<PAGE> 1
SUPPLEMENT TO THE PROSPECTUSES
WARBURG PINCUS EMERGING MARKETS FUND
WARBURG PINCUS INSTITUTIONAL FUND -- EMERGING MARKETS PORTFOLIO
WARBURG PINCUS INSTITUTIONAL FUND -- INTERNATIONAL EQUITY PORTFOLIO
WARBURG PINCUS INTERNATIONAL EQUITY FUND
WARBURG PINCUS INTERNATIONAL SMALL COMPANY FUND
WARBURG PINCUS MAJOR FOREIGN MARKETS FUND
WARBURG PINCUS TRUST -- EMERGING MARKETS PORTFOLIO
WARBURG PINCUS TRUST -- INTERNATIONAL EQUITY PORTFOLIO
The following information supersedes certain information in the funds'
Prospectuses.
New Adviser. Effective today, Credit Suisse Asset Management, LLC (CSAM) became
the funds' investment adviser as a result of the closing of the previously
announced acquisition of Warburg Pincus Asset Management, Inc. (Warburg Pincus)
by Credit Suisse Group (Credit Suisse), and the combination of Warburg Pincus
with Credit Suisse's existing U.S. asset management business. Accordingly, all
references in the Prospectuses to Warburg Pincus are now to CSAM.
CSAM in an indirect wholly-owned U.S. subsidiary of Credit Suisse. CSAM,
together with its predecessor firms, has been engaged in the investment advisory
business for over 60 years and has assets under management of approximately
$58.7 billion. CSAM's principal business address is 153 East 53rd Street, New
York, New York 10022.
Change of Name of Distributor. Counsellors Securities Inc., the funds'
distributor, has changed its name to Credit Suisse Asset Management Securities,
Inc. to reflect its ownership by Credit Suisse.
Address Change. The following address replaces the current address provided in
the Prospectus for overnight or courier service: Boston Financial, Attn: Warburg
Pincus Funds, 66 Brooks Drive, Braintree, MA 02184.
Portfolio Manager Changes. The following information replaces certain
information in the funds' Prospectuses:
WARBURG PINCUS EMERGING MARKETS FUND
WARBURG PINCUS INSTITUTIONAL FUND -- EMERGING MARKETS PORTFOLIO
Harold E. Sharon (see biography below) now serves as Co-Portfolio Manager of
these funds along with Vincent J. McBride. Richard H. King no longer serves as a
Co-Portfolio Manager. Morid Kamshad, Jun Sung Kim and Federico D. Laffan
continue to serve as Associate Portfolio Managers of the funds.
WARBURG PINCUS INTERNATIONAL EQUITY FUND
WARBURG PINCUS INSTITUTIONAL FUND -- INTERNATIONAL EQUITY PORTFOLIO
P. Nicholas Edwards (see biography below), Harold W. Ehrlich, Vincent J. McBride
and Harold E. Sharon (see biography below) continue to serve as
<PAGE> 2
Co-Portfolio Managers of these funds. Richard H. King no longer serves as a
Co-Portfolio Manager of the funds.
WARBURG PINCUS INTERNATIONAL SMALL COMPANY FUND
Harold E. Sharon (see biography below), formerly Portfolio Manager, and J.H.
Cullum Clark, formerly Associate Portfolio Manager, now each serve as
Co-Portfolio Manager of this fund.
WARBURG PINCUS MAJOR FOREIGN MARKETS FUND
P. Nicholas Edwards (see biography below) and Harold W. Ehrlich continue to
serve as Co-Portfolio Managers and Vincent J. McBride, Nancy Nierman, J.H.
Cullum Clark and Todd Jacobson continue to serve as Associate Portfolio Managers
of these funds. Richard H. King no longer serves as a Co-Portfolio Manager of
the funds.
WARBURG PINCUS TRUST -- EMERGING MARKETS PORTFOLIO
Harold E. Sharon (see biography below) now serves as Co-Portfolio Manager of
this portfolio along with Vincent J. McBride. Richard H. King no longer serves
as a Co-Portfolio Manager. Jun Sung Kim (see biography below) and Federico D.
Laffan (see biography below) now serve as Associate Portfolio Managers along
with Morid Kamshad.
WARBURG PINCUS TRUST -- INTERNATIONAL EQUITY PORTFOLIO
P. Nicholas Edwards (see biography below) now serves as Co-Portfolio Manager of
this portfolio along with Harold W. Ehrlich, Vincent J. McBride and Harold E.
Sharon. Richard H. King no longer serves as a Co-Portfolio Manager. Nancy
Nierman continues to serve as Associate Portfolio Manager of the portfolio.
CERTAIN MANAGER BIOGRAPHIES
P. Nicholas Edwards joined Warburg Pincus, CSAM's predecessor, in 1995.
Previously, Mr. Edwards was a director at Jardine Fleming Investment Advisors,
Tokyo, from 1984 to 1995.
Harold E. Sharon joined Warburg Pincus, CSAM's predecessor, in March 1998.
Previously, Mr. Sharon was an executive director and portfolio manager with CIBC
Oppenheimer from 1994 to 1998 and a Senior Vice President and portfolio manager
at Warburg Pincus from 1990 to 1994.
Jun Sung Kim joined Warburg Pincus, CSAM's predecessor, in 1997. Previously, Mr.
Kim was an investment manager with Asset Korea Ltd., Seoul, from 1995 to 1997,
an investment analyst with Baring Securities Ltd., Seoul, from 1994 to 1995 and
an assistant investment manager with Koeneman Capital Management, Singapore,
from 1992 to 1994.
Federico D. Laffan joined Warburg Pincus, CSAM's predecessor, in 1997.
Previously, Mr. Laffan was a senior manager and partner with Green Cay Asset
Management from 1996 to 1997 and a senior portfolio manager and director with
Foreign & Colonial Emerging Markets, London, from 1990 to 1996.
Dated: July 6, 1999
<PAGE> 3
STATEMENT OF ADDITIONAL INFORMATION
February 22, 1999
As Revised July 6, 1999
WARBURG PINCUS INSTITUTIONAL FUND, INC.
POST-VENTURE CAPITAL PORTFOLIO
SMALL COMPANY GROWTH PORTFOLIO
SMALL COMPANY VALUE PORTFOLIO
VALUE PORTFOLIO
EMERGING MARKETS PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO
JAPAN GROWTH PORTFOLIO
This Statement of Additional Information provides information about Warburg
Pincus Institutional Fund, Inc. (the "Fund"), relating to the Post-Venture
Capital, Small Company Growth, Small Company Value and Value Portfolios (each a
"U.S. Portfolio" and collectively the "U.S. Portfolios") and relating to the
Emerging Markets, International Equity and Japan Growth Portfolios (each an
"International Portfolio," collectively, the "International Portfolios" and
together with the U.S. Portfolios, the "Portfolios") that supplements
information contained in the Prospectus for the U.S. Portfolios and the
Prospectus for the International Portfolios (collectively, the "Prospectuses"),
each dated February 22, 1999.
The Fund's audited Annual Report dated October 31, 1998, which either
accompanies this Statement of Additional Information or has previously been
provided to the investor to whom this Statement of Additional Information is
being sent, is incorporated herein by reference.
This Statement of Additional Information is not itself a Prospectus and no
investment in shares of the Portfolios should be made solely upon the
information contained herein. Copies of the Fund's Prospectuses, Annual Report
and information regarding each Portfolio's current performance may be obtained
by writing or telephoning:
Warburg Pincus
P.O. Box 9030
Boston, MA 02205-9030
1-800-222-8977
<PAGE> 4
CONTENTS
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INVESTMENT OBJECTIVES AND POLICIES.............................................................................1
Options on Securities and Securities Indices and Futures and Currency Exchange Transactions...............1
Securities Options.....................................................................................1
Securities Index Options...............................................................................4
OTC Options............................................................................................5
Currency Exchange Transactions.........................................................................5
Forward Currency Contracts.............................................................................5
Currency Options.......................................................................................6
Currency Hedging.......................................................................................6
Futures Activities........................................................................................7
Futures Contracts......................................................................................7
Options on Futures Contracts...........................................................................8
Hedging Generally.........................................................................................9
Swaps.................................................................................................10
Asset Coverage for Forward Contracts, Options, Futures and Options on Futures and Swaps..................10
Foreign Investments......................................................................................11
Foreign Currency Exchange.............................................................................11
Information...........................................................................................12
Political Instability.................................................................................12
Foreign Markets.......................................................................................12
Increased Expenses....................................................................................12
Privatizations........................................................................................12
Foreign Debt Securities...............................................................................13
Brady Bonds...........................................................................................13
Depositary Receipts...................................................................................13
Emerging Markets......................................................................................14
Euro Conversion.......................................................................................14
Japan and Its Securities Markets.........................................................................14
Domestic Politics.....................................................................................15
Economic Background...................................................................................15
Securities Markets....................................................................................17
Other Factors.........................................................................................18
U.S. Government Securities...............................................................................19
Money Market Obligations.................................................................................19
Repurchase Agreements.................................................................................19
Money Market Mutual Funds.............................................................................20
Debt Securities..........................................................................................20
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Below Investment Grade Securities.....................................................................21
Structured Securities.................................................................................22
Mortgage-Backed Securities............................................................................22
Asset-Backed Securities...............................................................................23
Structured Notes, Bonds or Debentures.................................................................24
Loan Participations and Assignments...................................................................24
Temporary Defensive Strategies...........................................................................25
Securities of Other Investment Companies.................................................................25
Lending of Portfolio Securities..........................................................................25
When-Issued Securities and Delayed-Delivery Transactions.................................................26
Short Sales..............................................................................................26
Short Sales Against the Box...........................................................................27
Convertible Securities...................................................................................27
Warrants.................................................................................................28
Non-Publicly Traded and Illiquid Securities..............................................................28
Rule 144A Securities..................................................................................29
Emerging Growth and Smaller Capitalization Companies; Unseasoned Issuers.................................29
Special Situation Companies..............................................................................30
Private Funds............................................................................................30
Borrowing................................................................................................32
Reverse Repurchase Agreements and Dollar Rolls...........................................................32
REITs....................................................................................................32
Non-Diversified Status...................................................................................33
Investment Policies of the Emerging Markets Portfolio Only...............................................33
Stand-By Commitments..................................................................................33
General...............................................................................................34
INVESTMENT RESTRICTIONS.......................................................................................34
All Portfolios........................................................................................34
International Equity Portfolio........................................................................35
Small Company Growth, Value and Emerging Markets Portfolios...........................................36
Post-Venture Capital, Small Company Value and Japan Growth Portfolios.................................38
PORTFOLIO VALUATION...........................................................................................40
Private Funds............................................................................................40
PORTFOLIO TRANSACTIONS........................................................................................41
PORTFOLIO TURNOVER............................................................................................43
MANAGEMENT OF THE FUND........................................................................................44
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Officers and Board of Directors..........................................................................44
Portfolio Managers.......................................................................................48
Post-Venture Capital Portfolio........................................................................48
Small Company Growth Portfolio........................................................................48
Small Company Value Portfolio.........................................................................49
Value Portfolio.......................................................................................49
International Equity Growth Portfolio.................................................................49
Emerging Markets Portfolio............................................................................50
Japan Growth Portfolio................................................................................50
Investment Advisers and Co-Administrators................................................................50
Custodians and Transfer Agent............................................................................54
Distribution and Shareholder Servicing...................................................................54
Organization of the Fund.................................................................................55
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................................................55
EXCHANGE PRIVILEGE............................................................................................56
ADDITIONAL INFORMATION CONCERNING TAXES.......................................................................56
The Portfolios and Their Investments.....................................................................56
Passive Foreign Investment Companies.....................................................................59
Dividends and Distributions..............................................................................59
Sales of Shares..........................................................................................60
Foreign Taxes............................................................................................61
Backup Withholding.......................................................................................61
Notices..................................................................................................62
Other Taxation...........................................................................................62
DETERMINATION OF PERFORMANCE..................................................................................62
INDEPENDENT ACCOUNTANTS AND COUNSEL...........................................................................66
MISCELLANEOUS.................................................................................................66
FINANCIAL STATEMENTS..........................................................................................68
Appendix -- Description of Ratings...........................................................................A-1
</TABLE>
iii
<PAGE> 7
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the descriptions of each
Portfolio's investment objective and policies in the Prospectuses. There are no
assurances that the Portfolios will achieve their investment objectives.
The investment objective of the Small Company Value and International
Equity Portfolios is long-term capital appreciation.
The investment objective of the Small Company Growth and Emerging
Markets Portfolios is capital growth.
The investment objective of each of the Post-Venture Capital and Japan
Growth Portfolios is long-term growth of capital.
The investment objective of the Value Portfolio is total return.
Unless otherwise indicated, all of the Portfolios are permitted, but
not obligated, to engage in the following investment strategies, subject to any
percentage limitations set forth below.
The Portfolios are not obligated to pursue any of the following
strategies and do not represent that these techniques are available now or will
be available at any time in the future.
Options on Securities and Securities Indices and Currency Exchange
Transactions.
Each Portfolio 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 Portfolio'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 Portfolio may write covered put and call
options on stock and debt securities and each Portfolio may purchase such
options that are traded on foreign and U.S. exchanges, as well as OTC options.
A Portfolio realizes fees (referred to as "premiums") for granting the rights
evidenced by the options it has written. A put option embodies the right of its
purchaser to compel the writer of the option to purchase from the option holder
an underlying security at a specified price for a specified time period or at a
specified time. In contrast, a call option embodies the right of its purchaser
to compel the writer of the option to sell to the option holder an underlying
security at a specified price for a specified time period or at a specified
time.
The potential loss associated with purchasing an option is limited to
the premium paid, and the premium would partially offset any gains achieved
from its use. However, for an option writer the exposure to adverse price
movements in the underlying security or index is potentially unlimited during
the exercise period. Writing securities options
<PAGE> 8
may result in substantial losses to a Portfolio, force the sale or purchase of
portfolio securities at inopportune times or at less advantageous prices, limit
the amount of appreciation the Portfolio could realize on its investments or
require the Portfolio 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 Portfolio
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
Portfolio that writes call options retains the risk of an increase in the price
of the underlying security. The size of the premiums that the Portfolio 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 Portfolio that are deemed covered
by virtue of the Portfolio'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
Portfolio has written options may exceed the time within which the Portfolio
must make delivery in accordance with an exercise notice. In these instances,
the Portfolio may purchase or temporarily borrow the underlying securities for
purposes of physical delivery. By so doing, the Portfolio will not bear any
market risk, since the Portfolio 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 Portfolio 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 Portfolio may write covered call options. For example, if a Portfolio
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
Portfolio will compensate for the decline in the value of the cover by
purchasing an appropriate additional amount of mortgage-backed securities.
Options written by a Portfolio 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. The Portfolios (other than the Emerging
Markets Portfolio) may write (i) in-the-money call options when Credit Suisse
Asset Management, LLC, the Portfolios' investment adviser ("CSAM"), expects
that the price of the underlying security will remain flat or decline
moderately during the option period,
2
<PAGE> 9
(ii) at-the-money call options when CSAM expects that the price of the
underlying security will remain flat or advance moderately during the option
period and (iii) out-of-the-money call options when CSAM expects that the
premiums received from writing the call option plus the appreciation in market
price of the underlying security up to the exercise price will be greater than
the appreciation in the price of the underlying security alone. In any of the
preceding situations, if the market price of the underlying security declines
and the security is sold at this lower price, the amount of any realized loss
will be offset wholly or in part by the premium received. Out-of-the-money,
at-the-money and in-the-money put options (the reverse of call options as to
the relation of exercise price to market price) may be used in the same market
environments that such call options are used in equivalent transactions. To
secure its obligation to deliver the underlying security when it writes a call
option, a Portfolio 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 the Portfolio
prior to the exercise of options that it has purchased or written,
respectively, of options of the same series) in which the Portfolio 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 the Portfolio has
purchased an option and engages in a closing sale transaction, whether the
Portfolio 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
Portfolio initially paid for the original option plus the related transaction
costs. Similarly, in cases where the Portfolio 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 Portfolio 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 the
broker-dealer through which the option was sold, requiring the Portfolio to
deliver the underlying security against payment of the exercise price. This
obligation terminates when the option expires or the Portfolio effects a
closing purchase transaction. A Portfolio 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
3
<PAGE> 10
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 Portfolio'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 Portfolio. The Portfolio, 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, the
Portfolio 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
Fund or a Portfolio 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 Portfolio will be able to purchase on a particular security.
Securities Index Options. Each Portfolio may purchase (in the case of
each of the Post-Venture Capital, the Small Company Growth, the Small Company
Value and the Value Portfolios, with respect to up to 10% of its total assets)
and each Portfolio (other than the Emerging Markets Portfolio) may write
exchange-listed and OTC put and call options on securities indexes. A
securities index measures the movement of a certain group of securities by
assigning relative values to the securities included in the index, fluctuating
with changes in the market values of the securities included in the index. Some
securities index options are based on a broad market index, such as the NYSE
Composite Index, or a narrower market index such as the Standard & Poor's 100.
Indexes may also be based on a particular industry or market segment.
Options on securities indexes are similar to options on securities
except that (i) the expiration cycles of securities index options are monthly,
while those of securities options are currently quarterly, and (ii) the
delivery requirements are different. Instead of giving the right to take or
make delivery of securities at a specified price, an option on a securities
index gives the holder the right to receive a cash "exercise settlement amount"
equal to (a) the amount, if any, by which the fixed exercise price of the
option exceeds (in the case 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
4
<PAGE> 11
index options may be offset by entering into closing transactions as described
above for securities options.
OTC Options. The Portfolios may purchase OTC or dealer options or
sell covered OTC options. Unlike exchange-listed options where an intermediary
or clearing corporation, such as the Clearing Corporation, assures that all
transactions in such options are properly executed, the responsibility for
performing all transactions with respect to OTC options rests solely with the
writer and the holder of those options. A listed call option writer, for
example, is obligated to deliver the underlying securities to the clearing
organization if the option is exercised, and the clearing organization is then
obligated to pay the writer the exercise price of the option. If a Portfolio
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 the Portfolio, the
Portfolio 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, the Portfolio 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
Portfolio 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 Portfolio originally wrote the option.
