest consist of investment grade tax-exempt notes and tax-exempt
commercial paper rated no lower than A-2 by S&P or Prime-2 by Moody's or the
equivalent from another major rating service or, if not rated, of municipal
issuers having an issue of outstanding municipal obligations rated within the
three highest grades by Moody's or S&P.
Temporary Defensive Strategies. For temporary defensive
purposes or, in the case of the Global Fixed Income Fund, during times of
international political or economic uncertainty, each Fund other than the
Intermediate Government Fund may invest without limit
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<PAGE> 24
in short-term money market obligations, and the Intermediate Government Fund may
invest without limit in short-term Government Securities.
Money Market Mutual Funds. Where CSAM believes that it would
be beneficial to the Fund and appropriate considering the factors of return and
liquidity, each Fund may invest up to 5% of its assets in securities of money
market mutual funds that are unaffiliated with the Fund or CSAM. A money market
mutual fund is an investment company that invests in short-term high quality
money market instruments. A money market mutual fund generally does not purchase
securities with a remaining maturity of more than one year. The Intermediate
Government Fund and the New York Municipal Fund would invest in money market
mutual funds that invest in Government Securities and tax-exempt securities,
respectively. As a shareholder in any mutual fund, a Fund will bear its ratable
share of the mutual fund's expenses, including management fees, and will remain
subject to payment of the Fund's management fees and other expenses with respect
to assets so invested.
Convertible Securities. Convertible securities in which the
Fixed Income and Global Fixed Income Funds may invest, including both
convertible debt and convertible preferred stock, may be converted at either a
stated price or stated rate into underlying shares of common stock. Because of
this feature, convertible securities enable an investor to benefit from
increases in the market price of the underlying common stock. Convertible
securities provide higher yields than the underlying equity securities, but
generally offer lower yields than non-convertible securities of similar quality.
The value of convertible securities fluctuates in relation to changes in
interest rates like bonds and, in addition, fluctuates in relation to the
underlying common stock.
Structured Securities. The Funds may purchase any type of
publicly traded or privately negotiated fixed income security, including
mortgage-backed securities; structured notes, bonds or debentures; and
assignments of and participations in loans.
Mortgage-Backed Securities. A Fund may invest in
mortgage-backed securities, such as those issued by the Government National
Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA"),
Federal Home Loan Mortgage Corporation ("FHLMC") or certain foreign issuers.
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property. The
mortgages backing these securities include, among other mortgage instruments,
conventional 30-year fixed-rate mortgages, 15-year fixed-rate mortgages,
graduated payment mortgages and adjustable rate mortgages. The government or the
issuing agency typically guarantees the payment of interest and principal of
these securities. However, the guarantees do not extend to the securities' yield
or value, which are likely to vary inversely with fluctuations in interest
rates, nor do the guarantees extend to the yield or value of the Fund's shares.
These securities generally are "pass-through" instruments, through which the
holders receive a share of all interest and principal payments from the
mortgages underlying the securities, net of certain fees.
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<PAGE> 25
Yields on pass-through securities are typically quoted by
investment dealers and vendors based on the maturity of the underlying
instruments and the associated average life assumption. The average life of
pass-through pools varies with the maturities of the underlying mortgage loans.
A pool's term may be shortened by unscheduled or early payments of principal on
the underlying mortgages. The occurrence of mortgage prepayments is affected by
various factors, including the level of interest rates, general economic
conditions, the location, scheduled maturity and age of the mortgage and other
social and demographic conditions. Because prepayment rates of individual pools
vary widely, it is not possible to predict accurately the average life of a
particular pool. For pools of fixed-rate 30-year mortgages, a common industry
practice in the U.S. has been to assume that prepayments will result in a
12-year average life. At present, pools, particularly those with loans with
other maturities or different characteristics, are priced on an assumption of
average life determined for each pool. In periods of falling interest rates, the
rate of prepayment tends to increase, thereby shortening the actual average life
of a pool of mortgage-related securities. Conversely, in periods of rising rates
the rate of prepayment tends to decrease, thereby lengthening the actual average
life of the pool. However, these effects may not be present, or may differ in
degree, if the mortgage loans in the pools have adjustable interest rates or
other special payment terms, such as a prepayment charge. Actual prepayment
experience may cause the yield of mortgage-backed securities to differ from the
assumed average life yield. Reinvestment of prepayments may occur at higher or
lower interest rates than the original investment, thus affecting the Fund's
yield.
The rate of interest on mortgage-backed securities is lower
than the interest rates paid on the mortgages included in the underlying pool
due to the annual fees paid to the servicer of the mortgage pool for passing
through monthly payments to certificate holders and to any guarantor, such as
GNMA, and due to any yield retained by the issuer. Actual yield to the holder
may vary from the coupon rate, even if adjustable, if the mortgage-backed
securities are purchased or traded in the secondary market at a premium or
discount. In addition, there is normally some delay between the time the issuer
receives mortgage payments from the servicer and the time the issuer makes the
payments on the mortgage-backed securities, and this delay reduces the effective
yield to the holder of such securities.
Asset-Backed Securities. A Fund may invest in asset-backed
securities, which represent participations in, or are secured by and payable
from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property and receivables
from revolving credit (credit card) agreements. Such assets are securitized
through the use of trusts and special purpose corporations. Payments or
distributions of principal and interest may be guaranteed up to certain amounts
and for a certain time period by a letter of credit or a pool insurance policy
issued by a financial institution unaffiliated with the trust or corporation.
Asset-backed securities present certain risks that are not
presented by other securities in which the Fund may invest. Automobile
receivables generally are secured by automobiles. Most issuers of automobile
receivables permit the loan servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to
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<PAGE> 26
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the asset-backed securities. In addition,
because of the large number of vehicles involved in a typical issuance and
technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in the underlying
automobiles. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities. Credit card receivables are generally unsecured, and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts owed
on the credit cards, thereby reducing the balance due. In addition, there is no
assurance that the security interest in the collateral can be realized.
Structured Notes, Bonds or Debentures. Typically, the value of
the principal and/or interest on these instruments is determined by reference to
changes in the value of specific currencies, interest rates, commodities,
indexes or other financial indicators (the "Reference") or the relevant change
in two or more References. The interest rate or the principal amount payable
upon maturity or redemption may be increased or decreased depending upon changes
in the applicable Reference. The terms of the structured securities may provide
that in certain circumstances no principal is due at maturity and, therefore,
may result in the loss of a Fund's entire investment. The value of structured
securities may move in the same or the opposite direction as the value of the
Reference, so that appreciation of the Reference may produce an increase or
decrease in the interest rate or value of the security at maturity. In addition,
the change in interest rate or the value of the security at maturity may be a
multiple of the change in the value of the Reference so that the security may be
more or less volatile than the Reference, depending on the multiple.
Consequently, structured securities may entail a greater degree of market risk
and volatility than other types of debt obligations.
Assignments and Participations. Each Fund may invest in
assignments of and participations in loans issued by banks and other financial
institutions.
When a Fund purchases assignments from lending financial
institutions, the Fund will acquire direct rights against the borrower on the
loan. However, since assignments are generally arranged through private
negotiations between potential assignees and potential assignors, the rights and
obligations acquired by a Fund as the purchaser of an assignment may differ
from, and be more limited than, those held by the assigning lender.
Participations in loans will typically result in a Fund having
a contractual relationship with the lending financial institution, not the
borrower. A Fund would have the right to receive payments of principal, interest
and any fees to which it is entitled only from the lender of the payments from
the borrower. In connection with purchasing a participation, a Fund generally
will have no right to enforce compliance by the borrower with the terms of the
loan agreement relating to the loan, nor any rights of set-off against the
borrower, and the Fund may not benefit directly from any collateral supporting
the loan in which it has purchased a participation. As a result, a Fund
purchasing a participation will assume the credit risk of both the borrower and
the lender selling the participation. In the event of the insolvency of the
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lender selling the participation, the Fund may be treated as a general creditor
of the lender and may not benefit from any set-off between the lender and the
borrower.
A Fund may have difficulty disposing of assignments and
participations because there is no liquid market for such securities. The lack
of a liquid secondary market will have an adverse impact on the value of such
securities and on a Fund's ability to dispose of particular assignments or
participations when necessary to meet the Fund's liquidity needs or in response
to a specific economic event, such as a deterioration in the creditworthiness of
the borrower. The lack of a liquid market for assignments and participations
also may make it more difficult for a Fund to assign a value to these securities
for purposes of valuing the Fund's portfolio and calculating its net asset
value.
With respect to the New York Municipal Fund, income derived
from participations or assignments may not be tax-exempt, depending on the
structure of the particular securities. To the extent such income is not
tax-exempt it will be subject to the New York Municipal Fund's 20% limit on
investing in non-municipal securities.
A Fund may invest in fixed and floating rate loans ("Loans")
arranged through private negotiations between a foreign government (a
"Borrower") and one or more financial institutions ("Lenders"). The majority of
the Fund's investments in Loans are expected to be in the form of participations
in Loans ("Participations") and assignments of portions of Loans from third
parties ("Assignments"). Participations typically will result in the Fund having
a contractual relationship only with the Lender, not with the Borrower. A Fund
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the Borrower. In connection with
purchasing Participations, the Fund generally will have no right to enforce
compliance by the Borrower with the terms of the loan agreement relating to the
Loan, nor any rights of set-off against the Borrower, and the Fund may not
directly benefit from any collateral supporting the Loan in which it has
purchased the Participation. As a result, the Fund will assume the credit risk
of both the Borrower and the Lender that is selling the Participation. In the
event of the insolvency of the Lender selling a Participation, the Fund may be
treated as a general creditor of the Lender and may not benefit from any set-off
between the Lender and the Borrower. The Fund will acquire Participations only
if the Lender interpositioned between the Fund and the Borrower is determined by
CSAM to be creditworthy.
When a Fund purchases Assignments from Lenders, the Fund will
acquire direct rights against the Borrower on the Loan. However, since
Assignments are generally arranged through private negotiations between
potential assignees and potential assignors, the rights and obligations acquired
by the Fund as the purchaser of an Assignment may differ from, and be more
limited than, those held by the assigning Lender.
There are risks involved in investing in Participations and
Assignments. A Fund may have difficulty disposing of them because there is no
liquid market for such securities. The lack of a liquid secondary market will
have an adverse impact on the value of
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such securities and on the Fund's ability to dispose of particular
Participations or Assignments when necessary to meet the Fund's liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the Borrower. The lack of a liquid market for Participations
and Assignments also may make it more difficult for a Fund to assign a value to
these securities for purposes of valuing the Fund's portfolio and calculating
its net asset value.
Interest Rate, Index, Mortgage and Currency Swaps; Interest
Rate Caps, Floors and Collars. Each Fund may enter into interest rate, index and
mortgage swaps and interest rate caps, floors and collars for hedging purposes
or to seek to increase total return; the Fixed Income and Global Fixed Income
Funds may enter into currency swaps for hedging purposes. Interest rate swaps
involve the exchange by the Fund with another party of their respective
commitments to pay or receive interest, such as an exchange of fixed rate
payments for floating rate payments. Index swaps involve the exchange by the
Fund with another party of the respective amounts payable with respect to a
notional principal amount related to one or more indexes. Mortgage swaps are
similar to interest rate swaps in that they represent commitments to pay and
receive interest. The notional principal amount, however, is tied to a reference
pool or pools of mortgages. Currency swaps involve the exchange of cash flows on
a notional amount of two or more currencies based on their relative future
values. The purchase of an interest rate cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined interest rate, to receive
payment of interest on a notional principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling the interest rate floor. An interest rate collar is the
combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates.
A Fund will enter into interest rate, index and mortgage swaps
only on a net basis, which means that the two payment streams are netted out,
with the Fund receiving or paying, as the case may be, only the net amount of
the two payments. Interest rate, index and mortgage swaps do not involve the
delivery of securities, other underlying assets or principal. Accordingly, the
risk of loss with respect to interest rate, index and mortgage swaps is limited
to the net amount of interest payments that the Fund is contractually obligated
to make. If the other party to an interest rate, index or mortgage swap
defaults, the Fund's risk of loss consists of the net amount of interest
payments that the Fund is contractually entitled to receive. In contrast,
currency swaps usually involve the delivery of a gross payment stream in one
designated currency in exchange for the gross payment stream in another
designated currency. Therefore, the entire payment stream under a currency swap
is subject to the risk that the other party to the swap will default on its
contractual delivery obligations. To the extent that the net amount payable by
the Fund under an interest rate, index or mortgage swap and the entire amount of
the payment stream payable by the Fund under a currency swap or an interest rate
cap, floor or collar are held in a segregated account consisting of cash or
liquid securities, the Funds and CSAM believe that swaps do not constitute
senior securities under the Investment Company Act of 1940, as amended (the
"1940 Act") and, accordingly, will not treat them as being subject to each
Fund's borrowing restriction.
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The Fund will not enter into interest rate, index, mortgage or
currency swaps, or interest rate cap, floor or collar transactions unless the
unsecured commercial paper, senior debt or claims paying ability of the other
party is rated either AA or A-1 or better by S&P or Aa or P-1 or better by
Moody's or, if unrated by such rating organizations, determined to be of
comparable quality by CSAM.
Foreign Investments. (Fixed Income and Global Fixed Income
Funds only) Investors should recognize that investing in foreign companies
involves certain risks, including those discussed below, which are not typically
associated with investing in United States issuers. Individual foreign economies
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency, and balance of payments positions. A Fund may invest
in securities of foreign governments (or agencies or instrumentalities thereof),
and many, if not all, of the foregoing considerations apply to such investments
as well.
Foreign Currency Exchange. Since a Fund may invest in
securities denominated in currencies other than the U.S. dollar, and since the
Fund may temporarily hold funds in bank deposits or other money market
investments denominated in foreign currencies, the Fund may be affected
favorably or unfavorably by exchange control regulations or changes in the
exchange rate between such currencies and the dollar. A change in the value of a
foreign currency relative to the U.S. dollar will result in a corresponding
change in the dollar value of the Fund assets denominated in that foreign
currency. Changes in foreign currency exchange rates may also affect the value
of dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholder by the Fund. The rate of exchange between the U.S. dollar and other
currencies is determined by the forces of supply and demand in the foreign
exchange markets. Changes in the exchange rate may result over time from the
interaction of many factors directly or indirectly affecting economic and
political conditions in the United States and a particular foreign country,
including economic and political developments in other countries. Governmental
intervention may also play a significant role. National governments rarely
voluntarily allow their currencies to float freely in response to economic
forces. Sovereign governments use a variety of techniques, such as intervention
by a country's central bank or imposition of regulatory controls or taxes, to
affect the exchange rates of their currencies. A Fund may use hedging techniques
with the objective of protecting against loss through the fluctuation of the
value of foreign currencies against the U.S. dollar, particularly the forward
market in foreign exchange, currency options and currency futures. See "Currency
Exchange Transactions" and "Futures Activities" above.
Euro Conversion. The introduction of a single European
currency, the euro, on January 1, 1999 for participating European nations in the
Economic and Monetary Union presented unique risks and uncertainties for
investors in those countries, including (i) the functioning of the payment and
operational systems of banks and other financial institutions; (ii) the creation
of suitable clearing and settlement payment schemes for the euro; (iii) the
fluctuation of the euro relative to non-euro currencies during the transition
period from January 1, 1999 to December 31, 2000 and beyond; and (iv) whether
the interest rate, tax and
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labor regimes of the European countries participating in the euro will converge
over time. Further, the conversion of the currencies of other Economic Monetary
Union countries, such as the United Kingdom, and the admission of other
countries, including Central and Eastern European countries, to the Economic
Monetary Union could adversely affect the euro. These or other factors may cause
market disruptions and could adversely affect the value of foreign securities
and currencies held by the Funds.
Information. Many of the foreign securities held by a Fund
will not be registered with, nor the issuers thereof be subject to reporting
requirements of, the SEC. Accordingly, there may be less publicly available
information about such securities and about the foreign company or government
issuing them than is available about a domestic company or government entity.
Foreign companies are generally subject to financial reporting standards,
practices and requirements that are not uniform or less rigorous than those
applicable to U.S. companies.
Political Instability. With respect to some foreign countries,
there is the possibility of expropriation or confiscatory taxation, limitations
on the removal of funds or other assets of the Fund, political or social
instability, or domestic developments which could affect U.S. investments in
those and neighboring countries.
Foreign Markets. Securities of some foreign companies are less
liquid and their prices more volatile than securities of comparable U.S.
companies. Certain foreign countries are known to experience long delays between
the trade and settlement dates of securities purchased or sold which may result
in increased exposure to market and foreign exchange fluctuations and increased
illiquidity.
Increased Expenses. The operating expenses of a Fund can be
expected to be higher than that of an investment company investing exclusively
in U.S. securities, since the expenses of the Fund, such as cost of converting
foreign currency into U.S. dollars, the payment of fixed brokerage commissions
on foreign exchanges, custodial costs, valuation costs and communication costs,
as well as the rate of the investment advisory fees, though similar to such
expenses of some other international funds, are higher than those costs incurred
by other investment companies.
Dollar-Denominated Debt Securities of Foreign Issuers. The
returns on foreign debt securities reflect interest rates and other market
conditions prevailing in those countries. The relative performance of various
countries' fixed income markets historically has reflected wide variations
relating to the unique characteristics of each country's economy. Year-to-year
fluctuations in certain markets have been significant, and negative returns have
been experienced in various markets from time to time.
Foreign Debt Securities. The returns on foreign debt
securities reflect interest rates and other market conditions prevailing in
those countries and the effect of gains and losses in the denominated currencies
against the U.S. dollar, which have had a substantial impact on investment in
foreign fixed income securities. The relative performance of various countries'
fixed income markets historically has reflected wide variations relating to the
unique
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<PAGE> 31
characteristics of each country's economy. Year-to-year fluctuations in certain
markets have been significant, and negative returns have been experienced in
various markets from time to time.
The foreign government securities in which a Fund may invest
generally consist of obligations issued or backed by national, state or
provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt obligations
of supranational entities, which include international organizations designated,
or backed by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples include the International Bank for Reconstruction and Development (the
"World Bank"), the European Coal and Steel Community, the Asian Development Bank
and the InterAmerican Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt securities
of quasi-governmental agencies are issued by entities owned by either a
national, state or equivalent government or are obligations of a political unit
that is not backed by the national government's full faith and credit and
general taxing powers. An example of a multinational currency unit is the
European Currency Unit ("ECU"). An ECU represents specified amounts of the
currencies of certain member states of the European Economic Community. The
specific amounts of currencies comprising the ECU may be adjusted by the Council
of Ministers of the European Community to reflect changes in relative values of
the underlying currencies.
Privatizations. Each Fund may invest in privatizations (i.e.
foreign government programs of selling interests in government-owned or
controlled enterprises). The ability of U.S. entities, such as the Funds, to
participate in privatizations may be limited by local law, or the terms for
participation may be less advantageous than for local investors. There can be no
assurance that privatization programs will be available or successful.
Brady Bonds. The Fund may invest in so-called "Brady Bonds,"
which have been issued by Costa Rica, Mexico, Uruguay and Venezuela and which
may be issued by other Latin American countries. Brady Bonds are issued as part
of a debt restructuring in which the bonds are issued in exchange for cash and
certain of the country's outstanding commercial bank loans. Investors should
recognize that Brady Bonds do not have a long payment history. Brady Bonds may
be collateralized or uncollateralized, are issued in various currencies
(primarily the U.S. dollar) and are actively traded in the over-the-counter
("OTC") secondary market for debt of Latin American issuers. In light of the
history of commercial bank loan defaults by Latin American public and private
entities, investments in Brady Bonds may be viewed as speculative.
Depositary Receipts. Assets of a Fund may be invested in the
securities of foreign issuers in the form of American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and International Depositary
Receipts ("IDRs"). These securities may not
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necessarily be denominated in the same currency as the securities into which
they may be converted. ADRs are receipts typically issued by a U.S. bank or
trust company which evidence ownership of underlying securities issued by a
foreign corporation. EDRs, which are sometimes referred to as Continental
Depositary Receipts ("CDRs"), are receipts issued in Europe and IDRs, which are
sometimes referred to as Global Depositary Receipts, are issued outside the
United States. EDRs and IDRs are typically issued by non-U.S. banks and trust
companies and evidence ownership of either foreign or domestic securities.
Generally, ADRs in registered form are designed for use in U.S. securities
markets and EDRs and IDRs in bearer form are designed for use in European
securities markets and non-U.S. securities markets, respectively.
U.S. Government Securities. A Fund may invest in Government
Securities. Direct obligations of the U.S. Treasury include a variety of
securities that differ in their interest rates, maturities and dates of
issuance. U.S. government securities also include securities issued or
guaranteed by the Federal Housing Administration, Farmers Home Loan
Administration, Export-Import Bank of the United States, Small Business
Administration, GNMA, General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, FHLMC, Federal
Intermediate Credit Banks, Federal Land Banks, FNMA, Federal Maritime
Administration, Tennessee Valley Authority, District of Columbia Armory Board
and Student Loan Marketing Association. A Fund may also invest in instruments
that are supported by the right of the issuer to borrow from the U.S. Treasury
and instruments that are supported by the credit of the instrumentality. Because
the United States Government is not obligated by law to provide support to an
instrumentality it sponsors, the Fund will invest in obligations issued by such
an instrumentality only if CSAM determines that the credit risk with respect to
the instrumentality does not make its securities unsuitable for investment by
the Fund.
