<PAGE> 1
SUPPLEMENT TO THE PROSPECTUSES
WARBURG PINCUS FUNDS
The following information supersedes certain information in the funds'
Prospectuses.
New Adviser. Effective today, Credit Suisse Asset Management, LLC (CSAM) became
the funds' investment adviser as a result of the closing of the previously
announced acquisition of Warburg Pincus Asset Management, Inc. (Warburg Pincus)
by Credit Suisse Group (Credit Suisse), and the combination of Warburg Pincus
with Credit Suisse's existing U.S. asset management business. Accordingly, all
references in the Prospectuses to Warburg Pincus are now to CSAM.
CSAM is an indirect wholly-owned U.S. subsidiary of Credit Suisse. CSAM,
together with its predecessor firms, has been engaged in the investment advisory
business for over 60 years and has assets under management of approximately
$58.7 billion. CSAM's principal business address is 153 East 53rd Street, New
York, New York 10022.
Change of Name of Distributor. Counsellors Securities Inc., the funds'
distributor, has changed its name to Credit Suisse Asset Management Securities,
Inc. to reflect its ownership by Credit Suisse.
Address Change. The following address replaces the current address provided in
the Prospectus for overnight or courier service: Boston Financial, Attn: Warburg
Pincus Funds, 66 Brooks Drive, Braintree, MA 02184.
Dated: July 6, 1999
<PAGE> 2
WARBURG PINCUS FUNDS
SHAREHOLDER
GUIDE
Common Class
December 3, 1998
As Revised July 6, 1999
This Shareholder Guide is incorporated into and legally part of each
Warburg Pincus (Common Class) prospectus.
[Warburg Pincus Funds Logo]
<PAGE> 3
BUYING SHARES
OPENING AN ACCOUNT
Your account application provides us with key information we need to set up
your account correctly. It also lets you authorize services that you may find
convenient in the future.
If you need an application, call our Shareholder Service Center to receive
one by mail or fax. Or you can download it from our Internet Web site:
www.warburg.com.
You can make your initial investment by check or wire. The "By Wire" method
in the table enables you to buy shares on a particular day at that day's closing
NAV.
ADDING TO AN ACCOUNT
You can add to your account in a variety of ways, as shown in the table. If
you want to use ACH transfer, be sure to complete the "ACH on Demand" section of
the account application.
INVESTMENT CHECKS
Please use either a personal or bank check payable in U.S. dollars to Warburg
Pincus Funds. Unfortunately, we cannot accept "starter" checks that do not have
your name preprinted on them. We also cannot accept checks payable to you or to
another party and endorsed to the order of Warburg Pincus Funds. These types of
checks may be returned to you and your purchase order may not be processed.
Limited exceptions include properly endorsed IRA Rollover and government checks.
MINIMUM INITIAL INVESTMENT
<TABLE>
<S> <C>
Cash Reserve Fund: $ 1,000
New York Tax Exempt
Fund: $ 1,000
Balanced Fund: $ 1,000
Growth & Income Fund: $ 1,000
WorldPerks(R) Funds: $ 5,000
Long-Short Funds $ 25,000
All other funds: $ 2,500
IRAs: $ 500*
Transfers/Gifts to
Minors: $ 500*
* $25,000 minimum for Long-Short
Funds.
</TABLE>
WIRE INSTRUCTIONS
State Street Bank and Trust Company
ABA# 0110 000 28
Attn: Mutual Funds/Custody Dept.
[Warburg Pincus Fund Name]
DDA# 9904-649-2
F/F/C: [Account Number and Registration]
HOW TO REACH US
SHAREHOLDER SERVICE CENTER
Toll free: 800 -WARBURG
(800 -927-2874)
Fax: 212-370-9833
MAIL
Warburg Pincus Funds
P.O. Box 9030
Boston, MA 02205-9030
OVERNIGHT/COURIER SERVICE
Boston Financial
Attn: Warburg Pincus Funds
66 Brooks Drive
Braintree, MA 02184
INTERNET WEB SITE
www.warburg.com
2
<PAGE> 4
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
<S> <C>
BY CHECK
- - Complete the New Account Application. - Make your check payable to Warburg
For IRAs use the Universal IRA Pincus Funds.
Application. - Write the account number and the fund
- - Make your check payable to Warburg name on your check.
Pincus Funds. - Mail to Warburg Pincus Funds.
- - Mail to Warburg Pincus Funds. - Minimum amount is $100.
BY EXCHANGE
- - Call our Shareholder Service Center to - Call our Shareholder Service Center to
request an exchange. Be sure to read request an exchange.
the current prospectus for the new - Minimum amount is $250.
fund. Also please observe the minimum If you do not have telephone privileges,
initial investment. mail or fax a signed letter of
If you do not have telephone privileges, instruction.
mail or fax a signed letter of
instruction.
BY WIRE
- - Complete and sign the New Account - Call our Shareholder Service Center by
Application. 4 p.m. ET to inform us of the incoming
- - Call our Shareholder Service Center and wire. Please be sure to specify your
fax the signed New Account Application name, the account number and the fund
by 4 p.m. ET. name on your wire advice.
- - Shareholder Services will telephone you - Wire the money for receipt that day.
with your account number. Please be - Minimum amount is $500.
sure to specify your name, the account
number and the fund name on your wire
advice.
- - Wire your initial investment for
receipt that day.
- - Mail the original, signed application
to Warburg Pincus Funds.
This method is not available for IRAs.
BY AUTOMATED CLEARING HOUSE (ACH) TRANSFER
- - Cannot be used to open an account. - Call our Shareholder Service Center to
request an ACH transfer from your bank.
- Your purchase will be effective at the
next NAV calculated after we receive your
order in proper form.
- Minimum amount is $50.
Requires ACH on Demand privileges.
</TABLE>
800-WARBURG (800-927-2874)
MONDAY - FRIDAY, 8 A.M. - 8 P.M. ET SATURDAY, 8 A.M. - 4 P.M. ET
3
<PAGE> 5
SELLING SHARES(*)
<TABLE>
<CAPTION>
SELLING SOME OR ALL OF YOUR SHARES CAN BE USED FOR
<S> <C>
BY MAIL
Write us a letter of instruction that - Accounts of any type.
includes: - Sales of any amount.
- - your name(s) and signature(s) For IRAs please use the IRA Distribution
- - the fund name and account number Request Form.
- - the dollar amount you want to sell
- - how to send the proceeds
Obtain a signature guarantee or other
documentation, if required (see "Selling
Shares
in Writing").
Mail the materials to Warburg Pincus
Funds.
If only a letter of instruction is
required, you can fax it to the
Shareholder Service Center.
BY EXCHANGE
- - Call our Shareholder Service Center to - Accounts with telephone privileges.
request an exchange. Be sure to read If you do not have telephone privileges,
the current prospectus for the new fund. mail or fax a letter of instruction to
Also please observe the minimum initial exchange shares.
investment.
BY PHONE
Call our Shareholder Service Center to - Non-IRA accounts with telephone
request a redemption. You can receive the privileges.
proceeds as:
- - a check mailed to the address of record
- - an ACH transfer to your bank ($50
minimum)
- - a wire to your bank ($500 minimum)
See "By Wire or ACH Transfer" for
details.
BY WIRE OR ACH TRANSFER
- - Complete the "Wire Instructions" or - Non-IRA accounts with wire-redemption
"ACH on Demand" section of your New or ACH on Demand privileges.
Account Application. - Requests by phone or mail.
- - For federal-funds wires, proceeds will
be wired on the next business day. For
ACH transfers, proceeds will be
delivered within two business days.
</TABLE>
()* For the Central & Eastern Europe Fund only: A short-term trading fee of 1.0%
of the amount redeemed will be deducted from the redemption proceeds if you sell
shares of the fund after holding them less than six months. This fee, which is
currently being waived, does not apply to shares acquired through reinvestment
of distributions. For purposes of computing the short-term trading fee, any
shares bought through reinvestment of distributions will be redeemed first
without charging the fees, followed by the shares held longest.
4
<PAGE> 6
SELLING SHARES IN WRITING
Some circumstances require a written sell order, along with a signature
guarantee. These include:
- accounts whose address of record has been changed within the past 30 days
- redemption in certain large amounts (other than by exchange)
- requests to send the proceeds to a different payee or address
- shares represented by certificates, which must be returned with your sell
order
A signature guarantee helps protect against fraud. You can obtain one from
most banks or securities dealers, but not from a notary public.
RECENTLY PURCHASED SHARES
If the fund has not yet collected payment for the shares you are selling, it
will delay sending you the proceeds until your purchase payment clears. This may
take up to 10 calendar days after the purchase. To avoid the collection period,
consider buying shares by bank wire, bank check, certified check or money order.
LOW-BALANCE ACCOUNTS
If your account balance falls below the minimum required to keep it open due
to redemptions or exchanges, the fund may ask you to increase your balance. If
it is still below the minimum after 60 days, the fund may close your account and
mail you the proceeds.
MINIMUM TO KEEP AN ACCOUNT OPEN
<TABLE>
<S> <C>
Cash Reserve Fund: $ 750
New York Tax Exempt Fund: $ 750
Balanced Fund: $ 500
Growth & Income Fund: $ 500
WorldPerks Funds: $ 750
All other funds: $2,000
IRAs: $ 250
Transfers/Gifts to
Minors: $ 250
</TABLE>
800-WARBURG (800-927-2874)
MONDAY - FRIDAY, 8 A.M. - 8 P.M. ET SATURDAY, 8 A.M. - 4 P.M. ET
5
<PAGE> 7
SHAREHOLDER SERVICES
AUTOMATIC SERVICES
Buying or selling shares automatically is easy with the services described
below. You can set up most of these services with your account application or by
calling our Shareholder Service Center.
AUTOMATIC MONTHLY INVESTMENT PLAN
For making automatic investments ($50 minimum) from a designated bank
account.
AUTOMATIC WITHDRAWAL PLAN
For making automatic monthly, quarterly, semiannual or annual withdrawals of
$250 or more.
DISTRIBUTION SWEEP
For automatically reinvesting your dividend and capital-gain distributions
into another identically registered Warburg Pincus fund. Not available for IRAs.
RETIREMENT PLANS
Warburg Pincus offers a range of tax-advantaged retirement accounts,
including:
- Traditional IRAs
- Roth IRAs
- Roth Conversion IRAs
- Spousal IRAs
- Rollover IRAs
- SEP IRAs
To transfer your IRA to Warburg Pincus, use the IRA Transfer/Direct Rollover
Form. If you are opening a new IRA, you will also need to complete the Universal
IRA Application. Please consult your tax professional concerning your IRA
eligibility and tax situation.
TRANSFERS/GIFTS TO MINORS
Depending on state laws, you can set up a custodial account under the Uniform
Transfers-to-Minors Act (UTMA) or the Uniform Gifts-to-Minors Act (UGMA). Please
consult your tax professional about these types of accounts.
ACCOUNT CHANGES
Call our Shareholder Service Center to update your account records whenever
you change your address. Shareholder Services can also help you change your
account information or privileges.
6
<PAGE> 8
OTHER POLICIES
TRANSACTION DETAILS
You are entitled to capital-gain and earned dividend distributions as soon as
your purchase order is executed. For the Intermediate Maturity Government, New
York Intermediate Municipal and Fixed Income Funds and the Money Market Funds,
you begin to earn dividend distributions the business day after your purchase
order is executed. However, if we receive your purchase order and payment to
purchase shares of a Money Market Fund before 12 p.m. (noon), you begin to earn
dividend distributions on that day.
Your purchase order will be canceled and you may be liable for losses or fees
incurred by the fund if:
- your investment check or ACH transfer does not clear
- you place a telephone order by 4 p.m. ET and we do not receive your wire that
day
If you wire money without first calling Shareholder Services to place an
order, and your wire arrives after the close of regular trading on the NYSE,
then your order will not be executed until the end of the next business day. In
the meantime, your payment will be held uninvested. Your bank or other
financial-services firm may charge a fee to send or receive wire transfers.
While we monitor telephone servicing resources carefully, during periods of
significant economic or market change it may be difficult to place orders by
telephone.
Uncashed redemption or distribution checks do not earn interest.
SPECIAL SITUATIONS
A fund reserves the right to:
- refuse any purchase or exchange request, including those from any person or
group who, in the fund's view, is likely to engage in excessive trading
- change or discontinue its exchange privilege after 30 days' notice to current
investors, or temporarily suspend this privilege during unusual market
conditions
- change its minimum investment amounts after 15 days' notice to current
investors of any increases
- charge a wire-redemption fee
- make a "redemption in kind"--payment in portfolio securities rather than
cash--for certain large redemption amounts that could hurt fund operations
- suspend redemptions or postpone payment dates as permitted by the Investment
Company Act of 1940 (such as during periods other than weekends or holidays
when the NYSE is closed or trading on the NYSE is restricted, or any other
time that the SEC permits)
- modify or waive its minimum investment requirements for employees and clients
of its adviser, sub-adviser, distributor and their affiliates and, for the
Long-Short Funds, investments through certain financial-services firms
($10,000 minimum) and through retirement plan programs (no minimum)
- stop offering its shares for a period of time (such as when management
believes that a substantial increase in assets could adversely affect it)
800-WARBURG (800-927-2874)
MONDAY - FRIDAY, 8 A.M. - 8 P.M. ET SATURDAY, 8 A.M. - 4 P.M. ET
7
<PAGE> 9
[WARBURG PINCUS FUNDS LOGO]
P.O. BOX 9030, BOSTON, MA 02205-9030
800-WARBURG (800-927-2874) B www.warburg.com
CREDIT SUISSE ASSET MANAGEMENT SECURITIES, INC.,DISTRIBUTOR. WPCOM-31-1298Dc
<PAGE> 10
STATEMENT OF ADDITIONAL INFORMATION
February 22, 1999
As revised July 6, 1999
WARBURG PINCUS JAPAN GROWTH FUND
WARBURG PINCUS JAPAN SMALL COMPANY FUND
This combined Statement of Additional Information provides
information about Warburg Pincus Japan Growth Fund ("Japan Growth Fund") and
Warburg Pincus Japan Small Company Fund ("Japan Small Company Fund") (each a
"Fund" and collectively, the "Funds") that supplements information contained in
the combined Prospectus for the Common Shares of the Funds and the Prospectus
for the Advisor Shares of the Japan Growth Fund, each dated February 16, 1999
as amended or supplemented from time to time (together the "Prospectuses"), and
is incorporated by reference in its entirety into those Prospectuses.