Although the Portfolios 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 Portfolios, there can be no assurance that the
Portfolio 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 Portfolio. Until the Portfolio, 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 Portfolio'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. The value in U.S. dollars of the
assets of a Portfolio that are invested in foreign securities may be affected
favorably or unfavorably by changes in a variety of factors not applicable to
investment in U.S. securities, and the Portfolio 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. Each Portfolio will conduct its currency exchange transactions (i)
on a spot (i.e., cash) basis at the rate prevailing in the currency exchange
market, (ii) through entering into futures contracts or options on such
contracts (as described above), (iii) through entering into forward contracts
to purchase or sell currency or (iv) by purchasing exchange-traded currency
options.
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
5
<PAGE> 12
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, the Portfolio 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 the Portfolio retains the portfolio security and
engages in an offsetting transaction, the Portfolio, at the time of execution
of the offsetting transaction, will incur a gain or a loss to the extent that
movement has occurred in forward contract prices.
Currency Options. The Portfolios 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. The Portfolios' 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 a Portfolio generally accruing in
connection with the purchase or sale of its portfolio securities. Position
hedging is the sale of forward currency with respect to portfolio security
positions. A Portfolio may not position hedge to an extent greater than the
aggregate market value (at the time of entering into the hedge) of the hedged
securities.
A decline in the U.S. dollar value of a foreign currency in which the
Portfolio'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
Portfolio may purchase foreign currency put options. If the value of the
foreign currency does decline, the Portfolio will have the right to sell the
currency for a fixed amount in dollars and will thereby offset, in whole or in
part, the adverse effect on the U.S. dollar value of its securities that
otherwise would have resulted. Conversely, if a rise in the U.S. dollar value
of a currency in which securities to be acquired are denominated is projected,
thereby potentially increasing the cost of the securities, the Portfolio 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 Portfolio 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 Portfolio may not be able to contract to sell a
currency at a price above the devaluation level it anticipates.
6
<PAGE> 13
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 the Portfolio's investments and a currency hedge may not be entirely
successful in mitigating changes in the value of the Portfolio'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
Portfolio against a price decline if the issuer's creditworthiness
deteriorates.
Futures Activities. Each Portfolio 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 Portfolios 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 Portfolio's policies. There is no overall limit on the
percentage of Portfolio assets that may be at risk with respect to futures
activities.
Futures Contracts. A foreign currency futures contract provides for
the future sale by one party and the purchase by the other party of a certain
amount of a specified non-U.S. currency at a specified price, date, time and
place. An interest rate futures contract provides for the future sale by one
party and the purchase by the other party of a certain amount of a specific
interest rate sensitive financial instrument (debt security) at a specified
price, date, time and place. Securities indexes are capitalization weighted
indexes which reflect the market value of the securities represented in the
indexes. A securities index futures contract is an agreement to be settled by
delivery of an amount of cash equal to a specified multiplier times the
difference between the value of the index at the close of the last trading day
on the contract and the price at which the agreement is made.
No consideration is paid or received by a Portfolio upon entering into
a futures contract. Instead, the Portfolio 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 Portfolio upon termination of the futures contract, assuming all
contractual obligations have been satisfied. The broker will have access to
amounts in the margin account if the Portfolio fails
7
<PAGE> 14
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 Portfolios will also
incur brokerage costs in connection with entering into futures transactions.
At any time prior to the expiration of a futures contract, a Portfolio
may elect to close the position by taking an opposite position, which will
operate to terminate the Portfolio'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 Portfolios may enter into futures contracts only if there is an
active market for such ays with little or no trading, thereby preventing prompt
liquidation of futures positions at an advantageous price and subjecting a
Portfolio to substantial losses. In such event, and in the event of adverse
price movements, the Portfolio would be required to make daily cash payments of
variation margin. In such situations, if the Portfolio 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
Portfolio 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 Portfolio's
performance.
Options on Futures Contracts. Each Portfolio may purchase and write
put and call options on foreign currency, interest rate and stock index futures
contracts and may enter into closing transactions with respect to such options
to terminate existing positions. There is no guarantee that such closing
transactions can be effected; the ability to establish and close out positions
on such options will be subject to the existence of a liquid market.
An option on a currency, interest rate or securities index futures
contract, as contrasted with the direct investment in such a contract, gives
the purchaser the right, in return for the premium paid, to assume a position
in a futures contract at a specified exercise price at any time prior to the
expiration date of the option. The writer of the option is required upon
exercise to assume an offsetting futures position (a short position if the
option is a call and a long position if the option is a put). Upon exercise of
an option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is 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
8
<PAGE> 15
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 the
Portfolio.
Hedging Generally. In addition to entering into options and futures
transactions for other purposes, including generating current income to offset
expenses or increase return, each Portfolio 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 the Portfolio, an increase in the value of the
futures contracts could only mitigate, but not totally offset, the decline in
the value of the Portfolio's assets.
In hedging transactions based on an index, whether a Portfolio 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
Portfolio'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 Portfolio'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 the Portfolio's net investment
results if market movements are not as anticipated when the hedge is
established. Securities index futures transactions may be subject to additional
correlation risks. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which would distort the 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 Portfolio will engage in hedging transactions only when deemed
advisable by CSAM, and successful use by the Portfolio 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
9
<PAGE> 16
or trends. Losses incurred in hedging transactions and the costs of these
transactions will affect the Portfolio's performance.
Swaps (Emerging Markets, International Equity and Japan Growth
Portfolios). The Emerging Markets, International Equity and Japan Growth
Portfolios may each enter into swaps relating to indexes, interest rates,
currencies and equity and debt interests of foreign issuers. A swap transaction
is an agreement between a Portfolio and a counterparty to act in accordance
with the terms of the swap contract. Index swaps involve the exchange by the
Portfolio with another party of the respective amounts payable with respect to
a notional principal amount related to one or more indexes. Interest rate swaps
involve the exchange by the Portfolios with another party of their respective
commitments to pay or receive interest, such as an exchange of fixed rate
payments for floating rate payments. Currency swaps involve the exchange of
cash flows on a notional amount of two or more currencies based on their
relative future values. An equity or debt swap is an agreement to exchange
streams of payments computed by reference to a notional amount based on the
performance of a securities index, a basket of securities or a single security.
A Portfolio may enter into these transactions for hedging purposes, such as to
preserve a return or spread on a particular investment or portion of its
assets, to protect against currency fluctuations, as a duration management
technique or to protect against any increase in the price of securities the
Portfolio anticipates purchasing at a later date. The Portfolios may also use
these transactions for speculative purposes to increase total return, such as
to obtain the price performance of a security without actually purchasing the
security in circumstances where, for example, the subject security is illiquid,
is unavailable for direct investment or available only on less attractive
terms. Swaps have risks associated with them, including possible default by the
counterparty to the transaction, illiquidity and, where swaps are used as
hedges, the risk that the use of a swap could result in losses greater than if
the swap had not been employed.
A Portfolio will usually enter into swaps on a net basis, i.e., the
two payment streams are netted out in a cash settlement on the payment date or
dates specified in the agreement, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. Swaps do not involve
the delivery of securities, other underlying assets or principal. Accordingly,
the risk of loss with respect to swaps is limited to the net amount of payments
that the Portfolio is contractually obligated to make. If the counterparty to a
swap defaults, the Portfolio's risk of loss consists of the net amount of
payments that the Portfolio is contractually entitled to receive. Where swaps
are entered into for good faith hedging purposes, CSAM believes such
obligations do not constitute senior securities under the Investment Company
Act of 1940, as amended (the "1940 Act"), and, accordingly, will not treat them
as being subject to a Portfolio's borrowing restrictions. Where swaps are
entered into for other than hedging purposes, a Portfolio will segregate an
amount of cash or liquid securities having a value equal to the accrued excess
of its obligations over its entitlements with respect to each swap on a daily
basis.
Asset Coverage for Forward Contracts, Options, Futures and Options on
Futures and Swaps. Each Portfolio 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 Portfolio on
currencies, securities and indexes; currency, interest rate and index futures
contracts and options on these futures contracts and, in the case of the
Emerging Markets, International Equity and Japan Growth Portfolios, swaps.
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<PAGE> 17
These guidelines may, in certain instances, require segregation by the
Portfolio of cash or liquid securities with its custodian or a designated
sub-custodian to the extent the Portfolio'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 Portfolio's
assets could impede portfolio management or the Portfolio's ability to meet
redemption requests or other current obligations.
For example, a call option written by the Portfolio on securities may
require the Portfolio 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 Portfolio on
an index may require the Portfolio 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 Portfolio may require the Portfolio to segregate assets (as
described above) equal to the exercise price. The Portfolio 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 Portfolio. If the Portfolio holds a
futures or forward contract, the Portfolio 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 Portfolio 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.
Foreign Investments. Each of the International Portfolios will
invest, under normal market conditions, at least 65% of its total assets in
securities of issuers located outside the United States. The U.S. Portfolios
may invest, up to 20% of its total assets in the case of the Post-Venture
Capital and Value Portfolios and up to 10% of its total assets in the case of
the Small Company Growth and Small Company Value Portfolios, in securities of
issuers located outside the United States. Investors should recognize that
investing in foreign companies involves certain risks, including those
discussed below, which are in addition to those associated with investing in
U.S. issuers. Individual foreign economies may differ favorably or unfavorably
from the U.S. economy in such respects as growth of gross national product,
rate of inflation, capital reinvestment, resource self-sufficiency and balance
of payments positions. A Portfolio may invest in securities of foreign
governments (or agencies or instrumentalities thereof), and many, if not all,
of the foregoing considerations apply to such investments as well.
Foreign Currency Exchange. Since the International Portfolios will,
and the U.S. Portfolios may, be investing in securities denominated in
currencies other than the U.S. dollar, and since a Portfolio may temporarily
hold funds in bank deposits or other money market investments denominated in
foreign currencies, each Portfolio 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
a Portfolio's assets denominated in that foreign currency. Changes in foreign
currency exchange rates may also
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<PAGE> 18
affect the value of dividends and interest earned, gains and losses realized on
the sale of securities and net investment income and gains, if any, to be
distributed to shareholders by a Portfolio with respect to its foreign
investments. Unless otherwise contracted, the rate of exchange between the U.S.
dollar and other currencies is determined by the forces of supply and demand in
the foreign exchange markets. Changes in the exchange rate may result over time
from the interaction of many factors directly or indirectly affecting economic
and political conditions in the 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 Portfolio 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.
Information. The majority of the foreign securities held by a
Portfolio will not be registered with, nor the issuers thereof be subject to
reporting requirements of, the SEC. Accordingly, there may be less publicly
available information about the securities and about the foreign company or
government issuing them than is available about a domestic company or
government entity. Foreign companies are generally subject to financial
reporting standards, practices and requirements that are either not uniform or
less rigorous than those applicable to U.S. companies.
Political Instability. With respect to some foreign countries, there
is the possibility of expropriation or confiscatory taxation, limitations on
the removal of funds or other assets of the Portfolio, 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 are more volatile than securities of comparable U.S.
companies. Certain foreign countries are known to experience long delays
between the trade and settlement dates of securities purchased or sold, which
may result in increased exposure to market and foreign exchange fluctuations
and increased illiquidity.
Increased Expenses. The operating expenses of the International
Portfolios (and, to the extent they invest in foreign securities, the U.S.
Portfolios) can be expected to be higher than that of an investment company
investing exclusively in U.S. securities, since the expenses of the Portfolios
associated with foreign investing, such as custodial costs, valuation costs and
communication costs, as well as, in the case of the International Portfolios,
the rate of the investment advisory fees, though similar to such expenses of
some other funds investing internationally, are higher than those costs
incurred by other investment companies.
Privatizations . Each Portfolio 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 Portfolios,
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. The
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International Equity and Emerging Markets Portfolios could invest to a
significant extent in privatizations.
Foreign Debt Securities. The returns on foreign debt securities
reflect interest rates and other market conditions prevailing in those
countries and the effect of gains and losses in the denominated currencies
against the U.S. dollar, which have had a substantial impact on investment in
foreign fixed income securities. The relative performance of various countries'
fixed income markets historically has reflected wide variations relating to the
unique characteristics of each country's economy. Year-to-year fluctuations in
certain markets have been significant, and negative returns have been
experienced in various markets from time to time.
The foreign debt securities in which a Portfolio 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 debt 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-government agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt securities
of quasi-governmental agencies are issued by entities owned by either a
national, state or equivalent government or are obligations of a political unit
that is not backed by the national government's full faith and credit and
general taxing powers. An example of a multinational currency unit is the
European Currency Unit ("ECU"). An ECU represents specified amounts of the
currencies of certain member states of the European Economic Community. The
specific amounts of currencies comprising the ECU may be adjusted by the
Council of Ministers of the European Community to reflect changes in relative
values of the underlying currencies.
Brady Bonds. The Portfolio 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. The
International Equity and Emerging Markets Portfolios could invest to a
significant extent in Brady Bonds.
Depositary Receipts. Certain of the above risks may be involved with
ADRs, European Depositary Receipts ("EDRs") and International Depositary
Receipts ("IDRs"), instruments that evidence ownership of underlying securities
issued by a foreign corporation.
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ADRs, EDRs and IDRs may not necessarily be denominated in the same currency as
the securities whose ownership they represent. ADRs are typically issued by a
U.S. bank or trust company. EDRs (sometimes referred to as Continental
Depositary Receipts) are issued in Europe and IDRs (sometimes referred to as
Global Depositary Receipts) are issued outside the United States, each
typically by non-U.S. banks and trust companies. The risks associated with
investing in securities of non-U.S. issuers are generally heightened for
investments in securities of issuers in emerging markets.
Emerging Markets. Each Portfolio may, and the Emerging Markets
Portfolio will, invest in securities of issuers located in less developed
countries considered to be "emerging markets." Investing in securities of
issuers located in emerging markets involves not only the risks described above
with respect to investing in foreign securities, but also other risks,
including exposure to economic structures that are generally less diverse and
mature than, and to political systems that can be expected to have less
stability than, those of developed countries. For example, many investments in
emerging markets experienced significant declines in value due to political and
currency volatility in emerging markets countries during the latter part of
1997. Other characteristics of emerging markets that may affect investment
there include certain national policies that may restrict investment by
foreigners in issuers or industries deemed sensitive to relevant national
interests and the absence of developed legal structures governing private and
foreign investments and private property. The typically small size of the
markets for securities of issuers located in emerging markets and the
possibility of a low or nonexistent volume of trading in those securities may
also result in a lack of liquidity and in price volatility of those securities.
Euro Conversion. The introduction of a single European currency, the
euro, on January 1, 1999 for participating European nations in the Economic
Monetary Union presents unique risks and uncertainties for investors in those
countries, including (i) the functioning of the payment and operational systems
of banks and other financial institutions; (ii) the creation of suitable
clearing and settlement payment schemes for the euro; (iii) the fluctuation of
the euro relative to non-euro currencies during the transition period from
January 1, 1999 to December 31, 2000 and beyond; and (iv) whether the interest
rate, tax and labor regimes of the European countries participating in the euro
will converge over time. Further, the conversion of the currencies of other
Economic Monetary Union countries, such as the United Kingdom, and the
admission of other countries, including Central and Eastern European countries,
to the Economic and Monetary Union could adversely affect the euro. These or
other factors may cause market disruptions and could adversely affect the value
of foreign securities and currencies held by the Portfolios.
Japan and Its Securities Markets
The Japan Growth Portfolio (as well as the other International
Portfolios, each of which may invest a significant portion of its assets in
Japanese securities), will be subject to general economic and political
conditions in Japan. In addition to the considerations discussed above, these
include future political and economic developments, the possible imposition of,
or changes in, exchange controls or other Japanese governmental laws or
restrictions applicable to such investments, diplomatic developments, political
or social unrest and natural disasters.
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THE INFORMATION SET FORTH IN THIS SECTION HAS BEEN EXTRACTED FROM
VARIOUS GOVERNMENTAL PUBLICATIONS AND OTHER SOURCES. THE FUND MAKES NO
REPRESENTATION AS TO THE ACCURACY OF THE INFORMATION, NOR HAS THE FUND
ATTEMPTED TO VERIFY IT. FURTHERMORE, NO REPRESENTATION IS MADE THAT ANY
CORRELATION EXISTS BETWEEN JAPAN OR ITS ECONOMY IN GENERAL AND THE PERFORMANCE
OF ANY PORTFOLIO.
Domestic Politics
Japan has a parliamentary form of government. The legislative power
is vested in the Japanese Diet, which consists of a House of Representatives
(lower house) and a House of Councillors (upper house). Various political
parties are represented in the Diet, including the conservative Liberal
Democratic Party ("LDP"), which until August 1993, had been in power nationally
since its formation in 1955. The LDP ceased to have a majority of the lower
house in June 1993, when certain members of the lower house left the LDP and
formed two new political parties. After several years of political unrest, the
LDP elected Ryutaro Hashimoto in August 1995, the minister for international
trade and industry, as its new leader, and in January 1996, he became prime
minister. Mr. Hashimoto dissolved the Diet and called a general election in
October 1996, in which the LDP won 239 of the 500 lower-house seats. As a
result, LDP members filled all the new cabinet seats for the first time in
three years. The LDP, along with its former coalition partners (the Social
Democratic Party and Shinto Sakigake) agreed to continue to work together, but
only in loose alliance. Meanwhile, many dissatisfied Diet members from the main
opposition party have left the party to join the LDP. By September 1997, enough
Diet members from the main opposition party and other parties had defected to
the LDP for the LDP to regain its simple majority in the lower house. In August
of 1998, Keizo Obuchi, foreign minister under Hashimoto, was elected to the
office of prime minister. Japan's continuing political instability may hamper
its ability to establish and maintain effective economic and fiscal policies,
and recent and future political developments may lead to changes in policy that
might adversely affect a Portfolio's investments.