Government Trust Certificates. (Intermediate Government Fund
only) A Fund may invest in Government Trust Certificates. Each Certificate
evidences an undivided fractional interest in a Government Trust (each, a
"Trust"). The assets of each Trust consist of a promissory note, payable in U.S.
Dollars (the "Loan Note"), representing a loan made by the Trust to the
government of Israel (the "Borrower"), backed by a full faith and credit
guaranty issued by the United States of America, acting through the Defense
Security Assistance Agency of the Department of Defense (the "Guaranty"), of the
due and punctual payment of 90% of payments of principal and interest due on the
Loan Note and a security interest in collateral, consisting of non-callable
securities issued or guaranteed by the United States government, or derivatives
thereof, such as trust receipts or other securities evidencing an interest in
such United States government securities, sufficient to pay the remaining 10% of
all payments of principal and interest due on the Loan Notes. Each Certificate
issued by a Trust represents the right to receive a portion of the payments due
on the Loan Note held by that Trust. The Certificates are not subject to
prepayment or acceleration. Each Guaranty is entitled to the full faith and
credit of the United States of America. A certificate-holder's right to receive
any payments with respect to the Guaranty will be subject to termination if such
holder breaches the terms of its Certificate.
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Certificates are not considered by the Fund to be Government
Securities. The Certificates represent undivided fractional interests in the
Loan Notes, but the Certificates are not direct obligations of, and are not
guaranteed by, the Borrower. Thus, in the event of a failure to pay principal
and/or interest when due, the Fund may be subject to delays, expenses and risks
that are greater than those that would have been involved if the Fund had
purchased a direct obligation of the Borrower.
Municipal Obligations. Under normal circumstances, each Fund
may and the Municipal Fund will invest in "Municipal Obligations." Municipal
Obligations are debt obligations issued by or on behalf of states (including the
State of New York), territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies and
instrumentalities. Except for temporary defensive purposes, the New York
Municipal Fund will invest its assets in intermediate and long term obligations
with interest which is excluded from gross income for federal income tax
purposes and which is exempt from New York State and New York City personal
income taxes ("New York Municipal Obligations") and intends to invest
substantially all of its assets in those obligations. New York Municipal
Obligations include obligations issued by or on the behalf of the State of New
York, its political subdivisions, agencies and instrumentalities.
Municipal Obligations are issued by governmental entities to
obtain funds for various public purposes, including the construction of a wide
range of public facilities, the refunding of outstanding obligations, the
payment of general operating expenses and the extension of loans to public
institutions and facilities. Private activity bonds that are issued by or on
behalf of public authorities to finance various privately-operated facilities
are included within the term Municipal Obligations if the interest paid thereon
is exempt from federal income tax.
The two principal types of Municipal Obligations, in terms of
the source of payment of debt service on the bonds, consist of "general
obligation" and "revenue" issues. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable from the revenues derived from
a particular facility or class of facilities or in some cases, from the proceeds
of a special excise tax or other specific revenue source such as the user of the
facility being financed. Consequently, the credit quality of revenue bonds is
usually directly related to the credit standing of the user of the facility
involved.
There are, of course, variations in the quality of Municipal
Obligations, both within a particular classification and between
classifications, and the yields on Municipal Obligations depend upon a variety
of factors, including general money market conditions, the financial condition
of the issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
The ratings of Moody's and S&P represent their opinions as to the quality of
Municipal Obligations. It should be emphasized, however, that ratings are
general and are not absolute standards of quality, and Municipal Obligations
with the same maturity, interest rate and rating may have different yields while
Municipal Obligations of the same maturity and interest rate with
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different ratings may have the same yield. Subsequent to its purchase by a Fund,
an issue of Municipal Obligations may cease to be rated or its rating may be
reduced below the minimum rating required for purchase by the Fund. The Fund's
investment adviser will consider such an event in determining whether the Fund
should continue to hold the obligation. See the Appendix attached hereto for
further information concerning the ratings of Moody's and S&P and their
significance.
Among other instruments, a Fund may purchase short term Tax
Anticipation Notes, Bond Anticipation Notes, Revenue Anticipation Notes and
other forms of short term loans. Such notes are issued with a short term
maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements or other revenues.
The yields on Municipal Obligations are dependent upon a
variety of factors, including general economic and monetary conditions, money
market factors, conditions of the municipal bond market, size of a particular
offering, maturity of the obligation offered and rating of the issue.
Municipal Obligations are also subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon the ability of municipalities to levy taxes. There
is also the possibility that as a result of litigation or other conditions, the
power or ability of any one or more issuers to pay, when due, principal of and
interest on its, or their, Municipal Obligations may be materially affected.
Alternative Minimum Tax Bonds. (Fixed Income and New York
Municipal Funds only) A Fund may invest without limit in "Alternative Minimum
Tax Bonds," which are certain bonds issued after August 7, 1986 to finance
certain non-governmental activities. While the income from Alternative Minimum
Tax Bonds is exempt from regular federal income tax, it is a tax preference item
for purposes of the federal individual and corporate "alternative minimum tax."
The alternative minimum tax is a special tax that applies to a limited number of
taxpayers who have certain adjustments or tax preference items. Available
returns on Alternative Minimum Tax Bonds acquired by a Fund may be lower than
those from other Municipal Obligations acquired by a Fund due to the possibility
of federal, state and local alternative minimum or minimum income tax liability
on Alternative Minimum Tax Bonds. At present, the Fixed Income Fund does not
intend to purchase Alternative Minimum Tax Bonds.
Securities of Other Investment Companies. A Fund may invest in
securities of other investment companies to the extent permitted under the 1940
Act. Presently, under the 1940 Act, the Fund may hold securities of another
investment company in amounts which (i) do not exceed 3% of the total
outstanding voting stock of such company, (ii) do not exceed 5% of the value of
the Fund's total assets and (iii) when added to all other investment
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company securities held by the Fund, do not exceed 10% of the value of the
Fund's total assets.
Below Investment Grade Securities. (Fixed Income and Global
Fixed Income Funds only) A Fund may invest up to 35% of its net assets in fixed
income securities rated below investment grade and as low as C by Moody's or D
by S&P, and in comparable unrated securities. While the market values of these
securities tend to react less to fluctuations in interest rate levels than do
those of investment grade securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than investment grade securities. In
addition, these securities generally present a higher degree of credit risk.
Issuers of such securities are often highly leveraged and may not have more
traditional methods of financing available to them so that their ability to
service their debt obligations during an economic downturn or during sustained
periods of rising interest rates may be impaired. Investors should be aware that
ratings are relative and subjective and are not absolute standards of quality.
The market for below investment grade securities and unrated
securities is relatively new and has not weathered a major economic recession.
Any such recession could disrupt severely the market for such securities and may
adversely affect the value of such securities and the ability of the issuers of
such securities to repay principal and pay interest thereon.
A Fund may have difficulty disposing of certain of these
securities because there may be a thin trading market. Because there is no
established retail secondary market for many of these securities, the Fund
anticipates that these securities could be sold only to a limited number of
dealers or institutional investors. To the extent a secondary trading market for
these securities does exist, it generally is not as liquid as the secondary
market for investment grade securities. The lack of a liquid secondary market,
as well as adverse publicity and investor perception with respect to these
securities, may have an adverse impact on market price and the Fund's ability to
dispose of particular issues when necessary to meet the Fund's liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. The lack of a liquid secondary market for
certain securities also may make it more difficult for the Fund to obtain
accurate market quotations for purposes of valuing the Fund and calculating its
net asset value.
Subsequent to its purchase by a Fund, an issue of securities
may cease to be rated or its rating may be reduced below the minimum required
for purchase by the Fund. Neither event will require sale of such securities by
the Fund, although CSAM will consider such event in its determination of whether
the Fund should continue to hold the securities. The Fixed Income Fund and the
Global Fixed Income Fund may invest in securities rated as low as C by Moody's
or D by S&P and in unrated securities considered to be of equivalent quality.
Securities that are rated C by Moody's are the lowest rated class and can be
regarded as having extremely poor prospects of ever attaining any real
investment standing. Debt rated D by S&P is in default or is expected to default
upon maturity or payment date.
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Below investment grade and comparable unrated securities
(commonly referred to as "junk bonds") (i) will likely have some quality and
protective characteristics that, in the judgment of the rating organization, are
outweighed by large uncertainties or major risk exposures to adverse conditions
and (ii) are predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
The market values of certain of these securities also tend to be more sensitive
to individual corporate developments and changes in economic conditions than
higher-quality securities. In addition, these securities generally present a
higher degree of credit risk. The risk of loss due to default is significantly
greater because these securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness.
The market value of securities rated below investment grade is
more volatile than that of investment grade securities. Factors adversely
impacting the market value of these securities will adversely impact a Fund's
net asset value. A Fund will rely on the judgment, analysis and experience of
CSAM in evaluating the creditworthiness of an issuer. In this evaluation, CSAM
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters.
Normally, these securities are not intended for short-term investment. The Fund
may incur additional expenses to the extent it is required to seek recovery upon
a default in the payment of principal or interest on its portfolio holdings of
such securities.
Lending Portfolio Securities. A Fund may lend portfolio
securities to brokers, dealers and other financial organizations that meet
capital and other credit requirements or other criteria established by a Fund's
Board of Directors/Trustees (the "Board"). These loans, if and when made, may
not exceed 33-1/3% of the Fund's total assets taken at value (including the loan
collateral). The Fund will not lend portfolio securities to CSAM or its
affiliates unless it has applied for and received specific authority to do so
from the SEC. Loans of portfolio securities will be collateralized by cash or
liquid securities, which are maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. Any gain or
loss in the market price of the securities loaned that might occur during the
term of the loan would be for the account of the Fund. From time to time, a Fund
may return a part of the interest earned from the investment of collateral
received for securities loaned to the borrower and/or a third party that is
unaffiliated with the Fund and that is acting as a "finder."
By lending its securities, a Fund can increase its income by
continuing to receive interest and any dividends on the loaned securities as
well as by either investing the collateral received for securities loaned in
short-term instruments or obtaining yield in the form of interest paid by the
borrower when U.S. government securities are used as collateral. The Fund will
adhere to the following conditions whenever its portfolio securities are loaned:
(i) the Fund must receive at least 100% cash collateral or equivalent securities
of the type discussed in the preceding paragraph from the borrower; (ii) the
borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (iii) the Fund must be able
to terminate the loan at any time; (iv) the Fund must receive
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reasonable interest on the loan, as well as any dividends, interest or other
distributions on the loaned securities and any increase in market value; (v) the
Fund may pay only reasonable custodian fees in connection with the loan; and
(vi) voting rights on the loaned securities may pass to the borrower, provided,
however, that if a material event adversely affecting the investment occurs, the
Board of a Fund must terminate the loan and regain the right to vote the
securities. Loan agreements involve certain risks in the event of default or
insolvency of the other party including possible delays or restrictions upon the
Fund's ability to recover the loaned securities or dispose of the collateral for
the loan. The Fund bears a risk of loss in the event that the other party to the
loan agreement defaults on its obligations or becomes bankrupt and the Fund is
delayed or prevented from exercising its right to retrieve and dispose of the
loaned securities, including the risk of a possible decline in the value of the
loaned securities during the period in which the Fund seeks to assert its
rights.
Repurchase Agreements. Each Fund may invest up to 20% of its
total assets in repurchase agreement transactions with member banks of the
Federal Reserve System and 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, monitors the creditworthiness
of those bank and non-bank dealers with which the Fund enters into repurchase
agreements to evaluate this risk. A repurchase agreement is considered to be a
loan under the 1940 Act.
Reverse Repurchase Agreements and Dollar Rolls. A Fund may
enter into reverse repurchase agreements with member banks of the Federal
Reserve System and certain non-bank dealers. Reverse repurchase agreements
involve the sale of securities held by a Fund pursuant to its agreement to
repurchase them at a mutually agreed upon date, price and rate of interest. At
the time a Fund enters into a reverse repurchase agreement, it will segregate
with an approved custodian cash or liquid high-grade debt securities having a
value not less than the repurchase price (including accrued interest). The
segregated assets will be marked-to-market daily and additional assets will be
segregated on any day in which the assets fall below the repurchase price (plus
accrued interest). A Fund's liquidity and ability to manage its assets might be
affected when it sets aside cash or portfolio securities to cover such
commitments.
A Fund also may enter into "dollar rolls," in which the Fund
sells fixed-income securities for delivery in the current month and
simultaneously contracts to repurchase similar
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but not identical (same type, coupon and maturity) securities on a specified
future date. During the roll period, a Fund would forego principal and interest
paid on such securities. A Fund would be compensated by the difference between
the current sales price and the forward price for the future purchase, as well
as by the interest earned on the cash proceeds of the initial sale. At the time
a Fund enters into a dollar roll transaction, it will segregate with an approved
custodian cash or liquid securities having a value not less than the repurchase
price (including accrued interest) and will subsequently monitor the segregated
assets to ensure that its value is maintained. Reverse repurchase agreements and
dollar rolls that are accounted for as financings are considered to be
borrowings under the 1940 Act.
Reverse repurchase agreements and dollar rolls involve the
risk that the market value of the securities retained in lieu of sale may
decline below the price of the securities a Fund has sold but is obligated to
repurchase. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, such buyer or its trustee
or receiver may receive an extension of time to determine whether to enforce a
Fund's obligation to repurchase the securities, and the Fund's use of the
proceeds of the reverse repurchase agreement may effectively be restricted
pending such decision.
Zero Coupon Securities. A Fund may invest without limit in
"zero coupon" U.S. Treasury, foreign government and U.S. and foreign corporate
convertible and nonconvertible debt securities, which are bills, notes and bonds
that have been stripped of their unmatured interest coupons and custodial
receipts or certificates of participation representation interests in such
stripped debt obligations and coupons. A zero coupon security pays no interest
to its holder prior to maturity. Accordingly, such securities usually trade at a
deep discount from their face or par value and will be subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities that make current distributions of
interest. The Fund anticipates that it will not normally hold zero coupon
securities to maturity. Federal tax law requires that a holder of a zero coupon
security accrue a portion of the discount at which the security was purchased as
income each year, even though the holder receives no interest payment on the
security during the year. Such accrued discount will be includible in
determining the amount of dividends the Fund must pay each year and, in order to
generate cash necessary to pay such dividends, the Fund may liquidate portfolio
securities at a time when it would not otherwise have done so. At present, the
U.S. Treasury and certain U.S. agencies issue stripped Government Securities. In
addition, in the recent past, a number of banks and brokerage firms have
separated the principal portions from the coupon portions of U.S. Treasury bonds
and notes and sold them separately in the form of receipts or certificates
representing undivided interests in these instruments.
Government Zero Coupon Securities. The Fund may invest in (i)
Government Securities that have been stripped of their unmatured interest
coupons, (ii) the coupons themselves and (iii) receipts or certificates
representing interests in stripped Government Securities and coupons
(collectively referred to as "Government zero coupon securities"). The market
value of Government zero coupon securities that are considered Government
Securities is used for purposes of determining whether at least 65% of the
Fund's total assets is invested in Government Securities. However, receipts or
certificates which are underwritten by
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securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain notes or bonds issued by the U.S.
government, its agencies, authorities or instrumentalities will not be
considered Government Securities for purposes of the 65% test.
Short Sales. (Fixed Income, Global Fixed Income and
Intermediate Government Funds only) In a short sale, a Fund sells a borrowed
security and has a corresponding obligation to the lender to return the
identical security. The seller does not immediately deliver the securities sold
and is said to have a short position in those securities until delivery occurs.
If the Fund engages in a short sale, the collateral for the short position will
be maintained by the Fund's custodian or qualified sub-custodian. While the
short sale is open, the Fund will maintain in a segregated account an amount of
securities equal in value to the securities sold short.
While a short sale is made by selling a security a Fund does
not own, a short sale is "against the box" to the extent that the Fund
contemporaneously owns or has the right to obtain, at no added cost, securities
identical to those sold short. Not more than 10% of a Fund's net assets (taken
at current value) may be held as collateral for short sales against the box at
any one time. A Fund does not intend to engage in short sales against the box
for investment purposes. The Fund may, however, make a short sale as a hedge,
when it believes that the price of a security may decline, causing a decline in
the value of a security owned by the Fund (or a security convertible or
exchangeable for such security). In such case, any future losses in the Fund's
long position should be offset by a gain in the short position and, conversely,
any gain in the long position should be reduced by a loss in the short position.
The extent to which such gains or losses are reduced will depend upon the amount
of the security sold short relative to the amount the Fund owns. There will be
certain additional transaction costs associated with short sales against the
box, but the Fund will endeavor to offset these costs with the income from the
investment of the cash proceeds of short sales.
If a Fund effects a short sale of securities at a time when it
has an unrealized gain on the securities, it may be required to recognize that
gain as if it had actually sold the securities (as a "constructive sale") on the
date it effects the short sale. However, such constructive sale treatment may
not apply if the Fund closes out the short sale with securities other than the
appreciated securities held at the time of the short sale and if certain other
conditions are satisfied. Uncertainty regarding the tax consequences of
effecting short sales may limit the extent to which a Fund may effect short
sales.
Emerging Growth and Smaller Capitalization Companies;
Unseasoned Issuers. Investing in securities of companies with continuous
operations of less than three years ("unseasoned issuers") may involve greater
risks since these securities may have limited marketability and, thus, may be
more volatile than securities of larger, more established companies or the
market in general. Because such companies normally have fewer shares outstanding
than larger companies, it may be more difficult for a Fund to buy or sell
significant amounts of such shares without an unfavorable impact on prevailing
prices. These companies may have limited product lines, markets or financial
resources and may lack
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management depth. In addition, these companies are typically subject to a
greater degree of changes in earnings and business prospects than are larger,
more established companies. There is typically less publicly available
information concerning these companies than for larger, more established ones.
Although investing in securities of unseasoned issuers offers
potential for above-average returns if the companies are successful, the risk
exists that the companies will not succeed and the prices of the companies'
shares could significantly decline in value. Therefore, an investment in a Fund
may involve a greater degree of risk than an investment in other mutual funds
that seek capital appreciation by investing in more established, larger
companies.
"Special Situation" Companies. (Fixed Income and Global Fixed
Income Funds only) "Special situation companies" are companies involved in an
actual or prospective acquisition or consolidation; reorganization;
recapitalization; merger, liquidation or distribution of cash, securities or
other assets; a tender or exchange offer; a breakup or workout of a holding
company; or litigation which, if resolved favorably, would improve the value of
the company's stock. If the actual or prospective situation does not materialize
as anticipated, the market price of the securities of a "special situation
company" may decline significantly. CSAM believes, however, that if it analyzes
"special situation companies" carefully and invests in the securities of these
companies at the appropriate time, the Fund may achieve capital growth. There
can be no assurance, however, that a special situation that exists at the time
of an its investment will be consummated under the terms and within the time
period contemplated.
Variable Rate and Master Demand Notes. (Fixed Income and New
York Municipal Funds only) Variable rate demand notes ("VRDNs") are obligations
issued by corporate or governmental entities which contain a floating or
variable interest rate adjustment formula and an unconditional right of demand
to receive payment of the unpaid principal balance plus accrued interest upon a
short notice period not to exceed seven days. The interest rates are adjustable
at intervals ranging from daily to up to every six months to some prevailing
market rate for similar investments, such adjustment formula being calculated to
maintain the market value of the VRDN at approximately the par value of the VRDN
upon the adjustment date. The adjustments are typically based upon the prime
rate of a bank or some other appropriate interest rate adjustment index.
Master demand notes are notes which provide for a periodic
adjustment in the interest rate paid (usually tied to the Treasury Bill auction
rate) and permit daily changes in the principal amount borrowed. While there may
be no active secondary market with respect to a particular VRDN purchased by a
Fund, the Fund may, upon the notice specified in the note, demand payment of the
principal of and accrued interest on the note at any time and may resell the
note at any time to a third party. The absence of such an active secondary
market, however, could make it difficult for the Fund to dispose of the VRDN
involved in the event the issuer of the note defaulted on its payment
obligations, and the Fund could, for this or other reasons, suffer a loss to the
extent of the default.
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When-Issued Securities and Delayed-Delivery Transactions. A
Fund may utilize its assets to purchase securities on a "when-issued" basis or
purchase or sell securities for delayed delivery (i.e., payment or delivery
occur beyond the normal settlement date at a stated price and yield). The Fund
will enter into a when-issued transaction for the purpose of acquiring portfolio
securities and not for the purpose of leverage, but may sell the securities
before the settlement date if CSAM deems it advantageous to do so. The payment
obligation and the interest rate that will be received on when-issued securities
are fixed at the time the buyer enters into the commitment. Due to fluctuations
in the value of securities purchased or sold on a when-issued or
delayed-delivery basis, the yields obtained on such securities may be higher or
lower than the yields available in the market on the dates when the investments
are actually delivered to the buyers.
When a Fund agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash or liquid securities that are
acceptable as collateral to the appropriate regulatory authority equal to the
amount of the commitment in a segregated account. Normally, the custodian will
set aside portfolio securities to satisfy a purchase commitment, and in such a
case the Fund may be required subsequently to place additional assets in the
segregated account in order to ensure that the value of the account remains
equal to the amount of the Fund's commitment. It may be expected that the Fund's
net assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash. When
a Fund engages in when-issued or delayed-delivery transactions, it relies on the
other party to consummate the trade. Failure of the seller to do so may result
in the Fund's incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.