Each Fund's audited Annual Report dated October 31, 1998,
which either accompanies this Statement of Additional Information or has
previously been provided to the investor to whom this Statement of Additional
Information is being sent, is incorporated herein by reference.
This Statement of Additional Information is not itself a
prospectus and no investment in shares of the Funds should be made solely upon
the information contained herein. Copies of the Prospectuses, Annual Reports
and information regarding each Fund's current performance may be obtained by
writing or telephoning:
<TABLE>
<S> <C>
Common Shares Advisor Shares
------------- --------------
Warburg Pincus Funds Warburg Pincus Advisor Funds
P.O. Box 9030 P.O. Box 9030
Boston, Massachusetts 02205-9030 Boston, Massachusetts 02205-9030
800-WARBURG Attn: Institutional Services
800-222-8977
</TABLE>
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
INVESTMENT OBJECTIVES AND POLICIES.....................................................................................1
Asian Securities.......................................................................................................1
Strategic and Other Transactions.......................................................................................1
Options on Securities and Securities Indices and Futures and Currency Exchange
Transactions.................................................. .........................................1
Securities Options............................................................................................2
Securities Index Options......................................................................................5
OTC Options...................................................................................................5
Futures Activities............................................................................................6
Futures Contracts....................................................................................6
Options on Futures Contracts.........................................................................7
Currency Exchange Transactions................................................................................8
Forward Currency Contracts...........................................................................8
Currency Options.....................................................................................8
Currency Hedging.....................................................................................8
Hedging Generally.............................................................................................9
Swaps ........................................................................................................10
Asset Coverage for Forward Contracts, Options, Futures Options on
Futures and Swaps.......................................................................................11
Additional Information on Other Investment Practices...................................................................12
Foreign Investments...........................................................................................12
Foreign Debt Securities..............................................................................12
Foreign Currency Exchange............................................................................13
Information..........................................................................................13
Political Instability................................................................................14
Foreign Markets......................................................................................14
Increased Expenses...................................................................................14
Dollar-Denominated Debt Securities of Foreign Issuers................................................14
Depositary Receipts..................................................................................14
Privatizations.......................................................................................14
Brady Bonds .........................................................................................15
Emerging Markets.....................................................................................15
Sovereign Debt.......................................................................................15
U.S. Government Securities....................................................................................16
Debt Securities...............................................................................................17
Below Investment Grade Securities....................................................................18
Mortgage-Backed Securities...........................................................................19
Asset-Backed Securities..............................................................................20
Loan Participations and Assignments..................................................................21
Structured Notes, Bonds or Debentures................................................................21
REITs ........................................................................................................22
Convertible Securities........................................................................................22
Securities of Other Investment Companies......................................................................22
</TABLE>
(i)
<PAGE> 12
<TABLE>
<S> <C>
Lending of Portfolio Securities...............................................................................23
Borrowing.....................................................................................................23
When-Issued Securities and Delayed-Delivery Transactions......................................................24
Short Sales "Against the Box".................................................................................24
Emerging Growth and Smaller Capitalization Companies; Unseasoned
Issuers.................................................................................................25
Special Situation Companies...................................................................................25
Warrants......................................................................................................26
Non-Publicly Traded and Illiquid Securities...................................................................26
Rule 144A Securities.................................................................................27
Money Market Obligations......................................................................................27
Repurchase Agreements................................................................................28
Money Market Mutual Funds............................................................................28
Reverse Repurchase Agreements and Dollar Rolls................................................................28
Non-Diversified Status........................................................................................29
Temporary Defensive Strategies.........................................................................................29
Debt Securities...............................................................................................29
Money Market Obligations......................................................................................30
INVESTMENT RESTRICTIONS................................................................................................30
All Funds .............................................................................................................30
Japan Growth Fund......................................................................................................30
Japan Small Company Fund...............................................................................................32
PORTFOLIO VALUATION....................................................................................................33
PORTFOLIO TRANSACTIONS.................................................................................................34
PORTFOLIO TURNOVER.....................................................................................................37
JAPAN AND ITS SECURITIES MARKETS.......................................................................................37
Domestic Politics......................................................................................................37
Economic Background....................................................................................................38
Generally. ..........................................................................................38
Economic Trends......................................................................................39
Currency Fluctuation.................................................................................40
Securities Markets.....................................................................................................40
The Exchange Market..................................................................................40
The OTC Market.......................................................................................41
Market Risks.........................................................................................41
Other Factors..........................................................................................................41
MANAGEMENT OF THE FUNDS................................................................................................42
Officers and Board of Directors........................................................................................42
Portfolio Managers.....................................................................................................47
Investment Adviser and Co-Administrators...............................................................................48
Custodian and Transfer Agent...........................................................................................50
Organization of the Funds..............................................................................................51
Distribution and Shareholder Servicing.................................................................................51
Common Shares.................................................................................................51
Advisor Shares................................................................................................52
</TABLE>
(ii)
<PAGE> 13
<TABLE>
<S> <C>
General.................................................................................................53
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.........................................................................54
Automatic Cash Withdrawal Plan.........................................................................................54
EXCHANGE PRIVILEGE.....................................................................................................54
ADDITIONAL INFORMATION CONCERNING TAXES................................................................................55
The Funds and Their Investments........................................................................................55
Foreign Taxes..........................................................................................................58
Passive Foreign Investment Companies...................................................................................58
Dividends and Distributions............................................................................................59
Sales of Shares........................................................................................................60
Backup Withholding.....................................................................................................60
Notices ...............................................................................................................60
Other Taxation.........................................................................................................61
DETERMINATION OF PERFORMANCE...........................................................................................65
INDEPENDENT ACCOUNTANTS AND COUNSEL....................................................................................66
MISCELLANEOUS..........................................................................................................66
FINANCIAL STATEMENTS...................................................................................................68
APPENDIX - DESCRIPTION OF RATINGS.....................................................................................A-1
</TABLE>
(iii)
<PAGE> 14
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the descriptions of each
Fund's investment objectives and policies in the Prospectuses. There are no
assurances that the Funds will achieve their investment objectives.
The investment objective of the Japan Small Company Fund is
long-term capital appreciation.
The investment objective of the Japan Growth Fund is long-term
growth of capital.
Unless otherwise indicated, all of the Funds are permitted,
but not obligated, to engage in the following investment strategies, subject to
any percentage limitations set forth below.
The Funds are not obligated to pursue any of the following
strategies and do not represent that these techniques are available now or will
be available at any time in the future.
Asian Securities
The Japan Growth and the Japan Small Company Funds will
invest, under normal market conditions, at least 65% of their total assets in
equity securities of companies located in or conducting a majority of their
business in Japan. In addition, the Funds may invest up to 35% of their total
assets in securities of other Asian issuers. These include companies located in
or conducting a majority of their business in Asia, companies which have issued
securities traded principally in an Asian country, or governments, governmental
entities or political subdivisions of Asian countries. The Funds consider Asia
to be comprised of the contiguous eastern Eurasian land mass and adjacent
islands, including, without limitation, the countries of Taiwan, Korea,
Indonesia, China, Hong Kong, Turkey, India, Pakistan, the Philippines, Sri
Lanka, Singapore and Thailand. For purposes of applying the foregoing
limitations, if a company meets the definition of an Asian issuer as a result
of relationships with respect to more than one Asian country, the Funds may
consider the company to be associated with any of such countries.
Determinations as to the eligibility of issuers under the foregoing definitions
will be made by Credit Suisse Asset Management, LLC, the Funds' investment
adviser ("CSAM"), based on publicly available information and inquiries made to
the companies. Due to the rapidly evolving nature of Asian markets, the Funds
reserve the ability to consider additional countries to be included in Asia if
market conditions should develop so as to warrant such a change in investment
policy, and to modify its 10% limitation on investments relating to any one
Asian country (other than Japan).
Strategic and Other Transactions
Options on Securities and Securities Indices and Futures and
Currency Exchange Transactions. Each Fund may purchase and write covered or
collateralized options on securities, securities indices and currencies for both
hedging purposes and to increase total return. Up to 25% of the Fund's total
assets may be at risk in connection with investing in
<PAGE> 15
options on securities, securities indices and, if applicable, currencies. The
amount of assets considered to be "at risk" is, in the case of purchasing
options, the amount of the premium paid, and, in the case of writing options,
the value of the underlying obligation.
Securities Options. Each Fund may write covered put and call
options on stock and debt securities and each Fund may purchase such options
that are traded on foreign and U.S. exchanges, as well as OTC options. A Fund
realizes fees (referred to as "premiums") for granting the rights evidenced by
the options it has written. A put option embodies the right of its purchaser
to compel the writer of the option to purchase from the option holder an
underlying security at a specified price for a specified time period or at a
specified time. In contrast, a call option embodies the right of its purchaser
to compel the writer of the option to sell to the option holder an underlying
security at a specified price for a specified time period or at a specified
time.
The potential loss associated with purchasing an option is
limited to the premium paid, and the premium would partially offset any gains
achieved from its use. However, for an option writer the exposure to adverse
price movements in the underlying security or index is potentially unlimited
during the exercise period. Writing securities options may result in
substantial losses to a Fund, force the sale or purchase of portfolio
securities at inopportune times or at less advantageous prices, limit the
amount of appreciation the Fund could realize on its investments or require the
Fund to hold securities its would otherwise sell.
The principal reason for writing covered options on a security
is to attempt to realize, through the receipt of premiums, a greater return
than would be realized on the securities alone. In return for a premium, a
Fund, as the writer of a covered call option, forfeits the right to any
appreciation in the value of the underlying security above the strike price for
the life of the option (or until a closing purchase transaction can be
effected). A Fund that writes call options retains the risk of an increase in
the price of the underlying security. The size of the premiums that the Funds
may receive may be adversely affected as new or existing institutions,
including other investment companies, engage in or increase their
option-writing activities.
If security prices rise, a put writer would generally expect
to profit, although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that the
writer will also profit, because it should be able to close out the option at a
lower price. If security prices decline, the put writer would expect to suffer
a loss. This loss may be less than the loss from purchasing the underlying
instrument directly to the extent that the premium received offsets the effects
of the decline.
In the case of options written by a Fund that are deemed
covered by virtue of the Fund's holding convertible or exchangeable preferred
stock or debt securities, the time required to convert or exchange and obtain
physical delivery of the underlying common stock with respect to which the Fund
has written options may exceed the time within which the Fund must make
delivery in accordance with an exercise notice. In these instances, a Fund may
purchase or temporarily borrow the underlying securities for purposes of
physical delivery.
2
<PAGE> 16
By so doing, the Fund will not bear any market risk, since the Fund will have
the absolute right to receive from the issuer of the underlying security an
equal number of shares to replace the borrowed securities, but the Fund may
incur additional transaction costs or interest expenses in connection with any
such purchase or borrowing.
Additional risks exist with respect to certain of the
securities for which a Fund may write covered call options. For example, if
the Fund writes covered call options on mortgage-backed securities, the
mortgage-backed securities that it holds as cover may, because of scheduled
amortization or unscheduled prepayments, cease to be sufficient cover. If this
occurs, the Fund will compensate for the decline in the value of the cover by
purchasing an appropriate additional amount of mortgage-backed securities.
Options written by a Fund will normally have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. Each Fund that can write put and call
options on securities may write (i) in-the-money call options when CSAM expects
that the price of the underlying security will remain flat or decline
moderately during the option period, (ii) at-the-money call options when CSAM
expects that the price of the underlying security will remain flat or advance
moderately during the option period and (iii) out-of-the-money call options
when CSAM expects that the premiums received from writing the call option plus
the appreciation in market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. In any of the preceding situations, if the market price of the
underlying security declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-the-money, at-the-money and in-the-money put options (the
reverse of call options as to the relation of exercise price to market price)
may be used in the same market environments that such call options are used in
equivalent transactions. To secure its obligation to deliver the underlying
security when it writes a call option, each Fund will be required to deposit in
escrow the underlying security or other assets in accordance with the rules of
the Clearing Corporation and of the securities exchange on which the option is
written.
Prior to their expirations, put and call options may be sold
in closing sale or purchase transactions (sales or purchases by a Fund prior to
the exercise of options that it has purchased or written, respectively, of
options of the same series) in which a Fund may realize a profit or loss from
the sale. An option position may be closed out only where there exists a
secondary market for an option of the same series on a recognized securities
exchange or in the OTC market. When a Fund has purchased an option and engages
in a closing sale transaction, whether the Fund realizes a profit or loss will
depend upon whether the amount received in the closing sale transaction is more
or less than the premium the Fund initially paid for the original option plus
the related transaction costs. Similarly, in cases where a Fund has written an
option, it will realize a profit if the cost of the closing purchase
transaction is less than the premium received upon writing the original option
and will incur a loss if the cost of the
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closing purchase transaction exceeds the premium received upon writing the
original option. A Fund may engage in a closing purchase transaction to realize
a profit, to prevent an underlying security with respect to which it has written
an option from being called or put or, in the case of a call option, to unfreeze
an underlying security (thereby permitting its sale or the writing of a new
option on the security prior to the outstanding option's expiration). The
obligation of a Fund under an option it has written would be terminated by a
closing purchase transaction (the Fund would not be deemed to own an option as a
result of the transaction). So long as the obligation of a Fund as the writer of
an option continues, the Fund may be assigned an exercise notice by the
broker-dealer through which the option was sold, requiring the Fund to deliver
the underlying security against payment of the exercise price. This obligation
terminates when the option expires or the Fund effects a closing purchase
transaction. A Fund cannot effect a closing purchase transaction with respect
to an option once it has been assigned an exercise notice.
