<PAGE> 1
SUPPLEMENT TO THE PROSPECTUSES
WARBURG PINCUS INSTITUTIONAL FUND
The following information supersedes certain information in the fund's
Prospectuses.
Provident Distributors, Inc. (PDI), located at Four Falls Corporate Center, West
Conshohocken, PA 19428-2961, is the fund's distributor and is responsible for
making the fund available to you.
Portfolio Manager Changes. The following information replaces certain
information in the fund's Prospectuses:
WARBURG PINCUS INSTITUTIONAL FUND -- EMERGING MARKETS PORTFOLIO
Harold E. Sharon and Vincent J. McBride serve as Co-Portfolio Managers of this
portfolio and Jun Sung Kim and Federico D. Laffan serve as Associate Portfolio
Managers of this portfolio. Morid Kamshad no longer serves as Associate
Portfolio Manager of this portfolio.
WARBURG PINCUS INSTITUTIONAL FUND -- SMALL COMPANY GROWTH PORTFOLIO
Stephen J. Lurito and Sammy Oh serve as Co-Portfolio Managers of this portfolio.
Elizabeth B. Dater no longer serves as Co-Portfolio Manager of this portfolio.
Dated: January 3, 2000 16-0100
for
WPINI
WPINU
<PAGE> 2
STATEMENT OF ADDITIONAL INFORMATION
February 22, 1999
As Revised January 3, 2000
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, 1999, which either
accompanies this Statement of Additional Information or has previously been
provided to the investor to whom this Statement of Additional Information is
being sent, is incorporated herein by reference.
This Statement of Additional Information is not 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
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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
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
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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
Officers and Board of Directors........................................................................................44
Portfolio Managers.....................................................................................................48
Post-Venture Capital Portfolio......................................................................................48
Small Company Growth Portfolio......................................................................................48
Small Company Value Portfolio.......................................................................................48
Value Portfolio.....................................................................................................49
International Equity Growth Portfolio...............................................................................49
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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
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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> 7
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, (ii) at-the-
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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 of a call option, to unfreeze an underlying security (thereby
permitting its sale or the writing of a new option on the security prior to the
outstanding option's expiration). The obligation of the Portfolio under an
option it has written would be terminated by a closing purchase transaction (the
Portfolio would not be deemed to own an option as a result of the transaction).
So long as the obligation of the Portfolio as the writer of an option continues,
the Portfolio may be assigned an exercise notice by 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
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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
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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> 11
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> 12
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
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<PAGE> 13
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 contracts, there is no assurance that an active market
will exist at any particular time. Most futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit or trading may be suspended for
specified periods during the day. It is possible that futures contract prices
could move to the daily limit for several consecutive trading days with little
or no trading, thereby preventing prompt liquidation of futures positions at an
advantageous price and subjecting a 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> 14
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> 15
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> 16
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
11
<PAGE> 17
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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<PAGE> 18
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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<PAGE> 19
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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<PAGE> 20
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> 21
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 1993
---- ---- ---- ---- ---- ----
Consumption
Expenditures
<S> <C> <C> <C> <C> <C> <C>
Private............... Yen303,050 Yen308,472 Yen299,440 Yen290,515 Yen286,154 Yen278,703
Government............ 50,083 50,239 48,969 47,555 45,743 44,771
Gross Fixed
Capital Formation..... 133,044 143,217 148,190 136,792 137,291 140,433
Increase (Decrease) in
Stocks................ 914 828 1,058 947 50 620
Exports of Goods and
Services................. 46,355 55,979 49,598 45,393 44,410 44,197
Imports of Goods and
Services................. 46,753 51,331 46,900 38,272 34,387 33,343
GDP (Expenditures)....... 499,191 507,403 500,356 482,930 479,260 475,381
Change in GDP from
Preceding Year........... (1.6)% 1.4% 3.6% 0.8% 0.8% 0.9%
</TABLE>
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
Consumption
Expenditures
<S> <C> <C> <C>
Private.................. Yen272,294 Yen261,891 Yen249,288
Government............... 43,262 41,356 38,807
Gross Fixed
Capital Formation........ 143,525 143,998 136,467
Increase (Decrease) in
Stocks................... 1,489 3,453 2,430
Exports of Goods and
Services.................... 47,384 46,723 45,920
Imports of Goods and
Services.................... 36,891 39,121 42,872
GDP (Expenditures).......... 471,064 458,299 430,040
Change in GDP from
Preceding Year.............. 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>
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<PAGE> 22
<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
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> <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
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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
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<PAGE> 24
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
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<PAGE> 25
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
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<PAGE> 26
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 debt securities rated 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
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<PAGE> 27
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
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<PAGE> 28
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
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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
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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
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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 purchase securities on 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."