Stand-By Commitment Agreements. (Fixed Income and New York
Municipal Funds only) A Fund may acquire "stand-by commitments" with respect to
securities held in its portfolio. Under a stand-by commitment, a dealer agrees
to purchase at the Fund's option specified securities at a specified price. The
Fund's right to exercise stand-by commitments is unconditional and unqualified.
Stand-by commitments acquired by the Fund may also be referred to as "put"
options. A stand-by commitment is not transferable by the Fund, although the
Fund can sell the underlying securities to a third party at any time.
The principal risk of stand-by commitments is that the writer
of a commitment may default on its obligation to repurchase the securities
acquired with it. When investing in stand-by commitments, a Fund will seek to
enter into stand-by commitments only with brokers, dealers and banks that, in
the opinion of CSAM, present minimal credit risks. In evaluating the
creditworthiness of the issuer of a stand-by commitment, CSAM will periodically
review relevant financial information concerning the issuer's assets,
liabilities and contingent claims. The Fund acquires stand-by commitments only
in order to facilitate portfolio liquidity and does not expect to exercise its
rights under stand-by commitments for trading purposes.
The amount payable to a Fund upon its exercise of a stand-by
commitment is normally (i) the Fund's acquisition cost of the securities
(excluding any accrued interest which
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the Fund paid on their acquisition), less any amortized market premium or plus
any amortized market or original issue discount during the period the Fund owned
the securities, plus (ii) all interest accrued on the securities since the last
interest payment date during that period.
A Fund expects that stand-by commitments will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding stand-by commitments held in the Fund's portfolio will
not exceed 1/2 of 1% of the value of the Fund's total assets calculated
immediately after each stand-by commitment is acquired.
A Fund would acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The acquisition of a stand-by commitment would not affect the
valuation or assumed maturity of the underlying securities. Stand-by commitments
acquired by the Fund would be valued at zero in determining net asset value.
Where the Fund paid any consideration directly or indirectly for a stand-by
commitment, its cost would be reflected as unrealized depreciation for the
period during which the commitment was held by the Fund. Stand-by commitments
would not affect the average weighted maturity of a Fund's portfolio.
The Internal Revenue Service ("IRS") has issued a revenue
ruling to the effect that a registered investment company will be treated for
federal income tax purposes as the owner of the Municipal Obligations acquired
subject to a stand-by commitment and the interest on the Municipal Obligations
will be tax exempt to a Fund.
REITs. (Fixed Income and Global Fixed Income Funds only) A
fund may invest in real estate investment trusts ("REITs"), which are pooled
investment vehicles that invest primarily in income-producing real estate or
real estate related loans or interests. Like regulated investment companies such
as the Funds, REITs are not taxed on income distributed to shareholders provided
they comply with several requirements of the Internal Revenue Code of 1986, as
amended (the "Code"). The Fund investing in a REIT will indirectly bear its
proportionate share of any expenses paid by the REIT in addition to the expenses
of the Fund.
Investing in REITs involves certain risks. A REIT may be
affected by changes in the value of the underlying property owned by such REIT
or by the quality of any credit extended by the REIT. REITs are dependent on
management skills, are not diversified (except to the extent the Code requires),
and are subject to the risks of financing projects. REITs are subject to heavy
cash flow dependency, default by borrowers, self-liquidation, the possibilities
of failing to qualify for the exemption from tax for distributed income under
the Code and failing to maintain their exemptions from the 1940 Act. REITs are
also subject to interest rate risks.
Warrants. (Fixed Income and Global Fixed Income Funds only) A
Fund may utilize up to 10% of its net assets to purchase warrants issued by
domestic and foreign
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companies to purchase newly created equity securities consisting of common and
preferred stock. Neither Fund currently intends to invest in warrants. The
equity security underlying a warrant is outstanding at the time the warrant is
issued or is issued together with the warrant.
Investing in warrants can provide a greater potential for
profit or loss than an equivalent investment in the underlying security, and,
thus, can be a speculative investment. The value of a warrant may decline
because of a decline in the value of the underlying security, the passage of
time, changes in interest rates or in the dividend or other policies of the
company whose equity underlies the warrant or a change in the perception as to
the future price of the underlying security, or any combination thereof.
Warrants generally pay no dividends and confer no voting or other rights other
than to purchase the underlying security.
Non-Publicly Traded and Illiquid Securities. A Fund may not
invest more than 15% of its net assets in non-publicly traded and illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market, repurchase agreements which have a maturity of longer
than seven days, VRDNs and master demand notes providing for settlement upon
more than seven days notice by the Fund, and time deposits maturing in more than
seven calendar days. Securities that have legal or contractual restrictions on
resale but have a readily available market are not considered illiquid for
purposes of this limitation. Repurchase agreements subject to demand are deemed
to have a maturity equal to the notice period.
Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which have
not been registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market. Companies whose securities are not publicly traded
may not be subject to the disclosure and other investor protection requirements
applicable to companies whose securities are publicly traded. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has
developed for certain securities that are not registered under the Securities
Act including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for repayment.
The fact that there are contractual or legal restrictions on resale to the
general public or to certain institutions may not be indicative of the liquidity
of such investments.
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Non-publicly traded securities (including Rule 144A
Securities) may involve a high degree of business and financial risk and may
result in substantial losses. These securities may be less liquid than publicly
traded securities, and a Fund may take longer to liquidate these positions than
would be the case for publicly traded securities. Although these securities may
be resold in privately negotiated transactions, the prices realized from these
sales could be less than those originally paid by the Fund. Further, companies
whose securities are not publicly traded may not be subject to the disclosure
and other investor protection requirements that would be applicable if their
securities were publicly traded. A Fund's investment in illiquid securities is
subject to the risk that should the Fund desire to sell any of these securities
when a ready buyer is not available at a price that is deemed to be
representative of their value, the value of the Fund's net assets could be
adversely affected.
Rule 144A Securities. Rule 144A under the Securities Act
adopted by the SEC allows for a broader institutional trading market for
securities otherwise subject to restriction on resale to the general public.
Rule 144A establishes a "safe harbor" from the registration requirements of the
Securities Act for resales of certain securities to qualified institutional
buyers. CSAM anticipates that the market for certain restricted securities such
as institutional commercial paper will expand further as a result of this
regulation and use of automated systems for the trading, clearance and
settlement of unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of Securities Dealers,
Inc.
An investment in Rule 144A Securities will be considered
illiquid and therefore subject to a Fund's limit on the purchase of illiquid
securities unless the Fund's Board of Directors/Trustees or its delegates
determines that the Rule 144A Securities are liquid. In reaching liquidity
decisions, CSAM may consider, inter alia, the following factors: (i) the
unregistered nature of the security; (ii) the frequency of trades and quotes for
the security; (iii) the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; (iv) dealer undertakings
to make a market in the security; and (v) the nature of the security and the
nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of the transfer).
Investing in Rule 144A securities could have the effect of
increasing the level of illiquidity in the Funds to the extent that qualified
institutional buyers are unavailable or uninterested in purchasing such
securities from the Funds. The Boards may adopt guidelines and delegate to CSAM
the daily function of determining and monitoring the liquidity of Rule 144A
Securities, although each Board will retain ultimate responsibility for
liquidity determinations.
Borrowing. A Fund may borrow up to 30% of its total assets for
temporary or emergency purposes, including to meet portfolio redemption requests
so as to permit the orderly disposition of portfolio securities or to facilitate
settlement transactions on portfolio securities. Investments (including
roll-overs) will not be made when borrowings exceed 5% of the Fund's net assets.
Although the principal of such borrowings will be fixed, a Fund's assets may
change in value during the time the borrowing is outstanding. The Fund expects
that
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some of its borrowings may be made on a secured basis. In such situations,
either the custodian will segregate the pledged assets for the benefit of the
lender or arrangements will be made with a suitable subcustodian, which may
include the lender.
Non-Diversified Status. (Global Fixed Income and New York
Municipal Funds only) The Funds are classified as non-diversified within the
meaning of the 1940 Act, which means that they are not limited by such Act in
the proportion of its assets that it may invest in securities of a single
issuer. As non-diversified investment companies, the Funds may invest a greater
proportion of their assets in the obligations of a small number of issuers and,
as a result, may be subject to greater risk with respect to portfolio
securities. To the extent that the Funds assume large positions in the
securities of a small number of issuers, their return may fluctuate to a greater
extent than that of a diversified company as a result of changes in the
financial condition or in the market's assessment of the issuers.
A Fund's investments will be limited, however, in order to
qualify as a "regulated investment company" for purposes of the Code. See
"Additional Information Concerning Taxes." To qualify, a Fund will comply with
certain requirements, including limiting its investments so that at the close of
each quarter of the taxable year (i) not more than 25% of the market value of
its total assets will be invested in the securities of a single issuer, and (ii)
with respect to 50% of the market value of its total assets, not more than 5% of
the market value of its total assets will be invested in the securities of a
single issuer and the Fund will not own more than 10% of the outstanding voting
securities of a single issuer.
Taxable Investments. (New York Municipal Fund only) Because
the Fund's purpose is to provide income exempt from federal income tax and New
York State and New York City personal income tax, the Fund generally will invest
in taxable obligations only if and when the Fund's investment adviser believes
it would be in the best interests of the Fund's investors to do so. Situations
in which the Fund may invest up to 20% of its total assets in taxable securities
include: (i) pending investment of proceeds of sales of Fund shares or portfolio
securities or (ii) when the Fund requires highly liquid securities in order to
meet anticipated redemptions. The Fund may temporarily invest more than 20% of
its total assets in taxable securities to maintain a "defensive" posture when
the Fund's investment adviser determines that it is advisable to do so because
of adverse market conditions affecting the market for Municipal Obligations
generally.
Among the taxable investments in which the Fund may invest are
repurchase agreements and time deposits maturing in not more than seven days.
The Fund may engage in repurchase agreement transactions on Government
Securities with member banks of the Federal Reserve System or with certain
dealers listed on the Federal Reserve Bank of New York's list of reporting
dealers. Under the terms of a typical repurchase agreement, the Fund would
acquire an underlying debt obligation for a relatively short period (usually not
more than one week) subject to an obligation of the seller to repurchase, and
the Fund to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Fund's holding period. A repurchase agreement
is considered to be a loan under the 1940 Act. The value of the underlying
securities will be at least equal at all times to the total amount of the
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repurchase obligation, including interest. The Fund bears a risk of loss in the
event that the other party to a repurchase agreement defaults on its obligations
and the Fund is delayed or prevented from exercising its rights to dispose of
the collateral securities, including the risk of a possible decline in the value
of the underlying securities during the period while the Fund seeks to assert
these rights. The Fund's investment adviser, acting under the supervision of the
Board, reviews on an ongoing basis, the creditworthiness and the values of the
collateral of those banks and dealers with which the Fund enters into repurchase
agreements to evaluate potential risks.
INVESTMENT RESTRICTIONS
Fixed Income Fund. The investment limitations numbered 1
through 12 may not be changed without the affirmative vote of the holders of a
majority of the Fixed Income Fund's outstanding shares. Such majority is defined
as the lesser of (i) 67% or more of the shares present at the meeting, if the
holders of more than 50% of the outstanding shares of the Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding shares.
Investment limitations 13 through 15 may be changed by a vote of the Board at
any time.
The Fixed Income Fund may not:
1. Borrow money except that the Fund may (i) borrow from banks
for temporary or emergency purposes, and (ii) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the Fund's
total assets. For purposes of this restriction, short sales, the entry into
currency transactions, options, futures contracts, options on futures contracts,
forward commitment transactions and dollar roll transactions that are not
accounted for as financings (and the segregation of assets in connection with
any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of
the value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of U.S.
government securities.
3. Make loans except that the Fund may purchase or hold
fixed-income securities, including loan participations, assignments and
structured securities; lend portfolio securities; and enter into repurchase
agreements.
4. Underwrite any securities issued by others except to the
extent that the investment in restricted securities and the sale of securities
in accordance with the Fund's investment objective, policies and limitations may
be deemed to be underwriting.
5. Purchase or sell real estate or invest in oil, gas or
mineral exploration or development programs or oil, gas and mineral leases,
except that the Fund may invest in
34
<PAGE> 47
(a) securities secured by real estate, mortgages or interests therein and (b)
securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
6. Make short sales of securities or maintain a short
position, except the Fund may maintain short positions in forward currency
contracts, options, futures contracts and options on futures contracts and make
short sales "against the box."
7. Purchase more than 10% of the voting securities of any one
issuer; provided that this limitation shall not apply to investments in U.S.
government securities.
8. Purchase securities on margin, except that the Fund may
obtain any short-term credits necessary for the clearance of purchases and sales
of securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with transactions in currencies,
options, futures contracts or related options will not be deemed to be a
purchase of securities on margin.
9. Invest in commodities, except that the Fund may purchase
and sell futures contracts, including those relating to securities, currencies
and indexes, and options on futures contracts, securities, currencies or
indexes, and purchase and sell currencies or securities on a forward commitment
or delayed-delivery basis.
10. Issue any senior security except as permitted in these
Investment Restrictions.
11. Purchase the securities of any issuer if as a result more
than 5% of the value of the Fund's total assets would be invested in the
securities of such issuer, except that this 5% limitation does not apply to U.S.
government securities and except that up to 25% of the value of the Fund's total
assets may be invested without regard to this 5% limitation.
12. Purchase securities of other investment companies except
in connection with a merger, consolidation, acquisition, reorganization or offer
of exchange or as otherwise permitted under the 1940 Act.
13. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
and options on futures contracts.
14. Invest more than 15% of the value of the Fund's net assets
in securities which may be illiquid because of legal or contractual restrictions
on resale or securities for which there are no readily available market
quotations. For purposes of this limitation, (a) repurchase agreements with
maturities greater than seven days, (b) VRDNs and master demand notes providing
for settlement upon more than seven days notice by the Fund and
35
<PAGE> 48
(c) time deposits maturing in more than seven calendar days shall be considered
illiquid securities.
15. Make additional investments (including roll-overs) if the
Fund's borrowings exceed 5% of its net assets.
Global Fixed Income Fund. The investment limitations numbered
1 through 10 may not be changed without the affirmative vote of the holders of a
majority (as defined above) of the Global Fixed Income Fund's outstanding
shares. Investment limitations 11 through 13 may be changed by a vote of the
Board at any time.
The Global Fixed Income Fund may not:
1. Borrow money except that the Fund may (a) borrow from banks
for temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the Fund's
total assets. For purposes of this restriction, short sales, the entry into
currency transactions, options, futures contracts, options on futures contracts,
forward commitment transactions and dollar roll transactions that are not
accounted for as financings (and the segregation of assets in connection with
any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of
the value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of U.S.
government securities.
3. Make loans, except that the Fund may purchase or hold
fixed-income securities, including loan participations and assignments and
structured securities; lend portfolio securities; and enter into repurchase
agreements.
4. Underwrite any securities issued by others except to the
extent that the investment in restricted securities and the sale of securities
in accordance with the Fund's investment objective, policies and limitations may
be deemed to be underwriting.
5. Purchase or sell real estate or invest in real estate
limited partnerships, oil, gas or mineral exploration or development programs or
oil, gas and mineral leases, except that the Fund may invest in (a) securities
secured by real estate, mortgages or interests therein and (b) securities of
companies that invest in or sponsor oil, gas or mineral exploration or
development programs.
6. Make short sales of securities or maintain a short
position, except the Fund may maintain short positions in forward currency
contracts, options, futures contracts and options on futures contracts and make
short sales "against the box."
36
<PAGE> 49
7. Purchase securities on margin, except that the Fund may
obtain any short-term credits necessary for the clearance of purchases and sales
of securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with transactions in currencies,
options, futures contracts or related options will not be deemed to be a
purchase of securities on margin.
8. Invest in commodities, except that the Fund may purchase
and sell futures contracts, including those relating to securities, currencies
and indexes, and options on futures contracts, securities, currencies or
indexes, and purchase and sell currencies or securities on a forward commitment
or delayed-delivery basis.
9. Issue any senior security except as permitted in these
Investment Restrictions.
10. Purchase securities of other investment companies except
in connection with a merger, consolidation, acquisition, reorganization or offer
of exchange, or as otherwise permitted under the 1940 Act.
11. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
and options on futures contracts.
12. Invest more than 15% of the value of the Fund's net assets
in securities which may be illiquid because of legal or contractual restrictions
on resale or securities for which there are no readily available market
quotations. For purposes of this limitation, repurchase agreements with
maturities greater than seven days shall be considered illiquid securities.
13. Make additional investments (including roll-overs) if the
Fund's borrowings exceed 5% of its net assets.
Intermediate Government Fund. The investment limitations
numbered 1 through 12 may not be changed without the affirmative vote of the
holders of a majority (as defined above) of the Intermediate Government Fund's
outstanding shares. Investment limitations 13 through 15 may be changed by a
vote of the Board at any time.
The Intermediate Government Fund may not:
1. Borrow money except that the Fund may (a) borrow from
banks for temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the Fund's
total assets. For purposes of this restriction, short sales, the entry into
37
<PAGE> 50
currency transactions, options, futures contracts, options on futures contracts,
forward commitment transactions and dollar roll transactions that are not
accounted for as financings (and the segregation of assets in connection with
any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of
the value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of
Government Securities.
3. Make loans except that the Fund may purchase or hold fixed
income securities, including loan participations, assignments and structured
securities; lend portfolio securities and enter into repurchase agreements.
4. Underwrite any securities issued by others except to the
extent that the investment in restricted securities and the sale of securities
in accordance with the Fund's investment objective, policies and limitations may
be deemed to be underwriting.
5. Purchase or sell real estate, real estate investment trust
securities or invest in oil, gas or mineral exploration or development programs,
except that the Fund may invest in securities secured by real estate, mortgages
or interests therein.
6. Make short sales of securities or maintain a short
position, except the Fund may maintain short positions in forward currency
contracts, options, futures contracts and options on futures contracts and make
short sales "against the box".
7. Purchase more than 10% of the voting securities of any one
issuer; provided that this limitation shall not apply to investments in
Government Securities.
8. Purchase securities on margin, except that the Fund may
obtain any short-term credits necessary for the clearance of purchases and sales
of securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with transactions in currencies,
options, futures contracts or related options will not be deemed to be a
purchase of securities on margin.
9. Invest in commodities, except that the Fund may purchase
and sell futures contracts, including those relating to securities, currencies
and indexes, and options on futures contracts, securities, currencies or
indexes, and purchase and sell currencies or securities on a forward commitment
or delayed-delivery basis.
10. Issue any senior security except as permitted in these
Investment Restrictions.
11. Purchase the securities of any issuer if as a result more
than 5% of the value of the Fund's total assets would be invested in the
securities of such issuer, except that
38
<PAGE> 51
this 5% limitation does not apply to Government Securities and except that up to
25% of the value of the Fund's total assets may be invested without regard to
this 5% limitation.
12. Purchase securities of other investment companies except
in connection with a merger, consolidation, acquisition, reorganization or offer
of exchange or as permitted under the 1940 Act.
13. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
and options on futures contracts.
14. Invest more than 15% of the value of the Fund's net assets
in securities which may be illiquid because of legal or contractual restrictions
on resale or securities for which there are no readily available market
quotations. For purposes of this limitation, repurchase agreements with
maturities greater than seven days shall be considered illiquid securities.
15. Make additional investments (including roll-overs) if the
Fund's borrowings exceed 5% of its net assets.
New York Municipal Fund. The investment limitations numbered 1
through 10 may not be changed without the affirmative vote of the holders of a
majority (as defined above) of the Municipal Fund's outstanding shares.
Investment limitations 11 and 14 may be changed by a vote of the Board at any
time.
The New York Municipal Fund may not:
1. Borrow money except that the Fund may (a) borrow from banks
for temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the Fund's
total assets. For purposes of this restriction, short sales, the entry into
currency transactions, options, futures contracts, options on futures contracts,
forward commitment transactions and dollar roll transactions that are not
accounted for as financings (and the segregation of assets in connection with
any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause more than 25% of
the value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of (a) U.S.
government securities, (b) certificates of deposit issued by United States
branches of United States banks or (c) Municipal Obligations. For purposes of
39
<PAGE> 52
this restriction, private purpose bonds ultimately payable by companies within
the same industry are treated as if they were issued by issuers in the same
industry.
3. Make loans except that the Fund may purchase or hold
fixed-income securities, including loan participations, assignments and
structured securities, and enter into repurchase agreements in accordance with
its investment objective, policies and limitations.
4. Underwrite any securities issued by others except to the
extent that the investment in restricted securities and the sale of securities
in accordance with the Fund's investment objective, policies and limitations may
be deemed to be underwriting.
5. Purchase or sell real estate, real estate investment trust
securities or invest in oil, gas or mineral exploration or development programs,
except that the Fund may invest in securities secured by real estate, mortgages
or interests therein.
6. Make short sales of securities or maintain a short
position, except the Fund may maintain short positions in forward currency
contracts, options, futures contracts and options on futures contracts.
7. Purchase securities on margin, except that the Fund may
obtain any short-term credits necessary for the clearance of purchases and sales
of securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with transactions in currencies,
options, futures contracts or related options will not be deemed to be a
purchase of securities on margin.
8. Invest in commodities, except that the Fund may purchase
and sell futures contracts, including those relating to securities, currencies
and indexes, and options on futures contracts, securities or indexes, and
purchase and sell currencies or securities on a forward commitment or
delayed-delivery basis.