Economic Background
Generally. Since the end of World War II, Japan has experienced
significant economic development. Since the mid-1980's, Japan has become a
major creditor nation. With the exception of the periods associated with the
oil crises of the 1970's, Japan has generally experienced very low levels of
inflation. There is no guarantee, however, that these favorable trends will
continue.
The Japanese government has called for a transformation of the economy
away from its high dependency on export-led growth towards greater stimulation
of the domestic economy. In addition, there has been a move toward more
economic liberalization and discounting in the consumer sector. These shifts
have already begun to take place and may cause disruption in the Japanese
economy.
Strains in the system have also been one of the major causes of
Japan's economic weakness. The non-performing loans of financial institutions
have hampered their ability to take on risk, thus obstructing the flow of funds
into capital outlays as well as equities. The large commercial banks are having
to bear a heavy burden of the bad-debt problem (e.g., in accepting write-offs
of loans they have extended to distressed smaller
15
<PAGE> 22
institutions, in recapitalizing failed institutions and in stepping up
contributions to the Deposit Insurance Corporation, an organization jointly
established in 1971 by the government and private financial institutions to
protect depositors). While the banking system appears to be making some
progress in its attempt to deal with non-performing assets, it is extremely
difficult to gauge the true extent of the bad-debt problem which could lead to
a crisis in the banking system.
Japan's economy is a market economy in which industry and commerce are
predominantly privately owned and operated. However, the Japanese government
is involved in establishing and meeting objectives for developing the economy
and improving the standard of living of the Japanese people.
Japan is largely dependent upon foreign economies for raw materials.
For instance, almost all of its oil is imported, the majority from the Middle
East. In the past, oil prices have had a major impact on the domestic economy,
but more recently Japan has worked to reduce its dependence on oil by
encouraging energy conservation and use of alternative fuels. In addition, a
restructuring of industry, with emphasis shifting from basic industries to
processing and assembly-type industries, has contributed to the reduction of
oil consumption. However, there is no guarantee this favorable trend will
continue.
Economic Trends. The following tables set forth Japan's gross
domestic product and certain other economic indicators for the years shown.
GROSS DOMESTIC PRODUCT (GDP)
(yen in billions)
<TABLE>
<CAPTION>
1998* 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consumption Expenditures
Private............... Yen303,050 Yen308,472 Yen299,440 Yen290,515 Yen286,154
Government............ 50,083 50,239 48,969 47,555 45,743
Gross Fixed
Capital Formation..... 133,044 143,217 148,190 136,792 137,291
Increase (Decrease) in
Stocks................ 914 828 1,058 947 50
Exports of Goods and
Services................. 56,355 55,979 49,598 45,393 44,410
Imports of Goods and
Services................. 46,753 51,331 46,900 38,272 34,387
GDP (Expenditures)....... 499,191 507,403 500,356 482,930 479,260
Change in GDP from
Preceding Year........... (1.6)% 1.4% 3.6% 0.8% 0.8%
<CAPTION>
1993 1992 1991 1990
---- ---- ---- ----
Consumption Expenditures
<S> <C> <C> <C> <C>
Private............... Yen278,703 Yen272,294 Yen261,891 Yen249,288
Government............ 44,771 43,262 41,356 38,807
Gross Fixed
Capital Formation..... 140,433 143,525 143,998 136,467
Increase (Decrease) in
Stocks................ 620 1,489 3,453 2,430
Exports of Goods and
Services................. 44,197 47,384 46,723 45,920
Imports of Goods and
Services................. 33,343 36,891 39,121 42,872
GDP (Expenditures)....... 475,381 471,064 458,299 430,040
Change in GDP from
Preceding Year........... 0.9% 2.8% 6.6% --
</TABLE>
Source: International Monetary Fund, International Financial Statistics
- ------------------
* Average of the first and second quarters of 1998.
<TABLE>
<CAPTION>
WHOLESALE PRICE INDEX CONSUMER PRICE INDEX
(Base Year: 1990) (Base Year: 1990)
All Change from Change from
Year Commodities Preceding Year General Preceding Year
---- ----------- -------------- ------- --------------
<S> <C> <C> <C> <C>
1990 100.0 -- 100.0 --
1991 100.2 0.2 103.3 3.3
</TABLE>
16
<PAGE> 23
<TABLE>
<CAPTION>
WHOLESALE PRICE INDEX CONSUMER PRICE INDEX
(Base Year: 1990) (Base Year: 1990)
All Change from Change from
Year Commodities Preceding Year General Preceding Year
---- ----------- -------------- ------- --------------
<S> <C> <C> <C> <C>
1992 98.7 (1.5) 105.1 1.8
1993 95.0 (3.7) 106.4 1.3
1994 93.0 (2.0) 107.1 0.7
1995 92.2 (0.8) 107.0 (0.1)
1996 92.3 0.6 107.2 0.2
1997 93.7 1.7 109.0 1.8
1998 91.7* (2.0) 109.6** 0.6
</TABLE>
<TABLE>
<S> <C>
Source: International Monetary Fund, Source: International Monetary Fund,
International Financial Statistics International Financial Statistics
</TABLE>
- ------------------
* Average of the first eleven months of 1998.
** Average of the first ten months of 1998.
Currency Fluctuation. Investments by a Portfolio in Japanese
securities will be denominated in yen and most income received by the Portfolio
from such investments will be in yen. However, the Portfolio's net asset value
will be reported, and distributions will be made, in U.S. dollars. Therefore,
a decline in the value of the yen relative to the U.S. dollar could have an
adverse effect on the value of the Portfolio's Japanese investments. The
following table presents the average exchange rates of Japanese yen for U.S.
dollars for the years shown:
AVERAGE CURRENCY EXCHANGE RATES
<TABLE>
<CAPTION>
Year Yen Per U.S. Dollar
---- -------------------
<S> <C>
1990 144.79
1991 134.71
1992 126.65
1993 111.20
1994 102.21
1995 94.06
1996 108.78
1997 120.99
1998 139.11*
</TABLE>
Source: International Monetary Fund, International Financial Statistics
* Average of the first eleven months of 1998.
Securities Markets
The Exchange Market. The Japanese exchange market is a highly
systematized, government regulated market currently consisting of eight stock
exchanges. The three main Japanese Exchanges (Tokyo, Osaka and Nagoya) are
comprised of First and Second Sections. The First Sections have more stringent
listing standards with respect to a company's number of years in existence,
number of outstanding shares and trading volume and, accordingly, list larger,
more established companies than the Second Sections. The Tokyo Stock Exchange
("TSE") is the largest exchange and, as of December 31, 1998, the First Section
of the TSE
17
<PAGE> 24
listed 1,340 companies with market capitalization of approximately 267.8
trillion yen (approximately $2.3 trillion as of such date). The Second Sections
of the main Japanese Exchanges generally list smaller, less capitalized
companies than those traded on the First Sections. As of December 31, 1998, the
Second Section of the TSE listed 498 companies with market capitalization of
approximately 7.4 trillion yen (approximately $64.0 billion as of such date).
The OTC Market. The Japanese OTC market ("JASDAQ") is less
systematized than the stock exchanges. Trading of equity securities through
the JASDAQ market is conducted by securities firms in Japan, primarily through
an organization which acts as a "matching agent," as opposed to a recognized
stock exchange. Consequently, securities traded through JASDAQ may, from time
to time, and especially in falling markets, become illiquid and experience
short-term price volatility and wide spreads between bid and offer prices. This
combination of limited liquidity and price volatility may have an adverse
effect on the investment performance of a Portfolio. In periods of rapid price
increases, the limited liquidity of JASDAQ restricts a Portfolio's ability to
adjust its portfolio quickly in order to take full advantage of a significant
market increase, and conversely, during periods of rapid price declines, it
restricts the ability of a Portfolio to dispose of securities quickly in order
to realize gains previously made or to limit losses on securities held in its
portfolio. In addition, although JASDAQ has generally experienced sustained
growth in aggregate market capitalization and trading volume, there have been
periods in which aggregate market capitalization and trading volume have
declined.
As of December 31, 1998, 868 issues were traded through JASDAQ, having
an aggregate market capitalization in excess of 7.7 trillion yen (approximately
$67.8 billion as of such date). The entry requirements for JASDAQ were amended
on December 1, 1998. As of February 22, 1999, there was no English translation
of the amendments available. JASDAQ has generally attracted small growth
companies or companies whose major shareholders wish to sell only a small
portion of the company's equity.
Market Risks. Although the market for Japanese equities traded on the
First Section of the TSE is substantial in terms of trading volume and
liquidity, the TSE has nonetheless exhibited significant market volatility in
the past several years. With respect to the OTC market, trades of certain
stocks may not be effected on days when the matching of buy and sell orders for
such stocks does not occur. The liquidity of the Japanese OTC market, as well
as that of the Second Sections of the exchanges, although increasing in recent
years, is limited by the small number of publicly held shares which trade on a
regular basis. Overall, Japanese securities markets have declined significantly
since 1989 which has contributed to a weakness in the Japanese economy and the
impact of a further decline cannot be ascertained.
Other Factors
The islands of Japan lie in the western Pacific Ocean, off the eastern
coast of the continent of Asia. Japan has in the past experienced earthquakes
and tidal waves of varying degrees of severity, and the risks of such
phenomena, and the damage resulting therefrom, continue to exist. The long-term
economic effects of such geological factors on the Japanese economy as a whole,
and on the Portfolio's investments, cannot be predicted. In addition, Japan has
one of the world's highest population densities. A significant percentage
18
<PAGE> 25
of the total population of Japan is concentrated in the metropolitan areas of
Tokyo, Yokohama, Osaka and Nagoya.
U.S. Government Securities. The obligations issued or guaranteed by
the U.S. government in which a Portfolio may invest include: direct obligations
of the U.S. Treasury and obligations issued by U.S. government agencies and
instrumentalities. Included among direct obligations of the United States are
Treasury Bills, Treasury Notes and Treasury Bonds, which differ in terms of
their interest rates, maturities and dates of issuance. Treasury Bills have
maturities of less than one year, Treasury Notes have maturities of one to 10
years and Treasury Bonds generally have maturities of greater than 10 years at
the date of issuance. Included among the obligations issued by agencies and
instrumentalities of the United States are: instruments that are supported by
the full faith and credit of the United States (such as certificates issued by
the Government National Mortgage Association ("GNMA")); instruments that are
supported by the right of the issuer to borrow from the U.S. Treasury (such as
securities of Federal Home Loan Banks); and instruments that are supported by
the credit of the instrumentality (such as Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC")
bonds).
Other U.S. government securities the Portfolios may invest in include
securities issued or guaranteed by the Federal Housing Administration, Farmers
Home Loan Administration, Export-Import Bank of the United States, Small
Business Administration, General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Intermediate Credit Banks,
Federal Land Banks, Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board and Student Loan Marketing Association.
Because the U.S. government is not obligated by law to provide support to an
instrumentality it sponsors, a Portfolio 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 Portfolio.
Money Market Obligations. Each Portfolio is authorized to invest,
under normal market conditions (up to 20% of its assets in the case of each
U.S. Portfolio) in domestic and foreign short-term (one year or less remaining
to maturity) money market obligations. Money market instruments consist of
obligations issued or guaranteed by the U.S. government or a foreign
government, their agencies or instrumentalities; bank obligations (including
certificates of deposit, time deposits and bankers' acceptances of domestic or
foreign, domestic savings and loans and similar institutions) that are high
quality investments; commercial paper rated no lower than A-2 by Standard &
Poor's Ratings Services ("S&P") or Prime-2 by Moody's Investors Service, Inc.
("Moody's") or the equivalent from another major rating service or, if unrated,
of an issuer having an outstanding, unsecured debt issue then rated within the
three highest rating categories; and repurchase agreements with respect to the
foregoing.
Repurchase Agreements. Each Portfolio may invest in repurchase
agreement transactions with member banks of the Federal Reserve System and
certain non-bank dealers. Repurchase agreements are contracts under which the
buyer of a security simultaneously commits to resell the security to the seller
at an agreed-upon price and date. Under the terms of a typical repurchase
agreement, a Portfolio would acquire any underlying security for a relatively
short period (usually not more than one week) subject to an obligation of the
seller to
19
<PAGE> 26
repurchase, and the Portfolio to resell, the obligation at an agreed-upon price
and time, thereby determining the yield during the Portfolio's holding period.
This arrangement results in a fixed rate of return that is not subject to
market fluctuations during the Portfolio'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 Portfolio 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 Portfolio 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 Portfolio seeks to assert this right. CSAM, acting under
the supervision of each Portfolio's Board, monitors the creditworthiness of
those bank and non-bank dealers with which the Portfolio enters into repurchase
agreements to evaluate this risk. A repurchase agreement is considered to be a
loan under the 1940 Act.
Money Market Mutual Funds. Where CSAM believes that it would be
beneficial to a Portfolio and appropriate considering the factors of return and
liquidity, a Portfolio may invest up to 5% of its assets in securities of money
market mutual funds that are unaffiliated with the Portfolio or CSAM. A money
market mutual fund is an investment company that invests in short-term high
quality money market instruments. A money market mutual fund generally does not
purchase securities with a remaining maturity of more than one year. As a
shareholder in any mutual fund, a Portfolio will bear its ratable share of the
mutual fund's expenses, including management fees, and will remain subject to
payment of the Portfolio's management fees and other expenses with respect to
assets so invested.
Debt Securities. Each International Portfolio may invest up to 35%
of its total assets, and each U.S. Portfolio may invest up to 20% of its total
assets, in debt securities. Any percentage limitation on a Portfolio's ability
to invest in debt securities will not be applicable during periods when the
Portfolio pursues a temporary defensive strategy as discussed below.
The interest income to be derived may be considered as one factor in
selecting debt securities for investment by CSAM. Because the market value of
debt obligations can be expected to vary inversely to changes in prevailing
interest rates, investing in debt obligations may provide an opportunity for
capital growth when interest rates are expected to decline. The success of such
a strategy is dependent upon CSAM's ability to forecast accurately changes in
interest rates. The market value of debt obligations may also be expected to
vary depending upon, among other factors, the ability of the issuer to repay
principal and interest, any change in investment rating and general economic
conditions.
Each Portfolio may invest to a limited extent in zero coupon
securities. See "Additional Information Concerning Taxes" for a discussion of
the tax consequences to shareholders of a Portfolio that invests in zero coupon
securities.
A security will be deemed to be investment grade if it is rated within
the four highest grades by Moody's or S&P or, if unrated, is determined to be
of comparable quality by CSAM. Securities rated in the fourth highest grade may
have speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. Subsequent to
its purchase by a Portfolio, an issue of securities may cease to be rated
20
<PAGE> 27
or its rating may be reduced below the minimum required for purchase by the
Portfolio. Neither event will require sale of such securities, although CSAM
will consider such event in its determination of whether the Portfolio should
continue to hold the securities.
Below Investment Grade Securities. The Emerging Markets Portfolio may
invest or hold up to 35% of its net assets in drated below investment grade.
Within their 20% limitation on investing in debt securities, each of the Value
Portfolio and the Small Company Value Portfolio may invest up to 10% of its
total assets in debt securities rated below investment grade. Within their
respective percentage limitation on investing in debt securities, each of the
Small Company Growth, Post-Venture Capital, International Equity and Japan
Growth Portfolios may invest up to 5% of its total assets in debt securities
rated below investment grade. A Portfolio's investments in convertible debt or
equity securities rated below investment grade will be included in determining
these percentage limitations.
Below investment grade debt securities may be rated as low as C by
Moody's or D by S&P, or be deemed by CSAM 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. A security rated D by S&P is in default or is expected to
default upon maturity or payment date. Below investment grade securities
(commonly referred to as "junk bonds"), (i) will likely have some quality and
protective characteristics that, in the judgment of the rating organizations,
are outweighed by large uncertainties or major risk exposures to adverse
conditions and (ii) are 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 investment grade 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. While the market values of below investment grade 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, below
investment grade securities generally present a higher degree of credit risk.
Issuers of below investment grade securities are often highly leveraged and may
not have more traditional methods of financing available to them so that their
ability to service their obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. The risk of loss
due to default by such issuers is significantly greater because below
investment grade securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness.
An economic recession could disrupt severely the market for such
securities and may adversely affect the value of such securities and the
ability of the issuers of such securities to repay principal and pay interest
thereon.
A Portfolio 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
Portfolios anticipate that these securities could be sold only to a limited
number of dealers or institutional investors. To the extent a secondary trading
market
21
<PAGE> 28
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 a Portfolio's
ability to dispose of particular issues when necessary to meet the Portfolio's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities also may make it more difficult for a
Portfolio to obtain accurate market quotations for purposes of valuing the
Portfolio and calculating its net asset value.
The market value of below investment grade securities is more volatile
than that of investment grade securities. Factors adversely impacting the
market value of these securities will adversely impact the Portfolio's net
asset value. The Portfolio 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, below investment grade securities are not intended for short-term
investment. A Portfolio may incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal or
interest on its portfolio holdings of such securities. At times, adverse
publicity regarding lower-rated securities has depressed the prices for such
securities to some extent.
Structured Securities. Each Portfolio 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. Each Portfolio may invest in
mortgage-backed securities issued by U.S. government entities, such the
Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC"). In addition, the Japan Growth Portfolio may invest in
mortgage-backed securities sponsored by U.S. and foreign issuers as well as
non-governmental 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 Portfolio's shares. These securities generally are
"pass-through" instruments, through which the holders receive a share of all
interest and principal payments from the mortgages underlying the securities,
net of certain fees.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. The occurrence of mortgage prepayments is affected by various
factors, including the level of interest rates, general economic
22
<PAGE> 29
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. 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 Portfolio's yield. In addition, collateralized mortgage
obligations may be less marketable than other securities.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificate holders and to any guarantor, such as GNMA, and
due to any yield retained by the issuer. Actual yield to the holder may vary
from the coupon rate, even if adjustable, if the mortgage-backed securities are
purchased or traded in the secondary market at a premium or discount. In
addition, there is normally some delay between the time the issuer receives
mortgage payments from the servicer and the time the issuer makes the payments
on the mortgage-backed securities, and this delay reduces the effective yield
to the holder of such securities.