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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> 42
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> 43
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> 44
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> 45
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> 46
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> 47
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>
<CAPTION>
- ------------------------------------------------------------------------------------
<S> <C>
Emerging Markets $2,578,000
- ------------------------------------------------------------------------------------
Small Company Growth $10,795,000
- ------------------------------------------------------------------------------------
Value $4,196,000
- ------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 48
<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> 49
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>
<CAPTION>
<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.
</TABLE>
44
<PAGE> 50
<TABLE>
<S> <C>
JACK W. FRITZ (72) DIRECTOR/TRUSTEE
2425 NORTH FISH CREEK ROAD PRIVATE INVESTOR; CONSULTANT AND DIRECTOR OF FRITZ
P.O. BOX 483 BROADCASTING, INC. AND FRITZ COMMUNICATIONS
WILSON, WYOMING 83014 (DEVELOPERS AND OPERATORS OF RADIO STATIONS);
DIRECTOR OF ADVO, INC. (DIRECT MAIL ADVERTISING);
DIRECTOR/TRUSTEE OF OTHER WARBURG PINCUS FUNDS.
Jeffrey E. Garten (53) Director
Box 208200 Dean of Yale School of Management and William S.
New Haven, Connecticut Beinecke Professor in the Practice of International
Trade and Finance; Undersecretary of Commerce for
International Trade 06520-8200 from November 1993 to
October 1995; Director/Trustee of other Warburg
Pincus Funds.
James S. Pasman, Jr. (69) 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* (58) 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.
</TABLE>
- ---------------------------
* Indicates a Director who is an "interested person" of the Fund as defined in
the 1940 Act.
45
<PAGE> 51
<TABLE>
<S> <C>
Steven N. Rappaport (51) Director
40 East 52nd Street President of Loanet, Inc. since 1997; Executive Vice
New York, New York 10022 President of Loanet, Inc. from 1994 to 1997;
Director, President, North American Operations, and
former Executive Vice President from 1992 to 1993 of
Worldwide Operations of Metallurg Inc.; Executive
Vice President, Telerate, Inc. from 1987 to 1992;
Partner in the law firm of Hartman & Craven until
1987; Director/Trustee of other Warburg Pincus Funds
and other CSAM-advised investment companies.
Alexander B. Trowbridge (70) Director/Trustee
1317 F Street, N.W., 5th Floor Currently retired; President of Trowbridge Partners,
Washington, DC 20004 Inc. (business consulting) from January 1990 to
November 1996; Director or Trustee of New England
Mutual Life Insurance Co., ICOS Corporation
(biopharmaceuticals), IRI International (energy
services), The Rouse Company (real estate
development), Harris Corp. (electronics and
communications equipment), The Gillette Co.
(personal care products) and Sunoco, Inc. (petroleum
refining and marketing); Director/Trustee of other
Warburg Pincus Funds.
Eugene L. Podsiadlo (42) President Managing
466 Lexington Avenue Director of CSAM; Associated with CSAM since CSAM
New York, New York 10017-3147 acquired the Funds' predecessor adviser in July
1999; with the predecessor adviser since 1991; Vice
President of Citibank, N.A. from 1987 to 1991;
Officer of CSAMSI and of other Warburg Pincus Funds.