9. Issue any senior security except as permitted in these
Investment Restrictions.
10. Purchase securities of other investment companies except
(a) in connection with a merger, consolidation, acquisition or reorganization or
(b) as permitted under the 1940 Act.
11. Invest less than 80% of its assets in securities the
interest on which is exempt from federal income tax, except during temporary
defensive periods or under unusual market conditions, as determined by the
Fund's investment adviser.
12. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with the writing of covered put and
call options and purchased securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
40
<PAGE> 53
arrangements with respect to currency transactions, options, futures contracts,
and options on futures contracts.
13. Invest more than 15% of the value of the Fund's net assets
in securities which may be illiquid because of legal or contractual restrictions
on resale or securities for which there are no readily available market
quotations. For purposes of this limitation, (a) repurchase agreements with
maturities greater than seven days, (b) variable rate and master demand notes
providing for settlement upon more than seven days' notice by the Fund and (c)
time deposits maturing in more than seven calendar days shall be considered
illiquid securities.
14. Make additional investments (including roll-overs) if the
Fund's borrowings exceed 5% of its net assets.
If a percentage restriction (other than the percentage
limitation set forth in each of No. 1 above) is adhered to at the time of an
investment, a later increase or decrease in the percentage of assets resulting
from a change in the values of portfolio securities or in the amount of a Fund's
assets will not constitute a violation of such restriction.
PORTFOLIO VALUATION
The following is a description of the procedures used by the
Fund in valuing its assets.
Securities listed on a U.S. securities exchange (including
securities traded through the Nasdaq National Market System) or foreign
securities exchange or traded in an over-the-counter market will be valued at
the most recent sale as of the time the valuation is made or, in the absence of
sales, at the mean between the highest bid and lowest asked quotations. If there
are no such quotations, the value of the securities will be taken to be the most
recent bid quotation on the exchange or market. Options contracts will be valued
similarly. Futures contracts will be valued at the most recent settlement price
at the time of valuation. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the primary
market for such security. In determining the market value of portfolio
investments, each Fund may employ outside organizations (each, a "Pricing
Service") which may use a matrix, formula or other objective method that takes
into consideration market indexes, matrices, yield curves and other specific
adjustments. The procedures of Pricing Services are reviewed periodically by the
officers of each Fund under the general supervision and responsibility of the
Board, which may replace a Pricing Service at any time. Short-term obligations
with maturities of 60 days or less are valued at amortized cost, which
constitutes fair value as determined by the Board. Amortized cost involves
valuing a portfolio instrument at its initial cost and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument. The
amortized cost method of valuation may also be used with respect to other debt
obligations with 60 days or less remaining to maturity. Securities, options,
futures contracts and other assets for which market quotations are not available
will be valued at their fair value as determined in good faith pursuant to
41
<PAGE> 54
consistently applied procedures established by the Board. In addition, the Board
or its delegates may value a security at fair value if it determines that such
security's value determined by the methodology set forth above does not reflect
its fair value.
Trading in securities in certain foreign countries is
completed at various times prior to the close of business on each business day
in New York (i.e., a day on which The New York Stock Exchange, Inc. (the "NYSE")
is open for trading). In addition, securities trading in a particular country or
countries may not take place on all business days in New York. Furthermore,
trading takes place in various foreign markets on days which are not business
days in New York and days on which a Fund's net asset value is not calculated.
As a result, calculation of the Fund's net asset value may not take place
contemporaneously with the determination of the prices of certain foreign
portfolio securities used in such calculation. All assets and liabilities
initially expressed in foreign currency values will be converted into U.S.
dollar values at the prevailing rate as quoted by a Pricing Service as of 12:00
noon (Eastern time). If such quotations are not available, the rate of exchange
will be determined in good faith pursuant to consistently applied procedures
established by the Board.
PORTFOLIO TRANSACTIONS
CSAM is responsible for establishing, reviewing and, where
necessary, modifying a Fund's investment program to achieve its investment
objectives. Purchases and sales of newly issued portfolio securities are usually
principal transactions without brokerage commissions effected directly with the
issuer or with an underwriter acting as principal. Other purchases and sales may
be effected on a securities exchange or over-the-counter, depending on where it
appears that the best price or execution will be obtained. The purchase price
paid by a Fund to underwriters of newly issued securities usually includes a
concession paid by the issuer to the underwriter, and purchases of securities
from dealers, acting as either principals or agents in the after market, are
normally executed at a price between the bid and asked price, which includes a
dealer's mark-up or mark-down. Transactions on U.S. stock exchanges and some
foreign stock exchanges involve the payment of negotiated brokerage commissions.
On exchanges on which commissions are negotiated, the cost of transactions may
vary among different brokers. On most foreign exchanges, commissions are
generally fixed. There is generally no stated commission in the case of
securities traded in domestic or foreign over-the-counter markets, but the price
of securities traded in over-the-counter markets includes an undisclosed
commission or mark-up. Government Securities are generally purchased from
underwriters or dealers, although certain newly issued Government Securities may
be purchased directly from the U.S. Treasury or from the issuing agency or
instrumentality. No brokerage commissions are typically paid on purchases and
sales of Government Securities.
CSAM will select specific portfolio investments and effect
transactions for a Fund and in doing so seeks to obtain the overall best
execution of portfolio transactions. In evaluating prices and executions, CSAM
will consider the factors it deems relevant, which may include the breadth of
the market in the security, the price of the security, the financial condition
and execution capability of a broker or dealer and the reasonableness of the
42
<PAGE> 55
commission, if any, for the specific transaction and on a continuing basis. CSAM
may, in its discretion, effect transactions in portfolio securities with dealers
who provide brokerage and research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934) to the Fund and/or other
accounts over which CSAM exercises investment discretion. CSAM may place
portfolio transactions with a broker or dealer with whom it has negotiated a
commission that is in excess of the commission another broker or dealer would
have charged for effecting the transaction if CSAM determines in good faith that
such amount of commission was reasonable in relation to the value of such
brokerage and research services provided by such broker or dealer viewed in
terms of either that particular transaction or of the overall responsibilities
of CSAM. Research and other services received may be useful to CSAM in serving
its other clients and, due to brokerage business on behalf of the Fund, research
or other services obtained by the placement of business of other clients may be
useful to CSAM in carrying out its obligations to the Fund. Research may include
furnishing advice, either directly or through publications or writings, as to
the value of securities, the advisability of purchasing or selling specific
securities and the availability of securities or purchasers or sellers of
securities; furnishing seminars, information, analyses and reports concerning
issuers, industries, securities, trading markets and methods, legislative
developments, changes in accounting practices, economic factors and trends and
portfolio strategy; access to research analysts, corporate management personnel,
industry experts, economists and government officials; comparative performance
evaluation and technical measurement services and quotation services; and
products and other services (such as third party publications, reports and
analyses, and computer and electronic access, equipment, software, information
and accessories that deliver, process or otherwise utilize information,
including the research described above) that assist CSAM in carrying out its
responsibilities. Research received from brokers or dealers is supplemental to
CSAM's own research program. The fees to CSAM under its advisory agreement with
a Fund are not reduced by reason of its receiving any brokerage and research
services.
The following table details amounts paid by each Fund in
commissions to broker-dealers for execution of portfolio transactions during the
indicated fiscal year or period.
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended
October 31, 1996 October 31, 1997 October 31, 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Fixed Income Fund $31,906 $29,433 $4,572
Global Fixed Income Fund -0- $900 $900
Intermediate Government Fund -0- -0- -0-
New York Municipal Fund -0- -0- -0-
</TABLE>
Investment decisions for a Fund concerning specific portfolio
securities are made independently from those for other clients advised by CSAM.
Such other investment clients may invest in the same securities as the Fund.
When purchases or sales of the same security are made at substantially the same
time on behalf of such other clients, transactions are averaged as to price and
available investments allocated as to amount, in a manner which
43
<PAGE> 56
CSAM believes to be equitable to each client, including the Fund. In some
instances, this investment procedure may adversely affect the price paid or
received by a Fund or the size of the position obtained or sold for the Fund. To
the extent permitted by law, CSAM may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for such other
investment clients in order to obtain best execution.
In no instance will portfolio securities be purchased from or
sold to CSAM, Credit Suisse Asset Management Securities, Inc. ("CSAMSI") or
Credit Suisse First Boston ("CS First Boston") or any affiliated person of such
companies. In addition, a Fund will not give preference to any institutions with
whom the Fund enters into distribution or shareholder servicing agreements
concerning the provision of distribution services or support services.
Transactions for the Fixed Income and Global Fixed Income
Funds may be effected on foreign securities exchanges. In transactions for
securities not actively traded on a foreign securities exchange, a Fund will
deal directly with the dealers who make a market in the securities involved,
except in those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting as principal for their own account.
On occasion, securities may be purchased directly from the issuer. Such
portfolio securities are generally traded on a net basis and do not normally
involve brokerage commissions. Securities firms may receive brokerage
commissions on certain portfolio transactions, including options, futures and
options on futures transactions and the purchase and sale of underlying
securities upon exercise of options.
A Fund may participate, if and when practicable, in bidding
for the purchase of securities for the Fund's portfolio directly from an issuer
in order to take advantage of the lower purchase price available to members of
such a group. The Fund will engage in this practice, however, only when CSAM, in
its sole discretion, believes such practice to be otherwise in the Fund's
interest.
PORTFOLIO TURNOVER
The Funds do not intend to seek profits through short-term
trading, but the rate of turnover will not be a limiting factor when the Fund
deems it desirable to sell or purchase securities. A Fund's portfolio turnover
rate is calculated by dividing the lesser of purchases or sales of its portfolio
securities for the year by the monthly average value of the portfolio
securities. Securities with remaining maturities of one year or less at the date
of acquisition are excluded from the calculation.
Certain practices that may be employed by the Fund could
result in high portfolio turnover. For example, portfolio securities may be sold
in anticipation of a rise in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another of comparable quality purchased at
approximately the same time to take advantage of what CSAM believes to be a
temporary disparity in the normal yield relationship between the two securities.
These yield disparities may occur for reasons not directly related to the
investment quality of particular issues or the general movement of interest
rates, such as changes in the overall demand for, or
44
<PAGE> 57
supply of, various types of securities. In addition, options on securities may
be sold in anticipation of a decline in the price of the underlying security
(market decline) or purchased in anticipation of a rise in the price of the
underlying security (market rise) and later sold. To the extent that its
portfolio is traded for the short-term, the Fund will be engaged essentially in
trading activities based on short-term considerations affecting the value of an
issuer's stock instead of long-term investments based on fundamental valuation
of securities. Because of this policy, portfolio securities may be sold without
regard to the length of time for which they have been held. Consequently, the
annual portfolio turnover rate of the Fund may be higher than mutual funds
having a similar objective that do not utilize these strategies.
It is not possible to predict the Funds' portfolio turnover
rates. High portfolio turnover rates (100% or more) may result in higher
brokerage commission, higher dealer markups or underwriting commissions as well
as other transaction costs. In addition, gains realized from portfolio turnover
may be taxable to shareholders.
SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL
OBLIGATIONS
The New York Municipal Fund's ability to achieve its
investment objective is dependent upon the ability of the issuers of New York
Municipal Obligations to meet their continuing obligations for the payment of
principal and interest. New York State and New York City face long-term economic
problems that could seriously affect their ability and that of other issuers of
New York Municipal Obligations to meet their financial obligations. Certain
substantial issuers of New York Municipal Obligations (including issuers whose
obligations may be acquired by the Fund) have experienced serious financial
difficulties in recent years. These difficulties have at times jeopardized the
credit standing and impaired the borrowing abilities of all New York issuers and
have generally contributed to higher interest costs for their borrowings and
fewer markets for their outstanding debt obligations. Although several different
issues of municipal securities of New York State and its agencies and
instrumentalities and of New York City have been downgraded by S&P and Moody's
in recent years, the most recent actions of S&P and Moody's have been to place
the debt obligations of New York State and New York City on CreditWatch with
positive implications and to upgrade the debt obligations of New York City,
respectively. Strong demand for New York Municipal Obligations has also at times
had the effect of permitting New York Municipal Obligations to be issued with
yields relatively lower, and after issuance, to trade in the market at prices
relatively higher than comparably rated municipal obligations issued by other
jurisdictions. A recurrence of the financial difficulties previously experienced
by certain issuers of New York Municipal Obligations could result in defaults or
declines in the market values of those issuers' existing obligations and,
possibly, in the obligations of other issuers of New York Municipal Obligations.
Although as of the date of this Prospectus, no issuers of New York Municipal
Obligations are in default with respect to the payment of their municipal
obligations, the occurrence of any such default could affect adversely the
market values and marketability of all New York Municipal Obligations and,
consequently, the net asset value of the New York Municipal Fund's portfolio.
45
<PAGE> 58
Some of the significant financial considerations relating to
the Fund's investments in New York Municipal Obligations are summarized below.
This summary information is not intended to be a complete description and is
principally derived from official statements relating to issues of New York
Municipal Obligations that were available prior to the date of this Statement of
Additional Information. The accuracy and completeness of the information
contained in those official statements have not been independently verified.
State Economy
New York is the third most populous state in the nation and
has a relatively high level of personal wealth. The State's economy is diverse
with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location and its
excellent air transport facilities and natural harbors have made it an important
link in international commerce. Travel and tourism constitute an important part
of the economy. Like the rest of the nation, New York has a declining proportion
of its workforce engaged in manufacturing, and an increasing proportion engaged
in service industries.
The State has historically been one of the wealthiest states
in the nation. For decades, however, the State has grown more slowly than the
nation as a whole, gradually eroding its relative economic position. State per
capita personal income has historically been significantly higher than the
national average, although the ratio has varied substantially. Because New York
City (the "City") is a regional employment center for a multi-state region,
State personal income measured on a residence basis understates the relative
importance of the State to the national economy and the size of the base to
which State taxation applies.
The State economic forecast has been raised slightly from the
enacted budget forecast. Continued growth is projected in 1998 and 1999 for
employment, wages, and personal income, although the growth rates of personal
income and wages are expected to be lower than those in 1997. The growth of
personal income is projected to decline from 5.7 percent in 1997 to 4.8 percent
in 1998 and 4.2 percent in 1999, in part because growth in bonus payments is
expected to slow down, a distinct shift from the torrid rate of the last few
years. Overall employment growth is expected to be 1.9 percent in 1998, the
strongest in a decade, but will drop to 1.0 percent in 1999, reflecting the
slowing growth in the national economy, continued restraint in governmental
spending, and restructuring in the health care, social service, and banking
sectors.
There can be no assurance that the State economy will not
experience worse-than-predicted results, with corresponding material and adverse
effects on the State's projections of receipts and disbursements.
State Budget
The State Constitution requires the governor (the "Governor")
to submit to the State legislature (the "Legislature") a balanced executive
budget which contains a complete plan of expenditures for the ensuing fiscal
year and all moneys and revenues estimated to be
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available therefor, accompanied by bills containing all proposed appropriations
or reappropriations and any new or modified revenue measures to be enacted in
connection with the executive budget. The entire plan constitutes the proposed
State financial plan for that fiscal year. The Governor is required to submit to
the Legislature quarterly budget updates which include a revised cash-basis
state financial plan, and an explanation of any changes from the previous state
financial plan.
State law requires the Governor to propose a balanced budget
each year. In recent years, the State has closed projected budget gaps of $5.0
billion (1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than
$1 billion (1998-99). The State, as a part of the 1998-99 Executive Budget
projections submitted to the Legislature in February 1998, projected a 1999-00
General Fund budget gap of approximately $1.7 billion and a 2000-01 gap of $3.7
billion. As a result of changes made in the 1998-99 enacted budget, the 1999-00
gap is now expected to be roughly $1.3 billion, or about $400 million less than
previously projected, after application of reserves created as part of the
1998-99 budget process. Such reserves would not be available against subsequent
year imbalances.
Sustained growth in the State's economy could contribute to
closing projected budget gaps over the next several years, both in terms of
higher-than-projected tax receipts and in lower-than-expected entitlement
spending. However, the State's projections in 1999-00 currently assume actions
to achieve $600 million in lower disbursements and $250 million in additional
receipts from the settlement of State claims against the tobacco industry.
Consistent with past practice, the projections do not include any costs
associated with new collective bargaining agreements after the expiration of the
current round of contracts at the end of the 1998-99 fiscal year. The State
expects that the 1990-00 Financial Plan will achieve savings from initiatives by
State agencies to deliver services more efficiently, workforce management
efforts, maximization of federal and non-General Fund spending offsets, and
other actions necessary to bring projected disbursements and receipts into
balance.
The State will formally update its outyear projections of
receipts and disbursements for the 2000-01 and 2001-02 fiscal years as a part of
the 1999-00 Executive Budget process, as required by law. The revised
expectations for years 2000-01 and 2001-02 will reflect the cumulative impact of
tax reductions and spending commitments enacted over the last several years as
well as new 1999-00 Executive Budget recommendations. The School Tax Relief
Program ("STAR") program, which dedicates a portion of personal income tax
receipts to fund school tax reductions, has a significant impact on General Fund
receipts. STAR is projected to reduce personal income tax revenues available to
the General Fund by an estimated $1.3 billion in 2000-01. Measured from the
1998-99 base, scheduled reductions to estate and gift, sales and other taxes,
reflecting tax cuts enacted in 1997-98 and 1998-99, will lower General Fund
taxes and fees by an estimated $1.8 billion in 2000-01. Disbursement projections
for the outyears currently assume additional outlays for school aid, Medicaid,
welfare reform, mental health community reinvestment, and other multi-year
spending commitments in law.
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On September 11, 1997, the New York State Comptroller issued a
report which noted that the ability to deal with future budget gaps could become
a significant issue in the State's 2000-2001 fiscal year, when the cost of tax
cuts increases by $1.9 billion. The report contained projections that, based on
current economic conditions and current law for taxes and spending, showed a gap
in the 2000-2001 State fiscal year of $5.6 billion and of $7.4 billion in the
2001-2002 State fiscal year. The report noted that these gaps would be smaller
if recurring spending reductions produce savings in earlier years. The State
Comptroller has also stated that if Wall Street earnings moderate and the State
experiences a moderate recession, the gap for the 2001-2002 State fiscal year
could grow to nearly $12 billion.
The State's current fiscal year began on April 1, 1998 and
ends on March 31, 1999 and is referred to herein as the State's 1998-99 fiscal
year. The Legislature adopted the debt service component of the State budget for
the 1998-99 fiscal year on March 30, 1998 and the remainder of the budget on
April 18, 1998. In the period prior to adoption of the budget for the current
fiscal year, the Legislature also enacted appropriations to permit the State to
continue its operations and provide for other purposes. On April 25, 1998, the
Governor vetoed certain items that the Legislature added to the Executive
Budget. The Legislature had not overridden any of the Governor's vetoes as of
the start of the legislative recess on June 19, 1998 (under the State
Constitution, the Legislature can override one or more of the Governor's vetoes
with the approval of two-thirds of the members of each house).
General Fund disbursements in 1998-99 are now projected to
grow by $2.43 billion over 1997-98 levels, or $690 million more than proposed in
the Governor's Executive Budget, as amended. The change in General Fund
disbursements from the Executive Budget to the enacted budget reflects
legislative additions (net of the value of the Governor's vetoes), actions taken
at the end of the regular legislative session, as well as spending that was
originally anticipated to occur in 1997-98 but is now expected to occur in
1998-99. The State projects that the 1998-99 State Financial Plan is balanced on
a cash basis, with an estimated reserve for future needs of $761 million.
The State's enacted budget includes several new multi-year tax
reduction initiatives, including acceleration of State-funded property and local
income tax relief for senior citizens under the STAR, expansion of the child
care income-tax credit for middle-income families, a phased-in reduction of the
general business tax, and reduction of several other taxes and fees, including
an accelerated phase-out of assessments on medical providers. The enacted budget
also provides for significant increases in spending for public schools, special
education programs, and for the State and City university systems. It also
allocates $50 million for a new Debt Reduction Reserve Fund ("DRRF") that may
eventually be used to pay debt service costs on or to prepay outstanding
State-supported bonds.
The 1998-99 State Financial Plan projects a closing balance in
the General Fund of $1.42 billion that is comprised of a reserve of $761 million
available for future needs, a balance of $400 million in the Tax Stabilization
Reserve Fund ("TSRF"), a balance of $158 million in the Community Projects Fund
("CPF"), and a balance of $100 million in the Contingency Reserve Fund ("CRF").
The TSRF can be used in the event of an unanticipated
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General Fund cash operating deficit, as provided under the State Constitution
and State Finance Law. The CPF is used to finance various legislative and
executive initiatives. The CRF provides resource to help finance any
extraordinary litigation costs during the fiscal year.
The forecast of General Fund receipts in 1998-99 incorporates
several Executive Budget tax proposals that, if enacted, would further reduce
receipts otherwise available to the General Fund by approximately $700 million
during 1998-99. The Executive Budget proposes accelerating school tax relief for
senior citizens under STAR, which is projected to reduce General Fund receipts
by $537 million in 1998-99. The proposed reduction supplements STAR tax
reductions already scheduled in law, which are projected at $187 million in
1998-99. The Budget also proposes several new tax-cut initiatives and other
funding changes that are projected to further reduce receipts available to the
General Fund by over $200 million. These initiatives include reducing the fee to
register passenger motor vehicles and earmarking a larger portion of such fees
to dedicated funds and other purposes; extending the number of weeks in which
certain clothing purchases are exempt from sales taxes; more fully conforming
State law to reflect recent Federal changes in estate taxes; continuing lower
pari-mutuel tax rates; and accelerating scheduled property tax relief for
farmers from 1999 to 1998. In addition to the specific tax and fee reductions
discussed above, the Executive Budget also proposes establishing a reserve of
$100 million to permit the acceleration into 1998-99 of other tax reductions
that are otherwise scheduled in law for implementation in future fiscal years.