Asset-Backed Securities. Each Portfolio 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 Portfolio may invest. Automobile receivables
generally are secured by automobiles. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations.
If the servicer were to sell these obligations to another party, there is a
risk that the purchaser would acquire an interest superior to that of the
holders of the asset-backed securities. In addition, because of the large
number of vehicles involved in a typical issuance and technical requirements
under state laws, the trustee for the holders of the automobile receivables may
not have a proper security interest in the underlying automobiles. Therefore,
there is the possibility that recoveries on repossessed collateral may not, in
some cases, be available to support payments on these securities. Credit card
receivables are generally unsecured, and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. In addition, there
23
<PAGE> 30
is no assurance that the security interest in the collateral can be realized.
The Emerging Markets and Japan Growth Portfolios may purchase asset-backed
securities that are unrated.
Structured Notes, Bonds or Debentures. Typically, the value of the
principal and/or interest on these instruments is determined by reference to
changes in the value of specific currencies, interest rates, commodities,
indexes or other financial indicators (the "Reference") or the relevant change
in two or more References. The interest rate or the principal amount payable
upon maturity or redemption may be increased or decreased depending upon
changes in the applicable Reference. The terms of the structured securities may
provide that in certain circumstances no principal is due at maturity and,
therefore, may result in the loss of a Portfolio's entire investment. The value
of structured securities may move in the same or the opposite direction as the
value of the Reference, so that appreciation of the Reference may produce an
increase or decrease in the interest rate or value of the security at maturity.
In addition, the change in interest rate or the value of the security at
maturity may be a multiple of the change in the value of the Reference so that
the security may be more or less volatile than the Reference, depending on the
multiple. Consequently, structured securities may entail a greater degree of
market risk and volatility than other types of debt obligations.
Loan Participations and Assignments. Each Portfolio 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 Portfolio'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 Portfolio having a contractual
relationship only with the Lender, not with the Borrower. The Portfolio 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 Portfolio 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
Portfolio may not directly benefit from any collateral supporting the Loan in
which it has purchased the Participation. As a result, the Portfolio 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 Portfolio 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
Portfolio will acquire Participations only if the Lender interpositioned
between the Portfolio and the Borrower is determined by CSAM to be
creditworthy.
When the Portfolio purchases Assignments from Lenders, the Portfolio
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 Portfolio 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. The Portfolio 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
24
<PAGE> 31
such securities and on the Portfolio's ability to dispose of particular
Participations or Assignments when necessary to meet the Portfolio'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 the
Portfolio to assign a value to these securities for purposes of valuing the
Portfolio's portfolio and calculating its net asset value.
Temporary Defensive Strategies. When CSAM believes that a defensive
posture is warranted, each Portfolio may invest temporarily without limit in
investment grade debt obligations and in domestic and foreign money market
obligations, including repurchase agreements.
Securities of Other Investment Companies. Each Portfolio may invest
in securities of other investment companies to the extent permitted under the
1940 Act. Presently, under the 1940 Act, a Portfolio 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 Portfolio's total assets and (iii) when added to all other investment
company securities held by the Portfolio, do not exceed 10% of the value of the
Portfolio's total assets.
Lending of Portfolio Securities. A Portfolio may lend portfolio
securities to brokers, dealers and other financial organizations that meet
capital and other credit requirements or other criteria established by the
Fund's Board of Directors (the "Board"). These loans, if and when made, may not
exceed 33-1/3% of a Portfolio's net assets (including the loan collateral)
taken at value. A Portfolio will not lend portfolio securities to its
investment adviser, any sub-investment adviser or their affiliates unless it
has applied for and received specific authority to do so from the SEC. Loans of
portfolio securities will be collateralized by cash, letters of credit or U.S.
Government 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 Portfolio involved. From time
to time, a Portfolio 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 Portfolio and that is acting as a
"finder."
By lending its securities, the Portfolio 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. Each Portfolio
will adhere to the following conditions whenever its portfolio securities are
loaned: (i) the Portfolio 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
Portfolio must be able to terminate the loan at any time; (iv) the Portfolio
must receive reasonable interest on the loan, as well as any dividends,
interest or other distributions on the loaned securities and any increase in
market value; (v) the Portfolio 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
25
<PAGE> 32
adversely affecting the investment occurs, the Board must terminate the loan
and regain the right to vote the securities. Loan agreements involve certain
risks in the event of default or insolvency of the other party including
possible delays or restrictions upon the Portfolio's ability to recover the
loaned securities or dispose of the collateral for the loan.
When-Issued Securities and Delayed-Delivery Transactions. Each
Portfolio may utilize up to 20% of its total assets to purchon a when-issued
basis and purchase or sell securities on a delayed-delivery basis. In these
transactions, payment for and delivery of the securities occurs beyond the
regular settlement dates. A Portfolio will not enter into a when-issued or
delayed-delivery transaction for the purpose of leverage, but may sell the
right to acquire a when-issued security prior to its acquisition or dispose of
its right to deliver or receive securities in a delayed-delivery transaction if
CSAM deems it advantageous to do so. The payment obligation and the interest
rate that will be received in when-issued and delayed-delivery transactions 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 prices of such securities may be higher or lower than the prices
available in the market on the dates when the investments are actually
delivered to the buyers. Each Portfolio will segregate with its custodian cash
or liquid securities in an amount equal to its when-issued and delayed-delivery
purchase commitments and will segregate the securities underlying commitments
to sell securities for delayed delivery. When a Portfolio agrees to purchase
when-issued or delayed-delivery securities, its custodian will set aside cash
or liquid securities equal to the amount of the commitment. Normally, the
custodian will set aside portfolio securities to satisfy a purchase commitment,
and in such a case a Portfolio may be required subsequently to segregate
additional assets in order to ensure that the value of the segregated assets
remains equal to the amount of the Portfolio's commitment. It may be expected
that a Portfolio'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 Portfolio 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 Portfolio incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
Short Sales (Post-Venture Capital Portfolio). The Post-Venture
Capital Portfolio may engage in "short sales" that do not meet the definition
of short sales "against the box" with respect to up to 10% of its total assets.
In a short sale, the investor 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. To deliver the securities to the buyer,
the Portfolio must arrange through a broker to borrow the securities and, in so
doing, the Portfolio becomes obligated to replace the securities borrowed at
their market price at the time of replacement, whatever that price may be. The
Portfolio will make a profit or incur a loss as a result of a short sale
depending on whether the price of the security decreases or increases between
the date of the short sale and the date on which the Portfolio purchases the
security to replace the borrowed securities that have been sold. The amount of
any loss would be increased (and any gain decreased) by any premium or interest
the Portfolio is required to pay in connection with a short sale.
The Portfolio's obligation to replace the securities borrowed in
connection with a short sale will be secured by cash or liquid securities
deposited as collateral with the broker.
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In addition, the Portfolio will segregate with its custodian or a qualified
subcustodian an amount of cash or liquid securities equal to the difference, if
any, between (i) the market value of the securities sold at the time they were
sold short and (ii) any cash or liquid securities deposited as collateral with
the broker in connection with the short sale (not including the proceeds of the
short sale). Until it replaces the borrowed securities, the Portfolio will
maintain the segregated assets daily at a level so that (a) the amount
segregated plus the amount deposited with the broker (not including the
proceeds from the short sale) will equal the current market value of the
securities sold short and (b) the amount segregated plus the amount deposited
with the broker (not including the proceeds of the short sale) will not be less
than the market value of the securities at the time they were sold short.
Short Sales Against the Box. Each Portfolio may enter into short
sales "against the box." Not more than 10% of a Portfolio's net assets (taken
at current value) may be held as collateral for such sales at any one time,
except that the Emerging Markets Portfolio will not be subject to such
limitation. While a short sale is made by selling a security a Portfolio does
not own, a short sale is "against the box" to the extent that the Portfolio
contemporaneously owns or has the right to obtain, at no added cost, securities
identical to those sold short. A Portfolio will segregate with its custodian or
a qualified subcustodian, the securities sold short or convertible or
exchangeable preferred stocks or debt securities in connection with short sales
against the box. No Portfolio, other than the Small Company Value Portfolio,
intends to engage in short sales against the box for investment purposes. A
Portfolio may 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 Portfolio (or a security convertible or exchangeable for such security). In
such case, any future losses in the Portfolio'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 Portfolio owns. There will be certain
additional transaction costs associated with short sales against the box, but
the Portfolio will endeavor to offset these costs with the income from the
investment of the cash proceeds of short sales.
If a Portfolio 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 Portfolio 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 Portfolio
may effect short sales.
Convertible Securities. Convertible securities in which a Portfolio
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. Like bonds, the value of convertible securities fluctuates in
relation to changes in interest rates and, in addition, also fluctuates in
relation to the underlying common stock.
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Warrants. Each Portfolio may invest up to 10% of its net assets in
warrants. Warrants are securities that give the holder the right, but not the
obligation to purchase equity issues of the company issuing the warrants, or a
related company, at a fixed price either on a date certain or during a set
period. A Portfolio may invest in warrants to purchase equity securities
consisting of common and preferred stock. The equity security underlying a
warrant is authorized at the time the warrant is issued or is issued together
with the warrant.
Investing in warrants can provide a greater potential for profit or
loss than an equivalent investment in the underlying security, and, thus, can
be a speculative investment. At the time of issue, the cost of a warrant is
substantially less than the cost of the underlying security itself, and price
movements in the underlying security are generally magnified in the price
movements of the warrant. This leveraging effect enables the investor to gain
exposure to the underlying security with a relatively low capital investment.
This leveraging increases an investor's risk, however, in the event of a
decline in the value of the underlying security and can result in a complete
loss of the amount invested in the warrant. In addition, the price of a warrant
tends to be more volatile than, and may not correlate exactly to, the price of
the underlying security. If the market price of the underlying security is
below the exercise price of the warrant on its expiration date, the warrant
will generally expire without value. The value of a warrant may decline because
of a decline in the value of the underlying security, the passage of time,
changes in interest rates or in the dividend or other policies of the company
whose equity underlies the warrant or a change in the perception as to the
future price of the underlying security, or any combination thereof. Warrants
generally pay no dividends and confer no voting or other rights other than to
purchase the underlying security.
Non-Publicly Traded and Illiquid Securities. Each Portfolio (other
than the Post-Venture Capital, Value and Emerging Markets Portfolios) may not
invest more than 10% of its net assets in 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,
certain Rule 144A Securities (as defined below), time deposits maturing in more
than seven days and, with respect to the Post-Venture Capital Portfolio,
Private Funds (as defined below). The Post-Venture Capital, Value and Emerging
Markets Portfolios may invest up to 15% of its net assets in such securities.
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 without borrowing. A mutual
fund might also have to register such restricted
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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.
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 Portfolio's limit on the purchase of illiquid securities
unless the Board or its delegates determines that the Rule 144A Securities are
liquid. CSAM will monitor the liquidity of restricted securities in a Portfolio
under the supervision of the Board. 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 Portfolios to the extent that qualified
institutional buyers are unavailable or uninterested in purchasing such
securities from the Portfolios. The Board may adopt guidelines and delegate to
CSAM the daily function of determining and monitoring the liquidity of Rule
144A Securities, although the Board will retain ultimate responsibility for
liquidity determinations.
Emerging Growth and Smaller Capitalization Companies; Unseasoned
Issuers. Each Portfolio may invest in small- and medium- sized and emerging
growth companies and, except for the International Equity Portfolio, companies
with continuous operations of less than three years ("unseasoned issuers"),
which may include foreign securities, involve considerations that are not
applicable to investing in securities of established, larger-capitalization
issuers, including reduced and less reliable information about issuers and
markets, less stringent financial disclosure requirements, illiquidity of
securities and markets, higher brokerage commissions and fees and greater
market risk in general. In addition,
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securities of these companies may involve greater risks since these securities
may have limited marketability and, thus, may be more volatile.
Although investing in securities of small- and medium-sized and
emerging growth companies, unseasoned issuers or issuers in "special
situations" (see below) 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 Portfolio may involve a greater degree of risk
than an investment in other mutual funds that seek growth of capital or capital
appreciation by investing in better-known, larger companies.
Special Situation Companies". "Special situation companies" are
involved in an actual or prospective acquisition or consolidation;
reorganization; recapitalization; merger, liquidation or distribution of cash,
securities or other assets; a tender or exchange offer; a breakup or workout of
a holding company; or litigation which, if resolved favorably, may provide an
attractive investment opportunity. If the actual or prospective situation does
not materialize as anticipated, the market price of the securities of a
"special situation company" may decline significantly.
Private Funds (Post-Venture Capital Portfolio). Up to 10% of the
Portfolio's assets may be invested in United States or foreign private limited
partnerships or other investment funds ("Private Funds") that themselves invest
in equity or debt securities of (a) companies in the venture capital or
post-venture capital stages of development or (b) companies engaged in special
situations or changes in corporate control, including buyouts. In selecting
Private Funds for investment, Abbott Capital Management, LLC, the Portfolio's
sub-investment adviser with respect to Private Funds ("Abbott"), attempts to
invest in a mix of Private Funds that will provide an above average internal
rate of return (i.e., the discount rate at which the present value of an
investment's future cash inflows (dividend income and capital gains) are equal
to the cost of the investment). CSAM believes that the Portfolio's investments
in Private Funds offer individual investors a unique opportunity to participate
in venture capital and other private investment funds, providing access to
investment opportunities typically available only to large institutions and
accredited investors. Although investments in Private Funds offer the
opportunity for significant capital gains, these investments involve a high
degree of business and financial risk that can result in substantial losses in
the portion of the Post-Venture Capital Portfolio's assets invested in these
investments. Among these are the risks associated with investment in companies
in an early stage of development or with little or no operating history,
companies operating at a loss or with substantial variation in operation
results from period to period, companies with the need for substantial
additional capital to support expansion or to maintain a competitive position,
or companies with significant financial leverage. Such companies may also face
intense competition from others including those with greater financial
resources or more extensive development, manufacturing, distribution or other
attributes, over which the Portfolio will have no control.
Interests in the Private Funds in which the Post-Venture Capital
Portfolio may invest will be subject to substantial restrictions on transfer
and, in some instances, may be non-transferable for a period of years. Private
Funds may participate in only a limited number of investments and, as a
consequence, the return of a particular Private Fund may be substantially
adversely affected by the unfavorable performance of even a single investment.
Certain of the
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Private Funds in which the Portfolio may invest may pay their investment
managers a fee based on the performance of the Portfolio, which may create an
incentive for the manager to make investments that are riskier or more
speculative than would be the case if the manager was paid a fixed fee. Private
Funds are not registered under the 1940 Act and, consequently, are not subject
to the restrictions on affiliated transactions and other protections applicable
to regulated investment companies. The valuation of companies held by Private
Funds, the securities of which are generally unlisted and illiquid, may be very
difficult and will often depend on the subjective valuation of the managers of
the Private Funds, which may prove to be inaccurate. Inaccurate valuations of a
Private Fund's portfolio holdings may affect the Portfolio's net asset value
calculations. Private Funds in which the Portfolio invests will not borrow to
increase the amount of assets available for investment or otherwise engage in
leverage. Debt securities held by a Private Fund will tend to be rated below
investment grade and may be rated as low as C by Moody's or D by S&P.
Securities in these rating categories are in payment default or have extremely
poor prospects of attaining any investment standing. The Portfolio may also
hold non-publicly traded equity securities of companies in the venture and
post-venture stages of development, such as those of closely held companies or
private placements of public companies. The portion of the Portfolio's assets
invested in these non-publicly traded securities will vary over time depending
on investment opportunities and other factors. The Portfolio's illiquid assets,
including interests in Private Funds and other illiquid non-publicly traded
securities, may not exceed 15% of the Portfolio's net assets.
CSAM believes that venture capital participation in a company's
capital structure can lead to revenue/earnings growth rates above those of
older, public companies such as those in the Dow Jones Industrial Average, the
Fortune 500 or the Morgan Stanley Capital International Europe, Australasia,
Far East ("EAFE") Index. Venture capitalists finance start-up companies,
companies in the early stages of developing new products or services and
companies undergoing a restructuring or recapitalization, since these companies
may not have access to conventional forms of financing (such as bank loans or
public issuances of stock). Venture capitalists may hold substantial positions
in companies that may have been acquired at prices significantly below the
initial public offering price. This may create a potential adverse impact in
the short-term on the market price of a company's stock due to sales in the
open market by a venture capitalist or others who acquired the stock at lower
prices prior to the company's IPO. CSAM will consider the impact of such sales
in selecting post-venture capital investments. Venture capitalists may be
individuals or funds organized by venture capitalists which are typically
offered only to large institutions, such as pension funds and endowments, and
certain accredited investors. Outside of the United States, venture capitalists
may also consist of merchant banks and other banking institutions that provide
venture capital financing in a manner similar to U.S. venture capitalists.
Venture capital participation in a company is often reduced when the company
engages in an IPO of its securities or when it is involved in a merger, tender
offer or acquisition.
CSAM has experience in researching small companies, companies in the
early stages of development and venture capital-financed companies. Its team of
analysts, led by Elizabeth Dater, regularly monitors portfolio companies whose
securities are held by over 400 of the larger domestic venture capital funds.
Ms. Dater has managed post-venture equity securities in separate accounts for
institutions since 1989 and currently manage over $1 billion of such assets for
investment companies and other institutions.
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Borrowing. Each Portfolio 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
Portfolio's net assets. Although the principal of such borrowings will be
fixed, the Portfolio's assets may change in value during the time the borrowing
is outstanding. Each Portfolio expects that some of its borrowings may be made
on a secured basis. In such situations, either the custodian will segregate the
pledged assets for the benefit of the lender or arrangements will be made with
a suitable subcustodian, which may include the lender.