</TABLE>
46
<PAGE> 52
<TABLE>
<S> <C>
Hal Liebes, Esq. (35) Vice President and Secretary
153 East 53rd Street MANAGING Director and General Counsel of CSAM;
New York, New York 10022 Associated with CSAM since 1995; ASSOCIATED WITH
LEHMAN BROTHERS, INC. FROM 1996 TO 1997; Associated
with CS First Boston Investment Management from 1994
to 1995; Associated with Division of Enforcement,
U.S. Securities and Exchange Commission from 1991 to
1994; Officer of CSAMSI, other Warburg Pincus Funds
AND OTHER CSAM-ADVISED INVESTMENT COMPANIES.
Michael A. Pignataro (40) Treasurer and Chief Financial Officer
153 East 53rd Street Vice President and Director of Fund Administration
New York, New York 10022 of CSAM; Associated with CSAM since 1984; Officer of
CSAMSI, other Warburg Pincus Funds AND OTHER
CSAM-ADVISED INVESTMENT COMPANIES.
Stuart J. Cohen, Esq. (31) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel of CSAM; Associated
New York, New York 10017-3147 with CSAM since CSAM acquired the Funds' predecessor
adviser in July 1999; with the predecessor adviser
since 1997; Associated with the law firm of Gordon
Altman Butowsky Weitzen Shalov & Wein from 1995 to
1997; Officer of other Warburg Pincus Funds.
Rocco A. DelGuercio (36) Assistant Treasurer
153 East 53rd Street Assistant Vice President and Administrative Officer
New York, New York 10022 of CSAM; Associated with CSAM since June 1996;
Assistant Treasurer, Bankers Trust Corp. -- Fund
Administration from March 1994 to June 1996; Mutual
Fund Accounting Supervisor, Dreyfus Corporation from
April 1987 to March 1994; Officer of other Warburg
Pincus Funds AND OTHER CSAM-ADVISED INVESTMENT
COMPANIES.
</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
47
<PAGE> 53
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>
- ------------------------
* Each Director serves as a Director or Trustee of 51 investment companies
and portfolios in the Warburg Pincus Family of Funds.
** Mr. Priest receives compensation as an affiliate of CSAM, and,
accordingly, receives no compensation from the Fund or any other
investment company advised by CSAM.
*** Mr. Reichman resigned as a Director of the Fund effective August 18,
1999.
**** 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
48
<PAGE> 54
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 Co-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. Stephen J. Lurito and Sammy Oh are
Co-Portfolio Managers of the Small Company Growth Portfolio. MR. LURITO HAS
BEEN ASSOCIATED WITH CSAM SINCE CSAM ACQUIRED THE FUNDS' PREDECESSOR ADVISER IN
JULY 1999 AND JOINED THE PREDECESSOR ADVISER IN 1987. PRIOR TO THAT HE WAS A
RESEARCH ANALYST AT SANFORD C. BERNSTEIN & COMPANY, INC. MR. LURITO EARNED A
B.A. DEGREE FROM THE UNIVERSITY OF VIRGINIA AND AN M.B.A. FROM THE WHARTON
SCHOOL, UNIVERSITY OF PENNSYLVANIA.
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.
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. Scott T. Lewis and Stacy Dutton are the Co-Portfolio
Manager of the Value Portfolio. Mr. Lewis has been associated with CSAM since
CSAM acquired the Funds' predecessor adviser in July 1999 and joined the
predecessor adviser in
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<PAGE> 55
1986. PRIOR TO THAT MR. LEWIS WAS AN ASSISTANT PORTFOLIO MANAGER AT BENCH
CORPORATION FROM 1984 TO 1985 AND A TRADER AT ATLANTA/SOSNOFF MANAGEMENT CORP.
FROM 1984 TO 1985 AND A TRADER AT E.F. HUTTON & CO. FROM 1982 TO 1984. MR. LEWIS
RECEIVED A M.B.A. AND A B.S. DEGREE FROM NEW YORK UNIVERSITY.
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 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.
50
<PAGE> 56
Emerging Markets Portfolio. Mr. McBride and Mr. Sharon are also
Co-Portfolio Managers of the Emerging Markets Portfolio (see biographies above).
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) serves as the
Portfolio Manager of, and Todd Jacobson, CFA, serve as the Associate 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 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
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<PAGE> 57
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.