The Division of the Budget ("DOB") estimates that the 1998-99
Financial Plan includes approximately $64 million in non-recurring resources,
comprising less than two-tenths of one percent of General Fund disbursements.
The non-recurring resources projected for use in 1998-99 consist of $27 million
in retroactive federal welfare reimbursements for family assistance recipients
with HIV/AIDS, $25 million in receipts from the Housing Finance Agency that were
originally anticipated in 1997-98, and $10 million in other measures, including
$5 million in asset sales.
Disbursements from Capital Projects funds in 1998-99 are
estimated at $4.82 billion, or $1.07 billion higher than 1997-98. The proposed
spending plan includes: $2.51 billion in disbursements for transportation
purposes, including the State and local highway and bridge program; $815 million
for environmental activities; $379 million for correctional services; $228
million for the State University of New York ("SUNY") and the City University of
New York ("CUNY"); $290 million for mental hygiene projects; and $375 million
for CEFAP. Approximately 28 percent of capital projects are proposed to be
financed by "pay-as-you-go" resources. State-supported bond issuances finance 46
percent of capital projects, with federal grants financing the remaining 26
percent.
Many complex political, social and economic forces influence
the State's economy and finances, which may in turn affect the State's Financial
Plan. These forces may affect the State unpredictably from fiscal year to fiscal
year and are influenced by governments, institutions, and organizations that are
not subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and
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magnitude of changes in the national and the State economies. The DOB believes
that its projections of receipts and disbursements relating to the current State
Financial Plan, and the assumptions on which they are based, are reasonable.
Actual results, however, could differ materially and adversely from their
projections, and those projections may be changed materially and adversely from
time to time.
In the past, the State has taken management actions and made
use of internal sources to address potential State financial plan shortfalls,
and the DOB believes it could take similar actions should variances occur in its
projections for the current fiscal year.
Recent Financial Results
The General Fund is the principal operating fund of the State
and is used to account for all financial transactions, except those required to
be accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular purposes.
On March 31, 1998, the State recorded, on a GAAP-basis, its
first-ever, accumulated positive balance in its General Fund. This "accumulated
surplus" was $567 million. The improvement in the State's GAAP position is
attributable, in part, to the cash surplus recorded at the end of the State's
1997-98 fiscal year. Much of that surplus is reserved for future requirements,
but a portion is being used to meet spending needs in 1998-99. Thus, the State
expects some deterioration in its GAAP position, but expects to maintain a
positive GAAP balance through the end of the current fiscal year.
The State completed its 1997-98 fiscal year with a combined
Governmental Funds operating surplus of $1.80 billion, which included an
operating surplus in the General Fund of $1.56 billion, in Capital Projects
Funds of $232 million and in Special Revenue Funds of $49 million, offset in
part by an operating deficit of $43 million in Debt Service Funds.
The State reported a General Fund operating surplus of $1.56
billion for the 1997-98 fiscal year, as compared to an operating surplus of
$1.93 billion for the 1996-97 fiscal year. As a result, the State reported an
accumulated surplus of $567 million in the General Fund for the first time since
it began reporting its operations on a GAAP-basis. The 1997-98 fiscal year
operating surplus reflects several major factors, including the cash-basis
operating surplus resulting from the higher-than-anticipated personal income tax
receipts, an increase in taxes receivable of $681 million, an increase in other
assets of $195 million and a decrease in pension liabilities of $144 million.
This was partially offset by an increase in payables to local governments of
$270 million and tax refunds payable of $147 million.
Debt Limits and Outstanding Debt
There are a number of methods by which the State of New York
may incur debt. Under the State Constitution, the State may not, with limited
exceptions for emergencies, undertake long-term general obligation borrowing
(i.e., borrowing for more than one year) unless the borrowing is authorized in a
specific amount for a single work or purpose
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by the Legislature and approved by the voters. There is no limitation on the
amount of long-term general obligation debt that may be so authorized and
subsequently incurred by the State.
The State may undertake short-term borrowings without voter
approval (i) in anticipation of the receipt of taxes and revenues, by issuing
tax and revenue anticipation notes, and (ii) in anticipation of the receipt of
proceeds from the sale of duly authorized but unissued general obligation bonds,
by issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
The State employs additional long-term financing mechanisms,
lease-purchase and contractual-obligation financings, which involve obligations
of public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with the local Government
Assistance Corporation to restructure the way the State makes certain local aid
payments.
In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
structure. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities had been suspended since the Governor
took office in 1995. As a result of the structural imbalances in JDA's capital
structure, and defaults in its loan portfolio and loan guarantee program
incurred between 1991 and 1996, JDA would have experienced a debt service cash
flow shortfall had it not completed its recent refinancing. JDA anticipates that
it will transact additional refinancings in 1999, 2000 and 2003 to complete its
long-term plan of finance and further alleviate cash flow imbalances which are
likely to occur in future years. JDA recently resumed its lending activities
under a revised set of lending programs and underwriting guidelines.
On January 13, 1992, S&P reduced its ratings on the State's
general obligation bonds from A to A- and, in addition, reduced its ratings on
the State's moral obligation, lease purchase, guaranteed and contractual
obligation debt. On August 28, 1997, S&P revised its ratings on the State's
general obligation bonds from A- to A and revised its ratings on the
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State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. On March 2, 1998, S&P affirmed its A rating on the State's outstanding
bonds.
On January 6, 1992, Moody's reduced its ratings on outstanding
limited-liability State lease purchase and contractual obligations from A to
Baa1. On February 28, 1994, Moody's reconfirmed its A rating on the State's
general obligation long-term indebtedness. On March 20, 1998, Moody's assigned
the highest commercial paper rating of P-1 to the short-term notes of the State.
On July 6, 1998, Moody's assigned an A2 rating with a stable outlook to the
State's general obligations.
The State anticipates that its capital programs will be
financed, in part, through borrowings by the State and its public authorities in
the 1998-99 fiscal year. Information on the State's five-year Capital Program
and Financing Plan for the 1998-99 through 2002-03 fiscal years, updated to
reflect actions taken in the 1998-99 State budget (the "Plan"), was released on
July 30, 1998. The projection of State borrowings for the 1998-99 fiscal year is
subject to change as market conditions, interest rates and other factors vary
throughout the fiscal year.
The State expects to issue $528 million in general obligation
bonds (including $154 million for purposes of redeeming outstanding BANs) and
$154 million in general obligation commercial paper. The State also anticipates
the issuance of up to a total of $419 million in Certificates of Participation
to finance equipment purchases (including costs of issuance, reserve funds, and
other costs) during the 1998-99 fiscal year. Of this amount, it is anticipated
that approximately $191 million will be issued to finance agency equipment
acquisitions, including amounts to address Statewide technology issues related
to Year 2000 compliance. Approximately $228 million will also be issued to
finance equipment acquisitions for welfare reform-related information technology
systems.
Borrowings by public authorities pursuant to lease-purchase
and contractual-obligation financings for capital programs of the State are
projected to total approximately $2.93 billion, including costs of issuance,
reserve funds, and other costs, net of anticipated refundings and other
adjustments in 1998-99.
As a part of the Plan, changes were proposed to the State's
borrowing plan, including: the delay in the issuance of COPs to finance welfare
information systems until 1998-99 to permit a thorough assessment of needs; and
the elimination of issuances for the CEFAP to reflect the proposed conversion of
that bond-financed program to pay-as-you-go financing.
New York State has never defaulted on any of its general
obligation indebtedness or its obligations under lease-purchase or
contractual-obligation financing arrangements and has never been called upon to
make any direct payments pursuant to its guarantees.
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Litigation
Certain litigation pending against New York State or its
officers or employees could have a substantial or long-term adverse effect on
New York State finances. Among the more significant of these cases are those
that involve (1) the validity of agreements and treaties by which various Indian
tribes transferred title to New York State of certain land in central and
upstate New York; (2) certain aspects of New York State's Medicaid policies,
including its rates, regulations and procedures; (3) action against New York
State and New York City officials alleging inadequate shelter allowances to
maintain proper housing; (4) alleged responsibility of New York State officials
to assist in remedying racial segregation in the City of Yonkers; (5) challenges
to regulations promulgated by the Superintendent of Insurance establishing
certain excess medical malpractice premium rates; (6) challenges to the
constitutionality of Public Health Law 2807-d, which imposes a gross receipts
tax from certain patient care services; (7) action seeking enforcement of
certain sales and excise taxes and tobacco products and motor fuel sold to
non-Indian consumers on Indian reservations; and (8) a challenge to the
Governor's application of his constitutional line item veto authority.
Several actions challenging the constitutionality of
legislation enacted during the 1990 legislative session which changed actuarial
funding methods for determining state and local contributions to state employee
retirement systems have been decided against the State. As a result, the
Comptroller developed a plan to restore the State's retirement systems to prior
funding levels. Such funding is expected to exceed prior levels by $116 million
in fiscal 1996-97, $193 million in fiscal 1997-98, peaking at $241 million in
fiscal 1998-99. Beginning in fiscal 2001-02, State contributions required under
the Comptroller's plan are projected to be less than that required under the
prior funding method. As a result of the United States Supreme Court decision in
the case of State of Delaware v. State of New York, on January 21, 1994, the
State entered into a settlement agreement with various parties. Pursuant to all
agreements executed in connection with the action, the State was required to
make aggregate payments of $351.4 million. Annual payments to the various
parties will continue through the State's 2002-03 fiscal year in amounts which
will not exceed $48.4 million in any fiscal year subsequent to the State's
1994-95 fiscal year. Litigation challenging the constitutionality of the
treatment of certain moneys held in a reserve fund was settled in June 1996 and
certain amounts in a Supplemental Reserve Fund previously credited by the State
against prior State and local pension contributions will be paid in 1998.
The legal proceedings noted above involve State finances,
State programs and miscellaneous cure rights, tort, real property and contract
claims in which the State is a defendant and the monetary damages sought are
substantial, generally in excess of $100 million. These proceedings could affect
adversely the financial condition of the State in the 1998-99 fiscal year or
thereafter. Adverse developments in these proceedings, other proceedings for
which there are unanticipated, unfavorable and material judgments, or the
initiation of new proceedings could affect the ability of the State to maintain
a balanced financial plan. An adverse decision in any of these proceedings could
exceed the amount of the reserve established in the State's financial plan for
the payment of judgments and, therefore, could affect the ability of the State
to maintain a balanced financial plan.
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Although other litigation is pending against New York State,
except as described herein, no current litigation involves New York State's
authority, as a matter of law, to contract indebtedness, issue its obligations,
or pay such indebtedness when it matures, or affects New York State's power or
ability, as a matter of law, to impose or collect significant amounts of taxes
and revenues.
Authorities
The fiscal stability of New York State is related, in part, to
the fiscal stability of its Authorities, which generally have responsibility for
financing, constructing and operating revenue-producing public benefit
facilities. Authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself, and may issue bonds and
notes within the amounts of, and as otherwise restricted by, their legislative
authorization. The State's access to the public credit markets could be
impaired, and the market price of its outstanding debt may be materially and
adversely affected, if any of the Authorities were to default on their
respective obligations, particularly with respect to debt that is
State-supported or State-related.
Authorities are generally supported by revenues generated by
the projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years, however, New
York State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the Authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years. In addition, certain
statutory arrangements provide for State local assistance payments otherwise
payable to localities to be made under certain circumstances to certain
Authorities. The State has no obligation to provide additional assistance to
localities whose local assistance payments have been paid to Authorities under
these arrangements. However, in the event that such local assistance payments
are so diverted, the affected localities could seek additional State funds.
New York City and Other Localities
The fiscal health of the State may also be impacted by the
fiscal health of its localities, particularly the City, which has required and
continues to require significant financial assistance from the State. The City
depends on State aid both to enable the City to balance its budget and to meet
its cash requirements. There can be no assurance that there will not be
reductions in State aid to the City from amounts currently projected or that
State budgets will be adopted by the April 1 statutory deadline or that any such
reductions or delays will not have adverse effects on the City's cash flow or
expenditures. In addition, the Federal budget negotiation process could result
in a reduction in or a delay in the receipt of Federal grants which could have
additional adverse effects on the City's cash flow or revenues.
In 1975, New York City suffered a fiscal crisis that impaired
the borrowing ability of both the City and New York State. In that year the City
lost access to the public credit markets. The City was not able to sell
short-term notes to the public again until 1979.
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In 1975, S&P suspended its A rating of City bonds. This suspension remained in
effect until March 1981, at which time the City received an investment grade
rating of BBB from S&P.
On July 2, 1985, S&P revised its rating of City bonds upward
to BBB+ and on November 19, 1987, to A-. On February 3, 1998 and again on May
27, 1998, S&P assigned a BBB+ rating to the City's general obligation debt and
placed the ratings on CreditWatch with positive implications.
Moody's ratings of City bonds were revised in November 1981
from B (in effect since 1977) to Ba1, in November 1983 to Baa, in December 1985
to Baa1, in May 1988 to A and again in February 1991 to Baa1. On February 25,
1998, Moody's upgraded nearly $28 billion of the City's general obligations from
Baa1 to A3. On June 9, 1998, Moody's again assigned on A3 rating to the City's
general obligations and stated that its outlook was stable.
New York City is heavily dependent on New York State and
federal assistance to cover insufficiencies in its revenues. There can be no
assurance that in the future federal and State assistance will enable the City
to make up its budget deficits. To help alleviate the City's financial
difficulties, the Legislature created the Municipal Assistance Corporation
("MAC") in 1975. Since its creation, MAC has provided, among other things,
financing assistance to the City by refunding maturing City short-term debt and
transferring to the City funds received from sales of MAC bonds and notes. MAC
is authorized to issue bonds and notes payable from certain stock transfer tax
revenues, from the City's portion of the State sales tax derived in the City
and, subject to certain prior claims, from State per capita aid otherwise
payable by the State to the City. Failure by the State to continue the
imposition of such taxes, the reduction of the rate of such taxes to rates less
than those in effect on July 2, 1975, failure by the State to pay such aid
revenues and the reduction of such aid revenues below a specified level are
included among the events of default in the resolutions authorizing MAC's
long-term debt. The occurrence of an event of default may result in the
acceleration of the maturity of all or a portion of MAC's debt. MAC bonds and
notes constitute general obligations of MAC and do not constitute an enforceable
obligation or debt of either the State or the City.
Since 1975, the City's financial condition has been subject to
oversight and review by the New York State Financial Control Board (the "Control
Board") and since 1978 the City's financial statements have been audited by
independent accounting firms. To be eligible for guarantees and assistance, the
City is required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal years covering the City and certain
agencies showing balanced budgets determined in accordance with GAAP. New York
State also established the Office of the State Deputy Comptroller for New York
City ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. On June 30, 1986, the City satisfied the statutory
requirements for termination of the control period. This means that the Control
Board's powers of approval are suspended, but the Board continues to have
oversight responsibilities.
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On June 10, 1997, the City submitted to the Control Board the
Financial Plan (the "1998-2001 Financial Plan") for the 1998 through 2001 fiscal
years, relating to the City, the Board of Education ("BOE") and CUNY and
reflected the City's expense and capital budgets for the 1998 fiscal year, which
were adopted on June 6, 1997. The 1998-2001 Financial Plan projected revenues
and expenditures for the 1998 fiscal year balanced in accordance with GAAP. The
1998-99 Financial Plan projects General Fund receipts (including transfers from
other funds) of $36.22 billion, an increase of $1.02 billion over the estimated
1997-1998 level. Recurring growth in the State General Fund tax base is
projected to be approximately six percent during 1998-99, after adjusting for
tax law and administrative changes. This growth rate is lower than the rates for
1996-97 or currently estimated for 1997-98, but roughly equivalent to the rate
for 1995-96.
The 1998-99 forecast for user taxes and fees also reflects the
impact of scheduled tax reductions that will lower receipts by $38 million, as
well as the impact of two Executive Budget proposals that are projected to lower
receipts by an additional $79 million. The first proposal would divert $30
million in motor vehicle registration fees from the General Fund to the
Dedicated Highway and Bridge Trust Fund; the second would reduce fees for motor
vehicle registrations, which would further lower receipts by $49 million. The
underlying growth of receipts in this category is projected at 4 percent, after
adjusting for these scheduled and recommended changes.
In comparison to the current fiscal year, business tax
receipts are projected to decline slightly in 1998-99, falling from $4.98
million to $4.96 billion. The decline in this category is largely attributable
to scheduled tax reductions. In total, collections for corporation and utility
taxes and the petroleum business tax are projected to fall by $107 million from
1997-98. The decline in receipts in these categories is partially offset by
growth in the corporation franchise, insurance and bank taxes, which are
projected to grow by $88 million over the current fiscal year.
The Financial Plan is projected to show a GAAP-basis surplus
of $131 million for 1997-98 and a GAAP-basis deficit of $1.3 billion for 1998-99
in the General Fund, primarily as a result of the use of the 1997-98 cash
surplus. In 1998-99, the General Fund GAAP Financial Plan shows total revenues
of $34.68 billion, total expenditures of $35.94 billion, and net other financing
sources and uses of $42 million.
Although the City has maintained balanced budgets in each of
its last eighteen fiscal years and is projected to achieve balanced operating
results for the 1999 fiscal year, there can be no assurance that the gap-closing
actions proposed in the 1998-2001 Financial Plan can be successfully implemented
or that the City will maintain a balanced budget in future years without
additional State aid, revenue increases or expenditure reductions. Additional
tax increases and reductions in essential City services could adversely affect
the City's economic base.
The projections set forth in the 1998-2001 Financial Plan were
based on various assumptions and contingencies which are uncertain and which may
not materialize. Changes
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in major assumptions could significantly affect the City's ability to balance
its budget as required by State law and to meet its annual cash flow and
financing requirements. Such assumptions and contingencies include the condition
of the regional and local economies, the impact on real estate tax revenues of
the real estate market, wage increases for City employees consistent with those
assumed in the 1998-2001 Financial Plan, employment growth, the ability to
implement proposed reductions in City personnel and other cost reduction
initiatives, the ability of the Health and Hospitals Corporation and the BOE to
take actions to offset reduced revenues, the ability to complete revenue
generating transactions, provision of State and Federal aid and mandate relief
and the impact on City revenues and expenditures of Federal and State welfare
reform and any future legislation affecting Medicare or other entitlements.
Implementation of the 1998-2001 Financial Plan is also
dependent upon the City's ability to market its securities successfully. The
City's financing program for fiscal years 1998 through 2001 contemplates the
issuance of $5.7 billion of general obligation bonds and $5.7 billion of bonds
to be issued by the proposed New York City Transitional Finance Authority (the
"Finance Authority") to finance City capital projects. The Finance Authority,
was created as part of the City's effort to assist in keeping the City's
indebtedness within the forecast level of the constitutional restrictions on the
amount of debt the City is authorized to incur. Despite this additional
financing mechanism, the City currently projects that, if no further action is
taken, it will reach its debt limit in City fiscal year 1999-2000. Indebtedness
subject to the constitutional debt limit includes liability on capital contracts
that are expected to be funded with general obligation bonds, as well as general
obligation bonds. On June 2, 1997, an action was commenced seeking a declaratory
judgment declaring the legislation establishing the Transitional Finance
Authority to be unconstitutional. If such legislation were voided, projected
contracts for the City capital projects would exceed the City's debt limit
during fiscal year 1997-98. Future developments concerning the City or entities
issuing debt for the benefit of the City, and public discussion of such
developments, as well as prevailing market conditions and securities credit
ratings, may affect the ability or cost to sell securities issued by the City or
such entities and may also affect the market for their outstanding securities.
The City Comptroller and other agencies and public officials
have issued reports and made public statements which, among other things, state
that projected revenues and expenditures may be different from those forecast in
the City's financial plans. It is reasonable to expect that such reports and
statements will continue to be issued and to engender public comment.
The City since 1981 has fully satisfied its seasonal financing
needs in the public credit markets, repaying all short-term obligations within
their fiscal year of issuance. Although the City's 1998 fiscal year financial
plan projected $2.4 billion of seasonal financing, the City expected to
undertake only approximately $1.4 billion of seasonal financing. The City issued
$2.4 billion of short-term obligations in fiscal year 1997. Seasonal financing
requirements for the 1996 fiscal year increased to $2.4 billion from $2.2
billion and $1.75 billion in the 1995 and 1994 fiscal years, respectively.
Seasonal financing requirements were
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<PAGE> 70
$1.4 billion in the 1993 fiscal year. The delay in the adoption of the State's
budget in certain past fiscal years has required the City to issue short-term
notes in amounts exceeding those expected early in such fiscal years.
Certain localities, in addition to the City, have experienced
financial problems and have requested and received additional New York State
assistance during the last several State fiscal years. The potential impact on
the State of any future requests by localities for additional assistance is not
included in the State's projections of its receipts and disbursements for the
1997-98 fiscal year.