There is no assurance that sufficient trading interest will
exist to create a liquid secondary market on a securities exchange for any
particular option or at any particular time, and for some options, no such
secondary market may exist. A liquid secondary market in an option may cease
to exist for a variety of reasons. In the past, for example, higher than
anticipated trading activity or order flow or other unforeseen events have at
times rendered certain of the facilities of the Options Clearing Corporation
(the "Clearing Corporation") and various securities exchanges inadequate and
resulted in the institution of special procedures, such as trading rotations,
restrictions on certain types of orders or trading halts or suspensions in one
or more options. There can be no assurance that similar events, or events that
may otherwise interfere with the timely execution of customers' orders, will
not recur. In such event, it might not be possible to effect closing
transactions in particular options. Moreover, a Fund's ability to terminate
options positions established in the OTC market may be more limited than for
exchange-traded options and may also involve the risk that securities dealers
participating in OTC transactions would fail to meet their obligations to the
Fund. The Funds, however, intend to purchase OTC options only from dealers
whose debt securities, as determined by CSAM, are considered to be investment
grade. If, as a covered call option writer, a Fund is unable to effect a
closing purchase transaction in a secondary market, it will not be able to sell
the underlying security and would continue to be at market risk on the
security.
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class which may be held
or written, or exercised within certain time periods by an investor or group of
investors acting in concert (regardless of whether the options are written on
the same or different securities exchanges or are held, written or exercised in
one or more accounts or through one or more brokers). It is possible that the
Funds and other clients of CSAM and certain of its affiliates may be considered
to be such a group. A securities exchange may order the liquidation of
positions found to be in violation of these limits and it may impose certain
other sanctions. These limits may restrict the number of options the Funds
will be able to purchase on a particular security.
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Securities Index Options. 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. For example, the Japan Growth Fund or
the Japan Small Company Fund might utilize securities options on indexes such
as the Nikkei 225 Index, the Nikkei 300 Index, the OTC (JASDAQ) Index and the
Topix Index.
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 index options
may be offset by entering into closing transactions as described above for
securities options.
OTC Options. Each Fund may purchase OTC or dealer options or
sell covered OTC options. Unlike exchange-listed options where an intermediary
or clearing corporation, such as the Clearing Corporation, assures that all
transactions in such options are properly executed, the responsibility for
performing all transactions with respect to OTC options rests solely with the
writer and the holder of those options. A listed call option writer, for
example, is obligated to deliver the underlying securities to the clearing
organization if the option is exercised, and the clearing organization is then
obligated to pay the writer the exercise price of the option. If a Fund were
to purchase a dealer option, however, it would rely on the dealer from whom it
purchased the option to perform if the option were exercised. If the dealer
fails to honor the exercise of the option by the Fund, the Fund would lose the
premium it paid for the option and the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid
market while OTC or dealer options do not. Consequently, a Fund will generally
be able to realize the value of a dealer option it has purchased only by
exercising it or reselling it to the dealer who issued it. Similarly, when a
Fund writes a dealer option, it generally will be able to close out the option
prior to its expiration only by entering into a closing purchase transaction
with the dealer to which the Fund originally wrote the option. Although each
Fund will seek to enter into dealer options only with dealers who will agree to
and that are expected to be capable of entering into closing transactions with
the Fund, there can be no assurance that the Funds will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. The
inability to
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enter into a closing transaction may result in material losses to the Funds.
Until a Fund, as a covered OTC call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) used to cover the written option until the option expires or is
exercised. This requirement may impair the Funds' ability to sell portfolio
securities or, with respect to currency options, currencies at a time when such
sale might be advantageous.
Futures Activities. Each Fund may enter into futures
contracts (and related options) on securities, securities indices, foreign
currencies and interest rates, and purchase and write (sell) related options
traded on exchanges designated by the Commodity Futures Trading Commission
(the "CFTC") or consistent with CFTC regulations, on foreign exchanges. These
futures contracts are standardized contracts for the future delivery of a
non-U.S. currency, an interest rate sensitive security or, in the case of index
futures contracts or certain other futures contracts, a cash settlement with
reference to a specified multiplier times the change in the index. An option
on a futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract.
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 the Fund's net asset value after
taking into account unrealized profits and unrealized losses on any such
contracts it has entered into Each Fund reserves the right to engage in
transactions involving futures contracts and options on futures contracts to
the extent allowed by CFTC regulations in effect from time to time and in
accordance with the Fund's policies. There is no overall limit on the
percentage of Fund assets that may be at risk with respect to futures
activities.
Futures Contracts. A foreign currency futures contract
provides for the future sale by one party and the purchase by the other party
of a certain amount of a specified non-U.S. currency at a specified price,
date, time and place. An interest rate futures contract provides for the
future sale by one party and the purchase by the other party of a certain
amount of a specific interest rate sensitive financial instrument (debt
security) at a specified price, date, time and place. Securities indexes are
capitalization weighted indexes which reflect the market value of the
securities represented in the indexes. 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 Fund upon entering
into a futures contract. Instead, the Fund is required to deposit in a
segregated account with its custodian an amount of cash or liquid securities
acceptable to the broker, equal to approximately 1% to 10% of the contract
amount (this amount is subject to change by the exchange on which the contract
is traded, and brokers may charge a higher amount). This amount is known as
"initial
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margin" and is in the nature of a performance bond or good faith deposit on the
contract which is returned to the Fund upon termination of the futures
contract, assuming all contractual obligations have been satisfied. The broker
will have access to amounts in the margin account if the Fund fails to meet its
contractual obligations. Subsequent payments, known as "variation margin," to
and from the broker, will be made daily as the 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." A Fund will also incur brokerage costs in
connection with entering into futures transactions.
At any time prior to the expiration of a futures contract, a
Fund may elect to close the position by taking an opposite position, which will
operate to terminate the Fund's existing position in the contract. Positions
in futures contracts and options on futures contracts (described below) may be
closed out only on the exchange on which they were entered into (or through a
linked exchange). No secondary market for such contracts exists. Although
each Fund may enter into futures contracts only if there is an active market
for such contracts, there is no assurance that an active market will exist at
any particular time. Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the
daily limit has been reached in a particular contract, no trades may be made
that day at a price beyond that limit or trading may be suspended for specified
periods during the day. It is possible that futures contract prices could move
to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions at an
advantageous price and subjecting the Fund to substantial losses. In such
event, and in the event of adverse price movements, the Fund would be required
to make daily cash payments of variation margin. In such situations, if a Fund
had insufficient cash, it might have to sell securities to meet daily variation
margin requirements at a time when it would be disadvantageous to do so. In
addition, if the transaction is entered into for hedging purposes, in such
circumstances the Fund may realize a loss on a futures contract or option that
is not offset by an increase in the value of the hedged position. Losses
incurred in futures transactions and the costs of these transactions will
affect a Fund's performance.
Options on Futures Contracts. Each Fund may purchase and
write put and call options on foreign currency, interest rate and stock index
futures contracts and may enter into closing transactions with respect to such
options to terminate existing positions. There is no guarantee that such
closing transactions can be effected; the ability to establish and close out
positions on such options will be subject to the existence of a liquid market.
An option on a currency, interest rate or securities index
futures contract, as contrasted with the direct investment in such a contract,
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract at a specified exercise price at any time prior
to the expiration date of the option. The writer of the option is required
upon exercise to assume an offsetting futures position (a short position if the
option is a call and a long position if the option is a put). Upon exercise of
an option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account, which represents the
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<PAGE> 21
amount by which the market price of the futures contract exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract. The potential loss related to the purchase of
an option on a futures contract is limited to the premium paid for the option
(plus transaction costs). Because the value of the option is fixed at the
point of sale, there are no daily cash payments by the purchaser to reflect
changes in the value of the underlying contract; however, the value of the
option does change daily and that change would be reflected in the net asset
value of each Fund.
Currency Exchange Transactions. The value in U.S. dollars of
the assets of the Funds that are invested in foreign securities may be affected
favorably or unfavorably by a variety of factors not applicable to investment
in U.S. securities, and the Funds 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
Fund will conduct its currency exchange transactions (i) on a spot (i.e., cash)
basis at the rate prevailing in the currency exchange market, (ii) through
entering into futures contracts or options on such contracts (as described
above), (iii) through entering into forward contracts to purchase or sell
currency or (iv) by purchasing exchange-traded currency options.
Forward Currency Contracts. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the contract as
agreed upon by the parties, at a price set at the time of the contract. These
contracts are entered into in the interbank market conducted directly between
currency traders (usually large commercial banks and brokers) and their
customers. Forward currency contracts are similar to currency futures
contracts, except that futures contracts are traded on commodities exchanges
and are standardized as to contract size and delivery date.
At or before the maturity of a forward contract, the Funds may
either sell a portfolio security and make delivery of the currency, or retain
the security and fully or partially offset its contractual obligation to
deliver the currency by negotiating with its trading partner to enter into an
offsetting transaction. If a Fund retains the portfolio security and engages
in an offsetting transaction, the Fund, at the time of execution of the
offsetting transaction, will incur a gain or a loss to the extent that movement
has occurred in forward contract prices.
Currency Options. The Funds may purchase exchange-traded put
and call options on foreign currencies. Put options convey the right to sell
the underlying currency at a price which is anticipated to be higher than the
spot price of the currency at the time the option is exercised. Call options
convey the right to buy the underlying currency at a price which is expected to
be lower than the spot price of the currency at the time the option is
exercised.
Currency Hedging. Each Fund's currency hedging will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward currency
with respect to specific receivables or payables of a Fund
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generally accruing in connection with the purchase or sale of its portfolio
securities. Position hedging is the sale of forward currency with respect to
portfolio security positions. No Fund may position hedge to an extent greater
than the aggregate market value (at the time of entering into the hedge) of the
hedged securities.
A decline in the U.S. dollar value of a foreign currency in
which a Fund's securities are denominated will reduce the U.S. dollar value of
the securities, even if their value in the foreign currency remains constant.
The use of currency hedges does not eliminate fluctuations in the underlying
prices of the securities, but it does establish a rate of exchange that can be
achieved in the future. For example, in order to protect against diminutions
in the U.S. dollar value of non-dollar denominated securities it holds, a Fund
may purchase foreign currency put options. If the value of the foreign
currency does decline, the Fund will have the right to sell the currency for a
fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on the U.S. dollar value of its securities that otherwise would
have resulted. Conversely, if a rise in the U.S. dollar value of a currency in
which securities to be acquired are denominated is projected, thereby
potentially increasing the cost of the securities, the Fund may purchase call
options on the particular currency. The purchase of these options could
offset, at least partially, the effects of the adverse movements in exchange
rates. The benefit to a Fund derived from purchases of currency options, like
the benefit derived from other types of options, will be reduced by premiums
and other transaction costs. Because transactions in currency exchange are
generally conducted on a principal basis, no fees or commissions are generally
involved. Currency hedging involves some of the same risks and considerations
as other transactions with similar instruments. Although currency hedges limit
the risk of loss due to a decline in the value of a hedged currency, at the
same time, they also limit any potential gain that might result should the
value of the currency increase. If a devaluation is generally anticipated, a
Fund may not be able to contract to sell a currency at a price above the
devaluation level it anticipates.
While the values of currency futures and options on futures,
forward currency contracts and currency options may be expected to correlate
with exchange rates, they will not reflect other factors that may affect the
value of a Fund's investments and a currency hedge may not be entirely
successful in mitigating changes in the value of the Fund's investments
denominated in that currency. A currency hedge, for example, should protect a
Yen-denominated bond against a decline in the Yen, but will not protect the
Fund against a price decline if the issuer's creditworthiness deteriorates.
Hedging Generally. In addition to entering into options,
futures and currency exchange transactions for other purposes, including
generating current income to offset expenses or increase return, each Fund may
enter into these transactions as hedges to reduce investment risk, generally by
making an investment expected to move in the opposite direction of a portfolio
position. A hedge is designed to offset a loss in a portfolio position with a
gain in the hedged position; at the same time, however, a properly correlated
hedge will result in a gain in the portfolio position being offset by a loss in
the hedged position. As a result, the use of options, futures, contracts and
currency exchange transactions for hedging purposes could limit any potential
gain from an increase in the value of the position hedged. In addition, the
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<PAGE> 23
movement in the portfolio position hedged may not be of the same magnitude as
movement in the hedge. With respect to futures contracts, since the value of
portfolio securities will far exceed the value of the futures contracts sold by
a Fund, an increase in the value of the futures contracts could only mitigate,
but not totally offset, the decline in the value of the Fund's assets.
In hedging transactions based on an index, whether a Fund will
realize a gain or loss depends upon movements in the level of securities prices
in the stock market generally or, in the case of certain indexes, in an
industry or market segment, rather than movements in the price of a particular
security. The risk of imperfect correlation increases as the composition of a
Fund's portfolio varies from the composition of the index. In an effort to
compensate for imperfect correlation of relative movements in the hedged
position and the hedge, a Fund's hedge positions may be in a greater or lesser
dollar amount than the dollar amount of the hedged position. Such "over
hedging" or "under hedging" may adversely affect the Fund's net investment
results if market movements are not as anticipated when the hedge is
established. Securities index futures transactions may be subject to
additional correlation risks. First, all participants in the futures market
are subject to margin deposit and maintenance requirements. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through offsetting transactions which would distort the 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.
Each Fund will engage in hedging transactions only when deemed
advisable by CSAM, and successful use by the Fund of hedging transactions will
be subject to CSAM's ability to predict trends in currency, interest rate or
securities markets, as the case may be, and to predict correctly movements in
the directions of the hedge and the hedged position and the correlation between
them, which predictions could prove to be inaccurate. This requires different
skills and techniques than predicting changes in the price of individual
securities, and there can be no assurance that the use of these strategies will
be successful. Even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior or trends. Losses incurred in hedging
transactions and the costs of these transactions will affect a Fund's
performance.
Swaps. The Funds may each enter into swaps relating to
indexes, currencies, interest-rates and debt and equity interests of foreign
issuers without limit. A swap transaction is an agreement between a Fund and a
counterparty to act in accordance with the terms of the swap contract. Index
swaps involve the exchange by the Fund with another party of the respective
amounts payable with respect to a notional principal amount related to one or
more indexes. Currency swaps involve the exchange of cash flows on a notional
amount of two or more currencies based on their relative future values.