Reverse Repurchase Agreements and Dollar Rolls. Each of the
Portfolios 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 the Portfolio pursuant to its
agreement to repurchase them at a mutually agreed upon date, price and rate of
interest. At the time the Portfolio enters into a reverse repurchase agreement,
it will segregate with an approved custodian cash or liquid 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). The Portfolio's liquidity and ability to manage its assets
might be affected when it sets aside cash or portfolio securities to cover such
commitments. Reverse repurchase agreements involve the risk that the market
value of the securities retained in lieu of sale may decline below the price of
the securities the Portfolio 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 the Portfolio's
obligation to repurchase the securities, and the Portfolio's use of the
proceeds of the reverse repurchase agreement may effectively be restricted
pending such decision.
The Portfolios also may enter into "dollar rolls," in which the
Portfolio sells fixed-income securities for delivery in the current month and
simultaneously contracts to repurchase similar but not identical (same type,
coupon and maturity) securities on a specified future date. During the roll
period, the Portfolio would forego principal and interest paid on such
securities. The Portfolio 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
the Portfolio 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 their value is maintained. Reverse repurchase
agreements and dollar rolls that are accounted for as financings are considered
to be borrowings under the 1940 Act.
REITs. Each Portfolio 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 Fund, REITs are not taxed on income
distributed to shareholders provided they comply with several requirements of
the Internal Revenue Code of 1986, amended (the "Code"). By investing in a
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REIT, the Portfolio will indirectly bear its proportionate share of any
expenses paid by the REIT in addition to the expenses of the Portfolio.
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.
Non-Diversified Status (Small Company Growth, Emerging Markets and
Japan Growth Portfolios). These Portfolios are classified as non-diversified
within the meaning of the 1940 Act, which means that each Portfolio is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. As a non-diversified portfolio, each Portfolio
may invest a greater proportion of its assets in the obligations of a smaller
number of issuers and, as a result, may be subject to greater risk with respect
to portfolio securities. Each Portfolio's investments will be limited, however,
in order to qualify as a "regulated investment company" for purposes of the
Code. To qualify, the Portfolio 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 Portfolio will not own more than 10% of the outstanding voting securities
of a single issuer.
Investment Policies of the Emerging Markets Portfolio Only
Stand-By Commitments (Emerging Markets Portfolio). The Emerging
Markets Portfolio 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 Portfolio's option specified securities at a specified price. The
Portfolio's right to exercise stand-by commitments is unconditional and
unqualified. Stand-by commitments acquired by the Portfolio may also be
referred to as "put" options. A stand-by commitment is not transferable by the
Portfolio, although the Portfolio can sell the underlying securities to a third
party at any time.
The principal risk of stand-by commitments is that the writer of a
commitment may default on its obligation to repurchase the securities acquired
with it. When investing in stand-by commitments, the Portfolio 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 amount payable to the Portfolio upon its exercise of a stand-by
commitment is normally (i) the Portfolio's acquisition cost of the securities
(excluding any accrued interest which the Portfolio paid on their acquisition),
less any amortized market premium or plus any
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amortized market or original issue discount during the period the Portfolio
owned the securities, plus (ii) all interest accrued on the securities since
the last interest payment date during that period.
The Portfolio expects that stand-by commitments will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the Portfolio 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 Portfolio's
portfolio will not exceed 1/2 of 1% of the value of the Portfolio's total
assets calculated immediately after each stand-by commitment is acquired.
The Portfolio 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 Portfolio would be valued at zero in determining
net asset value. Where the Portfolio 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
Portfolio. Stand-by commitments would not affect the average weighted maturity
of the Portfolio's portfolio.
General. The Portfolio may invest in securities of companies of any
size, whether traded on or off a national securities exchange. Portfolio
holdings may include emerging growth companies, which are small- or
medium-sized companies that have passed their start-up phase and that show
positive earnings and prospects for achieving profit and gain in a relatively
short period of time.
In appropriate circumstances, such as when a direct investment by the
Portfolio in the securities of a particular country cannot be made or when the
securities of an investment company are more liquid than the underlying
portfolio securities, the Portfolio may, consistent with the provisions of the
1940 Act, invest in the securities of closed-end investment companies that
invest in foreign securities. As a shareholder in a closed-end investment
company, the Portfolio will bear its ratable share of the investment company's
expenses, including management fees, and will remain subject to payment of the
Portfolio's administration fees and other expenses with respect to assets so
invested.
INVESTMENT RESTRICTIONS
All Portfolios. Certain investment limitations may not be changed
without the affirmative vote of the holders of a majority of the relevant
Portfolio's outstanding shares ("Fundamental Restrictions"). Such majority is
defined as the lesser of (i) 67% or more of the shares present at the meeting,
if the holders of more than 50% of the outstanding shares of the Portfolio are
present or represented by proxy, or (ii) more than 50% of the outstanding
shares. If a percentage restriction (other than the percentage limitations set
forth in each No. 1 below) is adhered to at the time of an investment, a later
increase or decrease in the percentage of
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assets resulting from a change in the values of portfolio securities or in the
amount of the Portfolio's assets will not constitute a violation of such
restriction.
International Equity Portfolio. The following investment limitations
numbered 1 through 12 are Fundamental Restrictions. Investment limitations 13
through 14 may be changed by a vote of the Board at any time.
The International Equity Portfolio may not:
1. Borrow money or issue senior securities except that the Portfolio
may (a) borrow from banks for temporary or emergency purposes, and not for
leveraging, and then in amounts not in excess of 30% of the value of the
Portfolio's total assets at the time of such borrowing and (b) enter into
futures contracts; or mortgage, pledge or hypothecate any assets except in
connection with any bank borrowing and in amounts not in excess of the lesser
of the dollar amounts borrowed. Whenever borrowings described in (a) exceed 5%
of the value of the Portfolio's total assets, the Portfolio will not make any
investments (including roll-overs). For purposes of this restriction, (a) the
deposit of assets in escrow in connection with certain of the Portfolio's
investment strategies and (b) collateral arrangements with respect to initial
or variation margin for futures contracts will not be deemed to be pledges of
the Portfolio's assets.
2. Purchase any securities which would cause 25% or more of the value
of the Portfolio'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 Portfolio may purchase or hold publicly
distributed fixed income securities, lend portfolio securities and enter into
repurchase agreements.
4. Underwrite any issue of securities except to the extent that the
investment in restricted securities and the purchase of fixed income securities
directly from the issuer thereof in accordance with the Portfolio's investment
objective, policies and limitations may be deemed to be underwriting.
5. Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or invest in real estate
limited partnerships, oil, gas or mineral exploration or development programs
or oil, gas and mineral leases, except that the Portfolio may invest in (a)
securities secured by real estate, mortgages or interests therein, (b)
securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs and (c) futures contracts and related
options and commodity options. The entry into forward foreign currency exchange
contracts is not and shall not be deemed to involve investing in commodities.
6. Make short sales of securities or maintain a short position, except
that a Portfolio may maintain short positions in forward currency contracts,
options and futures contracts and make short sales "against the box."
35
<PAGE> 42
7. Purchase, write or sell puts, calls, straddles, spreads or
combinations thereof, except that the Portfolio may (a) purchase put and call
options on securities and foreign currencies, (b) write covered call options on
securities and (c) purchase or write options on futures contracts.
8. 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.
9. Purchase securities on margin, except that the Portfolio may obtain
any short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of initial
or variation margin in connection with futures contracts or related options
will not be deemed to be a purchase of securities on margin.
10. Purchase the securities of any issuer if as a result more than 5%
of the value of the Portfolio'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
Portfolio's total assets may be invested without regard to this 5% limitation.
11. Purchase any security if as a result the Portfolio would then
have more than 5% of its total assets invested in securities of companies
(including predecessors) that have been in continuous operation for fewer than
three years.
12. 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.
13. Invest more than 10% of the value of the Portfolio'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 and (b) time deposits maturing in more
than seven calendar days shall be considered illiquid securities.
14. Invest in oil, gas or mineral leases.
Small Company Growth, Value and Emerging Markets Portfolios. The
following investment limitations numbered 1 through 9 are Fundamental
Restrictions. Investment limitations 10 through 13 may be changed by a vote of
the Board at any time.
Each of the Small Company Growth, Value and Emerging Markets
Portfolios may not:
1. Borrow money except that the Portfolios 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 Portfolios may not exceed 30% of the value of the
Portfolios' total assets at the time of such borrowing. For purposes of this
restriction, short sales, the entry into currency transactions, options,
futures contracts, options
36
<PAGE> 43
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 Portfolios' 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 Portfolios 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 Portfolios' investment objective, policies and
limitations may be deemed to be underwriting.
5. Purchase or sell real estate or invest in oil, gas or
mineral exploration or development programs, except that the Portfolios may
invest in (a) securities secured by real estate, mortgages or interests therein
and (b) securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
6. Make short sales of securities or maintain a short
position, except that the Portfolios may maintain short positions in forward
currency contracts, options, futures contracts and options on futures contracts
and make short sales "against the box".
7. Purchase securities on margin, except that the Portfolios
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 Portfolios 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 on a forward commitment
or delayed-delivery basis and, with respect to the Emerging Markets Portfolio,
enter into stand-by commitments.
9. Issue any senior security except as permitted in the
Portfolios' investment limitations.
10. Purchase securities of other investment companies except
in connection with a merger, consolidation, acquisition, reorganization or
offer of exchange, or as otherwise permitted under the 1940 Act.
11. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to
the deposit of assets in escrow and in connection with the purchase of
securities on a forward commitment or delayed-delivery basis and collateral and
initial or variation margin arrangements with respect to
37
<PAGE> 44
currency transactions, options, futures contracts, and options on futures
contracts and, with respect to the Small Company Growth Portfolio and Value
Portfolio, writing covered put and call options.
12. Invest more than 15% of each of the Value Portfolio's and
the Emerging Markets Portfolio's net assets and 10% of the Small Company Growth
Portfolio'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
Portfolios' borrowings exceed 5% of its net assets.
Post-Venture Capital, Small Company Value and Japan Growth Portfolios.
The following investment limitations numbered 1 through 10 are Fundamental
Restrictions. Investment limitations 11 through 15 may be changed by a vote of
the Board at any time.
Each of the Post-Venture Capital, Small Company Value and Japan Growth
Portfolios may not:
1. Borrow money except that the Portfolios 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 Portfolios may not exceed 30% of the value of the
Portfolios' total assets at the time of such borrowing. For purposes of this
restriction, short sales, the entry into currency transactions, options,
futures contracts, options on futures contracts, forward commitment
transactions and dollar roll transactions that are not accounted for as
financings (and the segregation of assets in connection with any of the
foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of
the value of the Portfolios' 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 Portfolios 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 Portfolios' investment objective, policies and
limitations may be deemed to be underwriting.
5. Purchase or sell real estate or invest in oil, gas or
mineral exploration or development programs, except that the Portfolios 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.
38
<PAGE> 45
6. With respect to the Small Company Value and Japan Growth
Portfolios only, make short sales of securities or maintain a short position,
except that each Portfolio may maintain short positions in forward currency
contracts, options, futures contracts and options on futures contracts and make
short sales "against the box."
7. Purchase securities on margin, except that the Portfolios
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 Portfolios 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 on a forward commitment
or delayed-delivery basis.
9. Issue any senior security except as permitted in the
Portfolios' investment limitations.
10. With respect to the Post-Venture Capital and Small Company
Value Portfolios only, purchase the securities of any issuer if as a result
more than 5% of the value of the Portfolio'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
Portfolio's total assets may be invested without regard to this 5% limitation.
11. 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.
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 and in connection with the purchase of
securities on a forward commitment or delayed-delivery basis and collateral and
initial or variation margin arrangements with respect to currency transactions,
options, futures contracts, and options on futures contracts.
13. Invest more than 15% of each Portfolio'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.
14. Make additional investments (including roll-overs) if each
Portfolio's borrowings exceed 5% of its net assets.
15. Invest in warrants (other than warrants acquired by the
Portfolio as part of a unit or attached to securities at the time of purchase)
if, as a result, the investments (valued at the lower of cost or market) would
exceed 10% of the value of the Portfolio's net assets.
39
<PAGE> 46
PORTFOLIO VALUATION
The following is a description of the procedures used by each
Portfolio 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. 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 debt
obligations with 60 days or less remaining to maturity. Notwithstanding the
foregoing, in determining the market value of portfolio investments, the
Portfolio 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 the Fund under the general supervision and responsibility of
the Board, which may replace a Pricing Service at any time. Securities,
options, futures contracts and other assets for which market quotations are not
available will be valued at their fair value as determined in good faith
pursuant to consistently applied procedures established by the Board. In
addition, the Board or its delegates may value a security at fair value if it
determines that such security's value determined by the methodology set forth
above does not reflect its fair value.
Trading in securities in certain foreign countries is completed at
various times prior to the close of business on each business day in New York
(i.e., a day on which The New York Stock Exchange, Inc. (the "NYSE") is open
for trading). In addition, securities trading in a particular country or
countries may not take place on all business days in New York. Furthermore,
trading takes place in various foreign markets on days which are not business
days in New York and days on which a Portfolio's net asset value is not
calculated. As a result, calculation of the Portfolio'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.
Private Funds (Post-Venture Capital Portfolio). Private Funds are
initially valued at cost (i.e., the actual dollar amount invested). Thereafter,
Private Funds are valued at the prices set forth in periodic reports received
by Abbott from the Private Funds. These reports are generally made quarterly.
Neither Abbott nor the Portfolio will monitor interim
40
<PAGE> 47
changes in the value of portfolio holdings of the Private Funds. As a result,
these changes will not be taken into account by the Portfolio in calculating
its net asset value.
PORTFOLIO TRANSACTIONS
CSAM is responsible for establishing, reviewing and, where necessary,
modifying each Portfolio's investment program to achieve its investment
objective. Purchases and sales of newly issued portfolio securities are usually
principal transactions without brokerage commissions effected directly with the
issuer or with an underwriter acting as principal. Other purchases and sales
may be effected on a securities exchange or over-the-counter, depending on
where it appears that the best price or execution will be obtained. The
purchase price paid by a Portfolio to underwriters of newly issued securities
usually includes a concession paid by the issuer to the underwriter, and
purchases of securities from dealers, acting as either principals or agents in
the after market, are normally executed at a price between the bid and asked
price, which includes a dealer's mark-up or mark-down. Transactions on U.S.
stock exchanges and some foreign stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers. On most
foreign exchanges, commissions are generally fixed. Purchases of Private Funds
by the Post-Venture Capital Portfolio through a broker or placement agent may
also involve a commission or other fee. There is generally no stated commission
in the case of securities traded in domestic or foreign over-the-counter
markets, but the price of securities traded in over-the-counter markets
includes an undisclosed commission or mark-up. U.S. Government Securities are
generally purchased from underwriters or dealers, although certain newly issued
U.S. Government Securities may be purchased directly from the U.S. Treasury or
from the issuing agency or instrumentality.
Except for the Post-Venture Capital Portfolio's investments in Private
Funds, which will be managed by Abbott, CSAM will select specific portfolio
investments and effect transactions for each Portfolio and in doing so seeks to
obtain the overall best execution of portfolio transactions. In evaluating
prices and executions, CSAM will consider the factors it deems relevant, which
may include the breadth of the market in the security, the price of the
security, the financial condition and execution capability of a broker or
dealer and the reasonableness of the commission, if any, for the specific
transaction and on a continuing basis. CSAM may, in its discretion, effect
transactions in portfolio securities with dealers who provide brokerage and
research services (as those terms are defined in Section 28(e) of the
Securities Exchange Act of 1934) to a Portfolio and/or other accounts over
which CSAM exercises investment discretion. CSAM may place portfolio
transactions with a broker or dealer with whom it has negotiated a commission
that is in excess of the commission another broker or dealer would have charged
for effecting the transaction if CSAM determines in good faith that such amount
of commission was reasonable in relation to the value of such brokerage and
research services provided by such broker or dealer viewed in terms of either
that particular transaction or of the overall responsibilities of CSAM.
Research and other services received due to brokerage business on behalf of the
Portfolios may be useful to CSAM in serving its other clients and, conversely,
research or other services obtained by the placement of business of other
clients may be useful to CSAM in carrying out its obligations to the
Portfolios. 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
41
<PAGE> 48
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. For the fiscal year ended October 31, 1998,
$30,744, $37,173, $2,090, $484,734, $1,968 and $9,387 was paid by the Small
Company Growth, Value, Emerging Markets, International Equity, Post-Venture
Capital and Small Company Value Portfolios, respectively, to brokers and
dealers who provided such research and other services. Research received from
brokers or dealers is supplemental to CSAM's own research program. The fees to
CSAM under its agreements with each Portfolio are not reduced by reason of its
receiving any brokerage and research services.
The Fund paid the following commissions to broker-dealers for
execution of portfolio transactions on behalf of the indicated Portfolios for
the indicated fiscal years ended October 31.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Value $115,662 $22,297 N/A
- --------------------------------------------------------------------------------------------------------
Small Company Value $27,058 0 N/A
- --------------------------------------------------------------------------------------------------------
Small Company Growth $299,840 $251,682 $69,950
- --------------------------------------------------------------------------------------------------------
Post-Venture Capital $3,314 0 N/A
- --------------------------------------------------------------------------------------------------------
International Equity $6,610,396 $4,321,534 $1,273,733
- --------------------------------------------------------------------------------------------------------
Emerging Markets $294,677 $289,393 $90,762
- --------------------------------------------------------------------------------------------------------
Japan Growth $8,210 0 N/A
- --------------------------------------------------------------------------------------------------------
</TABLE>
The table below shows the amount each of the following Portfolios
held, as of October 31, 1998, in securities of State Street Bank and Trust
Company, one of the regular broker-dealers of these Portfolios.