Fiscal difficulties experienced by the City of Yonkers
("Yonkers") resulted in the re-establishment of the Financial Control Board for
the City of Yonkers (the "Yonkers Board") by New York State in 1984. The Yonkers
Board is charged with oversight of the fiscal affairs of Yonkers. Future actions
taken by the State to assist Yonkers could result in increased State
expenditures for extraordinary local assistance.
Beginning in 1990, the City of Troy experienced a series of
budgetary deficits that resulted in the establishment of a Supervisory Board for
the City of Troy in 1994. The Supervisory Board's powers were increased in 1995,
when Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the city of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding. Troy MAC has issued
bonds to effect a restructuring of the City of Troy's obligations.
Eighteen municipalities received extraordinary assistance
during the 1996 legislative session through $50 million in special
appropriations targeted for distressed cities, and that was largely continued in
1997. Twenty-eight municipalities were scheduled to share in more than $32
million in targeted unrestricted aid allocated in the 1997-98 budget. An
additional $21 million will be dispersed among all cities, towns and villages, a
3.97% increase in General Purpose State Aid.
The 1998-99 budget includes an additional $29.4 million in
unrestricted aid targeted to 57 municipalities across the State. Other
assistance for municipalities with special needs totals more than $25.6 million.
Twelve upstate cities will receive $24.2 million in one-time assistance from a
cash flow acceleration of State aid.
Municipalities and school districts have engaged in
substantial short-term and long-term borrowings. In 1996, the total indebtedness
of all localities in the State other than New York City was approximately $20.0
billion. A small portion (approximately $77.2 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling State legislation. State law requires the Comptroller to review and
make recommendations concerning the budgets of those local government units
other than New York City that are authorized by State law to issue debt to
finance deficits during the period that such deficit financing is outstanding.
58
<PAGE> 71
From time to time, federal expenditure reductions could
reduce, or in some cases eliminate, federal funding of some local programs and
accordingly might impose substantial increased expenditure requirements on
affected localities. If the State, the City or any of the Authorities were to
suffer serious financial difficulties jeopardizing their respective access to
the public credit markets, the marketability of notes and bonds issued by
localities within the State could be adversely affected. Localities also face
anticipated and potential problems resulting from certain pending litigation,
judicial decisions and long-range economic trends. Long-range potential problems
of declining urban population, increasing expenditures and other economic trends
could adversely affect localities and require increasing the State assistance in
the future.
Year 2000 Compliance
The State is currently addressing "Year 2000" data processing
compliance issues. The Year 2000 compliance issue ("Y2K") arises because most
computer software programs allocate two digits to the data field for "year" on
the assumption that the first two digits will be "19". Such programs will thus
interpret the year 2000 as the year 1900 absent reprogramming. Y2K could impact
both the ability to enter data into computer programs and the ability of such
programs to correctly process data.
The Office for Technology is monitoring compliance on a
quarterly basis and is providing assistance and assigning resources to
accelerate compliance for mission critical systems, with most compliance testing
expected to be completed by mid-1999. There can be no guarantee, however, that
all of the State's mission-critical and high-priority computer systems will be
Year 2000 compliant and that there will not be an adverse impact upon State
operations or State finances as a result.
MANAGEMENT OF THE FUNDS
Officers and Boards of Directors/Trustees
The business and affairs of the Global Fixed Income and
Intermediate Government Funds are managed by the Board of Directors in
accordance with the laws of the State of Maryland. The business and affairs of
the Fixed Income and New York Municipal Funds are managed by a Board of Trustees
in accordance with the laws of The Commonwealth of Massachusetts. Each Board
elects officers who are responsible for the day-to-day operations of a Fund and
who execute policies authorized by the Board. Under each Fund's Charter, a Board
may classify or reclassify any unissued shares of the Funds into one or more
additional classes by setting or changing in any one or more respects their
relative rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption. A Board may similarly
classify or reclassify any class of its shares into one or more series and,
without shareholder approval, may increase the number of authorized shares of
the Funds.
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<PAGE> 72
The names (and ages) of the Funds' Directors/Trustees and
officers, their addresses, present positions and principal occupations during
the past five years and other affiliations are set forth below.
<TABLE>
<CAPTION>
<S> <C>
Richard H. Francis (65) Director/Trustee
40 Grosvenor Road Currently retired; Executive Vice President and Chief
Short Hills, New Jersey 07078 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 Fritz
P.O. Box 483 Broadcasting, Inc. and Fritz Communications
Wilson, Wyoming 83014 (developers and operators of radio stations);
Director of Advo, Inc. (direct mail advertising);
Director/Trustee of other Warburg Pincus Funds.
Jeffrey E. Garten (52) Director/Trustee
Box 208200 Dean of Yale School of Management and William S.
New Haven, Connecticut 06520-8200 Beinecke Professor in the Practice of International
Trade and Finance; Undersecretary of Commerce for
International Trade from November 1993 to October
1995; Professor at Columbia University from September
1992 to November 1993; Director/Trustee of other
Warburg Pincus Funds.
</TABLE>
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<PAGE> 73
<TABLE>
<CAPTION>
<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* (56) Chairman of the Board
153 East 53rd Street Chairman- Management Committee, Chief Executive
New York, New York 10022 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 (49) Director/Trustee
c/o Loanet, Inc. President of Loanet, Inc. since 1997; Executive Vice
153 East 53rd Street, President of Loanet, Inc. from 1994 to 1997;
Suite 5500 Director, President, North American Operations, and
New York, New York 10022 former Executive Vice President from 1992 to 1993 of
Worldwide Operations of Metallurg Inc.; Executive Vice
President, Telerate, Inc. from 1987 to 1992; Partner
in the law firm of Hartman & Craven until 1987;
Director/Trustee of other Warburg Pincus Funds and
other CSAM-advised investment companies.
</TABLE>
- --------
* Indicates a Director/Trustee who is an "interested person" of the Fund as
defined in the 1940 Act.
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<PAGE> 74
<TABLE>
<CAPTION>
<S> <C>
Arnold M. Reichman* (51) Vice Chairman of the Board
466 Lexington Avenue Managing Director and Chief Operating Officer of
New York, New York 10017-3147 CSAM; Associated with CSAM since CSAM acquired the
Funds' predecessor adviser in July 1999; with the
predecessor adviser since 1984; Officer of CSAMSI;
Director of The RBB Fund, Inc.; Director/Trustee of
other Warburg Pincus Funds.
Alexander B. Trowbridge (69) Director/Trustee
1317 F Street, N.W., 5th Floor Currently retired; President of Trowbridge Partners,
Washington, DC 20004 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 CSAM since New
York, New York 10017-3147 CSAM acquired the Funds' predecessor adviser in July
1999; with the predecessor adviser since 1991; Vice
President of Citibank, N.A. from 1987 to 1991; Officer
of CSAMSI and of other Warburg Pincus Funds.
</TABLE>
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<PAGE> 75
<TABLE>
<CAPTION>
<S> <C>
Hal Liebes, Esq. (34) Vice President and Secretary
153 East 53rd Street Director and General Counsel of CSAM; Associated with
New York, New York 10022 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 Administration of
New York, New York 10022 CSAM; Associated with CSAM since 1986; Officer of
other Warburg Pincus Funds.
Janna Manes, Esq. (31) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel of CSAM; Associated New
York, New York 10017-3147 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; Associated New
York, New York 10017-3147 with CSAM since CSAM acquired the Funds' predecessor
adviser in July 1999; with the predecessor adviser
since 1997; Associated with the law firm of Gordon
Altman Butowsky Weitzen Shalov & Wein from 1995 to
1997; Officer of other Warburg Pincus Funds.
</TABLE>
63
<PAGE> 76
<TABLE>
<CAPTION>
<S> <C>
Rocco A. DelGuercio (36) Assistant Treasurer
153 East 53rd Street Assistant Vice President and Administrative Officer
New York, New York 10022 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 an annual fee of $2,000, and $500 for each meeting of the
Board and $250 for each Audit Committee Meeting, as applicable, attended by him
for his services as Director and is reimbursed for expenses incurred in
connection with his attendance at Board meetings.
Directors'/Trustees' Compensation
(for fiscal year ended October 31, 1998)
<TABLE>
<CAPTION>
Total Compensation from all
Total Compensation Investment Companies in Warburg
Name of Director/Trustee from a Fund Pincus Fund Complex*
- ------------------------ ----------- --------------------
<S> <C> <C>
William W. Priest None** None**
Arnold M. Reichman None** None**
Richard N. Cooper*** $2,000 $56,600
Donald J. Donahue*** $2,000 $13,525
Richard H. Francis**** None None
Jack W. Fritz $2,000 $63,100
Jeffrey E. Garten**** $2,000 $49,325
Thomas A. Melfe*** $2,000 $60,700
James S. Pasman, Jr.**** None None
Steven N. Rappaport**** None None
Alexander B. Trowbridge $2,000 $64,000
</TABLE>
* Each Director/Trustee serves as a Director or Trustee of 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.
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<PAGE> 77
*** Mr. Donahue resigned as a Director/Trustee of each Fund effective
February 6, 1998. Messrs. Cooper and Melfe resigned as a
Director/Trustee of each Fund effective July 6, 1999.
**** Mr. Garten became a Director/Trustee of each Fund effective February 6,
1998. Messrs. Francis, Pasman and Rappaport became Directors/Trustees
of the Funds effective July 6, 1999.
As of January 31, 1999, the Directors and officers of each
Fund as a group owned less than 1% of the outstanding shares of each Fund.
Portfolio Managers of the Funds
Mr. M. Anthony E. van Daalen, Portfolio Manager of the
Intermediate Government Fund and Fixed Income Fund, earned a B.A. degree from
Wesleyan University and a M.B.A. degree from New York University. Mr. van Daalen
has been associated with CSAM since CSAM acquired the Funds' predecessor adviser
in July 1999 and joined the predecessor adviser in 1992, specializing in
government and high yield bonds. Prior to that Mr. van Daalen was an assistant
vice president, portfolio manager at Citibank in the Private Banking Group from
1985 to 1991. Prior to that Mr. van Daalen was a retail banking manager at The
Connecticut Bank and Trust Co. from 1983 to 1985 and an analyst at
Goldstein/Krall Market Research from 1982 to 1983.
Ms. Sharon B. Parente, Co-Portfolio Manager of the Municipal
Fund, earned a B.S. degree from the University of Virginia. Ms. Parente has been
associated with CSAM since CSAM acquired the Funds' predecessor adviser in July
1999 and joined the predecessor adviser in 1992, specializing in municipal bonds
and corporate cash. Prior to that Ms. Parente was a vice president at Citibank,
N.A. in the Private Banking Group from 1985 to 1992. Prior to that, Ms. Parente
was a fixed income portfolio manager at Calvert Group from 1981 to 1985 and a
municipal trader's assistant at Prescott, Ball & Turben from 1979 to 1981.
Mr. Charles C. Van Vleet, Portfolio Manager of the Global
Fixed Income Fund, earned a B.A. degree from the University of California,
Berkeley. Mr. Van Vleet has been associated with CSAM since CSAM acquired the
Funds' predecessor adviser in July 1999 and joined the predecessor adviser in
May 1998. Prior to that Mr. Van Vleet was a senior vice president and senior
global strategist at Putnam Investment Management from 1994 to 1998. Prior to
that Mr. Van Vleet served as vice president and senior portfolio manager at
Alliance Capital Management.
Mr. Patrick A. Bittner, CFA, Co-Portfolio Manager of the
Municipal Fund, earned a B.S. degree from the University of Wisconsin (Madison)
and a Masters of Business Science from Temple University. Mr. Bittner has been
associated with CSAM since CSAM acquired the Funds' predecessor adviser in July
1999 and joined the predecessor adviser in 1994. Prior to that Mr. Bittner
served as an assistant portfolio manager at First Fidelity Bank from 1991 to
1994.
65
<PAGE> 78
Investment Adviser and Co-Administrators
CSAM, located at 153 East 53rd Street, New York, New York
10022, serves as investment adviser to each Fund pursuant to a written agreement
(the "Advisory Agreement"). CSAM is an indirect wholly-owned U.S. subsidiary of
Credit Suisse Group ("Credit Suisse"). Credit Suisse is a global financial
services company, providing a comprehensive range of banking and insurance
products. Active on every continent and in all major financial centers, Credit
Suisse comprises five business units -- Credit Suisse Asset Management (asset
management); Credit Suisse First Boston (investment banking); Credit Suisse
Private Banking (private banking); Credit Suisse (retail banking); and
Winterthur (insurance). Credit Suisse has approximately $680 billion of global
assets under management and employs approximately 62,000 people worldwide. The
principal business address of Credit Suisse is Paradeplatz 8, CH 8070, Zurich,
Switzerland.
Prior to July 6, 1999, Warburg Pincus Asset Management, Inc.
("Warburg") served as investment adviser to each Fund. On that date, Credit
Suisse acquired Warburg and combined Warburg with Credit Suisse's existing
U.S.-based asset management business ("Credit Suisse Asset Management").
Consequently, the combined entity, CSAM, became the Funds' investment adviser.
Credit Suisse Asset Management, formerly known as BEA Associates, together with
its predecessor firms, has been engaged in the investment advisory business for
over 60 years.
Counsellors Funds Service, Inc. ("Counsellors Service") and
PFPC both serve as co-administrators to the Funds pursuant to separate written
agreements with each Fund (the "Counsellors Service Co-Administration Agreement"
and the "PFPC Co-Administration Agreement" respectively). For the services
provided by CSAM under the Advisory Agreements, Fixed Income Fund, Global Fixed
Income Fund, Intermediate Government Fund and New York Intermediate Municipal
Fund each pay CSAM a fee calculated at an annual rate of .50%, 1.00%, .50% and
.40%, respectively, of the Fund's average daily net assets. For the services
provided by Counsellors Service under the Counsellors Service Co-Administration
Agreement, each Fund pays Counsellors Service a fee calculated at an annual rate
of .10% of the Fund's average daily net assets. For the services provided by
PFPC under the PFPC Co-Administration Agreement, each Fund pays PFPC a fee
calculated at an annual rate of .05% of the Fund's average daily net assets,
exclusive of out-of-pocket expense. Each class of shares of the Fund bears its
proportionate share of fees payable to CSAM, 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 Portfolio's average daily net assets.
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<PAGE> 79
Advisory Fees paid to CSAM's predecessor, Warburg (portions of fees waived, if
any, are noted in parenthesis next to the amount earned)
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal Year ended
October 31, 1996 October 31, 1997 October 31, 1998
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Income Fund $ 648,732 ($ 163,311) $ 973,381 ($ 151,599) $ 1,799,237 ($ 138,880)
Global Fixed Income Fund $ 1,031,630 ($ 514,200) $ 1,783,032 ($ 707,931) $ 1,811,063 ($ 821,020)
Intermediate Government Fund $ 254,649 ($ 196,577) $ 234,862 ($ 133,433) $ 274,007 ($ 165,038)
New York Municipal Fund $ 301,602 ($ 102,812) $ 332,574 ($ 65,877) $ 386,531 ($ 67,141)
</TABLE>
Co-Administration Fees paid to PFPC (portions of fees waived, if any, are noted
in parenthesis next to the amount earned)
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended
October 31, 1996 October 31, 1997 October 31, 1998
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Income Fund $ 117,711 ($ 28,629) $ 97,338 $ 189,784
Global Fixed Income Fund $ 109,014 ($ 58,514) $ 89,151 $ 97,076
Intermediate Government Fund $ 47,013 ($ 36,869) $ 23,486 ($ 22,971) $ 30,565 ($ 21,456)
New York Municipal Fund $ 68,978 ($ 25,703) $ 41,572 $ 58,524
</TABLE>
Co-Administration Fees paid to Counsellors Service
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended
October 31, 1996 October 31, 1997 October 31, 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Fixed Income Fund $129,747 $194,676 $359,847
Global Fixed Income Fund $103,163 $178,303 $181,107
Intermediate Government Fund $ 50,930 $ 46,972 $ 54,802
New York Municipal Fund $ 75,401 $ 83,144 $ 96,633
</TABLE>
Custodian and Transfer Agent
PFPC Trust Company ("PFPC Trust") and State Street Bank and
Trust Company serve as custodians of each Funds' U.S. and non-U.S. assets,
respectively, pursuant
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<PAGE> 80
to separate custodian agreements (the "Custodian Agreements"). Under the
Custodian Agreements, PFPC Trust and State Street each (i) maintains a separate
account or accounts in the name of the Fund, (ii) holds and transfers portfolio
securities on account of the Fund, (iii) makes receipts and disbursements of
money on behalf of the Fund, (iv) collects and receives all income and other
payments and distributions for the account of the Fund's portfolio securities
held by it and (v) makes periodic reports to the Board concerning the Fund's
custodial arrangements. PFPC Trust may delegate its duties under its Custodian
Agreement with the Fund to a wholly owned direct or indirect subsidiary of PFPC
Trust or PNC Bank Corp. upon notice to the Fund and upon the satisfaction of
certain other conditions. With the approval of the Board, State Street is
authorized to select one or more foreign banking institutions and foreign
securities depositories to serve as sub-custodian on behalf of the Fund and PFPC
Trust is authorized to select one or more domestic banks or trust companies to
serve as sub-custodian on behalf of the Funds. PFPC Trust has entered into a
sub-custodian agreement with PNC Bank, National Association ("PNC"), pursuant to
which PNC provides asset safekeeping and securities clearing services. PFPC
Trust and PNC are indirect, wholly owned subsidiaries of PNC Bank Corp. and
their principal business address is 200 Stevens Drive, Lester, Pennsylvania
19113. The principal business address of State Street is 225 Franklin Street,
Boston, Massachusetts 02110.
State Street serves as the shareholder servicing, transfer and
dividend disbursing agent of each Fund pursuant to separate Transfer Agency and
Service Agreements, under which State Street (i) issues and redeems shares of a
Fund, (ii) addresses and mails all communications by the Fund to record owners
of Fund shares, including reports to shareholders, dividend and distribution
notices and proxy material for its meetings of shareholders, (iii) maintains
shareholder accounts and, if requested, sub-accounts and (iv) makes periodic
reports to the Fund's Board concerning the transfer agent's operations with
respect to the Fund. State Street has delegated to Boston Financial Data
Services, Inc., an affiliate of State Street ("BFDS"), responsibility for most
shareholder servicing functions. BFDS's principal business address is 2 Heritage
Drive, Boston, Massachusetts 02171.
Organization of the Funds
The Funds are open-end management investment companies. The
Fixed Income and New York Municipal Funds were organized in 1987 and 1986,
respectively, under the laws of The Commonwealth of Massachusetts and each is a
business entity commonly known as a "Massachusetts business trust." The Global
Fixed Income and Intermediate Government Funds were incorporated in 1990 and
1988, respectively, under the laws of the State of Maryland and each is an
entity commonly known as a "Maryland corporation." Each of the Funds is
"diversified" within the meaning of the 1940 Act, other than the Global Fixed
Income and New York Municipal Funds, which are "non-diversified." Each Fund
other than the New York Municipal Fund offers two classes of shares, Common
Shares and Advisor Shares. Unless otherwise indicated, references to a "Fund"
apply to each class of shares of that Fund.
The Fixed Income Fund's and New York Municipal Fund's
Agreement and Declaration of Trust (the "Trust Agreements") and the Global Fixed
Income Fund's and
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<PAGE> 81
Intermediate Government Fund's charter authorizes the Board of each Fund to
issue full and fractional shares of common stock, $.001 par value per share
("Common Stock"), of which one billion shares are designated Common Shares and
two billion shares are designated Advisor Shares.
Massachusetts law provides that shareholders could, under
certain circumstances, be held personally liable for the obligations of the
Fixed Income and New York Municipal Funds. However, the Trust Agreements
disclaim shareholder liability for acts or obligations of a Fund and requires
that notice of such disclaimer be given in each agreement, obligation or
instrument entered into or executed by the Fund or a Trustee. The Trust
Agreements provide for indemnification from the Fund's property for all losses
and expenses of any shareholder held personally liable for the obligations of
the Fund. Thus, the risk of a shareholder's incurring financial loss on account
of shareholder liability is limited to circumstances in which the Fund would be
unable to meet its obligations, a possibility that CSAM believes is remote and
immaterial. Upon payment of any liability incurred by the Fund, the shareholder
paying the liability will be entitled to reimbursement from the general assets
of the Fund. The Trustees intend to conduct the operations of the Fund in such a
way so as to avoid, as far as possible, ultimate liability of the shareholders
for liabilities of the Fund.
All shareholders of a Fund in each class, upon liquidation,
will participate ratably in the Fund's net assets. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Directors/Trustees can elect all Directors/Trustees of a
Fund. Shares are transferable but have no preemptive, conversion or subscription
rights.
Investors in a Fund are entitled to one vote for each full
share held and fractional votes for fractional shares held. Shareholders of a
Fund will vote in the aggregate except where otherwise required by law and
except that each class will vote separately on certain matters pertaining to its
distribution and shareholder servicing arrangements. There will normally be no
meetings of investors for the purpose of electing members of the governing Board
unless and until such time as less than a majority of the members holding office
have been elected by investors. Any Director of a Fund may be removed from
office upon the vote of shareholders holding at least a majority of the relevant
Fund's outstanding shares, at a meeting called for that purpose. A meeting will
be called for the purpose of voting on the removal of a Board member at the
written request of holders of 10% of the outstanding shares of a Fund.