Interest rate swaps involve the exchange
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by the Funds with another party of their respective commitments to pay or
receive interest, such as an exchange of fixed rate payments for floating rate
payments. 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 Fund 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 Fund anticipates
purchasing at a later date. The Funds 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 Fund will usually enter into swaps on a net basis, i.e., the
two payment streams are netted out in a cash settlement on the payment date or
dates specified in the agreement, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. Swaps do not involve the
delivery of securities, other underlying assets or principal. Accordingly, the
risk of loss with respect to swaps is limited to the net amount of payments
that the Fund is contractually obligated to make. If the counterparty to a
swap defaults, the Fund's risk of loss consists of the net amount of payments
that the Fund is contractually entitled to receive. Where swaps are entered
into for good faith hedging purposes, CSAM believes such obligations do not
constitute senior securities under the Investment Company Act of 1940, as
amended (the "1940 Act"), and, accordingly, will not treat them as being
subject to a Fund's borrowing restrictions. Where swaps are entered into for
other than hedging purposes, a Fund will segregate an amount of cash or liquid
securities having a value equal to the accrued excess of its obligations over
its entitlements with respect to each swap on a daily basis.
Asset Coverage for Forward Contracts, Options, Futures,
Options on Futures and Swaps. Each Fund will comply with guidelines
established by the U.S. Securities and Exchange Commission (the "SEC") and
other applicable regulatory bodies with respect to coverage of forward currency
contracts; options written by a Fund on currencies, securities, if applicable,
and indexes; and currency, interest rate and index futures contracts and
options on these futures contracts. These guidelines may, in certain
instances, require segregation by the Fund of cash or liquid securities with
its custodian or a designated sub-custodian to the extent the Fund's
obligations with respect to these strategies are not otherwise "covered"
through ownership of the underlying security or financial instrument or by
other portfolio positions or by other means consistent with applicable
regulatory policies. Segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary
to segregate them. As a result, there is a possibility that segregation of a
large percentage of a Fund's assets could impede portfolio management or the
Fund's ability to meet redemption requests or other current obligations.
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For example, a call option written by a Fund on securities may
require the Fund to hold the securities subject to the call (or securities
convertible into the securities without additional consideration) or to
segregate assets (as described above) sufficient to purchase and deliver the
securities if the call is exercised. A call option written by a Fund on an
index may require the Fund to own portfolio securities that correlate with the
index or to segregate assets (as described above) equal to the excess of the
index value over the exercise price on a current basis. A put option written
by a Fund may require the Fund to segregate assets (as described above) equal
to the exercise price. Each Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put
option sold by the Fund. If a Fund holds a futures or forward contract, the
Fund could purchase a put option on the same futures or forward contract with a
strike price as high or higher than the price of the contract held. Each Fund
may enter into fully or partially offsetting transactions so that its net
position, coupled with any segregated assets (equal to any remaining
obligation), equals its net obligation. Asset coverage may be achieved by
other means when consistent with applicable regulatory policies.
Additional Information on Other Investment Practices
Foreign Investments. Each Fund will ordinarily hold no less
than 65% of its total assets in foreign securities. 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. The Funds 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. See "Japan
and Its Securities Markets" for a discussion of factors relating to Japanese
investments specifically.
Foreign Debt Securities. Each Fund may invest up to 35% of its
total assets in foreign debt securities. The returns on foreign debt securities
reflect interest rates and other market conditions prevailing in those countries
and the effect of gains and losses in the denominated currencies against the
U.S. dollar, which have had a substantial impact on investment in foreign
fixed-income securities. The relative performance of various countries'
fixed-income markets historically has reflected wide variations relating to the
unique characteristics of each country's economy. Year-to-year fluctuations in
certain markets have been significant, and negative returns have been
experienced in various markets from time to time.
The foreign government securities in which each of the Funds
may invest generally consist of obligations issued or backed by national, state
or provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt obligations
of supranational entities, which include international organizations designated
or backed by governmental entities to promote economic reconstruction or
development, international banking institutions and related government
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agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank"), the European Coal and Steel Community, the
Asian Development Bank and the InterAmerican Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt securities
of quasi-governmental agencies are issued by entities owned by either a
national, state or equivalent government or are obligations of a political unit
that is not backed by the national government's full faith and credit and
general taxing powers. An example of a multinational currency unit is the
European Currency Unit ("ECU"). An ECU represents specified amounts of the
currencies of certain member states of the European Economic Community. The
specific amounts of currencies comprising the ECU may be adjusted by the
Council of Ministers of the European Community to reflect changes in relative
values of the underlying currencies.
Foreign Currency Exchange. Since the Funds will be investing
in securities denominated in currencies of non-U.S. countries, and since the
Funds may temporarily hold funds in bank deposits or other money market
investments denominated in foreign currencies, the Funds may be affected
favorably or unfavorably by exchange control regulations or changes in the
exchange rate between such currencies and the dollar. A change in the value of
a foreign currency relative to the U.S. dollar will result in a corresponding
change in the dollar value of the Fund assets denominated in that foreign
currency. Changes in foreign currency exchange rates may also affect the value
of dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by a Fund. Unless otherwise contracted, the rate of exchange
between the U.S. dollar and other currencies is determined by the forces of
supply and demand in the foreign exchange markets. Changes in the exchange
rate may result over time from the interaction of many factors directly or
indirectly affecting economic and political conditions in the 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.
See "Japan and Its Securities Markets -- Economic Background -- Currency
Fluctuation" below. The Funds may use hedging techniques with the objective of
protecting against loss through the fluctuation of the value of the yen against
the U.S. dollar, particularly the forward market in foreign exchange, currency
options and currency futures.
Information. The majority of the securities held by the Funds
will not be registered with, nor will 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.
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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 Funds, 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 Funds can
be expected to be higher than that of an investment company investing
exclusively in U.S. securities, since the expenses of the Funds, such as cost
of converting foreign currency into U.S. dollars, the payment of fixed
brokerage commissions on foreign exchanges, custodial costs, valuation costs
and communication costs, as well as the rate of the investment advisory fees,
though similar to such expenses of some other international funds, are higher
than those costs incurred by other investment companies not investing in
foreign securities. In addition, foreign securities may be subject to foreign
government taxes that would reduce the net yield on such securities.
Dollar-Denominated Debt Securities of Foreign Issuers. The
returns on foreign debt securities reflect interest rates and other market
conditions prevailing in those countries. The relative performance of various
countries' fixed income markets historically has reflected wide variations
relating to the unique characteristics of each country's economy. Year-to-year
fluctuations in certain markets have been significant, and negative returns
have been experienced in various markets from time to time.
Depositary Receipts. The assets of each Fund may be invested
in the securities of foreign issuers in the form of American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") and International
Depositary Receipts ("IDRs"). These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by a U.S. bank or trust company
which evidence ownership of underlying securities issued by a foreign
corporation. EDRs, which are sometimes referred to as Continental Depositary
Receipts ("CDRs"), are receipts issued in Europe, and IDRs, which are sometimes
referred to as Global Depositary Receipts ("GDRs"), are issued outside the
United States. EDRs (CDRs) and IDRs (GDRs) are typically issued by non-U.S.
banks and trust companies and evidence ownership of either foreign or domestic
securities. Generally, ADRs in registered form are designed for use in U.S.
securities markets and EDRs (CDRs) and IDRs (GDRs) in bearer form are designed
for use in European and non-U.S. securities markets, respectively.
Privatizations. Each Fund may invest in privatizations (i.e.
foreign government programs of selling interests in government-owned or
controlled enterprises). The ability of U.S. entities, such as the Funds, to
participate in privatizations may be limited by local law, or
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the terms for participation may be less advantageous than for local investors.
There can be no assurance that privatization programs will be available or
successful.
Brady Bonds. Each Fund may invest in so-called "Brady Bonds,"
which are securities created through the exchange of existing commercial bank
loans to public and private entities for new bonds in connection with debt
restructurings under a debt restructuring plan announced by former U.S.
Secretary of the Treasury Nicholas F. Brady. Brady Bonds may be collateralized
or uncollateralized, are issued in various currencies (primarily the U.S.
dollar) and are currently actively traded in the OTC secondary market for debt
instruments. Brady Bonds have been issued only recently and therefore do not
have a long payment history. In light of the history of commercial bank loan
defaults by Latin American public and private entities, investments in Brady
Bonds may be viewed as speculative.
Emerging Markets. Each Fund may invest in securities of
issuers located in "emerging markets" (less developed countries located outside
of the U.S.). Investing in emerging markets involves not only the risks
described above with respect to investing in foreign securities, but also other
risks, including exposure to economic structures that are generally less
diverse and mature than, and to political systems that can be expected to have
less stability than, those of developed countries. For example, many
investments in emerging markets experienced significant declines in value due
to political and currency volatility in emerging markets countries during the
latter part of 1997 and the first half of 1998. Other characteristics of
emerging markets that may affect investment include certain national policies
that may restrict investment by foreigners in issuers or industries deemed
sensitive to relevant national interests and the absence of developed
structures governing private and foreign investments and private property. The
typically small size of the markets of securities of issuers located in
emerging markets and the possibility of a low or nonexistent volume of trading
in those securities may also result in a lack of liquidity and in price
volatility of those securities.
Sovereign Debt. Investments in sovereign debt involve special
risks. The issuer of the debt or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal or interest
when due in accordance with the terms of such debt, and a Fund may have limited
legal recourse in the event of a default.
Sovereign debt differs from debt obligations issued by private
entities in that, generally, remedies for defaults must be pursued in the
courts of the defaulting party. Legal recourse is therefore somewhat limited.
Political conditions, especially a sovereign entity's willingness to meet the
terms of its debt obligations, are of considerable significance. Also, there
can be no assurance that the holders of commercial bank loans to the same
sovereign entity may not contest payments to the holders of sovereign debt in
the event of default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal
and pay interest in a timely manner may be affected by, among other factors,
its cash flow situation, the extent of its foreign reserves, the availability
of sufficient foreign exchange on the date a payment is
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due, the relative size of the debt service burden to the economy as a whole,
the sovereign debtor's policy toward principal international lenders and the
political constraints to which a sovereign debtor may be subject. Increased
protectionism on the part of a country's trading partners, or political changes
in those countries, could also adversely affect its exports. Such events could
diminish a country's trade account surplus, if any, or the credit standing of a
particular local government or agency.
The occurrence of political, social or diplomatic changes in
one or more of the countries issuing sovereign debt could adversely affect a
Fund's investments. Political changes or a deterioration of a country's
domestic economy or balance of trade may affect the willingness of countries to
service their sovereign debt. While CSAM intends to manage the Funds in a
manner that will minimize the exposure to such risks, there can be no assurance
that adverse political changes will not cause a Fund to suffer a loss of
interest or principal on any of its holdings.
Investors should also be aware that certain sovereign debt
instruments in which a Fund may invest involve great risk. Sovereign debt
issued by issuers in many emerging markets generally is deemed to be the
equivalent in terms of quality to securities rated below investment grade by
Moody's and S&P. Such securities are regarded as predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations and involve major risk exposure to
adverse conditions. Some of such sovereign debt, which may not be paying
interest currently or may be in payment default, may be comparable to
securities rated "D" by S&P or "C" by Moody's. A Fund may have difficulty
disposing of certain sovereign debt obligations because there may be a limited
trading market for such securities. Because there is no liquid secondary
market for many of these securities, the Funds anticipate that such securities
could be sold only to a limited number of dealers or institutional investors.
The lack of a liquid secondary market may have an adverse impact on the market
price of such securities and a Fund's ability to dispose of particular issues
when necessary to meet a Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the issuer.
The lack of a liquid secondary market for certain securities also may make it
more difficult for a Fund to obtain accurate market quotations for purposes of
valuing a Fund's portfolio and calculating its net asset value. When and if
available, fixed income securities may be purchased by a Fund at a discount
from face value. However, the Funds do not intend to hold such securities to
maturity for the purpose of achieving potential capital gains, unless current
yields on these securities remain attractive. From time to time, a Fund may
purchase securities not paying interest at the time acquired if, in the opinion
of CSAM, such securities have the potential for future income or capital
appreciation.
U.S. Government Securities. The obligations issued or
guaranteed by the U.S. government in which a Fund may invest include direct
obligations of the U.S. Treasury and obligations issued by U.S. government
agencies and instrumentalities. Included among direct obligations of the
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
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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 Funds 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 Fund will invest in obligations issued by such
an instrumentality only if CSAM determines that the credit risk with respect to
the instrumentality does not make its securities unsuitable for investment by
the Fund.
Debt Securities. The Japan Growth Fund and the Japan Small
Company Fund may each invest up to 35% of its total assets in investment grade
debt securities (other than money market obligations) and, in the case of the
Japan Small Company Fund, preferred stocks that are not convertible into common
stock for the purpose of seeking capital appreciation. Any percentage
limitation on a Fund's ability to invest in debt securities will not be
applicable during periods when the Fund pursues a temporary defensive strategy
as discussed below. Each Fund may invest to a limited extent in zero coupon
securities and government zero coupon securities. See "Additional Information
Concerning Taxes" for a discussion of the tax consequences to shareholders of a
Fund that invests in zero coupon securities.
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 appreciation 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.
A security will be deemed to be investment grade if it is
rated within the four highest grades by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Services ("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
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make principal and interest payments than is the case with higher grade bonds.
Subsequent to its purchase by a Fund, an issue of securities may cease to be
rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither event will require sale of such securities, although CSAM
will consider such event in its determination of whether the Fund should
continue to hold the securities.
Below Investment Grade Securities. The Japan Growth Fund may
invest or hold up to 5% of its net assets in securities rated below investment
grade, including convertible and non-convertible debt securities, downgraded
below investment grade subsequent to acquisition by the Fund. The Japan Small
Company Fund may invest or hold up to 5% of its net assets in securities
downgraded below investment grade, including convertible and non-convertible
debt securities, subsequent to acquisition by the Fund.