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio 1998* Waiver 1997+ Waiver 1996 Waiver
- ---------
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Post-Venture Capital $17,840 $17,840 N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Small Company Growth $2,012,526 $396,698 $1,405,403 $314,893 $268,768 $122,453
- --------------------------------------------------------------------------------------------------------------------------------
Small Company Value $55,629 $52,149 N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE> 58
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Value
- --------------------------------------------------------------------------------------------------------------------------------
Value $382,122 $196,905 $22,250 $22,250 N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Emerging Markets $314,334 $13,496 $376,368 $103,632 $21,487 $21,487
- --------------------------------------------------------------------------------------------------------------------------------
International Equity $9,511,718 $1,511,306 $9,423,008 $1,627,352 $5,644,429 $1,182,795
- --------------------------------------------------------------------------------------------------------------------------------
Japan Growth $15,596 $14,514 N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
</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.
CSAMSI AND PFPC SERVE AS CO-ADMINISTRATORS TO THE FUND PURSUANT TO
SEPARATE WRITTEN AGREEMENTS (THE "CSAMSI CO-ADMINISTRATION AGREEMENTS" AND THE
"PFPC CO-ADMINISTRATION AGREEMENTS," RESPECTIVELY). CSAMSI BECAME
CO-ADMINISTRATOR TO THE FUND ON NOVEMBER 1, 1999. PRIOR TO THAT, COUNSELLORS
FUNDS SERVICE, INC. ("COUNSELLORS SERVICE") SERVED AS CO-ADMINISTRATOR TOT HE
FUND.
As co-administrator, CSAMSI provides shareholder liaison services to the
Portfolios, including responding to shareholder inquiries and providing
information on shareholder investments. CSAMSI 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 CSAMSI a fee calculated at an annual rate of .10% of the
Portfolio's average daily net assets.
Counsellors Service (the Fund's predecessor co-administrator) 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
- ------------------------------------------------------------------------------------------------------------------
Small Company Value $6,181 N/A N/A
- ------------------------------------------------------------------------------------------------------------------
Value $50,950 $2,967 N/A
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE> 59
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Portfolio 1998 1997 1996
- ---------
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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-Venture Capital $3,150 $1,622 N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Small Company Growth $229,049 $0 $156,156 0 $29,863 $9,901
- --------------------------------------------------------------------------------------------------------------------------------
Small Company Value $7,923 $6,181 N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
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 Equity $995,886 $0 $963,938 0 $702,540 $119,850
- --------------------------------------------------------------------------------------------------------------------------------
Japan Growth $4,474 $1,701 N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE> 60
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
Provident Distributors, Inc. ("PDI") serves as the distributor of the
Portfolios. PDI's principal business address is FOUR FALLS CORPORATE CENTER,
WEST CONSHOHOCKEN, PENNSYLVANIA 19428-2961.
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
55
<PAGE> 61
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 next computed after they are accepted
by the Service Organization or its authorized designee. Service Organizations
may impose transaction or administrative charges or other direct fees, which
charges or fees would not be imposed if 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.
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.
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<PAGE> 62
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.
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,
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<PAGE> 63
among other things: (a) derive at least 90% of its gross income in each taxable
year from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of stock or securities or foreign
currencies, or other income (including, but not limited to, gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies; and (b) diversify its holdings so that,
at the end of each quarter of the 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.
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
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<PAGE> 64
amount of undistributed capital gains included in the shareholder's income.
Organizations or persons not subject to federal income tax on such capital gains
will be entitled to a refund of their pro rata share of such taxes paid by the
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
59
<PAGE> 65
the effect of these rules and prevent disqualification of the Portfolio as a
regulated investment company.
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.
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<PAGE> 66
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 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
61
<PAGE> 67
deemed distributions of long-term capital gains received by the shareholder with
respect to such share.
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
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<PAGE> 68
is not an additional tax and any amount withheld may be credited against a
shareholder's United States federal income tax liabilities.