The Fixed Income Fund and the New York Municipal Fund were
organized under the laws of The Commonwealth of Massachusetts as Massachusetts
business trusts in 1987 and 1986, respectively. In 1992, these Funds changed
their names from "Counsellors Fixed Income Fund" and "Counsellors New York
Municipal Bond Fund" to "Warburg, Pincus Fixed Income Fund" and "Warburg, Pincus
New York Municipal Bond Fund," respectively. On February 28, 1995, the New York
Municipal Fund changed its name to "Warburg, Pincus New York Intermediate
Municipal Fund." The Global Fixed Income Fund and the Intermediate Government
Fund were incorporated under the laws of the State of Maryland in
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<PAGE> 82
1990 and 1988, respectively, under the names "Counsellors Global Fixed Income
Fund, Inc." and "Counsellors Intermediate Maturity Government Fund, Inc.,"
respectively. On October 27, 1995 and February 16, 1996, the Funds amended their
respective charters to change their names to "Warburg, Pincus Global Fixed
Income Fund, Inc." and "Warburg, Pincus Intermediate Maturity Government Fund,
Inc."
Distribution and Shareholder Servicing
CSAMSI serves as the Funds' distributor. CSAMSI's principal
business address is 466 Lexington Avenue, New York, New York 10017-3147.
The Funds have entered into agreements ("Agreements") with
institutional shareholders of record, broker-dealers, financial institutions,
depository institutions, retirement plans and financial intermediaries
("Institutions") to provide certain distribution, shareholder servicing,
administrative and/or accounting services for their clients or customers (or
participants in the case of retirement plans) ("Customers") who are beneficial
owners of Advisor Shares. Agreements will be governed by a distribution plan
(the "Distribution Plan") pursuant to Rule 12b-1 under the 1940 Act. The
Distribution Plan requires the Board, at least quarterly, to receive and review
written reports of amounts expended under the Distribution Plan and the purposes
for which such expenditures were made. For the fiscal year ended October 31,
1998, the Fixed Income, Global Fixed Income and Intermediate Government Funds
paid $8,768, $38,716 and $17 respectively, in 12b-1 fees in connection with the
Fund's Advisor Shares, all of which were paid to Institutions.
An Institution with which a Fund has entered into an Agreement
may charge a Customer one or more of the following types of fees, as agreed upon
by the Institution and the Customer, with respect to the cash management or
other services provided by the Institution: (i) account fees (a fixed amount per
month or per year); (ii) transaction fees (a fixed amount per transaction
processed); (iii) compensation balance requirements (a minimum dollar amount a
Customer must maintain in order to obtain the services offered); or (iv) account
maintenance fees (a periodic charge based upon the percentage of assets in the
account or of the dividend paid on those assets). Services provided by an
Institution to Customers are in addition to, and not duplicative of, the
services to be provided under each Fund's co-administration and distribution and
shareholder servicing arrangements. A Customer of an Institution should read the
relevant Prospectus and this Statement of Additional Information in conjunction
with the Agreement and other literature describing the services and related fees
that would be provided by the Institution to its Customers prior to any purchase
of Fund shares. Prospectuses are available from the Fund's distributor upon
request. No preference will be shown in the selection of Fund portfolio
investments for the instruments of Institutions.
Each Fund has authorized certain broker-dealers, financial
institutions, recordkeeping organizations and other 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 of up to
.40% of the average annual value of accounts with the Funds maintained by such
Service Organizations. Service Organizations may also be reimbursed for
marketing costs. The Service Fee payable to any one Service Organization is
determined based upon a number of factors, including the nature and quality of
services provided, the operations processing requirements of the relationship
and the standardized fee schedule of the Service Organization or recordkeeper.
The Funds may reimburse part of the Service Fee at rates they would normally
pay to the transfer agent for providing the services.
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Advisor shares. Certain Institutions may receive additional
fees from the distributor, the adviser or their affiliates for providing
supplemental services in connection with investments in a fund. Institutions may
also be reimbursed for marketing and other costs. Additional fees may be up to
0.10% per year of the value of fund accounts maintained by the firm. Fees
payable to any particular Institution are determined based upon a number of
factors, including the nature and quality of the services provided, the
operations processing requirements of the relationship and the standardized fee
schedule of the Institution. To the extent that the distributor, the adviser or
their affiliates provide additional compensation or reimbursements for marketing
expenses, such payments would not represent an additional expense to the fund or
its shareholders.
General. The Distribution Plans and 12b-1 Plans will continue
in effect for so long as its continuance is specifically approved at least
annually by the Board, including a majority of the Directors/Trustees who are
not interested persons of a Fund and who have no direct or indirect financial
interest in the operation of the Distribution Plan ("Independent
Directors/Trustees"). Any material amendment of the Distribution Plan would
require the approval of the Board in the same manner. The Distribution Plans or
the 12b-1 Plans may not be amended to increase materially the amount to be spent
under it without shareholder approval of the Advisor Shares. The Distribution
Plans or the 12b-1 Plans may be terminated at any time, without penalty, by vote
of a majority of the Independent Directors/Trustees or by a vote of a majority
of the outstanding voting securities of the Advisor Shares of a Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of a Fund's shares is equal to the per
share net asset value of the relevant class of shares of the Fund.
Under the 1940 Act, a Fund may suspend the right of redemption
or postpone the date of payment upon redemption for any period during which the
NYSE is closed, other than customary weekend and holiday closings, or during
which trading on the NYSE is restricted, or during which (as determined by the
SEC) an emergency exists as a result of which disposal or fair valuation of
portfolio securities is not reasonably practicable, or for such other periods as
the SEC may permit. (The Funds may also suspend or postpone the recordation of
an exchange of its shares upon the occurrence of any of the foregoing
conditions.)
If conditions exist which make payment of redemption proceeds
wholly in cash unwise or undesirable, a Fund may make payment wholly or partly
in securities or other investment instruments which may not constitute
securities as such term is defined in the applicable securities laws. If a
redemption is paid wholly or partly in securities or other property, a
shareholder would incur transaction costs in disposing of the redemption
proceeds. The Fund intends to comply with Rule 18f-1 promulgated under the 1940
Act with respect to redemptions in kind.
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Automatic Cash Withdrawal Plan. An automatic cash withdrawal
plan (the "Plan") is available to shareholders who wish to receive specific
amounts of cash periodically. Withdrawals may be made under the Plan by
redeeming as many shares of a Fund as may be necessary to cover the stipulated
withdrawal payment. To the extent that withdrawals exceed dividends,
distributions and appreciation of a shareholder's investment in a Fund, there
will be a reduction in the value of the shareholder's investment and continued
withdrawal payments may reduce the shareholder's investment and ultimately
exhaust it. Withdrawal payments should not be considered as income from
investment in the Fund.
EXCHANGE PRIVILEGE
An exchange privilege with certain other funds advised by CSAM
is available to investors in each Fund. A Common Shareholder may exchange Common
Shares of a Fund for Common Shares of another Fund or for Common Shares of
another Warburg Pincus Fund at their respective net asset values. An Advisor
Shareholder may exchange Advisor Shares of a Fund for Advisor Shares of another
Warburg Pincus fund at their respective net asset values. If an exchange request
is received by Warburg Pincus Funds or their agent prior to the close of regular
trading on the NYSE, the exchange will be made at each Fund's net asset value
determined at the end of that business day. Exchanges will be effected without a
sales charge but must satisfy the minimum dollar amount necessary for new
purchases. The Fund may refuse exchange purchases at any time without prior
notice.
The exchange privilege is available to shareholders residing
in any state in which the shares being acquired may legally be sold. When an
investor effects an exchange of shares, the exchange is treated for federal
income tax purposes as a redemption. Therefore, the investor may realize a
taxable gain or loss in connection with the exchange. Investors wishing to
exchange shares of a Fund for shares in another Warburg Pincus Fund should
review the prospectus of the other fund prior to making an exchange. For further
information regarding the exchange privilege or to obtain a current prospectus
for another Warburg Pincus Fund, an investor should contact Warburg Pincus Funds
at 800-927-2874.
The Funds reserve the right to refuse exchange purchases by
any person or group if, in CSAM's judgment, a Fund would be unable to invest the
money effectively in accordance with its investment objective and policies, or
would otherwise potentially be adversely affected. Examples of when an exchange
purchase could be refused are when the Fund receives or anticipates receiving
large exchange orders at or about the same time and/or when a pattern of
exchanges within a short period of time (often associated with a "market timing"
strategy) is discerned. The Funds reserve the right to terminate or modify the
exchange privilege at any time upon 30 days' notice to shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is a summary of the material United States
federal income tax considerations regarding the purchase, ownership and
disposition of shares in each Fund. Each prospective shareholder is urged to
consult his own tax adviser with respect to the specific federal, state, local
and foreign tax consequences of investing in a Fund. The
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summary is based on the laws in effect on the date of this Statement of
Additional Information, which are subject to change.
The Funds and Their Investments
Each Fund intends to continue to qualify to be treated as a
regulated investment company each taxable year under the Code. To so qualify, a
Fund must, among other things: (a) derive at least 90% of its gross income in
each taxable year from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of stock or securities or
foreign currencies, or other income (including, but not limited to, gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; and (b) diversify its
holdings so that, at the end of each quarter of the Fund's taxable year, (i) at
least 50% of the market value of the Fund's assets is represented by cash,
securities of other regulated investment companies, Government Securities and
other securities, with such other securities limited, in respect of any one
issuer, to an amount not greater than 5% of the Fund's assets and not greater
than 10% of the outstanding voting securities of such issuer and (ii) not more
than 25% of the value of its assets is invested in the securities (other than
Government Securities or securities of other regulated investment companies) of
any one issuer or any two or more issuers that the Fund controls and are
determined to be engaged in the same or similar trades or businesses or related
trades or businesses. Each 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.
Each Fund intends to distribute annually to its shareholders
substantially all of its investment company taxable income, including the income
(if any) imputed with respect to investments in zero coupon securities. The
Board of each Fund will determine annually whether to distribute any net
realized long-term capital gains in excess of net realized short-term capital
losses (including any capital loss carryovers). Each Fund currently expects to
distribute any excess annually to its shareholders. However, if a Fund retains
for investment an amount equal to all or a portion of its net long-term capital
gains in excess of its net short-term capital losses and capital loss
carryovers, it will be subject to a corporate tax (currently at a rate of 35%)
on the amount retained. In that event, a Fund will designate such retained
amounts as undistributed capital gains in a notice to its shareholders who (a)
will be required to include in income for United Stares federal income tax
purposes, as long-term capital gains,
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their proportionate shares of the undistributed amount, (b) will be entitled to
credit their proportionate shares of the 35% tax paid by the Fund on the
undistributed amount against their United States federal income tax liabilities,
if any, and to claim refunds to the extent their credits exceed their
liabilities, if any, and (c) will be entitled to increase their tax basis, for
United States federal income tax purposes, in their shares by an amount equal to
65% of the amount of undistributed capital gains included in the shareholder's
income. Organizations or persons not subject to federal income tax on such
capital gains will be entitled to a refund of their pro rata share of such taxes
paid by the Fund upon filing appropriate returns or claims for refund with the
IRS. Even if a Fund makes such an election, it is possible that it may incur an
excise tax as a result of not having distributed net capital gains.
The Code imposes a 4% nondeductible excise tax on a Fund to
the extent the Fund does not distribute by the end of any calendar year at least
98% of its net investment income for that year and 98% of the net amount of its
capital gains (both long-and short-term) for the one-year period ending, as a
general rule, on October 31 of that year. For this purpose, however, any income
or gain retained by the Fund that is subject to corporate income tax will be
considered to have been distributed by year-end. In addition, the minimum
amounts that must be distributed in any year to avoid the excise tax will be
increased or decreased to reflect any underdistribution or overdistribution, as
the case may be, from the previous year. Each Fund anticipates that it will pay
such dividends and will make such distributions as are necessary in order to
avoid the application of this tax.
With regard to each Fund's investments in foreign securities,
exchange control regulations may restrict repatriations of investment income and
capital or the proceeds of securities sales by foreign investors such as the
Fund and may limit the Fund's ability to pay sufficient dividends and to make
sufficient distributions to satisfy the 90% and excise tax distribution
requirements.
If, in any taxable year, a Fund fails to qualify as a
regulated investment company under the Code or fails to meet the distribution
requirement, it would be taxed in the same manner as an ordinary corporation and
distributions to its shareholders would not be deductible by the Fund in
computing its taxable income. In addition, in the event of a failure to qualify,
a Fund's distributions, to the extent derived from the Fund's current or
accumulated earnings and profits (including amounts derived from interest on
tax-exempt obligations), would constitute dividends (eligible for the corporate
dividends-received deduction) which are taxable to shareholders as ordinary
income, even though those distributions might otherwise (at least in part) have
been treated in the shareholders' hands as long-term capital gains. If a Fund
fails to qualify as a regulated investment company in any year, it must pay out
its earnings and profits accumulated in that year in order to qualify again as a
regulated investment company. In addition, if the Fund failed to qualify as a
regulated investment company for a period greater than one taxable year, the
Fund may be required to recognize any net built-in gains (the excess of the
aggregate gains, including items of income, over aggregate losses that would
have been realized if it had been liquidated) in order to qualify as a regulated
investment company in a subsequent year.
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Special Tax Matters Regarding the Fixed Income Fund, Global
Fixed Income Fund and Intermediate Government Fund. Each Fund's short sales
against the box, if any, and transactions in foreign currencies, forward
contracts, options and futures contracts (including options and futures
contracts on foreign currencies) will be subject to special provisions of the
Code that, among other things, may affect the character of gains and losses
realized by the Fund (i.e., may affect whether gains or losses are ordinary or
capital), accelerate recognition of income to the Fund and defer Fund losses.
These rules could therefore affect the character, amount and timing of
distributions to shareholders. These provisions also (a) will require each Fund
to mark-to-market certain types of the positions in its portfolio (i.e., treat
them as if they were closed out) and (b) may cause the Fund to recognize income
without receiving cash with which to pay dividends or make distributions in
amounts necessary to satisfy the distribution requirements for avoiding income
and excise taxes. Each Fund will monitor its transactions, will make the
appropriate tax elections and will make the appropriate entries in its books and
records when it engages in short sales against the box or acquires any foreign
currency, forward contract, option, futures contract or hedged investment in
order to mitigate the effect of these rules and prevent disqualification of the
Fund as a regulated investment company.
Special Tax Matters Regarding the Intermediate Government
Fund. Investors in the Intermediate Government Fund do not have to pay state and
local income taxes with respect to interest income on most types of Government
Securities if the investors are the tax owners of these Government Securities.
Furthermore, some states, if certain requirements are satisfied, permit
investors to treat the portion of their regulated investment company dividends
that is attributable to interest income on these Government Securities as
tax-exempt income for state or local income tax purposes. Other states treat all
of these dividends as subject to state and local income taxation. Investors in
the Fund should consult their own tax advisers to assess the consequences of
investing in the Fund under state and local laws generally and to determine
whether dividends paid by the Fund that represent interest derived from
Government Securities are exempt from any applicable state or local taxes.
Special Tax Considerations Regarding the New York Municipal
Fund. Because the New York Municipal Fund will distribute exempt-interest
dividends, interest on indebtedness incurred by a shareholder to purchase or
carry Fund shares is not deductible for federal income, New York State and New
York City personal income tax purposes. If a shareholder receives an
exempt-interest dividend with respect to any share of the Fund and if such share
is held by the shareholder for six months or less, then any loss on the sale or
exchange of such share, to the extent of such exempt-interest dividend, shall be
disallowed. In addition, the Code may require a shareholder, if he or she
receives exempt-interest dividends, to treat as taxable income a portion of
certain otherwise non-taxable social security and railroad retirement benefit
payments. Furthermore, that portion of any exempt interest dividend paid by the
Fund which represents income from private activity bonds may not retain its
tax-exempt status in the hands of a shareholder who is a "substantial user" (or
persons related thereto) of a facility financed by such bonds. Similar rules
apply for purposes of New York State and New York City personal income tax.
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Under the Code, interest on specified private activity bonds
issued after August 7, 1986, although otherwise exempt from federal income tax,
is treated as an item of tax preference for purposes of the alternative minimum
tax on individuals and corporations. If the New York Municipal Fund invests in
such specified "private activity bonds," it will report a portion of the
"exempt-interest dividends" paid to its shareholders as interest on specified
private activity bonds, and hence as a tax preference item. Exempt interest
dividends are included in adjusted current earnings. The amount of the
alternative minimum tax imposed by the Code is the excess, if any, of the
taxpayer's "tentative minimum tax" over the taxpayer's regular tax liability for
the taxable year. The "tentative minimum tax" is equal to (i) 26% of the first
$175,000, and 28% of any amount over $175,000 (for corporations, 20% of the
whole), of the taxpayer's alternative minimum taxable income (defined as regular
taxable income modified by certain adjustments and increased by the taxpayer's
"items of tax preference," including the adjustment for corporate current
earnings and the tax preference for tax-exempt interest on private activity
bonds described above) for the taxable year in excess of the exemption amount,
less (ii) the alternative minimum tax foreign tax credit for the taxable year.
The exemption amount is $40,000 for corporations, $45,000 for those filing joint
returns, lesser amounts for others, and is phased out over certain income
levels. Prospective investors should consult their own tax advisers with respect
to the possible application of the alternative minimum tax to their tax
situations.
In addition, the receipt of New York Municipal Fund dividends
and distributions may affect a foreign corporate shareholder's federal "branch
profits" tax liability and a Subchapter S corporation shareholder's federal
"excess net passive income" tax liability. Shareholders should consult their own
tax advisers as to whether they are (i) substantial users with respect to a
facility or related to such users within the meaning of the Code or (ii) subject
to a federal alternative minimum tax, any applicable state alternative minimum
tax, the federal branch profits tax, or the federal excess net passive income
tax.
While the New York Municipal Fund does not expect to realize a
significant amount of net capital gains, any such gains realized will be
distributed annually as described in the Fund's Prospectus. Such distributions
("capital gain dividends"), if any, will be taxable to the shareholders as
long-term capital gains, regardless of how long a shareholder has held the
Fund's shares, and will be designated as capital gain dividends in a written
notice mailed by the Fund to the shareholders after the close of the Fund's
prior taxable year. If a shareholder receives a capital gain dividend with
respect to any share and if such share is held by the shareholder for six months
or less, then any loss (to the extent not disallowed pursuant to the other six
month rule described above) on the sale or exchange of such share, to the extent
of the capital gain dividend, shall be treated as a long-term capital loss.
Capital gain distributions by the New York Municipal Fund
result in a reduction in the net asset value of the Fund's shares. Should a
distribution reduce the net asset value below a shareholder's cost basis, such
distribution would nevertheless be taxable to the shareholder as ordinary income
or capital gain as described above, even though, from an investment standpoint,
it may constitute a partial return of capital. In particular, investors should
consider the tax implications of buying shares just prior to a distribution. The
price of
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shares purchased at that time includes the amount of the forthcoming
distribution. Those purchasing just prior to a distribution will then receive a
partial return of capital upon the distribution, which will nevertheless be
taxable to them.
If, for any full fiscal year, the New York Municipal Fund's
total distributions exceed net investment income and net realized capital gains,
the excess distributions may be treated as a taxable dividend or as a tax-free
return of capital (up to the amount of the shareholder's tax basis in his or her
shares). The amount treated as a tax-free return of capital will reduce a
shareholder's adjusted basis in his or her shares. Pursuant to the requirements
of the 1940 Act and other applicable laws, a notice will accompany any
distribution paid from sources other than net investment income.
Dividends derived by the New York Municipal Fund from
tax-exempt interest are designated as tax-exempt in the same percentage of the
day's dividend as the actual tax-exempt income earned on that day. Thus, the
percentage of the dividend designated as tax-exempt may vary from day to day.
Similarly, dividends derived by the Fund from interest on New York State
Municipal Obligations will be designated as exempt from New York's personal
income taxation in the same percentage of the day's dividend as the actual
interest on New York's Municipal Obligations earned on that day.
It should be noted that the portion of any New York Municipal
Fund dividends constituting New York exempt-interest dividends is excludable
from income for New York State and New York City personal income tax purposes
only. Any dividends paid to the Fund's shareholders subject to state or city
franchise or corporate income tax therefore may be taxed as ordinary dividends
to such shareholders, notwithstanding that all or a portion of such dividends is
exempt from state or city personal income tax.
Potential shareholders in the New York Municipal Fund,
including, in particular, corporate shareholders which may be subject to either
New York franchise tax or New York corporate income tax, should consult their
tax advisers with respect to (i) the application of corporate and franchise
taxes to the receipt of Fund dividends and as to their own state tax situation
in general, and (ii) the application of other state and local taxes to the
receipt of the Fund's dividends and distributions.
Although the New York Municipal Fund expects to be relieved of
all or substantially all federal, New York State and New York City income or
franchise taxes, depending upon the extent of its activities in other states and
localities in which its offices are maintained, in which its agents or
independent contractors are located or in which it is otherwise deemed to be
conducting business, that portion of the Fund's income which is treated as
earned in any such state or locality could be subject to state and local tax.
Any such taxes paid by the Fund would reduce the amount of income and gains
available for distribution to shareholders.
Passive Foreign Investment Companies (Fixed Income and Global Fixed Income Funds
only)
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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 "phantom" income and gain to
satisfy its distribution requirement and to avoid imposition of the 4% excise
tax. Each Fund will make the appropriate tax elections if possible, and take any
additional steps that are necessary to mitigate the effect of these rules.