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. Investors should be aware that ratings
are relative and subjective and are not absolute standards of quality.
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 medium- and lower-rated securities
and unrated securities of comparable quality tend to react less to fluctuations
in interest rate levels than do those of higher-rated securities, the market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
higher-quality securities. In addition, medium- and lower-rated securities and
comparable unrated securities generally present a higher degree of credit risk.
Issuers of medium- and lower-rated securities and unrated securities are often
highly leveraged and may not have more traditional methods of financing
available to them so that their ability to service their obligations during an
economic downturn or during sustained periods of rising interest rates may be
impaired. The risk of loss due to default by such issuers is significantly
greater because medium- and lower-rated securities and unrated securities
generally are unsecured and frequently are subordinated to the prior payment of
senior indebtedness.
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An economic recession could disrupt severely the market for
such securities and may adversely affect the value of such securities and the
ability of the issuers of such securities to repay principal and pay interest
thereon. A Fund may have difficulty disposing of certain of these securities
because there may be a thin trading market. Because there is no established
retail secondary market for many of these securities, the Funds anticipate that
these securities could be sold only to a limited number of dealers or
institutional investors. To the extent a secondary trading market for these
securities does exist, it generally is not as liquid as the secondary market
for higher-rated securities. The lack of a liquid secondary market, as well as
adverse publicity and investor perception with respect to these securities, may
have an adverse impact on market price and a Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. The lack of a liquid secondary market for
certain securities also may make it more difficult for a Fund to obtain
accurate market quotations for purposes of valuing the Fund and calculating its
net asset value.
The market value of securities in medium- and lower-rated
categories is also more volatile than that of higher quality securities.
Factors adversely impacting the market value of these securities will adversely
impact a Fund's net asset value. A Fund will rely on the judgment, analysis
and experience of CSAM in evaluating the creditworthiness of an issuer. In
this evaluation, in addition to relying on ratings assigned by Moody's or S&P,
CSAM will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters.
Interest rate trends and specific developments which may affect individual
issuers will also be analyzed. Subsequent to its purchase by a Fund, an issue
of securities may cease to be rated or its rating may be reduced. Neither
event will require sale of such securities, although CSAM will consider such
event in its determination of whether a Fund should continue to hold the
securities. Normally, medium- and lower-rated and comparable unrated
securities are not intended for short-term investment. A Fund may incur
additional expenses to the extent it is required to seek recovery upon a
default in the payment of principal or interest on its portfolio holdings of
such securities. At times, adverse publicity regarding lower-rated securities
has depressed the prices for such securities to some extent.
Mortgage-Backed Securities. Mortgage-backed securities issued
or guaranteed by the U.S. government, its agencies or instrumentalities include
those issued by GNMA, FNMA and FHLMC. Non-government issued mortgage-backed
securities may offer higher yields than those issued by government entities,
but may be subject to greater price fluctuations. Mortgage-backed securities
represent direct or indirect participations in, or are secured by and payable
from, mortgage loans secured by real property. The mortgages backing these
securities include, among other mortgage instruments, conventional 30-year
fixed-rate mortgages, 15-year fixed-rate mortgages, graduated payment mortgages
and adjustable rate mortgages. Although there may be government or private
guarantees on the payment of interest and principal of these securities, the
guarantees do not extend to the securities' yield or value, which are likely to
vary inversely with fluctuations in interest rates, nor do the guarantees
extend to the yield or value of the Fund's shares. These securities
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generally are "pass-through" instruments, through which the holders receive a
share of all interest and principal payments from the mortgages underlying the
securities, net of certain fees. Some mortgage-backed securities, such as
collateralized mortgage obligations ("CMOs"), make payments of both principal
and interest at a variety of intervals; others make semiannual interest
payments at a predetermined rate and repay principal at maturity (like a
typical bond).
Yields on pass-through securities are typically quoted by
investment dealers and vendors based on the maturity of the underlying
instruments and the associated average life assumption. The average life of
pass-through pools varies with the maturities of the underlying mortgage loans.
A pool's term may be shortened by unscheduled or early payments of principal on
the underlying mortgages. The occurrence of mortgage prepayments is affected
by various factors, including the level of interest rates, general economic
conditions, the location, scheduled maturity and age of the mortgage and other
social and demographic conditions. Because prepayment rates of individual
pools vary widely, it is not 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 Funds' yield. In addition, mortgage-backed securities issued by
certain non-government entities and 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. Asset-backed securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities include
those issued by the Student Loan Marketing Association. Asset-backed
securities 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
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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 these Funds may invest. Automobile
receivables generally are secured by automobiles. Most issuers of automobile
receivables permit the loan servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that
of the holders of the asset-backed securities. In addition, because of the
large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have a proper security interest in the underlying
automobiles. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities. Credit card receivables are generally unsecured, and the
debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due. In
addition, there is no assurance that the security interest in the collateral
can be realized. The remaining maturity of any asset-backed security a Fund
invests in will be 397 days or less. A Fund may purchase asset-backed
securities that are unrated.
Loan Participations and Assignments. Each Fund may invest in
fixed and floating rate loans ("Loans") arranged through private negotiations
between a foreign government (a "Borrower") and one or more financial
institutions ("Lenders"). The majority of each Fund's investments in Loans are
expected to be in the form of participations in Loans ("Participations") and
assignments of portions of Loans from third parties ("Assignments").
Participations typically will result in the Fund having a contractual
relationship only with the Lender, not with the Borrower. The Fund will have the
right to receive payments of principal, interest and any fees to which it is
entitled only from the Lender selling the Participation and only upon receipt by
the Lender of the payments from the Borrower. In connection with purchasing
Participations, the Fund generally will have no right to enforce compliance by
the Borrower with the terms of the loan agreement relating to the Loan, nor any
rights of set-off against the Borrower, and the Fund may not directly benefit
from any collateral supporting the Loan in which it has purchased the
Participation. As a result, the Fund will assume the credit risk of both the
Borrower and the Lender that is selling the Participation. In the event of the
insolvency of the Lender selling a Participation, the Fund may be treated as a
general creditor of the Lender and may not benefit from any set-off between the
Lender and the Borrower. The Fund will acquire Participations only if the Lender
interpositioned between the Fund and the Borrower is determined by CSAM to be
creditworthy.
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
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depending upon changes in the applicable Reference. The terms of the
structured securities may provide that in certain circumstances no principal is
due at maturity and, therefore, may result in the loss of a Fund's entire
investment. The value of structured securities may move in the same or the
opposite direction as the value of the Reference, so that appreciation of the
Reference may produce an increase or decrease in the interest rate or value of
the security at maturity. In addition, the change in interest rate or the
value of the security at maturity may be a multiple of the change in the value
of the Reference so that the security may be more or less volatile than the
Reference, depending on the multiple. Consequently, structured securities may
entail a greater degree of market risk and volatility than other types of debt
obligations.
REITs. Each Fund may invest in real estate investment trusts
("REITs"), which are pooled investment vehicles that invest primarily in
income-producing real estate or real estate related loans or interests. Like
regulated investment companies such as the Funds, REITs are not taxed on income
distributed to shareholders provided they comply with several requirements of
the Internal Revenue Code of 1986, amended (the "Code"). By investing in a
REIT, a Fund will indirectly bear its proportionate share of any expenses paid
by the REIT in addition to the expenses of the Fund.
Investing in REITs involves certain risks. A REIT may be
affected by changes in the value of the underlying property owned by such REIT
or by the quality of any credit extended by the REIT. REITs are dependent on
management skills, are not diversified (except to the extent the Code
requires), and are subject to the risks of financing projects. REITs are
subject to heavy cash flow dependency, default by borrowers, self-liquidation,
the possibilities of failing to qualify for the exemption from tax for
distributed income under the Code and failing to maintain their exemptions from
the 1940 Act. REITs are also subject to interest rate risks.
Convertible Securities. Convertible securities in which a fund
may invest, including both convertible debt and convertible preferred stock,
may be converted at either a stated price or stated rate into underlying shares
of common stock. Because of this feature, convertible securities enable an
investor to benefit from increases in the market price of the underlying common
stock. Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. The value of convertible securities fluctuates in relation to
changes in interest rates like bonds and, in addition, fluctuates in relation
to the underlying common stock. Subsequent to purchase by a Fund, convertible
securities may cease to be rated or a rating may be reduced below the minimum
required for purchase by the Fund. Neither event will require sale of such
securities, although CSAM will consider such event in its determination of
whether a Fund should continue to hold the securities.
Securities of Other Investment Companies. Each Fund may
invest in securities of other investment companies to the extent permitted
under the Investment Company Act of 1940, as amended (the "1940 Act").
Presently, under the 1940 Act, each Fund may hold securities of another
investment company in amounts which (i) do not exceed 3% of the total
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outstanding voting stock of such company, (ii) do not exceed 5% of the value of
the Fund's total assets and (iii) when added to all other investment company
securities held by the Fund, do not exceed 10% of the value of the Fund's total
assets.
Lending of Portfolio Securities. Each Fund may lend portfolio
securities to brokers, dealers and other financial organizations that meet
capital and other credit requirements or other criteria established by the
Fund's Board of Directors (the "Board"). These loans, if and when made, may not
exceed 33 1/3% of the Funds' total assets (including the loan collateral). The
Funds 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 Funds. From time to time, the Funds
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 Funds and that is acting as a "finder."
By lending its securities, each Fund can increase its income
by continuing to receive interest and any dividends on the loaned securities as
well as by either investing the collateral received for securities loaned in
short-term instruments or obtaining yield in the form of interest paid by the
borrower when U.S. government securities are used as collateral. Each Fund
will adhere to the following conditions whenever its portfolio securities are
loaned: (i) the Fund must receive at least 100% cash collateral or equivalent
securities of the type discussed in the preceding paragraph from the borrower;
(ii) the borrower must increase such collateral whenever the market value of
the securities rises above the level of such collateral; (iii) the Fund must be
able to terminate the loan at any time; (iv) the Fund must receive reasonable
interest on the loan, as well as any dividends, interest or other distributions
on the loaned securities and any increase in market value; (v) the Fund may pay
only reasonable custodian fees in connection with the loan; and (vi) voting
rights on the loaned securities may pass to the borrower, provided, however,
that if a material event adversely affecting the investment occurs, the Board
must terminate the loan and regain the right to vote the securities. Loan
agreements involve certain risks in the event of default or insolvency of the
other party including possible delays or restrictions upon a Fund's ability to
recover the loaned securities or dispose of the collateral for the loan.
Borrowing. Each Fund may borrow up to 30% of its total assets
for temporary or emergency purposes, including to meet portfolio redemption
requests so as to permit the orderly disposition of portfolio securities or to
facilitate settlement transactions on portfolio securities. Additional
investments (including roll-overs) will not be made when borrowings exceed 5%
of a Fund's net assets. Although the principal of such borrowings will be
fixed, a Fund's assets may change in value during the time the borrowing is
outstanding. Each Fund expects that some of its borrowings may be made on a
secured basis. In such situations, either the custodian will segregate the
pledged assets for the benefit of the lender or arrangements will be made with
a suitable subcustodian, which may include the lender.
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When-Issued Securities and Delayed-Delivery Transactions.
Each Fund may utilize up to 20% of its total assets to purchase securities on a
"when-issued" basis or purchase or sell securities for delayed delivery (i.e.,
payment or delivery occur beyond the normal settlement date at a stated price
and yield). In these transactions, payment for and delivery of the securities
occur beyond the regular settlement dates, normally within 30-45 days after the
transaction. The Funds will 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 before the
settlement date if CSAM deems it advantageous to do so. The payment obligation
and the interest rate that will be received on when-issued and delayed-delivery
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 obtained on 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 Fund will establish a
segregated account with its custodian consisting of 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 Fund agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash or liquid securities that are
acceptable as collateral to the appropriate regulatory authority equal to the
amount of the commitment in a segregated account. Normally, the custodian will
set aside portfolio securities to satisfy a purchase commitment, and in such a
case a Fund may be required subsequently to place additional assets in the
segregated account in order to ensure that the value of the account remains
equal to the amount of the Fund's commitment. It may be expected that a Fund's
net assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
When a Fund engages in when-issued or delayed-delivery transactions, it relies
on the other party to consummate the trade. Failure of the seller to do so may
result in the Funds' incurring a loss or missing an opportunity to obtain a
price considered to be advantageous.
Short Sales "Against the Box". The Japan Growth Fund may
engage in short sales against the box. In a short sale, the Fund sells a
borrowed security and has a corresponding obligation to the lender to return
the identical security. The seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. While a short sale is made by selling a security the Fund does not
own, a short sale is "against the box" to the extent that the Fund
contemporaneously owns or has the right to obtain, at no added cost, securities
identical to those sold short. It may be entered into by the Fund, for
example, to lock in a sales price for a security the Fund does not wish to sell
immediately. If the Fund engages in a short sale, the collateral for the short
position will be maintained by the Fund's custodian or qualified sub-custodian.
While the short sale is open, the Fund will maintain in a segregated account an
amount of securities equal in kind and amount to the securities sold short or
securities convertible into or exchangeable for such equivalent securities.
These securities constitute the Fund's long position.
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The Fund 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 Fund (or a security convertible or exchangeable for such
security). In such case, any future losses in the Fund's long position should
be offset by a gain in the short position and, conversely, any gain in the long
position should be reduced by a loss in the short position. The extent to
which such gains or losses are reduced will depend upon the amount of the
security sold short relative to the amount the Fund owns. There will be
certain additional transactions costs associated with short sales against the
box, but the Fund will endeavor to offset these costs with the income from the
investment of the cash proceeds of short sales.
If the Fund effects a short sale of securities at a time when
it has an unrealized gain on the securities, it may be required to recognize
that gain as if it had actually sold the securities (as a "constructive sale")
on the date it effects the short sale. However, such constructive sale treatment
may not apply if the Fund closes out the short sale with securities other than
the appreciated securities held at the time of the short sale and if certain
other conditions are satisfied. Uncertainty regarding the tax consequences of
effecting short sales may limit the extent to which the Fund may effect short
sales.