<TABLE>
--------------------------------------------------------
<S> <C>
Emerging Markets $2,578,000
--------------------------------------------------------
Small Company Growth $10,795,000
--------------------------------------------------------
Value $4,196,000
--------------------------------------------------------
</TABLE>
42
<PAGE> 49
<TABLE>
--------------------------------------------------------
<S> <C>
International Equity $118,376,000
--------------------------------------------------------
Small Company Value $165,000
--------------------------------------------------------
</TABLE>
Investment decisions for each Portfolio concerning specific portfolio
securities are made independently from those for other clients advised by CSAM
or Abbott, as relevant. Such other investment clients may invest in the same
securities as a Portfolio. When purchases or sales of the same security are
made at substantially the same time on behalf of such other clients,
transactions are averaged as to price and available investments allocated as to
amount, in a manner which CSAM or Abbott, as the case may be, believes to be
equitable to each client, including the Portfolios. In some instances, this
investment procedure may adversely affect the price paid or received by a
Portfolio or the size of the position obtained or sold for a Portfolio. To the
extent permitted by law, securities may be aggregated with those to be sold or
purchased for a Portfolio 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, Abbott, Credit Suisse Asset Management Securities, Inc. ("CSAMSI") or
Credit Suisse First Boston ("CSFB") or any affiliated person of such companies.
Transactions for the Portfolios may be effected on foreign securities
exchanges. In transactions for securities not actively traded on a foreign
securities exchange, the Fund will deal directly with the dealers who make a
market in the securities involved, except in those circumstances where better
prices and execution are available elsewhere. Such dealers usually are acting
as principal for their own account. On occasion, securities may be purchased
directly from the issuer. Such portfolio securities are generally traded on a
net basis and do not normally involve brokerage commissions. Securities firms
may receive brokerage commissions on certain portfolio transactions, including
options, futures and options on futures transactions and the purchase and sale
of underlying securities upon exercise of options.
Each Portfolio may participate, if and when practicable, in bidding
for the purchase of securities for the Portfolio's portfolio directly from an
issuer in order to take advantage of the lower purchase price available to
members of such a group. A Portfolio will engage in this practice, however,
only when CSAM, in its sole discretion, believes such practice to be otherwise
in the Portfolio's interest.
PORTFOLIO TURNOVER
The Portfolios do not intend to seek profits through short-term
trading, but the rate of turnover will not be a limiting factor when a
Portfolio deems it desirable to sell or purchase securities. A Portfolio's
portfolio turnover rate is calculated by dividing the lesser of purchases or
sales of its portfolio securities for the year by the monthly average value of
the portfolio securities. Securities with remaining maturities of one year or
less at the date of acquisition are excluded from the calculation.
Certain practices that may be employed by a Portfolio could result in
high portfolio turnover. For example, options on securities may be sold in
anticipation of a decline
43
<PAGE> 50
in the price of the underlying security (market decline) or purchased in
anticipation of a rise in the price of the underlying security (market rise)
and later sold. To the extent that its portfolio is traded for the short-term,
a Portfolio 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 a Portfolio may be higher than mutual funds having a similar objective
that do not utilize these strategies.
It is not possible to predict the Portfolios' portfolio turnover
rates. High portfolio turnover rates (100% or more) may result in higher
brokerage commissions, dealer markups or underwriting commissions as well as
other transaction costs. In addition, gains realized from portfolio turnover
may be taxable to shareholders.
MANAGEMENT OF THE FUND
Officers and Board of Directors
The business and affairs of the Fund are managed by the Board of
Directors in accordance with the laws of the State of Maryland. The Board
elects officers who are responsible for the day-to-day operations of the Fund
and who execute policies authorized by the Board. Under the Fund's Charter, the
Board may classify or reclassify any unissued shares of the Fund into one or
more additional classes by setting or changing in any one or more respects
their relative rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption. The Board may
similarly classify or reclassify any class of its shares into one or more
series and, without shareholder approval, may increase the number of authorized
shares of the Fund.
The names (and ages) of the Fund's Directors and officers, their
addresses, present positions and principal occupations during the past five
years and other affiliations are set forth below.
<TABLE>
<S> <C>
Richard H. Francis (67) Director
40 Grosvenor Road Currently retired; Executive Vice President and
Short Hills, New Jersey 07078 Chief Financial Officer of Pan Am Corporation
and Pan American World Airways, Inc. from
1988 to 1991; Director of The Infinity Mutual
Funds, BISYS Group Incorporated;
Director/Trustee of other Warburg Pincus Funds
and other CSAM-advised investment companies.
Jack W. Fritz (72) Director
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
Box 208200 Dean of Yale School of Management and William
New Haven, Connecticut 06520-8200 S. Beinecke Professor in the Practice of
International Trade and Finance; Undersecretary of
Commerce for International Trade from November 1993
to October 1995; Director/Trustee of other
Warburg Pincus Funds.
</TABLE>
44
<PAGE> 51
<TABLE>
<S> <C>
James S. Pasman, Jr. (68) Director
29 The Trillium Currently retired; President and Chief Operating
Pittsburgh, Pennsylvania 15238 Officer of National InterGroup, Inc. from April
1989 to March 1991; Chairman of Permian Oil Co.
from April 1989 to March 1991; Director of
Education Management Corp., Tyco International Ltd.;
Trustee, BT Insurance Funds Trust;
Director/Trustee of other Warburg Pincus Funds
and other CSAM-advised investment companies.
William W. Priest* (57) Chairman of the Board
153 East 53rd Street Chairman- Management Committee, Chief Executive
New York, New York 10022 Officer and Executive Director of CSAM
(U.S.) since 1990; Director of TIG Holdings, Inc.;
Director/Trustee of other Warburg Pincus Funds
and other CSAM-advised investment companies.
Steven N. Rappaport (50) Director
c/o Loanet, Inc. President of Loanet, Inc. since 1997; Executive
153 East 53rd Street, Vice 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.
Arnold M. Reichman* (51) Vice Chairman of the Board
466 Lexington Avenue Managing Director and Chief Operating Officer of CSAM;
New York, New York 10017-3147 Associated with CSAM since CSAM acquired the Funds'
predecessor adviser in July 1999; with the
predecessor adviser since 1984; Officer of CSAMSI;
Director of The RBB Fund, Inc.;
Director/Trustee of Warburg Pincus Funds.
</TABLE>
- ------------------------
* Indicates a Director who is an "interested person" of the Fund as defined in
the 1940 Act.
45
<PAGE> 52
<TABLE>
<S> <C>
Alexander B. Trowbridge (69) Director/Trustee
1317 F Street, N.W., 5th Floor Currently retired; President of Trowbridge Partners, Inc.
Washington, DC 20004 (business consulting) from January 1990 to November 1996;
Director or Trustee of New England Mutual Life Insurance
Co., ICOS Corporation (biopharmaceuticals), IRI International
(energy services), The Rouse Company (real estate development),
Harris Corp. (electronics and communications equipment), The
Gillette Co. (personal care products) and Sunoco, Inc. (petroleum
refining and marketing); Director/Trustee of other Warburg
Pincus Funds.
Eugene L. Podsiadlo (42) President
466 Lexington Avenue Managing Director of CSAM; Associated with
New York, New York 10017-3147 CSAM since CSAM acquired the Funds' predecessor
adviser in July 1999; with the predecessor adviser
since 1991; Vice President of Citibank, N.A. from
1987 to 1991; Officer of CSAMSI and of other
Warburg Pincus Funds.
Hal Liebes, Esq. (35) Vice President and Secretary
153 East 53rd Street Director and General Counsel of CSAM; Associated
New York, New York 10022 with CSAM since 1995; Associated with CS First Boston
Investment Management from 1994 to 1995; Associated with
Division of Enforcement, U.S. Securities and Exchange Commission
from 1991 to 1994; Officer of CSAMSI and other Warburg Pincus
Funds.
Michael A. Pignataro (39) Treasurer and Chief Financial Officer; Vice President and
153 East 53rd Street Director of Fund Administration of CSAM; Associated with
New York, New York 10022 CSAM since 1986; Officer of CSAMSI and other Warburg Pincus
Funds.
Janna Manes (31) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel of CSAM; Associated with CSAM
New York, New York 10017-3147 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.
</TABLE>
46
<PAGE> 53
<TABLE>
<S> <C>
Stuart J. Cohen, Esq. (30) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel of CSAM; Associated with CSAM
New York, New York 10017-3147 since CSAM acquired the Funds' predecessor adviser in July 1999;
with the predecessor adviser since 1997; Associated with the law
firm of Gordon Altman Butowsky Weitzen Shalov & Wein from 1995
to 1997; Officer of other Warburg Pincus Funds.
Rocco A. DelGuercio (36) Assistant Treasurer
153 East 53rd Street Assistant Vice President and Administrative Officer of CSAM;
New York, New York 10022 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 Fund's co-administrator ("PFPC"),
or any of their affiliates receives any compensation from the Fund for acting
as an officer or Director of the 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 $500, $1,000 or $2,000 per fund for Director services provided
and $250 for each meeting attended in addition to reimbursement for expenses
incurred in connection with attendance at Board meetings. Each member of the
Audit Committee receives an annual fee of $250, and the Chairman of the Audit
Committee receives an annual fee of $325.
Directors' Compensation
(for the fiscal year ended October 31, 1998)
<TABLE>
<CAPTION>
Total Total Compensation from
Compensation from all Investment Companies
Name of Director Fund Managed by CSAM*
- -------------------------------------- ----------------- ------------------------
<S> <C> <C>
William W. Priest** None None
Arnold M. Reichman** None None
Richard N. Cooper*** $1,900 $56,600
Richard H. Francis***** None None
Donald J. Donohue*** $ 475 $13,525
Jack W. Fritz $2,150 $63,100
Jeffrey E. Garten**** $1,675 $49,325
Thomas A. Melfe*** $2,150 $60,700
James S. Pasman, Jr. ***** None None
Steven N. Rappaport***** None None
Alexander B. Trowbridge $2,250 $64,000
</TABLE>
- --------------------------------------
47
<PAGE> 54
* Each Director serves as a Director or Trustee of 39 investment
companies advised by CSAM.
** Messrs. Priest and Reichman receive compensation as affiliates of CSAM,
and, accordingly, receive no compensation from the Fund or any other
investment company advised by CSAM.
*** Mr. Donohue resigned as a Director of the Fund effective February 6,
1998. Messrs. Cooper and Melfe resigned as a Director of each Fund
effective July 6, 1999.
**** Mr. Garten became a Director of the Fund effective February 6, 1998.
***** Messrs. Francis, Pasman and Rappaport became Directors of the Fund
effective July 6, 1999.
As of January 29, 1999, the Directors and officers of the Fund as a
group owned less than 1% of the outstanding shares of each Portfolio.
Portfolio Managers
Post-Venture Capital Portfolio. Elizabeth B. Dater is Co-Portfolio
Manager of the Post-Venture Capital Portfolio. Ms. Dater has been associated
with CSAM since CSAM acquired the Portfolio's predecessor adviser in July 1999
and joined the predecessor adviser in 1978. Previously, she was a vice
president of Research at Fiduciary Trust Company of New York and an
institutional sales assistant at Lehman Brothers. Ms. Dater has been a regular
panelist on Maryland Public Television's Wall Street Week with Louis Rukeyser
since 1976. Ms. Dater earned a B.A. degree from Boston University in
Massachusetts.
Robert S. Janis is Associate Portfolio Manager of the Post-Venture
Capital Portfolio. Previously, Mr. Janis was a vice president and senior
research analyst at U.S. Trust Company of New York. He earned B.A. and M.B.A.
degrees from the University of Pennsylvania.
Raymond L. Held and Thaddeus I. Gray, Investment Managers and Managing
Directors of Abbott, manage the Post-Venture Capital Portfolio's investments in
Private Funds. Prior to co-founding a predecessor of Abbott in 1986, Mr. Held
had been an investment analyst and portfolio manager at Manufacturers Hanover
Investment Corporation since 1970, before which time he had been a security
analyst with Weis, Voisin, Cannon, Inc., L.M. Rosenthal & Co., Shearson,
Hammill & Co. and Standard & Poor's Corporation. Mr. Held earned an M.B.A.
from New York University, an M.A. from Columbia University and a B.A. from
Queens College.
Prior to joining a predecessor of Abbott in 1989, Mr. Gray was an
assistant vice president at Commerzbank Capital Markets Corporation, where he
managed the area responsible for underwriting and distributing all new issues
of securities. Prior to this, he was an associate with Credit Commercial de
France in Paris in the Corporate Finance Department. Mr. Gray received his
B.A. in History from the University of Pennsylvania and his M.B.A. in Finance
from New York University. He is also a Chartered Financial Analyst.
Small Company Growth Portfolio. Ms. Dater (see biography above) and
Sammy Oh are Co-Portfolio Managers of the Small Company Growth Portfolio Mr.
Oh has been associated with CSAM since CSAM acquired the Portfolio's
predecessor adviser in July 1999 and joined the predecessor adviser in 1997.
Previously, Mr. Oh was a vice president of Bessemer Trust from 1995 to 1996,
and he was a vice president of Forstmann-Leff from 1993 to 1995.
48
<PAGE> 55
Small Company Value Portfolio. Kyle F. Frey is the Portfolio Manager
of the Small Company Value Portfolio. Mr. Frey has been associated with CSAM
since CSAM acquired the Portfolio's predecessor adviser in July 1999 and joined
the predecessor adviser in 1989. Previously, Mr. Frey was with Goldman, Sachs
& Co. in the institutional sales division. Mr. Frey earned a B.S. degree from
the University of New Hampshire and an M.B.A. from New York University.
Value Portfolio. Brian S. Posner and Stacy Dutton are the
Co-Portfolio Manager of the Value Portfolio. Mr. Posner has been associated
with CSAM since CSAM acquired the Portfolio's predecessor adviser in July 1999
and joined the predecessor adviser in 1987. Previously, Mr. Posner was
employed from 1987 to 1996 by Fidelity Investments, where, most recently, he
was the vice president and portfolio manager of the Fidelity Equity-Income II
Fund. Mr. Posner received an undergraduate degree from Northwestern University
and his M.B.A. in Finance from the University of Chicago.
Ms. Dutton has been associated with CSAM since it acquired the
Portfolio's predecessor adviser in July 1999 and joined the predecessor adviser
in 1997. Previously, Ms. Dutton was a senior vice president and analyst for
Jennison Associates Capital Corp. from 1993 to 1997.
International Equity Portfolio. P. Nicholas Edwards is Co-Portfolio
Manager of the International Equity Portfolio. Mr. Edwards has been associated
with CSAM since CSAM acquired the Portfolio's predecessor adviser in July 1999
and joined the predecessor adviser in 1995. Previously, Mr. Edwards was a
director at Jardine Fleming Investment Advisers, Tokyo. He was a vice
president of Robert Fleming Inc. in New York City from 1988 to 1991. Mr.
Edwards earned M.A. degrees from Oxford University and Hiroshima University in
Japan.
Harold W. Ehrlich is Co-Portfolio Manager of the International Equity
Portfolio. Mr. Ehrlich has been associated with CSAM since CSAM acquired the
Portfolio's predecessor adviser in July 1999 and joined the predecessor adviser
in 1995. Previously, Mr. Ehrlich was a senior vice president, portfolio
manager and analyst at Templeton Investment Counsel Inc. from 1987 to 1995. He
was a research analyst and assistant portfolio manager at Fundamental
Management Corporation from 1985 to 1986 and a research analyst at First Equity
Corporation of Florida from 1983 to 1985. Mr. Ehrlich earned a B.S.B.A. degree
from University of Florida and earned his Chartered Financial Analyst
designation in 1990.
Vincent J. McBride is Co-Portfolio Manager of the International Equity
Portfolio. Mr. McBride has been associated with CSAM since CSAM acquired the
Portfolio's predecessor adviser in July 1999 and joined the predecessor adviser
in 1994. Previously, Mr. McBride was an international equity analyst at Smith
Barney Inc. from 1993 to 1994 and at General Electric Investment Corporation
from 1992 to 1993. He was also a portfolio manager/analyst at United Jersey
Bank from 1989 to 1992 and a portfolio manager at First Fidelity Bank from 1987
to 1989. Mr. McBride earned a B.S. degree from the University of Delaware and
an M.B.A. degree from Rutgers University.
Harold E. Sharon is Co-Portfolio Manager of the International Equity
Portfolio. Mr. Sharon has been associated with CSAM since CSAM acquired the
Portfolio's predecessor
49
<PAGE> 56
adviser in July 1999 and joined the predecessor adviser in 1998. Previously,
Mr. Sharon was an executive director and portfolio manager at CIBC Oppenheimer
from 1994 to 1998. Mr. Sharon was previously a Vice President and Portfolio
Manager at the predecessor adviser from 1990 to 1994. Mr. Sharon earned a B.S.
Degree with honors from the University of Rochester and an M.S. degree in
Management from the Sloan School of Management, M.I.T.
Emerging Markets Portfolio. Mr. McBride and Mr. Sharon are also
Co-Portfolio Managers of the Emerging Markets Portfolio (see biographies
above).
Mr. Morid Kamshad is an Associate Portfolio Manager of the Emerging
Markets Portfolio. Mr. Kamshad has been associated with CSAM since CSAM
acquired the Portfolio's predecessor adviser in July 1999 and joined the
predecessor adviser in 1997. Previously, he was a senior investment manager
with Pictet Asset Management from 1995 to 1997. Mr. Kamshad was also an
investment analyst with HSBC Asset Management from 1994 to 1995 and a business
development manager with Air Products and Chemicals - France from 1989 to 1994.
Mr. Jun Sung Kim is an Associate Portfolio Manager of the Emerging
Markets Portfolio. Mr. Kim has been associated with CSAM since CSAM acquired
the Portfolio's predecessor adviser in July 1999 and joined the predecessor
adviser in 1997. Previously, he was an investment manager with Asset Korea
Ltd., Seoul from 1994 to 1995. He was also an assistant investment manager with
Koeneman Capital Management, Singapore from 1992 to 1994.