Notices
Shareholders will be notified annually by 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 (INCEPTION DATE) ONE-YEAR FIVE-YEARS SINCE INCEPTION
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Post-Venture Capital
(10/31/97) (17.70)% (22.50)% N/A N/A (17.70)% (22.50)%
- ----------------------------------------------------------------------------------------------------------------------------------
Small Company Growth
(12/29/95) (18.88)% (19.07)% N/A N/A 9.34% 9.13%
- ----------------------------------------------------------------------------------------------------------------------------------
Small Company Value
(10/31/97) (20.20)% (24.70)% N/A N/A (20.20)% (24.70)%
- ----------------------------------------------------------------------------------------------------------------------------------
Value
(6/30/97) 9.76% 9.22% N/A N/A 12.28% 11.60%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE> 69
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Emerging Markets
(9/30/96) (32.90)% (33.06)% N/A N/A (19.71)% (20.04)%
- ----------------------------------------------------------------------------------------------------------------------------------
International Equity
(9/1/92) (4.11)% (4.27)% 6.03% 5.85% 10.25% 10.04%
- ----------------------------------------------------------------------------------------------------------------------------------
Japan Growth Portfolio+
(10/31/97) (7.84)% (12.07)% N/A N/A (7.84)% (12.07)%
- ----------------------------------------------------------------------------------------------------------------------------------
</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
64
<PAGE> 70
relevant measuring period would be the number of months that have elapsed in the
current calendar year or most recent three months, as the case may be. Investors
should note that this performance may not be representative of the 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
65
<PAGE> 71
market and industry benchmarks. The Post-Venture Capital Portfolio may discuss
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
</TABLE>
66
<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>
1995 9.42 34.11
1996 4.40 20.26
1997 0.24 31.01
1998 18.29 26.23
</TABLE>
- -------------------------
+ Without reinvestment of dividends.
* The EAFE Index has outperformed the S&P 500 Index 14 out of the last 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>
</TABLE>
67
<PAGE> 73
<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
- -------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
68
<PAGE> 74
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Portfolio Name and Address Percentage Owned
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Newman-Stein Profit Sharing Plan 7.60%
C/O Mr. William Stein
Newman-Stein Inc.
902 Broadway
New York, NY 10010-6002
- -------------------------------------------------------------------------------------------------------------------
Guarantee & Trust Co. TTEE 6.32%
Stuart Goode IRA R/O
70 E. 77th St. Apt. 9A
New York, NY 10021-1811
- -------------------------------------------------------------------------------------------------------------------
Value National Financial Services Corp.* 77.81%
FBO Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
- -------------------------------------------------------------------------------------------------------------------
Mandel Associated Foundations 14.00%
1750 Euclid Avenue
Cleveland, OH 44115-2106
- -------------------------------------------------------------------------------------------------------------------
Foundations Investments of Ohio 6.28%
P.O. Box 6609
Cleveland, OH 44101-1609
- -------------------------------------------------------------------------------------------------------------------
Emerging Markets Louis R. Morrell/Irene A. Comito Co-Trustees 78.18%
Wake Forest University Trust
U/A DTD 6/25/41
P.O. Box 7354
Winston-Salem, NC 27109-7354
- -------------------------------------------------------------------------------------------------------------------
The Juilliard School 7.83%
60 Lincoln Center Plaza
New York, NY 10023-6588
- -------------------------------------------------------------------------------------------------------------------
Japan Growth Warburg Pincus Asset Management, Inc. 92.71%
Attn: Stephen Distler
466 Lexington Avenue
New York, NY 10017-3140
- -------------------------------------------------------------------------------------------------------------------
</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, 1999, which either
accompanies this Statement of Additional Information or has previously been
provided to the investor to whom this Statement of Additional Information is
being sent, is incorporated herein by reference with respect to all information
regarding the 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.
69
<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
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and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, 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- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
Additionally, the rating CI is reserved for income bonds on which no
interest is being paid. Such debt is rated between debt rated C and debt rated
D.
To provide more detailed indications of credit quality, the ratings may
be modified by the addition of a plus or minus sign to show relative standing
within this major rating category.
D - Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The following summarizes the ratings used by Moody's for corporate bonds:
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
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payments are protected by a large or exceptionally stable margin and principal
is secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of 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.
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