Emerging Growth and Smaller Capitalization Companies;
Unseasoned Issuers. The Funds may invest in securities of small- and
medium-sized, emerging growth companies and companies with continuous operations
of less than three years ("unseasoned issuers"), which may include JASDAQ and
Frontier Market securities. Such investments 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, 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 or unseasoned issuers offers potential for
above-average returns if the companies are successful, the risk exists that the
companies will not succeed and the prices of the companies' shares could
significantly decline in value. Therefore, an investment in a Fund may involve
a greater degree of risk than an investment in other mutual funds that seek
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.
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Warrants. Each Fund may invest up to 10% of net assets in
warrants to purchase newly created equity securities consisting of common and
preferred stock. Warrants are securities that give the holder the right, but not
the obligation to purchase equity issues of the company issuing the warrants, or
a related company, at a fixed price either on a date certain or during a set
period. A Fund may invest in warrants to purchase equity securities consisting
of common and preferred stock. The equity security underlying a warrant is
outstanding at the time the warrant is issued or is issued together with the
warrant.
Investing in warrants can provide a greater potential for
profit or loss than an equivalent investment in the underlying security, and,
thus, can be a speculative investment. 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. The Japan Small
Company Fund may not invest more than 15% of its net assets and the Japan Growth
Fund may not invest more than 10% of its net assets in non-publicly traded and
illiquid securities, including securities that are illiquid by virtue of the
absence of a readily available market, repurchase agreements which have a
maturity of longer than seven days, certain Rule 144A Securities (as defined
below), and time deposits maturing in more than seven days. Securities that have
legal or contractual restrictions on resale but have a readily available market
are not considered illiquid for purposes of this limitation. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.
Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which have
not been registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market. 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
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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 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 the Funds' limit on the purchase of illiquid
securities unless the Board or its delegates determines that the Rule 144A
Securities are liquid. In reaching liquidity decisions, the Board or its
delegates may consider, inter alia, the following factors: (i) the
unregistered nature of the security; (ii) the frequency of trades and quotes
for the security; (iii) the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; (iv) dealer undertakings
to make a market in the security and (v) the nature of the security and the
nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of the transfer).
Investing in Rule 144A securities could have the effect of
increasing the level of illiquidity in the Funds to the extent that qualified
institutional buyers are unavailable or uninterested in purchasing such
securities from the Funds. The Boards may adopt guidelines and delegate to
CSAM the daily function of determining and monitoring the liquidity of Rule
144A Securities, although each Board will retain ultimate responsibility for
liquidity determinations.
Money Market Obligations. Each Fund is authorized to invest,
under normal market conditions, up to 20% of its total assets in domestic and
foreign short-term (one year or less remaining to maturity) and medium-term
(five year or less remaining to maturity) money market obligations. These
instruments consist of obligations issued or guaranteed by the U.S. government
or a foreign government, its agencies or instrumentalities; bank obligations
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(including certificates of deposit, time deposits and bankers' acceptances of
domestic or foreign banks, domestic savings and loans and similar institutions)
that are high quality investments or, if unrated, deemed by CSAM to be high
quality investments; commercial paper rated no lower than A-2 by S&P or Prime-2
by 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. The Funds may invest in repurchase
agreement transactions with member banks of the Federal Reserve System and
certain non-bank dealers. Repurchase agreements are contracts under which the
buyer of a security simultaneously commits to resell the security to the seller
at an agreed-upon price and date. Under the terms of a typical repurchase
agreement, a Fund would acquire any underlying security for a relatively short
period (usually not more than one week) subject to an obligation of the seller
to repurchase, and the Fund to resell, the obligation at an agreed-upon price
and time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the underlying
securities will at all times be at least equal to the total amount of the
purchase obligation, including interest. The Fund bears a risk of loss in the
event that the other party to a repurchase agreement defaults on its
obligations or becomes bankrupt and the Fund is delayed or prevented from
exercising its right to dispose of the collateral securities, including the
risk of a possible decline in the value of the underlying securities during the
period in which the Fund seeks to assert this right. CSAM, acting under the
supervision of the Fund's Board of Directors (the "Board"), monitors the
creditworthiness of those bank and non-bank dealers with which each Fund enters
into repurchase agreements to evaluate this risk. A repurchase agreement is
considered to be a loan under the 1940 Act.
Money Market Mutual Funds. Where CSAM believes that it would be
beneficial to the Fund and appropriate considering the factors of return and
liquidity, each Fund may invest up to 5% of its net assets in securities of
money market mutual funds that are unaffiliated with the Fund or CSAM. A money
market mutual fund is an investment company that invests in short-term high
quality money market instruments. A money market mutual fund generally does not
purchase securities with a remaining maturity of more than one year. As a
shareholder in any mutual fund, a Fund will bear its ratable share of the mutual
fund's expenses, including management fees, and will remain subject to payment
of the Fund's administration fees and other expenses with respect to assets so
invested.
Reverse Repurchase Agreements and Dollar Rolls. Each of the
Funds may enter into reverse repurchase agreements with member banks of the
Federal Reserve System and certain non-bank dealers. Reverse repurchase
agreements involve the sale of securities held by a Fund pursuant to its
agreement to repurchase them at a mutually agreed upon date, price and rate of
interest. At the time a Fund enters into a reverse repurchase agreement, it
will segregate with an approved custodian containing 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
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fall below the repurchase price (plus accrued interest). A Fund's liquidity
and ability to manage its assets might be affected when it sets aside cash or
portfolio securities to cover such commitments. Reverse repurchase agreements
involve the risk that the market value of the securities retained in lieu of
sale may decline below the price of the securities the Fund has sold but is
obligated to repurchase. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, such buyer or
its trustee or receiver may receive an extension of time to determine whether
to enforce a Fund's obligation to repurchase the securities, and a Fund's use
of the proceeds of the reverse repurchase agreement may effectively be
restricted pending such decision.
Each of the Funds also may enter into "dollar rolls," in which
a Fund sells fixed-income securities for delivery in the current month and
simultaneously contracts to repurchase similar but not identical (same type,
coupon and maturity) securities on a specified future date. During the roll
period, the Fund would forego principal and interest paid on such securities.
A Fund would be compensated by the difference between the current sales price
and the forward price for the future purchase, as well as by the interest
earned on the cash proceeds of the initial sale. At the time a Fund enters
into a dollar roll transaction, it will segregate with an approved custodian,
cash or liquid securities having a value not less than the repurchase price
(including accrued interest) and will subsequently monitor the segregated
assets to ensure that its value is maintained. Reverse repurchase agreements
and dollar rolls that are accounted for as financings are considered to be
borrowings under the 1940 Act.
Non-Diversified Status. The Japan Growth Fund and the Japan
Small Company Fund are classified as non-diversified within the meaning of the
1940 Act, which means that each of these Funds 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 fund, each Fund 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.
The investments of these Funds will be limited, however, in order to qualify as
a "regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"). See "Additional Information Concerning Taxes."
To qualify, a Fund will comply with certain requirements, including limiting
its investments so that at the close of each quarter of the taxable year (i)
not more than 25% of the market value of its total assets will be invested in
the securities of a single issuer, and (ii) with respect to 50% of the market
value of its total assets, not more than 5% of the market value of its total
assets will be invested in the securities of a single issuer and the Fund will
not own more than 10% of the outstanding voting securities of a single issuer.
Temporary Defensive Strategies
Debt Securities. When CSAM believes that a defensive posture is
warranted, the Japan Growth Fund may invest temporarily without limit in U.S.
and foreign investment grade debt obligations, other securities of U.S.
companies and in domestic and foreign money market obligations, including
repurchase agreements. The Japan Small Company Fund may, for temporary defensive
purposes, invest without limit in U.S. debt securities.
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Money Market Obligations. Each Fund, for temporary defensive
purposes, may invest in domestic and foreign short-term (one year or less
remaining to maturity) and medium-term (five years or less remaining to
maturity) money market obligations without limit.
INVESTMENT RESTRICTION
All Funds
Certain investment limitations of each Fund may not be changed
without the affirmative vote of the holders of a majority of a Fund's
outstanding shares ("Fundamental Restrictions"). Such majority is defined as
the lesser of (i) 67% or more of the shares present at the meeting, if the
holders of more than 50% of the outstanding shares of the Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding shares.
If a percentage restriction (other than the percentage
limitation set forth in No. 1 of each of the Funds) is adhered to at the time
of an investment, a later increase or decrease in the percentage of assets
resulting from a change in the values of portfolio securities or in the amount
of the Funds' assets will not constitute a violation of such restriction.
Japan Growth Fund
The investment limitations numbered 1 through 9 are
Fundamental Restrictions. Investment limitations 10 through 14 may be changed
by a vote of the Board at any time.
The Japan Growth Fund may not:
1. Borrow money except that the Fund may (a) borrow from
banks for temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the
Fund's total assets at the time of such borrowing. For purposes of this
restriction, the entry into currency transactions, options, futures contracts,
options on futures contracts, forward commitment transactions and dollar roll
transactions that are not accounted for as financings (and the segregation of
assets in connection with any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of
the value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of U.S.
government securities.
3. Make loans, except that the Fund may purchase or hold
fixed-income securities, including loan participations, assignments and
structured securities, lend portfolio securities and enter into repurchase
agreements.
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4. Underwrite any securities issued by others except to the
extent that the investment in restricted securities and the sale of securities
in accordance with the Fund's investment objective, policies and limitations
may be deemed to be underwriting.
5. Purchase or sell real estate or invest in oil, gas or
mineral exploration or development programs, except that the Fund may invest in
(a) securities secured by real estate, mortgages or interests therein and (b)
securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
6. Make short sales of securities or maintain a short
position, except that the Fund may maintain short positions in forward currency
contracts, options, futures contracts and options on futures contracts and
enter into short sales "against the box."
7. Purchase securities on margin, except that the Fund may
obtain any short-term credits necessary for the clearance of purchases and
sales of securities. For purposes of this restriction, the deposit or payment
of initial or variation margin in connection with transactions in currencies,
options, futures contracts or related options will not be deemed to be a
purchase of securities on margin.
8. Invest in commodities, except that the Fund may purchase
and sell futures contracts, including those relating to securities, currencies
and indices, and options on futures contracts, securities, currencies or
indices, and purchase and sell currencies on a forward commitment or
delayed-delivery basis.
9. Issue any senior security except as permitted in these
investment limitations.
10. Purchase securities of other investment companies except
in connection with a merger, consolidation, acquisition, reorganization or
offer of exchange, or as otherwise permitted under the 1940 Act.
11. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to
the deposit of assets in escrow and in connection with the writing of covered
put and call options and purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
and options on futures contracts.
12. Invest more than 10% of the Fund's net assets in
securities which may be illiquid because of legal or contractual restrictions
on resale or securities for which there are no readily available market
quotations. For purposes of this limitation, repurchase agreements with
maturities greater than seven days shall be considered illiquid securities.
13. Invest in warrants (other than warrants acquired by the
Fund as part of a unit or attached to securities at the time of purchase) if,
as a result, the investments (valued at the lower of cost or market) would
exceed 10% of the value of the Fund's net assets.
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14. Make additional investments (including roll-overs) if the
Fund's borrowings exceed 5% of its net assets.
Japan Small Company Fund
The investment limitations numbered 1 through 9 are
Fundamental Restrictions. Investment limitations 10 through 14 may be changed
by a vote of the Board at any time.
The Japan Small Company Fund may not:
1. Borrow money except that the Fund may (a) borrow from
banks for temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the
Fund's total assets at the time of such borrowing. For purposes of this
restriction, short sales, the entry into currency transactions, options,
futures contracts, options on futures contracts, forward commitment
transactions and dollar roll transactions that are not accounted for as
financings (and the segregation of assets in connection with any of the
foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more
of the value of the Fund's total assets at the time of purchase to be invested
in the securities of issuers conducting their principal business activities in
the same industry; provided that there shall be no limit on the purchase of
U.S. government securities.
3. Make loans, except that the Fund may purchase or hold
fixed-income securities, including loan participations, assignments and
structured securities, lend portfolio securities and enter into repurchase
agreements.
4. Underwrite any securities issued by others except to
the extent that the investment in restricted securities and the sale of
securities in accordance with the Fund's investment objective, policies and
limitations may be deemed to be underwriting.
5. Purchase or sell real estate or invest in oil, gas or
mineral exploration or development programs, except that the Fund may invest in
(a) securities secured by real estate, mortgages or interests therein and (b)
securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
6. Make short sales of securities or maintain a short
position, except that the Fund may maintain short positions in forward currency
contracts, options, futures contracts and options on futures contracts.
7. Purchase securities on margin, except that the Fund
may obtain any short-term credits necessary for the clearance of purchases and
sales of securities. For purposes of this restriction, the deposit or payment
of initial or variation margin in connection
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with transactions in currencies, options, futures contracts or related options
will not be deemed to be a purchase of securities on margin.
8. Invest in commodities, except that the Fund may
purchase and sell futures contracts, including those relating to securities,
currencies and indices, and options on futures contracts, securities,
currencies or indices, and purchase and sell currencies on a forward commitment
or delayed-delivery basis.
9. Issue any senior security except as permitted in
these investment limitations.
10. Purchase securities of other investment companies
except in connection with a merger, consolidation, acquisition, reorganization
or offer of exchange, or as otherwise permitted under the 1940 Act.
11. Pledge, mortgage or hypothecate its assets, except to
the extent necessary to secure permitted borrowings and to the extent related
to the deposit of assets in escrow and in connection with the writing of
covered put and call options and purchase of securities on a forward commitment
or delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
and options on futures contracts.
12. Invest more than 15% of the Fund's net assets in
securities which may be illiquid because of legal or contractual restrictions
on resale or securities for which there are no readily available market
quotations. For purposes of this limitation, repurchase agreements with
maturities greater than seven days shall be considered illiquid securities. In
no event will the Fund's investment in restricted and illiquid securities
exceed 15% of the Fund's assets.
13. Invest in warrants (other than warrants acquired by
the Fund as part of a unit or attached to securities at the time of purchase)
if, as a result, the investments (valued at the lower of cost or market) would
exceed 10% of the value of the Fund's net assets.