Dividends and Distributions
Dividends of net investment income and distributions of net
realized short-term capital gains are taxable to a United States shareholder as
ordinary income, whether paid in cash or in shares. Distributions of
net-long-term capital gains, if any, that a Fund designates as capital gains
dividends are taxable as long-term capital gains, whether paid in cash or in
shares and regardless of how long a shareholder has held shares of the Fund.
Dividends and distributions paid by a Fund (except for the portion thereof, if
any, attributable to dividends on stock of U.S. corporations received by the
Fund) will not qualify for the deduction for dividends received by corporations.
Distributions in excess of a Fund's current and accumulated earnings and profits
will, as to each shareholder, be treated as a tax-free return of capital, to the
extent of a shareholder's basis in his shares of the Fund, and as a capital gain
thereafter (if the shareholder holds his shares of the Fund as capital assets).
Any dividend declared by a Fund in October, November or December of any calendar
year and payable to shareholders of record on a specified date in such a month
shall be deemed to have been received by each shareholder on December 31 of such
calendar year and to have been paid by the Fund not later than such December 31,
provided that such dividend is actually paid by the Fund during January of the
following calendar year.
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Shareholders receiving dividends or distributions in the form
of additional shares should be treated for United States federal income tax
purposes as receiving a distribution in the amount equal to the amount of money
that the shareholders receiving cash dividends or distributions will receive,
and should have a cost basis in the shares received equal to such amount.
If a Fund is the holder of record of any stock on the record
date for any dividends payable with respect to such stock, such dividends are
included in the Fund's gross income not as of the date received but as of the
later of (a) the date such stock became ex-dividend with respect to such
dividends (i.e., the date on which a buyer of the stock would not be entitled to
receive the declared, but unpaid, dividends) or (b) the date the Fund acquired
such stock. Accordingly, in order to satisfy its income distribution
requirements, the Fund may be required to pay dividends based on anticipated
earnings, and shareholders may receive dividends in an earlier year than would
otherwise be the case.
Sales of Shares
Upon the sale or exchange of his shares, a shareholder will
realize a taxable gain or loss equal to the difference between the amount
realized and his basis in his shares. Such gain or loss will be treated as
capital gain or loss, if the shares are capital assets in the shareholder's
hands, and will be long-term capital gain or loss if the shares are held for
more than one year and short-term capital gain or loss if the shares are held
for one year or less. Any loss realized on a sale or exchange will be disallowed
to the extent the shares disposed of are replaced, including replacement through
the reinvesting of dividends and capital gains distributions in a Fund, within a
61-day period beginning 30 days before and ending 30 days after the disposition
of the shares. In such a case, the basis of the shares acquired will be
increased to reflect the disallowed loss. Any loss realized by a shareholder on
the sale of a Fund share held by the shareholder for six months or less will be
treated for United States federal income tax purposes as a long-term capital
loss to the extent of any distributions or deemed distributions of long-term
capital gains received by the shareholder with respect to such share.
Foreign Taxes
Dividends and interest received by a Fund with respect to its
foreign investments may be subject to withholding and other taxes imposed by
foreign countries. However, tax conventions between certain countries and the
United States may reduce or eliminate such taxes. If either of the Fixed Income
Fund or the Global Fixed Income Fund qualifies as a regulated investment
company, if certain asset and distribution requirements are satisfied and if
more than 50% of the respective Fund's total assets at the close of its fiscal
year consists of stock or securities of foreign corporations, that Fund may
elect for U.S. income tax purposes to treat foreign income taxes paid by it as
paid by its shareholders. The Fixed Income Fund or the Global Fixed Income Fund
may qualify for and make this election in some, but not necessarily all, of its
taxable years. As a result, shareholders of the Fund would be required to
include their pro rata portions of such foreign taxes in computing their
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taxable incomes and then treat an amount equal to those foreign taxes as a U.S.
federal income tax deduction or as a foreign tax credit against their U.S.
federal income taxes. Shortly after any year for which it makes such an
election, each Fund will report to its shareholders the amount per share of such
foreign tax that must be included in each shareholder's gross income and the
amount which will be available for the deduction or credit. No deduction for
foreign taxes may be claimed by a shareholder who does not itemize deductions.
Certain limitations will be imposed on the extent to which the credit (but not
the deduction) for foreign taxes may be claimed.
Backup Withholding
A Fund may be required to withhold, for United States federal
income tax purposes, 31% of the dividends and distributions payable to
shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the IRS that they are subject to backup withholding. Certain
shareholders are exempt from backup withholding. Backup withholding is not an
additional tax and any amount withheld may be credited against a shareholder's
United States federal income tax liabilities.
Notices
Shareholders will be notified annually by a Fund as to the
United States federal income tax status of the dividends, distributions and
deemed distributions attributable to undistributed capital gains (discussed
above in "The Funds and Their Investments") made by the Fund to its
shareholders. Furthermore, shareholders will also receive, if appropriate,
various written notices after the close of the Fund's taxable year regarding the
United States federal income tax status of certain dividends, distributions and
deemed distributions that were paid (or that are treated as having been paid) by
a Fund to its shareholders during the preceding taxable year.
Other Taxation
Distributions also may be subject to additional state, local
and foreign taxes depending on each shareholder's particular situation.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN MATERIAL TAX CONSEQUENCES
AFFECTING A FUND AND ITS SHAREHOLDERS.
SHAREHOLDERS ARE ADVISED TO
CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF AN
INVESTMENT IN THE FUND.
DETERMINATION OF PERFORMANCE
From time to time, a Fund may quote the total return of its
Common Shares and/or Advisor Shares in advertisements or in reports and other
communications to shareholders. The net asset value of Common Shares is listed
in The Wall Street Journal each
80
<PAGE> 93
business day under the heading "Warburg Pincus Funds." Current total return
figures may be obtained by calling Warburg Pincus Funds at 800-927-2874.
With respect to a Funds' Common and Advisor Shares, the Fund's
average annual total returns for the period ended October 31, 1998 were as
follows (performance figures calculated without the waiver of fees, if any, are
noted in parenthesis):
Performance (Common Shares)
(performance figures calculated without the waiver of fees by a Fund's service
provider(s), if any, are noted in parenthesis)
<TABLE>
<CAPTION>
Period from the
commencement
One-Year Five-Year Ten-Year of operations
-------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Income Fund 6.48% (6.44%) 6.92% (6.79%) 8.06% (7.91%) 8.11% (7.95%)
(commenced operations on
August 17, 1987)
Global Fixed Income Fund 4.10% (3.55%) 5.69% (5.12%) 7.92% (6.74%)
(commenced operations on
November 1, 1990)
Intermediate Government Fund 9.08% (8.70%) 6.25% (5.81%) 8.00% (7.47%) 8.28% (7.64%)
(commenced operations on
August 22, 1988)
New York Municipal Fund 6.24% (6.16%) 5.02% (4.86%) 6.37% (5.99%) 6.00% (5.47%)
(commenced operations on
April 1, 1987)
</TABLE>
Performance (Advisor Shares)
(performance figures calculated without the waiver of fees by a Fund's service
provider(s), if any, are noted in parenthesis)
<TABLE>
<CAPTION>
Period from the
commencement of
One-Year operations
-------- ----------
<S> <C> <C> <C> <C>
Fixed Income Fund 6.21% (6.16%) 8.47% (8.38%)
(Advisor Class commenced operations on
July 3, 1996)
Global Fixed Income Fund 3.51% (3.13%) 5.48% (5.11%)
(Advisor Class commenced operations on
August 12, 1996)
Intermediate Government Fund 8.80% (7.01%) 9.16% (7.68%)
(Advisor Class commenced operations on
August 15, 1997)
</TABLE>
81
<PAGE> 94
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. Investor should note that the performance may not be representative
of the Fund's total return over longer market cycles.
When considering average total return figures for periods
longer than one year, it is important to note that the annual total return for
one year in the period might have been greater or less than the average for the
entire period. When considering total return figures for periods shorter than
one year, investors should bear in mind that each Fund seeks long-term
appreciation and that such return may not be representative of any Fund's return
over a longer market cycle. Each Fund may also advertise aggregate total return
figures of its Common Shares for various periods, representing the cumulative
change in value of an investment in the Common Shares of the specific period
(again reflecting changes in share prices and assuming reinvestment of dividends
and distributions). Aggregate and average total returns may be shown by means of
schedules, charts or graphs and may indicate various components of total return
(i.e., change in value of initial investment, income dividends and capital gain
distributions).
A Fund may advertise, from time to time, comparisons of the
performance of its Common Shares and/or Advisor Shares with that of one or more
other mutual funds with similar investment objectives. The Fund may advertise
average annual calendar year-to-date and calendar quarter returns, which are
calculated according to the formula set forth in the preceding paragraph except
that the relevant measuring period would be the number of months that have
elapsed in the current calendar year or most recent three months, as the case
may be. Investors should note that this performance may not be representative of
the Fund's total return in longer market cycles.
Yield is calculated by annualizing the net investment income
generated by a Fund over a specified thirty-day period according to the
following formula:
82
<PAGE> 95
YIELD = 2[(a-b+1)(6)-1]
---
cd
For purposes of this formula: "a" is dividends and interest earned during the
period; "b" is expenses accrued for the period (net of reimbursements); "c" is
the average daily number of shares outstanding during the period that were
entitled to receive dividends; and "d" is the maximum offering price per share
on the last day of the period.
<TABLE>
<CAPTION>
30-day annualized current yield
Fund (Common/Advisor Shares) as of October 31, 1998
- ---------------------------- ----------------------
<S> <C>
Fixed Income Fund 5.16%/4.90%
Global Fixed Income Fund 4.99%/4.49%
Intermediate Government Fund 4.86%/4.59%
New York Municipal Fund 3.45%/1.10%
</TABLE>
Tax equivalent yield is calculated over a specified thirty-day
period by dividing that portion of the Fund's yield which is tax-exempt by one
minus a stated income tax rate and adding the product to that portion, if any,
of the yield of the Municipal Fund that is not tax-exempt. The New York
Municipal Fund's tax-equivalent yield for the thirty-day period ending October
31, 1998 was 6.44%.
The performance of a class of a Fund shares will vary from
time to time depending upon market conditions, the composition of the Fund's
portfolio and operating expenses allocable to it. As described above, total
return and yield are based on historical earnings and are not intended to
indicate future performance. Consequently, any given performance quotation
should not be considered as representative of performance for any specified
period in the future. Performance information may be useful as a basis for
comparison with other investment alternatives. However, the Fund's performance
will fluctuate, unlike certain bank deposits or other investments which pay a
fixed yield for a stated period of time. Any fees charged by Institutions or
other institutional investors directly to their customers in connection with
investments in Fund shares are not reflected in the Fund's performance figures
and such fees, if charged, will reduce the actual return received by customers
on their investments.
In addition, reference may be made in advertising a class of
Fund shares to opinions of Wall Street economists and analysts regarding
economic cycles and their effects historically on the performance of small
companies, both as a class and relative to other investments. A Fund may also
discuss its beta, or volatility relative to the market, and make reference to
its relative performance in various market cycles in the United States.
Each Fund may compare its performance with (i) that of other
mutual funds with similar investment objectives and policies, which may be based
on the rankings prepared by Lipper Analytical Services, Inc. or similar
investment services that monitor the performance of mutual funds; (ii) in the
case of the Fixed Income Fund, with the Lehman
83
<PAGE> 96
Intermediate Government/Corporate Bond Index (an unmanaged index of government
and corporate bonds calculated by Lehman Brothers); in the case of the Global
Fixed Income Fund, with the Salomon Brothers World Government Bond Index (a
hedged, market-capitalization weighted index designed to track major government
debt markets), Lehman Brothers Aggregate Index and the Lipper World Income
Average (an average of funds that invest primarily in non-U.S. dollar and U.S.
dollar debt instruments); in the case of the Intermediate Government Fund, with
the Lehman Intermediate Government Bond Index (an unmanaged index of government
bonds calculated by Lehman Brothers); and in the case of the New York Municipal
Fund, with the Lehman 5-Year Municipal Bond Index and the Lipper New York
Intermediate Municipal Debt Funds Average (an unmanaged index of 61 Intermediate
Municipal Debt Funds calculated by Lipper Analytical Services); or (iii) other
appropriate indexes of investment securities or with data developed by CSAM
derived from such indexes. A Fund may also include evaluations of the Fund
published by nationally recognized ranking services and by financial
publications such as Barron's, Business Week, Financial Times, Forbes, Fortune,
Inc., Institutional Investor, Investor's Business Daily, Money, Morningstar,
Mutual Fund Magazine, SmartMoney, The Wall Street Journal and Worth.
Morningstar, Inc. rates funds in broad categories based on risk/reward analyses
over various time periods. In addition, each Fund may from time to time compare
the expense ratio of its Common Shares to that of investment companies with
similar objectives and policies, based on data generated by Lipper Analytical
Services, Inc. or similar investment services that monitor mutual funds.
In reports or other communications to investors or in
advertising, each Fund may also describe the general biography or work
experience of the portfolio managers of the Fund and may include quotations
attributable to the portfolio managers describing approaches taken in managing
the Fund's investments, research methodology underlying stock selection or the
Fund's investment objective. In addition, a Fund and its portfolio managers may
render periodic updates of Fund activity, which may include a discussion of
significant portfolio holdings; analysis of holdings by industry, country,
credit quality and other characteristics; and comparison and analysis of the
Fund with respect to relevant market industry benchmarks. Each Fund may also
discuss measures of risk, the continuum of risk and return relating to different
investments and the potential impact of foreign stocks on a portfolio otherwise
composed of domestic securities.
INDEPENDENT ACCOUNTANTS AND COUNSEL
PricewaterhouseCoopers LLP ("PwC"), with principal offices at
2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as independent
accountants for the Funds. The financial statements for the fiscal year ended
October 31, 1998 that are incorporated by reference in this Statement of
Additional Information have been audited by PwC, whose report thereon appears
elsewhere herein and have been incorporated by reference herein in reliance upon
the report of such firm of independent accountants given upon their authority as
experts in accounting and auditing.
84
<PAGE> 97
Willkie Farr & Gallagher serves as counsel for the Funds and
provides legal services from time to time for CSAM, Counsellors Service and
CSAMSI.
MISCELLANEOUS
The Funds are not sponsored, endorsed, sold or promoted by
Warburg, Pincus & Co. Warburg, Pincus & Co. makes no representation or warranty,
express or implied, to the owners of the Funds or any member of the public
regarding the advisability of investing in securities generally or in the Funds
particularly. Warburg, Pincus & Co. licenses certain trademarks and trade names
of Warburg, Pincus & Co., and is not responsible for and has not participated in
the calculation of the Funds' net asset value, nor is Warburg, Pincus & Co. a
distributor of the Funds. Warburg, Pincus & Co. has no obligation or liability
in connection with the administration, marketing or trading of the Funds.
As of January 29, 1999, the name, address and percentage of
ownership of each person that owns of record 5% or more of each Fund's
outstanding shares were as follows:
<TABLE>
<CAPTION>
FIXED INCOME FUND Common Shares Advisor Shares
- ----------------- ------------- --------------
<S> <C> <C>
Charles Schwab & Co., Inc.* 30.96%
Special Custody Account for the Exclusive Benefit
of Customers
Attn.: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104-4122
IN Trust* 99.95%
c/o Brian Frambes
3435 Stelzer Road, Ste. 1000
Columbus, OH 43219-6004
John L. Vogelstein* 6.00%
466 Lexington Avenue
New York, NY 10017-3140
Salomon Smith Barney Inc. 10.15%
Book Entry Account
Attn.: Matt Maestri
333 West 34 Street
7th Floor Mutual Funds Dept.
New York, NY 10001-2483
</TABLE>
85
<PAGE> 98
<TABLE>
<CAPTION>
GLOBAL FIXED INCOME FUND Common Shares Advisor Shares
- ------------------------ ------------- --------------
<S> <C> <C>
Charles Schwab & Co., Inc.* 34.98%
Special Custody Account for the Exclusive Benefit
of Customers
Attn.: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104-4122
Corelink Financial Inc.* 16.06%
P.O. Box 4054
Concord, CA 94524-4054
Nat'l Financial Svcs. Corp.* 13.25%
FBO Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
Prudential Securities Inc.* 6.69%
For Exclusive Benefit of Customer PC
1 New York Plaza
New York, NY 10004-1902
SBT & CO FBO 8134* 83.58%
PO Box 8469
La Jolla, CA 92038-8469
Salomon Smith Barney Inc.* 17.28%
Book Entry Account
Attn.: Matt Maestri
333 West 34 Street
7th Floor Mutual Funds Dept.
New York, NY 10001-2483
Donaldson Lufkin & Jenrette 6.65%
Securities Corp Pershing Division
Mutual Fund Balancing
1 Pershing Plaza Floor 14
Jersey City, NJ 07399-0001
INTERMEDIATE GOVERNMENT FUND Common Shares Advisor Shares
- ---------------------------- ------------- --------------
Charles Schwab & Co., Inc.* 34.12%
Special Custody Account for the Exclusive Benefit
of Customers
Attn.: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104-4122
</TABLE>
86
<PAGE> 99
<TABLE>
<CAPTION>
<S> <C> <C>
Albert J. Lagerman 99.43%
Gene W. Reisinger TTEES
Family Practice Center PC
401k Trust
307 E. Chestnut Street
Mifflinburg, PA 17844-9678
Nat'l Financial Svcs. Corp.* 7.29%
FBO Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
NEW YORK MUNICIPAL FUND Common Shares
Christopher W. Brody 13.93%
30 East 71st Street
New York, NY 10021-4956
Charles Schwab & Co., Inc.* 8.49%
Special Custody Account for the Exclusive Benefit
of Customers
Attn.: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104-4122
</TABLE>
* The Funds believe that these entities are not the beneficial owner of shares
held of record by them.
FINANCIAL STATEMENTS
Each Fund's audited annual report, dated October 31, 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.
87
<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 Service, Inc. ("Moody's"). Issuers rated Prime-1
(or related supporting institutions) are considered to have a superior capacity
for repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics of issuers rated Prime-1 but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
Corporate Bond Ratings
The following summarizes the ratings used by S&P for corporate
bonds:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA - Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB - This is the lowest investment grade. Debt rated BBB has
an adequate capacity to pay interest and repay principal. Although it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for bonds in this category than for bonds in higher rated
categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is
regarded, on balance, as predominately speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
BB represents a lower degree of speculation than B and C the highest degree of
speculation. While such bonds will likely have
<PAGE> 101
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default
than other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which could
lead to inadequate capacity to meet timely interest and principal payments. The
BB rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B - Debt rated B has a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable
vulnerability to default and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic conditions,
it is not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt rating. The C
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on
which no interest is being paid. Such debt is rated between debt rated C and
debt rated D.
To provide more detailed indications of credit quality, the
ratings from "AA" to "CCC" may be modified by the addition of a plus or minus
sign to show relative standing within this major rating category.
D - Debt rated D is in payment default. The D rating category
is used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The D rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The following summarizes the ratings used by Moody's for
corporate bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest
A-2
<PAGE> 102
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.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers (1, 2 and 3) with respect
to the bonds rated "Aa" through "B". The modifier 1 indicates that the bond
being rated ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates that the bond
ranks in the lower end of its generic rating category.
Caa - Bonds that are rated Caa are of poor standing. These
issues may be in default or present elements of danger may exist with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
A-3
<PAGE> 103
Short-Term Note Ratings
The following summarizes the two highest ratings used by S&P
for short-term notes:
SP-1 - Loans bearing this designation evidence a very strong
or strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics will be given a plus sign
designation.
SP-2 - Loans bearing this designation evidence a satisfactory
capacity to pay principal and interest.
The following summarizes the two highest ratings used by
Moody's for short-term notes and variable rate demand obligations:
MIG-1/VMIG-1 - Obligations bearing these designations are of
the best quality, enjoying strong protection from established cash flows of
funds for their servicing or from established and broad-based access to the
market for refinancing, or both.
MIG-2/VMIG-2 - Obligations bearing these designations are of
high quality with margins of protection ample although not so large as in the
preceding group.
Municipal Obligations Ratings
The following summarizes the ratings used by S&P for Municipal
Obligations:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA - Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB - This is the lowest investment grade. Debt rated BBB has
an adequate capacity to pay interest and repay principal. Although adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is
regarded, on balance, as predominately speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
BB represents a lower degree of speculation than B and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
A-4
<PAGE> 104
BB - Bonds rated BB have less near-term vulnerability to
default than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions, which could lead to inadequate capacity to meet timely interest and
principal payments. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB rating.
B - Bonds rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable
vulnerability to default and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic conditions,
it is not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt rating. The C
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on
which no interest is being paid. Such debt is rated between debt rated C and
debt rated D.
To provide more detailed indications of credit quality, the
ratings from "AA" to "CCC" may be modified by the addition of a plus or minus
sign to show relative standing within this major rating category.
D - Debt rated D is in payment default. The D rating category
is used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The D rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The following summarizes the highest four municipal ratings
used by Moody's:
Aaa - Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
A-5
<PAGE> 105
Aa - Bonds which are rated as are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
NOTE: Those bonds in the AA, A, BAA, BA and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols AA1, A1, BAA1, BA1, and B1.
Caa - Bonds that are rated Caa are of poor standing. These
issues may be in default or present elements of danger may exist with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
A-6