Federico D. Laffan is an Associate Portfolio Manager of the Emerging
Markets Portfolio. Mr. Laffan has been associated with CSAM since CSAM
acquired the Portfolio's predecessor adviser in July 1999 and joined the
predecessor adviser in 1997. Previously, Mr. Laffan was a senior manager and
partner with Green Cay Asset Management from 1996 to 1997 and a senior
portfolio manager and director with Foreign & Colonial Emerging Markets,
London, from 1990 to 1996.
Japan Growth Portfolio. Mr. Edwards (see biography above) and Todd
Jacobson, CFA, serve as Co-Portfolio Manager of the Japan Growth Portfolio. Mr.
Jacobson has been associated with CSAM since CSAM acquired the Portfolio's
predecessor adviser in July 1999 and joined the predecessor adviser in 1997.
Previously, Mr. Jacobson was an analyst at Brown Brothers Harriman from 1993 to
1997.
Investment Advisers and Co-Administrators
CSAM, located at 466 Lexington Avenue, New York, New York 10017-3147,
serves as investment adviser to each Portfolio pursuant to a written agreement
(the "Advisory Agreement"). CSAM is an indirect wholly-owned U.S. subsidiary of
Credit Suisse ("Credit Suisse"). Credit Suisse is a global financial services
company, providing a comprehensive range of banking and insurance products.
Active on every continent and in all major financial centers, Credit Suisse
comprises five business units -- Credit Suisse Asset Management (asset
management); Credit Suisse First Boston (investment banking); Credit Suisse
Private Banking (private banking); Credit Suisse (retail banking); and
Winterthur (insurance). Credit Suisse has approximately $680 billion of global
assets under management and employs approximately
50
<PAGE> 57
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 Portfolio. 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 serve
as co-administrators to the Fund pursuant to separate written agreements (the
"Advisory Agreements," the "Sub-Investment Advisory Agreement," the
"Counsellors Service Co-Administration Agreements" and the "PFPC
Co-Administration Agreements," respectively). CSAM, subject to the control of
the Fund's officers and the Board, manages the investment and reinvestment of
the assets of the Portfolios in accordance with each Portfolio's investment
objective and stated investment policies. CSAM makes investment decisions for
each Portfolio and places orders to purchase or sell securities on behalf of
the Portfolio and, with respect to the Post-Venture Capital Portfolio,
supervises the activities of Abbott. CSAM also employs a support staff of
management personnel to provide services to the Fund and furnishes the Fund
with office space, furnishings and equipment. Abbott, in accordance with the
investment objective and policies of the Post-Venture Capital Portfolio, makes
investment decisions for the Portfolio regarding investments in Private Funds,
effects transactions in Private Funds on behalf of the Portfolio and assists in
other administrative functions relating to investments in Private Funds.
For the services provided by CSAM, the Fund pays CSAM a fee calculated
at an annual rate equal to percentages of the relevant Portfolio's average
daily net assets, as follows: Small Company Growth Portfolio -- .90%, Small
Company Value Portfolio -- .90%, Value Portfolio -- .75%, Emerging Markets
Portfolio -- 1.00%, International Equity Portfolio -- .80%, and Japan Growth
Portfolio -- 1.10%. For the services provided by CSAM, the Post-Venture Capital
Portfolio pays CSAM a fee calculated at an annual rate of 1.10% of the
Portfolio's average daily net assets, out of which CSAM pays Abbott for
sub-investment advisory services. CSAM and the Portfolios' co-administrators
may voluntarily waive a portion of their fees from time to time and temporarily
limit the expenses to be borne by the Portfolios.
CSAM earned the following investment advisory fees with respect to the
Portfolios shown for the indicated fiscal years ended October 31 and
voluntarily waived the amounts shown.
51
<PAGE> 58
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Portfolio 1998* Waiver 1997+ Waiver 1996 Waiver
- ---------
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Post- $17,840 $17,840 N/A N/A N/A N/A
Venture
Capital
- --------------------------------------------------------------------------------------------------------------------
Small $2,012,526 $396,698 $1,405,403 $314,893 $268,768 $122,453
Company
Growth
- --------------------------------------------------------------------------------------------------------------------
Small $55,629 $52,149 N/A N/A N/A N/A
Company
Value
- --------------------------------------------------------------------------------------------------------------------
Value $382,122 $196,905 $22,250 $22,250 N/A N/A
- --------------------------------------------------------------------------------------------------------------------
Emerging $314,334 $13,496 $376,368 $103,632 $21,487 $21,487
Markets
- --------------------------------------------------------------------------------------------------------------------
International $9,511,718 $1,511,306 $9,423,008 $1,627,352 $5,644,429 $1,182,795
Equity
- --------------------------------------------------------------------------------------------------------------------
Japan $15,596 $14,514 N/A N/A N/A N/A
Growth
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
+ CSAM reimbursed expenses in the amount of $24,195 to the
Value Portfolio during the fiscal year ended October 31, 1997.
* CSAM reimbursed expenses in the amount of $48,425, $43,388,
$553 and $47,843 for the Post-Venture Capital Portfolio,
Small Company Value Portfolio, Value Portfolio and Japan
Growth Portfolio, respectively, during the fiscal year ended
October 31, 1998.
As co-administrator, Counsellors Service provides shareholder liaison
services to the Portfolios, including responding to shareholder inquiries and
providing information on shareholder investments. Counsellors Service also
performs a variety of other services, including furnishing certain executive
and administrative services, acting as liaison between each Portfolio and its
various service providers, furnishing corporate secretarial services, which
include preparing materials for meetings of the Board, preparing proxy
statements and annual and semiannual reports, assisting in the preparation of
tax returns and developing and monitoring compliance procedures for the
Portfolios. As compensation, each Portfolio pays Counsellors Service a fee
calculated at an annual rate of .10% of the Portfolio's average daily net
assets.
Counsellors Service earned the following administration fees with
respect to the Portfolios shown for the indicated fiscal years ended October
31.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Portfolio 1998 1997 1996
- ---------
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Post-Venture Capital $1,622 N/A N/A
- --------------------------------------------------------------------------------------------------------
Small Company Growth $223,614 $156,156 $29,863
- --------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE> 59
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Portfolio 1998 1997 1996
- ---------
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Company Value $6,181 N/A N/A
- --------------------------------------------------------------------------------------------------------
Value $50,950 $2,967 N/A
- --------------------------------------------------------------------------------------------------------
Emerging Markets $31,433 $37,637 $2,149
- --------------------------------------------------------------------------------------------------------
International Equity $1,188,965 $1,177,876 $705,554
- --------------------------------------------------------------------------------------------------------
Japan Growth $1,414 N/A N/A
- --------------------------------------------------------------------------------------------------------
</TABLE>
As a co-administrator, PFPC calculates each Portfolio's net asset
value, provides all accounting services for the Portfolios and assists in
related aspects of the Portfolios' operations. As compensation, each U.S.
Portfolio pays PFPC a fee calculated at an annual rate of .10% of the
Portfolio's first $500 million in average daily net assets, .075% of the next
$1 billion in average daily net assets, and .05% of average daily net assets
over $1.5 billion. The International Portfolios each pays PFPC a fee calculated
at an annual rate of .12% of the Portfolio's first $250 million in average
daily net assets, .10% of the next $250 million in average daily net assets,
.08% of the next $250 million in average daily net assets, and .05% of average
daily net assets over $750 million. PFPC has its principal offices at 400
Bellevue Parkway, Wilmington, Delaware 19809.
PFPC earned the following administration fees with respect to the
Portfolios shown for the indicated fiscal years ended October 31 and
voluntarily waived the amounts shown.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Portfolio 1998 Waiver 1997 Waiver 1996 Waiver
---------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Post- $3,150 $1,622 N/A N/A N/A N/A
Venture
Capital
- --------------------------------------------------------------------------------------------------------------
Small $229,049 $0 $156,156 0 $29,863 $9,901
Company
Growth
- --------------------------------------------------------------------------------------------------------------
Small $7,923 $6,181 N/A N/A N/A N/A
Company
Value
- --------------------------------------------------------------------------------------------------------------
Value $56,058 $27,867 $2,966 $2,966 N/A N/A
- --------------------------------------------------------------------------------------------------------------
Emerging
Markets $48,970 $37,720 $45,164 $45,164 $2,578 $2,578
- --------------------------------------------------------------------------------------------------------------
International $995,886 $0 $963,938 0 $702,540 $119,850
Equity
- --------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE> 60
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Portfolio 1998 Waiver 1997 Waiver 1996 Waiver
---------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Japan $4,474 $1,701 N/A N/A N/A N/A
Growth
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Custodians and Transfer Agent
Pursuant to separate custodian agreements (the "Custodian
Agreements"), PFPC Trust Company ("PFPC Trust") and State Street Bank and Trust
Company ("State Street") serve as custodians of the each Portfolio's U.S. and
non-U.S. assets, respectively. Under the Custodian Agreements, PFPC Trust and
State Street each (i) maintains a separate account or accounts in the name of
the Portfolio, (ii) holds and transfers portfolio securities for the account of
the Portfolio, (iii) makes receipts and disbursements of money on behalf of the
Portfolio, (iv) collects and receives all income and other payments and
distributions on account of the Portfolio's portfolio securities held by it and
(v) makes periodic reports to the Board concerning the Portfolio'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. State Street is authorized to select one or more foreign
banking institutions and foreign securities depositaries as sub-custodian on
behalf of the Portfolios and PFPC Trust is authorized to select one or more
domestic banks or trust companies to serve as sub-custodian on behalf of the
Portfolios. 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.
PNC also provides certain custodial services generally in connection
with purchases and sales of the International Equity Portfolio's shares.
State Street also serves as the shareholder servicing, transfer and
dividend disbursing agent of the Fund pursuant to a Transfer Agency and Service
Agreement, under which State Street (i) issues and redeems shares of each
Portfolio, (ii) addresses and mails all communications by the Fund to record
owners of Portfolio shares, including reports to shareholders, dividend and
distribution notices and proxy material for its meetings of shareholders, (iii)
maintains shareholder accounts and, if requested, sub-accounts and (iv) makes
periodic reports to the Board concerning the transfer agent's operations with
respect to the Fund. State Street has delegated to Boston Financial Data
Services, Inc., an affiliate of State Street ("BFDS"), responsibility for most
shareholder servicing functions. BFDS's principal business address is 2
Heritage Drive, Boston, Massachusetts 02171.
Distribution and Shareholder Servicing
CSAMSI serves as the distributor of the Portfolios. CSAMSI's
principal business address is 466 Lexington Avenue, New York, New York
10017-3147.
Each Portfolio 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 Portfolio'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 Portfolio
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 Portfolio in proper form will be priced at the
Portfolio's net asset value 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 Portfolio shares are purchased directly from the
Portfolios. Service Organizations may also be reimbursed for marketing costs.
The Portfolios may reimburse part of the Service Fee at rates they would
normally pay to the transfer agent for providing the services.
54
<PAGE> 61
Organization of the Fund
The Fund was incorporated on May 13, 1992 under the laws of the State
of Maryland under the name "Warburg, Pincus Institutional Fund, Inc." The
Fund's charter authorizes the Board of Directors to issue thirteen billion full
and fractional shares of capital stock, par value $.001 per share. Shares of
nine series have been classified, seven of which constitute the interests in
the Portfolios.
The Post-Venture Capital, Small Company Value, Value and International
Equity Portfolios are diversified, open-end management investment companies.
The Small Company Growth, Emerging Markets and Japan Growth Portfolios are
non-diversified, open-end management investment companies.
All shareholders of a Portfolio, upon liquidation, will participate
ratably in the Portfolio's net assets. Shares do not have cumulative voting
rights, which means that holders of more than 50% of the shares voting for the
election of Directors can elect all Directors. Shares are transferable but have
no preemptive, conversion or subscription rights.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of each Portfolio's shares is equal to its per
share net asset value. Under the 1940 Act, a Portfolio may suspend the right
of redemption or postpone the date of payment upon redemption for any period
during which the NYSE is closed, other than customary weekend and holiday
closings, or during which trading on the NYSE is restricted, or during which
(as determined by the SEC) an emergency exists as a result of which disposal or
fair valuation of portfolio securities is not reasonably practicable, or for
such other periods as the SEC may permit. (A Portfolio 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 Portfolio 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.
A Portfolio may, in certain circumstances and in its discretion,
accept securities as payment for the purchase of the Portfolio's shares from an
investor who has received such securities as redemption proceeds from another
Warburg Pincus Fund.
55
<PAGE> 62
EXCHANGE PRIVILEGE
Shareholders of a Portfolio may exchange all or part of their shares
for shares of another Portfolio or other portfolios of the Fund organized by
CSAM in the future on the basis of their relative net asset values per share at
the time of exchange. The exchange privilege enables shareholders to acquire
shares in a Portfolio with a different investment objective when they believe
that a shift between Portfolios is an appropriate investment decision.
If an exchange request is received by Warburg Pincus Funds or its
agent prior to the close of regular trading on the NYSE, the exchange will be
made at each Portfolio's net asset value determined at the end of that business
day. Exchanges will be effected without a sales charge but must satisfy the
minimum dollar amount necessary for new purchases. A Portfolio may refuse
exchange purchases at any time without notice.
The exchange privilege is available to investors in any state in which
the shares being acquired may be legally 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
Portfolio for shares in another portfolio of the Fund should review the
Prospectus of the other portfolio prior to making an exchange. For further
information regarding the exchange privilege or to obtain a current Prospectus
for another portfolio of the Fund, an investor should contact the Fund at
1-800-222-8977.
Each Portfolio reserves the right to refuse exchange purchases by any
person or group if, in CSAM's judgment, a Portfolio would be unable to invest
the money effectively in accordance with its investment objective and policies,
or would otherwise potentially be adversely affected. Examples of when an
exchange purchase could be refused are when a Portfolio receives or anticipates
receiving large exchange orders at or about the same time and when a pattern of
exchanges within a short period of time (often associated with a marketing
timing strategy) is discerned. The Portfolios 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 the Portfolios. 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 the Portfolios. The summary is based on the
laws in effect on the date of this Statement of Additional Information, which
are subject to change.
The Portfolios and Their Investments
Each Portfolio intends to continue to qualify to be treated as a
regulated investment company each taxable year under the Code. To so qualify,
a Portfolio 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
56
<PAGE> 63
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
Portfolio's taxable year, (i) at least 50% of the market value of the
Portfolio's assets is represented by cash, securities of other regulated
investment companies, United States government securities and other securities,
with such other securities limited, in respect of any one issuer, to an amount
not greater than 5% of the Portfolio'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 United States
government securities or securities of other regulated investment companies) of
any one issuer or any two or more issuers that the Portfolio controls and are
determined to be engaged in the same or similar trades or businesses or related
trades or businesses. Each Portfolio 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, a Portfolio 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) is
distributed, but will be subject to tax at regular corporate rates on any
taxable income or gains that it does not distribute. Any dividend declared by a
Portfolio 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 Portfolio not later than such December 31, provided
that such dividend is actually paid by the Portfolio during January of the
following calendar year.
Each Portfolio intends to distribute annually to its shareholders
substantially all of its investment company taxable income. The Board 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 Portfolio currently expects to distribute any
excess annually to its shareholders. However, if a Portfolio 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, the Portfolio will designate such
retained amounts as undistributed capital gains in a notice to its shareholders
who (a) will be required to include in income for United Stares federal income
tax purposes, as long-term capital gains, their proportionate shares of the
undistributed amount, (b) will be entitled to credit their proportionate shares
of the 35% tax paid by the Portfolio 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
57
<PAGE> 64
their pro rata share of such taxes paid by the Portfolio upon filing
appropriate returns or claims for refund with the Internal Revenue Service (the
"IRS").
The Code imposes a 4% nondeductible excise tax on each Portfolio to
the extent the Portfolio 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 Portfolio 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 Portfolio
anticipates that it will pay such dividends and will make such distributions as
are necessary in order to avoid the application of this tax.
If, in any taxable year, a Portfolio 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 Portfolio
in computing its taxable income. In addition, in the event of a failure to
qualify, the Portfolio's distributions, to the extent derived from the
Portfolio's current or accumulated earnings and profits would constitute
dividends (eligible for the corporate dividends-received deduction) which are
taxable to shareholders as ordinary income, even though those distributions
might otherwise (at least in part) have been treated in the shareholders' hands
as long-term capital gains. If a Portfolio 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 a Portfolio failed to qualify as a regulated
investment company for a period greater than one taxable year, the Portfolio
may be required to recognize any net built-in gains (the excess of the
aggregate gains, including items of income, over aggregate losses that would
have been realized if it had been liquidated) in order to qualify as a
regulated investment company in a subsequent year.
A Portfolio'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 Portfolio (i.e., may affect whether gains or
losses are ordinary or capital), accelerate recognition of income to the
Portfolio and defer Portfolio losses. These rules could therefore affect the
character, amount and timing of distributions to shareholders. These provisions
also (a) will require the Portfolio 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 Portfolio 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
Portfolio will monitor its transactions, will make the appropriate tax
elections and will make the appropriate entries in its books and records when
it engages in a short sale against-the-box or acquires any foreign currency,
forward contract, option, futures contract or hedged investment in order to
mitigate the effect of these rules and prevent disqualification of the
Portfolio as a regulated investment company.
58
<PAGE> 65
A Portfolio's investments in zero coupon securities may create special
tax consequences. Zero coupon securities do not make interest payments,
although a portion of the difference between zero coupon security's face value
and its purchase price is imputed as income to the Portfolio each year even
though the Portfolio receives no cash distribution until maturity. Under the
U.S. federal tax laws, the Portfolio will not be subject to tax on this income
if it pays dividends to its shareholders substantially equal to all the income
received from, or imputed with respect to, its investments during the year,
including its zero coupon securities. These dividends ordinarily will
constitute taxable income to the shareholders of the Portfolio.
Passive Foreign Investment Companies.
If a Portfolio 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 Portfolio to its shareholders.