14. Make additional investments (including roll-overs) if
the Fund's borrowings exceed 5% of its net assets.
PORTFOLIO VALUATION
The following is a description of the procedures used by the
Funds 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 OTC market will be valued at the most
recent sale as of the time the valuation is made or, in the absence of sales,
at the mean between the highest bid and lowest asked quotations. If there are
no such quotations, the value of the securities will be taken to be the most
recent bid quotation on the exchange or market. Options contracts will be
valued similarly. Futures
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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 other debt obligations with 60 days or less
remaining to maturity. Notwithstanding the foregoing, in determining the
market value of portfolio investments, the Funds may employ outside
organizations (each a "Pricing Service") which may use a matrix, formula or
other objective method that takes into consideration market indexes, matrices,
yield curves and other specific adjustments. The procedures of Pricing
Services are reviewed periodically by the officers of each Fund under the
general supervision and responsibility of the Boards, 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 Boards. In addition, the Boards or their
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 Japan and 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 the Funds' net asset value is
not calculated. As a result, calculation of the Funds' net asset value does
not take place contemporaneously with the determination of the prices of the
majority of the Funds' securities. All assets and liabilities initially
expressed in foreign currency values will be converted into U.S. dollar values
at the prevailing exchange rate as quoted by a Pricing Service as of 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 Boards.
PORTFOLIO TRANSACTIONS
CSAM is responsible for establishing, reviewing and, where
necessary, modifying each Fund's investment program to achieve its investment
objective. Purchases and sales of newly issued portfolio securities are
usually principal transactions without brokerage commissions effected directly
with the issuer or with an underwriter acting as principal. Other purchases
and sales may be effected on a securities exchange or over-the-counter,
depending on where it appears that the best price or execution will be
obtained. The purchase price paid by a Fund to underwriters of newly issued
securities usually includes a concession paid by the issuer to the underwriter,
and purchases of securities from dealers, acting as either principals or agents
in the after market, are normally executed at a price between the bid and asked
price, which includes a dealer's mark-up or mark-down. Transactions on U.S.
stock exchanges and
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some foreign stock exchanges involve the payment of negotiated brokerage
commissions. On exchanges on which commissions are negotiated, the cost of
transactions may vary among different brokers. On most foreign exchanges,
commissions are generally fixed. There is generally no stated commission in
the case of securities traded in domestic or foreign OTC markets, but the price
of securities traded in OTC markets includes an undisclosed commission or
mark-up. U.S. government securities are generally purchased from underwriters
or dealers, although certain newly issued U.S. government securities may be
purchased directly from the U.S. Treasury or from the issuing agency or
instrumentality. No brokerage commissions are typically paid on purchases and
sales of U.S. Government Securities.
CSAM will select specific portfolio investments and effect
transactions for the Funds and in doing so, seeks to obtain the overall best
execution of portfolio transactions. In evaluating prices and executions, CSAM
will consider the factors it deems relevant, which may include the breadth of
the market in the security, the price of the security, the financial condition
and execution capability of a broker or dealer and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis.
CSAM may, in its discretion, effect transactions in portfolio
securities with dealers who provide brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to
the Funds and/or other accounts over which CSAM exercises investment
discretion. CSAM may place portfolio transactions with a broker or dealer with
whom it has negotiated a commission that is in excess of the commission another
broker or dealer would have charged for effecting the transaction if CSAM
determines in good faith that such amount of commission was reasonable in
relation to the value of such brokerage and research services provided by such
broker or dealer viewed in terms of either that particular transaction or of
the overall responsibilities of CSAM. Research and other services received due
to brokerage business on behalf of the Funds may be useful to CSAM in serving
its other clients and, conversely, research or other services obtained by the
placement of business of other clients may be useful to CSAM in carrying out
its obligations to the Funds. Research may include furnishing advice, either
directly or through publications or writings, as to the value of securities,
the advisability of purchasing or selling specific securities and the
availability of securities or purchasers or sellers of securities; furnishing
seminars, information, analyses and reports concerning issuers, industries,
securities, trading markets and methods, legislative developments, changes in
accounting practices, economic factors and trends and portfolio strategy;
access to research analysts, corporate management personnel, industry experts,
economists and government officials; comparative performance evaluation and
technical measurement services and quotation services; and products and other
services (such as third party publications, reports and analyses, and computer
and electronic access, equipment, software, information and accessories that
deliver, process or otherwise utilize information, including the research
described above) that assist CSAM in carrying out its responsibilities.
Research received from brokers or dealers is supplemental to CSAM's own
research program. The fees to CSAM under its advisory agreement with the Fund
are not reduced by reason of its receiving any brokerage and research services.
For the fiscal year ended October 31, 1998, $8,749 and $13,127 of total
brokerage commissions was paid by the Japan Growth Fund and the Japan Small
Company Fund, respectively, to brokers and dealers
35
<PAGE> 49
who provided such research and other services. Research received from brokers
or dealers is supplemental to CSAM's own research program.
The following table details amounts paid by each Fund in
commissions to broker-dealers for execution of portfolio transactions during
the indicated fiscal years or periods ended October 31.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Fund 1996 1997 1998
---- ---- ---- ----
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Japan Growth Fund $172,240 $149,801 $197,011
------------------------------------------------------------------------------------------------
Japan Small Company Fund $1,551,006 $849,667 $267,535
------------------------------------------------------------------------------------------------
</TABLE>
As of October 31, 1998, the Japan Growth Fund and the Japan
Small Company Fund held $2,046,000 and $658,000 respectively, in the securities
of State Street Bank and Trust Co., one of the regular broker-dealers of each
Fund.
Investment decisions for the Funds concerning specific
portfolio securities are made independently from those for other clients advised
by CSAM. Such other investment clients may invest in the same securities as the
Funds. When purchases or sales of the same security are made at substantially
the same time on behalf of such other clients, transactions are averaged as to
price and available investments allocated as to amount, in a manner which CSAM
believes to be equitable to each client, including the Funds. In some instances,
this investment procedure may adversely affect the price paid or received by the
Funds or the size of the position obtained or sold for the Funds. To the extent
permitted by law, Warburg may aggregate the securities to be sold or purchased
for each Fund with those to be sold or purchased for such other investment
clients in order to obtain best execution.
In no instance will portfolio securities be purchased from or
sold to CSAM, Credit Suisse Asset Management Securities, Inc. ("CSAMSI") or
Credit Suisse First Boston ("CS First Boston") or any affiliated person of such
companies. In addition, the Funds will not give preference to any institutions
with whom the Funds enter into distribution or shareholder servicing agreements
concerning the provision of distribution services or support services.
Transactions for each of the Funds may be effected on foreign
securities exchanges. In transactions for securities not actively traded on a
foreign securities exchange, the Funds 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.
36
<PAGE> 50
Each Fund may participate, if and when practicable, in bidding
for the purchase of securities for the Fund's portfolio directly from an issuer
in order to take advantage of the lower purchase price available to members of
such a group. A Fund will engage in this practice, however, only when CSAM, in
its sole discretion, believe such practice to be otherwise in the Fund's
interest.
PORTFOLIO TURNOVER
The Funds do not intend to seek profits through short-term
trading, but the rate of turnover will not be a limiting factor when a Fund
deems it desirable to sell or purchase securities. The Funds' portfolio turnover
rate is calculated by dividing the lesser of purchases or sales of its portfolio
securities for the year by the monthly average value of the portfolio
securities. Securities with remaining maturities of one year or less at the date
of acquisition are excluded from the calculation.
Certain practices that may be employed by the Funds could
result in high portfolio turnover. For example, options on securities may be
sold in anticipation of a decline in the price of the underlying security
(market decline) or purchased in anticipation of a rise in the price of the
underlying security (market rise) and later sold. To the extent that its
portfolio is traded for the short-term, a Fund will be engaged essentially in
trading activities based on short-term considerations affecting the value of an
issuer's stock instead of long-term investments based on fundamental valuation
of securities. Because of this policy, portfolio securities may be sold without
regard to the length of time for which they have been held.
It is not possible to predict the Funds' portfolio turnover
rates. High portfolio turnover rates (100% or more) may result in higher
brokerage commissions, dealer markups or underwriting commissions as well as
other transaction costs. In addition, gains realized from portfolio turnover may
be taxable to shareholders.
JAPAN AND ITS SECURITIES MARKETS
The Japan Growth Fund and the Japan Small Company Fund, 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.
THE INFORMATION SET FORTH IN THIS SECTION HAS BEEN EXTRACTED
FROM VARIOUS GOVERNMENTAL PUBLICATIONS AND OTHER SOURCES. THE FUNDS MAKE NO
REPRESENTATION AS TO THE ACCURACY OF THE INFORMATION, NOR HAVE THE FUNDS
ATTEMPTED TO VERIFY IT. FURTHERMORE, NO REPRESENTATION IS MADE THAT ANY
CORRELATION EXISTS BETWEEN JAPAN OR ITS ECONOMY IN GENERAL AND THE PERFORMANCE
OF EACH FUND.
Domestic Politics
37
<PAGE> 51
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 the Funds' investments.
Economic Background
Generally. Since the end of World War II, Japan has experienced
significant economic development. Since the mid-1980's, Japan has become a major
creditor nation. With the exception of the periods associated with the oil
crises of the 1970's, Japan has generally experienced very low levels of
inflation. There is no guarantee, however, that these favorable trends will
continue.
The Japanese government has called for a transformation of the
economy away from its high dependency on export-led growth towards greater
stimulation of the domestic economy through extensive deregulation plans,
including a fundamental overhaul of Japan's financial industry. 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 financial system have also been one of the major
causes of Japan's economic weakness. The non-performing loans of financial
institutions have hampered their ability to take on risk, thus obstructing the
flow of funds into capital outlays as well as equities. The large commercial
banks are having to bear a heavy burden of the bad-debt problem (e.g., in
accepting write-offs of loans they have extended to distressed smaller
institutions, in recapitalizing failed institutions and in stepping up
contributions to the Deposit Insurance Corporation, an organization jointly
established in 1971 by the government and private financial institutions to
protect depositors). While the banking system appears to be making some progress
in its attempt to deal with non-performing assets, it is extremely
38
<PAGE> 52
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 1992 1991 1990
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consumption
Expenditures
Private........... Yen303,050 Yen308,472 Yen299,440 Yen290,515 Yen286,154 Yen278,703 Yen272,294 Yen261,891 Yen249,288
Government........ 50,083 50,239 48,969 47,555 45,743 44,771 43,262 41,356 38,807
Gross Fixed
Capital Formation.. 133,044 143,217 148,190 136,792 137,291 140,433 143,525 143,998 136,467
Increase (Decrease)
in Stocks........ 914 828 1,058 947 50 620 1,489 3,453 2,430
Exports of Goods and
Services............ 56,355 55,979 49,598 45,393 44,410 44,197 47,384 46,723 45,920
Imports of Goods and
Services............ 46,753 51,331 46,900 38,272 34,387 33,343 36,891 39,121 42,872
GDP (Expenditures) 499,191 507,403 500,356 482,930 479,260 475,381 471,064 458,299 430,040
Change in GDP from
Preceding Year..... (1.6)% 1.4% 3.6% 0.8% 0.8% 0.9% 2.8% 6.6% --
</TABLE>
Source: International Monetary Fund, International Financial Statistics
- ------
* Average of the first and second quarters of 1998.
<TABLE>
<CAPTION>
WHOLESALE PRICE INDEX CONSUMER PRICE INDEX
(Base Year: 1990) (Base Year: 1990)
All Change from Change from
Year Commodities Preceding Year General Preceding Year
---- ----------- -------------- ------- --------------
<S> <C> <C> <C> <C>
1990 100.0 -- 100.0 --
1991 100.2 0.2 103.3 3.3
1992 98.7 (1.5) 105.1 1.8
</TABLE>
39
<PAGE> 53
<TABLE>
<S> <C> <C> <C> <C>
1993 95.0 (3.7) 106.4 1.3
1994 93.0 (2.0) 107.1 0.7
1995 92.2 (0.8) 107.0 (0.1)
1996 92.3 0.1 107.2 0.2
1997 93.7 1.4 109.0 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 Fund in Japanese
securities will be denominated in yen and most income received by these Funds
from such investments will be in yen. However, the Funds' net asset value will
be reported, and distributions will be made, in U.S. dollars. Therefore, a
decline in the value of the yen relative to the U.S. dollar could have an
adverse effect on the value of a Fund's Japanese investments. The following
table presents the average exchange rates of Japanese yen for U.S. dollars for
the years shown:
AVERAGE CURRENCY EXCHANGE RATES
<TABLE>
<CAPTION>
Year Yen Per U.S. Dollar
---- -------------------
<S> <C>
1990 144.79
1991 134.71
1992 126.65
1993 111.20
1994 102.21
1995 94.06
1996 108.78
1997 120.99
1998 139.11*
</TABLE>
Source: International Monetary Fund, International Financial Statistics
- ---------------
* Average as of the first eleven months of 1998.
Securities Markets
The Exchange Market. The Japanese exchange market is a highly
systemized, government regulated market currently consisting of eight stock
exchanges. The three main Japanese Exchanges (Tokyo, Osaka and Nagoya) are
comprised of First and Second Sections. The First Sections have more stringent
listing standards with respect to a company's number of years in existence,
number of outstanding shares and trading volume and, accordingly, list larger,
more established companies than the Second Sections. The Tokyo Stock Exchange
("TSE") is the largest exchange and, as of December 31, 1998, the First Section
of the TSE listed 1,340 companies with market capitalization of approximately
267.8 trillion yen (approximately $2.3 trillion as of such date). The Second
Sections of the main Japanese
40
<PAGE> 54
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
systemized than the stock exchanges. Trading of equity securities through the
JASDAQ market is conducted by securities firms in Japan, primarily through an
organization which acts as a "matching agent," as opposed to a recognized stock
exchange. Consequently, securities traded through JASDAQ may, from time to time,
and especially in falling markets, become illiquid and experience short-term
price volatility and wide spreads between bid and offer prices. This combination
of limited liquidity and price volatility may have an adverse effect on the
investment performance of a Fund. In periods of rapid price increases, the
limited liquidity of JASDAQ restricts a Fund's ability to adjust its portfolio
quickly in order to take full advantage of a significant market increase, and
conversely, during periods of rapid price declines, it restricts the ability of
a Fund to dispose of securities quickly in order to realize gains previously
made or to limit losses on securities held in its portfolio. In addition,
although JASDAQ has generally experienced sustained growth in aggregate market
capitalization and trading volume, there have been periods in which aggregate
market capitalization and trading volume have declined.