Additional charges in the nature of interest may be imposed on the Portfolio in
respect of deferred taxes arising from such distributions or gains. If a
Portfolio 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 Portfolio 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 Portfolio, and such amounts would
be subject to the 90% and excise tax distribution requirements described above.
In order to make this election, the Portfolio 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. If a
Portfolio were able to make the election described in this paragraph, the
Portfolio would not be able to treat any portion of the long-term capital gains
included in income pursuant to the election as eligible for the 20% maximum
capital gains rate.
Alternatively, a Portfolio may make mark-to-market elections that will
result in a Portfolio being treated as if it had sold and repurchased all of
the PFIC stock at the end of each year. In this case, the Portfolio 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 Portfolio, unless revoked
with the consent of the IRS. By making the election, the Portfolio 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 Portfolio may have to
distribute this "phantom" income and gain to satisfy its distribution
requirement and to avoid imposition of the 4% excise tax. Each Portfolio 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 Portfolio designates as capital gains dividends
are taxable as long-term capital gains, whether paid in
59
<PAGE> 66
cash or in shares and regardless of how long a shareholder has held shares of
the Portfolio. Dividends and distributions paid by a Portfolio (except for the
portion thereof, if any, attributable to dividends on stock of U.S.
corporations received by the Portfolio) will not qualify for the deduction for
dividends received by corporations. Distributions in excess of a Portfolio'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 Portfolio, and as a capital gain thereafter (if the
shareholder holds his shares of the Portfolio as capital assets).
Shareholders receiving dividends or distributions in the form of
additional shares should be treated for United States federal income tax
purposes as receiving a distribution in the amount equal to the amount of money
that the shareholders receiving cash dividends or distributions will receive,
and should have a cost basis in the shares received equal to such amount.
Investors considering buying shares just prior to a dividend or
capital gain distribution should be aware that, although the price of shares
just purchased at that time may reflect the amount of the forthcoming
distribution, such dividend or distribution may nevertheless be taxable to
them.
If a Portfolio 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 Portfolio'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 Portfolio
acquired such stock. Accordingly, in order to satisfy its income distribution
requirements, the Portfolio 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 Portfolio, 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 Portfolio 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.
60
<PAGE> 67
Foreign Taxes.
Income received by a Portfolio from non-U.S. sources may be subject to
withholding and other taxes imposed by other countries. A Portfolio may elect
for U.S. income tax purposes to treat foreign income taxes paid by it as paid
by its shareholders if: (i) the Portfolio qualifies as a regulated investment
company, (ii) certain asset and distribution requirements are satisfied, and
(iii) more than 50% of the Portfolio's total assets at the close of its fiscal
year consists of stock or securities of foreign corporations. A Portfolio may
qualify for and make this election (the "Foreign Tax Credit Election") in some,
but not necessarily all, of its taxable years. If a Portfolio were to make an
election, shareholders of the Portfolio would be required to take into account
an amount equal to their pro rata portions of such foreign taxes in computing
their taxable income and then treat an amount equal to those foreign taxes as a
U.S. federal income tax deduction or as a foreign tax credit against their U.S.
federal income taxes. Shortly after any year for which it makes such an
election, a Portfolio will report to its shareholders the amount per share of
such foreign income tax that must be included in each shareholder's gross
income and the amount which will be available for the deduction or credit. No
deduction for foreign taxes may be claimed by a shareholder who does not
itemize deductions. Certain limitations will be imposed on the extent to which
the credit (but not the deduction) for foreign taxes may be claimed.
It is expected that the Portfolios other than the Emerging Markets,
International Equity and the Japan Growth Portfolios will not be eligible to
make the Foreign Tax Credit Election. In the absence of such an election, the
foreign taxes paid by a portfolio will reduce its investment company taxable
income, and distributions of investment company taxable income received by the
Portfolio from non-U.S. sources will be treated as United States source income
when distributed to shareholders.
In the opinion of Japanese counsel for the Fund, the operations of the
Japan Growth Portfolio will not subject the Portfolio to any Japanese income,
capital gains or other taxes except for withholding taxes on interest and
dividends paid to the Portfolio by Japanese corporations and securities
transaction taxes payable in the event of sales of portfolio securities in
Japan. In the opinion of such counsel, under the tax convention between the
United States and Japan (the "Convention") as currently in force, a Japanese
withholding tax at a rate of 15% is, within certain exceptions, imposed upon
dividends paid by Japanese corporations to the Portfolio. Pursuant to the
present terms of the Convention, interest received by the Portfolio from
sources within Japan is subject to a Japanese withholding tax at a rate of 10%.
Backup Withholding.
A Portfolio 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 Portfolio 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.
61
<PAGE> 68
Notices
Shareholders will be notified annually by the relevant Portfolio 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 Portfolios and Their Investments") made by the Portfolio to its
shareholders. Furthermore, shareholders will also receive, if appropriate,
various written notices after the close of the Portfolio'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 the Portfolio to its shareholders during the preceding
taxable year.
Other Taxation
Distributions also may be subject to additional state, local and
foreign taxes depending on each shareholder's particular situation.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN MATERIAL TAX CONSEQUENCES AFFECTING
THE PORTFOLIOS AND THEIR SHAREHOLDERS. SHAREHOLDERS ARE ADVISED TO CONSULT
THEIR OWN TAX ADVISERS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM
OF AN INVESTMENT IN THE PORTFOLIOS.
DETERMINATION OF PERFORMANCE
From time to time, a Portfolio may quote its total return in
advertisements or in reports and other communications to shareholders. The
total return of each Portfolio listed below for the fiscal periods ended
October 31, 1998 were as follows (performance figures calculated without waiver
of fees by the Fund's service provider(s), if any, are noted in italics):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PORTFOLIO ONE-YEAR FIVE-YEARS SINCE INCEPTION
(INCEPTION
DATE)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Post-Venture (17.70)% (22.50)% N/A N/A (17.70)% (22.50)%
Capital
(10/31/97)
- -----------------------------------------------------------------------------------------------------------------------
Small Company (18.88)% (19.07)% N/A N/A 9.34% 9.13%
Growth
(12/29/95)
- -----------------------------------------------------------------------------------------------------------------------
Small Company (20.20)% (24.70)% N/A N/A (20.20)% (24.70)%
Value
(10/31/97)
- -----------------------------------------------------------------------------------------------------------------------
Value 9.76% 9.22% N/A N/A 12.28% 11.60%
(6/30/97)
- -----------------------------------------------------------------------------------------------------------------------
Emerging (32.90)% (33.06)% N/A N/A (19.71)% (20.04)%
Markets
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
62
<PAGE> 69
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(9/30/96)
- -----------------------------------------------------------------------------------------------------------------------
International (4.11)% (4.27)% 6.03% 5.85% 10.25% 10.04%
Equity
(9/1/92)
- -----------------------------------------------------------------------------------------------------------------------
Japan Growth (7.84)% (12.07)% N/A N/A (7.84)% (12.07)%
Portfolio+
(10/31/97)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Not annualized.
These total return figures show the average percentage change in value
of an investment in a Portfolio from the beginning of the measurement period to
the end of the measurement period. The figures reflect changes in the price of
the Portfolio's shares assuming that any income dividends and/or capital gain
distributions made by the Portfolio during the period were reinvested in shares
of the Portfolio. 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 Portfolio's operations or on a year-by-year, quarterly or
current year-to-date basis).
A Portfolio's average annualized total return is calculated by finding
the average annual compounded rates of return for the one-, five- and ten- (or
such shorter period as the Portfolio 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.
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 such return may not be representative
of any Portfolio's return over a longer market cycle. A Portfolio may also
advertise aggregate total return figures for various periods, representing the
cumulative change in value of an investment in the relevant Portfolio for the
specific period. 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 Portfolio may advertise, from time to time, comparisons of its
performance with that of one or more other mutual funds with similar investment
objectives. A Portfolio 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
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<PAGE> 70
calendar year or most recent three months, as the case may be. Investors should
note that this performance may not be representative of the Portfolio's total
return in longer market cycles.
A Portfolio's performance will vary from time to time depending upon
market conditions, the composition of its portfolio and operating expenses
allocable to it. As described above, total return is based on historical
earnings and is not intended to indicate future performance. Consequently, any
given performance quotation should not be considered as representative of
performance for any specified period in the future. Performance information may
be useful as a basis for comparison with other investment alternatives.
However, a Portfolio's performance will fluctuate, unlike certain bank deposits
or other investments which pay a fixed yield for a stated period of time.
A Portfolio 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
Post-Venture Capital Portfolio, with the Nasdaq Industrials Index and
appropriate indexes prepared by Frank Russell Company relating to securities
represented in the Portfolio, which are unmanaged indexes of common stocks; in
the case of the Small Company Growth Portfolio, with appropriate indexes
prepared by Frank Russell Company relating to securities represented in the
Portfolio; in the case of the Small Company Value Portfolio, with appropriate
indexes prepared by Frank Russell Company relating to securities represented in
the Portfolio, which are unmanaged indexes; in the case of the Value Portfolio,
with appropriate indexes prepared by Frank Russell Company relating to
securities represented in the Portfolio; in the case of the Emerging Markets
Portfolio, with the Morgan Stanley Capital International Emerging Markets Free
Index; in the case of the International Equity Portfolio, the Morgan Stanley
Capital International All Country World Excluding U.S. Index and/or other
indexes prepared by Morgan Stanley relating to securities represented in the
Portfolio; and in the case of the Japan Growth Portfolio, the Topix Index,
which is an unmanaged index of common stocks; or (iii) other appropriate
indexes of investment securities or with data developed by CSAM derived from
such indexes. A Portfolio may also include evaluations of the Portfolio
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 Portfolio may from time to time
compare its expense ratio 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 Portfolio may also describe the general biography or work experience of
the portfolio managers of the Portfolio and may include quotations attributable
to the portfolio managers describing approaches taken in managing the
Portfolio's investments, research methodology underlying stock selection or the
Portfolio's investment objective. In addition, a Portfolio and its portfolio
managers may render updates of Portfolio 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 Portfolio with respect to relevant market and industry benchmarks. The
Post-Venture Capital Portfolio may discuss
64
<PAGE> 71
characteristics of venture capital financed companies and the benefits expected
to be achieved from investing in these companies. Each Portfolio 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.
CSAM believes that a diversified portfolio of international equity
securities, when combined with a similarly diversified portfolio of domestic
equity securities, tends to have a lower volatility than a portfolio composed
entirely of domestic securities. Furthermore, international equities have been
shown to reduce volatility in single asset portfolios regardless of whether the
investments are in all domestic equities or all domestic fixed-income
instruments, and research indicates that volatility can be significantly
decreased when international equities are added.
To illustrate this point, the performance of international equity
securities, as measured by the Morgan Stanley Capital International Europe,
Australasia, Far East (EAFE(R)) Index (the "EAFE Index"), has equaled or
exceeded that of domestic equity securities, as measured by the Standard &
Poor's 500 Composite Stock Index (the "S&P 500 Index") in 14 of the last 26
years. The following table compares annual total returns of the EAFE Index and
the S&P 500 Index for the calendar years shown.
<TABLE>
<CAPTION>
EAFE INDEX VS. S&P 500 INDEX
1972-1998
ANNUAL TOTAL RETURN+
YEAR EAFE INDEX S&P 500 INDEX
---- ---------- -------------
<S> <C> <C>
1972* 33.28 15.63
1973* -16.82 -17.37
1974* -25.60 -29.72
1975* 31.21 31.55
1976 -.36 19.15
1977* 14.61 -11.50
1978* 28.91 1.06
1979 1.82 12.31
1980 19.01 25.77
1981* -4.85 -9.73
1982 -4.63 14.76
1983* 20.91 17.27
1984* 5.02 1.40
1985* 52.97 26.33
1986* 66.80 14.62
1987* 23.18 2.03
1989 9.22 27.25
1990 -24.71 -6.56
1991 10.19 26.31
1992 -13.89 4.46
1993* 30.49 7.06
1994* 6.24 -1.54
1995 9.42 34.11
</TABLE>
65
<PAGE> 72
<TABLE>
<CAPTION>
EAFE INDEX VS. S&P 500 INDEX
1972-1998
ANNUAL TOTAL RETURN+
YEAR EAFE INDEX S&P 500 INDEX
---- ---------- -------------
<S> <C> <C>
1996 4.40 20.26
1997 0.24 31.01
1998 18.29 26.23
</TABLE>
- -------------------------
+ Without reinvestment of dividends.
* The EAFE Index has outperformed the S&P 500 Index 14 out of the last
26 years.
Source: Morgan Stanley Capital International; Bloomberg Financial Markets
The quoted performance information shown above is not intended to
indicate the future performance of the International Equity or Emerging Markets
Portfolios. Advertising or supplemental sales literature relating to a
Portfolio may describe the percentage decline from all-time high levels for
certain foreign stock markets. It may also describe how the Portfolio differs
from the EAFE Index in composition.
INDEPENDENT ACCOUNTANTS AND COUNSEL
PricewaterhouseCoopers LLP ("PwC"), with principal offices at 2400
Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as independent
accountants for the Fund. The financial statements for the Portfolios that are
incorporated by reference in this Statement of Additional Information have been
audited by PwC, and have been included herein by reference in reliance upon the
report of such firm of independent accountants given upon their authority as
experts in accounting and auditing.
Willkie Farr & Gallagher serves as counsel for the Fund and provides
legal services from time to time for CSAM and CSAMSI.
MISCELLANEOUS
The Portfolios 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 Portfolios 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 Portfolios. Warburg, Pincus & Co.
has no obligation or liability in connection with the administration, marketing
or trading of the Funds.
As of November 30, 1998, the names, addresses and percentage ownership
of each person that owned 5% or more of the outstanding shares of a Portfolio
are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Portfolio Name and Address Percentage Owned
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Post-Venture Capital Warburg Pincus Asset Management, Inc. 71.59%
Attn: Stephen Distler
466 Lexington Avenue, 10th Floor
New York, NY 10017-3140
- ------------------------------------------------------------------------------------------------
</TABLE>
66
<PAGE> 73
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Portfolio Name and Address Percentage Owned
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Guarantee & Trust Co. TTEE 8.92%
Stuart Goode IRA R/O
70 E 77th St. Apt. 9A
New York, NY 10021-1811
- ------------------------------------------------------------------------------------------------
Small Company Growth MAC & Co 12.38%
A/C BUCF 1831132
Mutual Funds Operations
P.O. Box 3198
Pittsburgh, PA 15230-3198
- ------------------------------------------------------------------------------------------------
Trustees of Amherst College 11.36%
Amherst College, Ms. Sharon Siegel
Treasurer Office
Box 2203 P.O. Box 5000
Amherst, MA 01002-5000
- ------------------------------------------------------------------------------------------------
MAC & Co 6.43%
FBO Oberlin College
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA 15230-3198
- ------------------------------------------------------------------------------------------------
Northern Trust Co TTEE* 5.60%
FBO Southern California
Rock Products C/O Mutual Funds
P.O. Box 92956
Chicago, IL 60675
- ------------------------------------------------------------------------------------------------
National City Bank of KY TTEE 5.22%
Baptist Healthcare System
UAD 05/06/97
Attn: Trust Mutual Funds
P.O. Box 94777
Cleveland, OH 44101-4777
- ------------------------------------------------------------------------------------------------
Small Company Value The American Numismatic Society 40.03%
155th Street Broadway
New York, NY 10032
- ------------------------------------------------------------------------------------------------
Wendel & Co. A/C 510105 8.79%
C/O The Bank of New York
Mutual Fund/Reorg Dept.
P.O. Box 1066 Wall Street Station
New York, NY 10268-1066
- ------------------------------------------------------------------------------------------------
Newman-Stein Profit Sharing Plan 7.60%
C/O Mr. William Stein
Newman-Stein Inc.
902 Broadway
New York, NY 10010-6002
- ------------------------------------------------------------------------------------------------
</TABLE>
67
<PAGE> 74
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Portfolio Name and Address Percentage Owned
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Guarantee & Trust Co. TTEE 6.32%
Stuart Goode IRA R/O
70 E. 77th St. Apt.9A
New York, NY 10021-1811
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Value National Financial Services Corp.* 77.81%
FBO Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
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Mandel Associated Foundations 14.00%
1750 Euclid Avenue
Cleveland, OH 44115-2106
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Foundations Investments of Ohio 6.28%
P.O. Box 6609
Cleveland, OH 44101-1609
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Emerging Markets Winston-Salem, NC 27109-7354 78.18%
Louis R. Morrell/Irene A. Comito Co-Trustees
Wake Forest University Trust
U/A DTD 6/25/41
P.O. Box 7354
Winston-Salem, NC 27109-7354
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The Juilliard School 7.83%
60 Lincoln Center Plaza
New York, NY 10023-6588
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Japan Growth Warburg Pincus Asset Management, Inc. 92.71%
Attn: Stephen Distler
466 Lexington Avenue
New York, NY 10017-3140
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</TABLE>
* Each Portfolio believes these entities are not the beneficial
owners of shares held of record by them.
FINANCIAL STATEMENTS
The 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 Portfolios included therein. The Fund will furnish without charge
a copy of the Annual Report upon request by calling the Fund at 1-800-222-8977.
68
<PAGE> 75
APPENDIX
DESCRIPTION OF RATINGS
Commercial Paper Ratings
Commercial paper rated A-1 by Standard and 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 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 they normally
exhibit adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal for bonds in this category than for bonds in higher rated
categories.
BB, B, CCC, CC and C - Debt rated BB and B 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 CCC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk
A-1
<PAGE> 76
exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces 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
has 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 BBB 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- debC rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
Additionally, the rating CI is reserved for income bonds on which no
interest is being paid. Such debt is rated between debt rated C and debt rated
D.
To provide more detailed indications of credit quality, the ratings
may be modified by the addition of a plus or minus sign to show relative
standing within this major rating category.
D - Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The following summarizes the ratings used by Moody's for corporate
bonds:
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 edge." Interest payments are protected by a large or exceptionally
stable margin and principal is secure.
A-2
<PAGE> 77
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 the
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 comprise 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