As of December 31, 1998, 868 issues were traded through JASDAQ,
having an aggregate market capitalization in excess of 7.7 trillion yen
(approximately $67.8 billion as of such date). The entry requirements for JASDAQ
were amended on December 1, 1998. As of February 22, 1999, there was no English
translation of the amendments available. JASDAQ has generally attracted small
growth companies or companies whose major shareholders wish to sell only a small
portion of the company's equity.
Market Risks. Although the market for Japanese equities traded
on the First Section of the TSE is substantial in terms of trading volume and
liquidity, the TSE has nonetheless exhibited significant market volatility in
the past several years. With respect to the OTC market, trades of certain stocks
may not be effected on days when the matching of buy and sell orders for such
stocks does not occur. The liquidity of the Japanese OTC market, as well as that
of the Second Sections of the exchanges, although increasing in recent years, is
limited by the small number of publicly held shares which trade on a regular
basis. Overall, 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 Funds' investments, cannot be predicted. In
41
<PAGE> 55
addition, Japan has one of the world's highest population densities. A
significant percentage of the total population of Japan is concentrated in the
metropolitan areas of Tokyo, Yokohama, Osaka and Nagoya.
MANAGEMENT OF THE FUNDS
Officers and Board of Directors
The business and affairs of each Fund are managed by the Board
of Directors in accordance with the laws of the State of Maryland. Each Board
elects officers who are responsible for the day-to-day operations of a Fund and
who execute policies authorized by the Board. Under each Fund's Charter, a Board
may classify or reclassify any unissued shares of the Funds into one or more
additional classes by setting or changing in any one or more respects their
relative rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption. A Board may similarly
classify or reclassify any class of its shares into one or more series and,
without shareholder approval, may increase the number of authorized shares of
the Funds.
The names (and ages) of each Fund's Directors and officers,
their addresses, present positions and principal occupations during the past
five years and other affiliations are set forth below.
<TABLE>
<S> <C>
Richard H. Francis (67) Director
40 Grosvenor Road Currently retired; Executive Vice President and Chief
Short Hills, New Jersey 07078 Financial Officer of Pan Am Corporation and Pan American
World Airways, Inc. from 1988 to 1991; Director of The
Infinity Mutual Funds, BISYS Group Incorporated;
Director/Trustee of other Warburg Pincus Funds and other
CSAM-advised investment companies.
Jack W. Fritz (72) Director
2425 North Fish Creek Road Private investor; Consultant and Director of Fritz
P.O. Box 483 Broadcasting, Inc. and Fritz Communications (developers
Wilson, Wyoming 83014 and operators of radio stations); Director of Advo, Inc.
(direct mail advertising); Director/Trustee of other
Warburg Pincus Funds.
</TABLE>
42
<PAGE> 56
<TABLE>
<S> <C>
Jeffrey E. Garten* (52) Director
Box 208200 Dean of Yale School of Management and William S. Beinecke
New Haven, Connecticut 06520-8200 Professor in the Practice of International Trade and
Finance; Undersecretary of Commerce for International
Trade from November 1993 to October 1995; Professor at
Columbia University from September 1992 to November 1993;
Director/Trustee of other Warburg Pincus Funds.
James S. Pasman, Jr. (68) Director
2j9 The Trillium Currently retired; President and Chief Operating Officer
Pittsburgh, Pennsylvania 15238 of National InterGroup, Inc. from April 1989 to March
1991; Chairman of Permian Oil Co. from April 1989 to
March 1991; Director of Education Management Corp., Tyco
International Ltd.; Trustee, BT Insurance Funds Trust;
Director/Trustee of other Warburg Pincus Funds and other
CSAM-advised investment companies.
William W. Priest* (57) Chairman of the Board
153 East 53rd Street Chairman-Management Committee, Chief Executive Officer
New York, New York 10022 and Managing Director of CSAM (U.S.) since 1990;
Director of TIG Holdings Inc.; Director/Trustee of other
Warburg Pincus Funds and other CSAM-advised investment
companies.
Steven N. Rappaport (50) Director
c/o Loanet, Inc. President of Loanet, Inc. since 1997; Executive Vice
153 East 53rd Street, President of Loanet, Inc. from 1994 to 1997; Director,
Suite 5500 President, North American Operations, and former
New York, New York 10022 Executive Vice President from 1992 to 1993 of Worldwide
Operations of Metallurg Inc.; Executive Vice President,
Telerate, Inc. from 1987 to 1992; Partner in the law firm
of Hartman & Craven until 1987; Director/Trustee of other
Warburg Pincus Funds and other CSAM-advised investment
companies.
</TABLE>
- --------------------
* Indicates a Director who is an "interested person" of the Funds as defined in
the 1940 Act.
43
<PAGE> 57
<TABLE>
<S> <C>
Arnold M. Reichman* (51) Vice Chairman of the Board
466 Lexington Avenue Managing Director and Chief Operating Officer of CSAM;
New York, New York 10017-3147 Associated with CSAM since CSAM acquired the Funds'
predecessor adviser in July 1999; with the predecessor
adviser since 1984; Officer of CSAMSI; Director of the
RBB Fund, Inc., Director/Trustee of other Warburg Pincus
Funds.
Alexander B. Trowbridge (69) Director
1317 F Street Currently retired; President of Trowbridge Partners, Inc.
5th Floor (business consulting) from January 1990 to November 1996;
Washington, DC 20004 Director or Trustee of New England Mutual Life Insurance
Co., ICOS Corporation (biopharmaceuticals), IRI
International (energy services), The Rouse Company (real
estate development), Harris Corp. (electronics and
communications equipment), The Gillette Co. (personal
care products) and Sunoco, Inc. (petroleum refining and
marketing); Director/Trustee of other Warburg Pincus Funds.
Eugene L. Podsiadlo (42) President
466 Lexington Avenue Managing Director of CSAM; Associated with CSAM since
New York, New York 10017-3147 CSAM acquired the Funds' predecessor adviser in July
1999; with the predecessor adviser since 1991; Vice
President of Citibank, N.A. from 1987 to 1991; Officer of
CSAMSI and other Warburg Pincus Funds.
Hal Liebes, Esq. (35) Vice President and Secretary
153 East 53rd Street Director and General Counsel of CSAM; Associated with
New York, New York 10022 CSAM since 1995; Associated with CS First Boston
Investment Management from 1994 to 1995; Associated with
Division of Enforcement, U.S. Securities and Exchange
Commission from 1991 to 1994; Officer of CSAMSI and other
Warburg Pincus Funds.
</TABLE>
- --------------------
* Indicates a Director who is an "interested person" of the Funds as defined in
the 1940 Act.
44
<PAGE> 58
<TABLE>
<S> <C>
Michael A. Pignataro (39) Treasurer and Chief Financial Officer Vice president
153 East 53rd Street and Director of Fund Administration of CSAM; Associated
New York, New York 10022 with CSAM since 1986; Officer of other Warburg Pincus Funds.
Janna Manes, Esq. (31) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel of CSAM; Associated with
New York, New York 10017-3147 CSAM since CSAM acquired the Funds' predecessor adviser
in July 1999; with the predecessor adviser since 1996;
Associated with the law firm of Willkie Farr & Gallagher
from 1993 to 1996; Officer of other Warburg Pincus Funds
Stuart J. Cohen, Esq. (30) Assistant Secretary
466 Lexington Avenue Vice President and Legal Counsel of CSAM; Associated with
Nw York, New York 10017-3147 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 of
New York, New York 10022 CSAM; Associated with CSAM since June 1996; Assistant
Treasurer, Bankers Trust Corp. -- Fund Administration
from March 1994 to June 1996; Mutual Fund Accounting
Supervisor, Dreyfus Corporation from April 1987 to March
1994; Officer of other Warburg Pincus Funds.
</TABLE>
No employee of CSAM, PFPC Inc., the Funds' co-administrator
("PFPC"), or any of their affiliates, receives any compensation from the Funds
for acting as an officer or director of a Fund. For each Fund in the Warburg
Pincus family of funds, each Director/Trustee who is not a director, trustee,
officer or employee of CSAM, PFPC or any of their affiliates receives an annual
fee of $500 per fund for Director services provided and $250 for each Board
meeting attended in addition to reimbursement for expenses
45
<PAGE> 59
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 received an annual fee of $325.
46
<PAGE> 60
Directors' Total Compensation (for the fiscal year ended October 31, 1998):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Name of Japan Small Japan Growth All Investment Companies
Director Company Fund in Warburg Pincus Fund
Fund Complex*
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
William W. Priest** None None None
- ----------------------------------------------------------------------------------------------------------
Arnold M. Reichman** None None None
- ----------------------------------------------------------------------------------------------------------
Richard N. Cooper*** $1,900 $1,900 $56,600
- ----------------------------------------------------------------------------------------------------------
Donald J. Donahue*** $ 475 $ 475 $13,525
- ----------------------------------------------------------------------------------------------------------
Richard H. Francis**** None None None
- ----------------------------------------------------------------------------------------------------------
Jack W. Fritz $2,150 $2,150 $63,100
- ----------------------------------------------------------------------------------------------------------
Jeffrey E. Garten***** $1,675 $1,675 $49,325
- ----------------------------------------------------------------------------------------------------------
Thomas A. Melfe*** $2,150 $2,150 $60,700
- ----------------------------------------------------------------------------------------------------------
James S. Pasman, Jr. **** None None None
- ----------------------------------------------------------------------------------------------------------
Steven N. Rappaport**** None None None
- ----------------------------------------------------------------------------------------------------------
Alexander B. Trowbridge $2,250 $2,250 $64,000
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* Each Director serves as a Director or Trustee of 39 investment
companies in the Warburg Pincus family of funds.
** Mr. Priest and Mr. Reichman receive compensation as affiliates of CSAM,
and, accordingly, receive no compensation from any Fund or any other
investment company advised by CSAM.
*** Mr. Donahue resigned as a Director of each Fund effective February 6,
1998. Messrs. Cooper and Melfe resigned as a Director of each Fund
effective July 6, 1999.
**** Messrs. Francis, Pasman and Rappaport became Directors of the Funds
effective July 6, 1999.
***** Mr. Gartner bacame a Director of the Funds effective February 6, 1998.
As of January 29, 1999, Directors and officers as a group,
owned of record less than 1% of each Fund's outstanding Common Shares. No
Director or officer owned any of the Funds' outstanding Advisor Shares.
Portfolio Managers
Mr. P. Nicholas Edwards is Portfolio Manager of the Japan
Growth Fund and Portfolio Manager of the Japan Small Company Fund. Mr. Edwards
has been associated with CSAM since CSAM acquired the Funds' predecessor
adviser in July 1999 and joined the predecessor adviser in August 1995. Prior
to that, Mr. Edwards was a director at Jardine Fleming Investment Advisers,
Tokyo. He was a vice president of Robert Fleming Inc. in
47
<PAGE> 61
New York City from 1988 to 1991. Mr. Edwards earned M.A. degrees from Oxford
University and Hiroshima University in Japan.
Mr. Todd Jacobson is Associate Portfolio Manager and Research
Analyst for the Japan Growth Fund and the Japan Small Company Fund. Mr. Jacobson
has seven years of investment experience. Mr. Jacobson has been associated with
CSAM since CSAM acquired the Funds' predecessor adviser in July 1999. Prior to
joining the predecessor adviser in 1997, Mr. Jacobson was an analyst at Brown
Brothers Harriman from 1993 to 1997. He was an analyst with Value Line from 1989
to 1991. Mr. Jacobson received his M.B.A. degree in Finance from the Wharton
School and his B.A. degree Phi Beta Kappa in Economics from the State University
of New York - Binghamton.
Investment Adviser and Co-Administrators
CSAM, located at 153 East 53rd Street, New York, New York
10022, serves as investment adviser to each Fund pursuant to a written agreement
(the "Advisory Agreement"). CSAM is an indirect wholly-owned U.S. subsidiary of
Credit Suisse ("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 served as investment adviser to
each Fund. On that date, Credit Suisse acquired Warburg and combined Warburg
with Credit Suisse's existing U.S.-based asset management business ("Credit
Suisse Asset Management"). Consequently, the combined entity, CSAM, became the
Funds' investment adviser. Credit Suisse Asset Management, formerly known as BEA
Associates, together with its predecessor firms, has been engaged in the
investment advisory business for over 60 years.
Counsellors Funds Service, Inc. ("Counsellors Service") and
PFPC both serve as co-administrators to each Fund pursuant to separate written
agreements (the "Counsellors Service Co-Administration Agreement" and the "PFPC
Co-Administration Agreement," respectively).
CSAM, subject to the control of the Funds' officers and the
Board, manages the investment and reinvestment of the assets of the Funds in
accordance with each Fund's investment objective and stated investment policies.
CSAM makes investment decisions for each Fund and places orders to purchase or
sell securities on behalf of the Fund. CSAM also employs a support staff of
management personnel to provide services to the Funds and furnishes the Funds
with office space, furnishings and equipment. For its investment advisory
services, CSAM receives a fee calculated at an annual rate of 1.25% of each
Fund's average daily net assets.
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<PAGE> 62
As co-administrator, Counsellors Service provides shareholder
liaison services to the Funds, including responding to shareholder inquiries and
providing information on shareholder investments. Counsellors Service also
performs a variety of other services, including furnishing certain executive and
administrative services, acting as liaison between each Fund 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 Funds. For its
administrative services, Counsellors Service receives a fee calculated at an
annual rate of .10% of each Fund's average daily net assets.
As a co-administrator, PFPC calculates each Fund's net asset
value, provides all accounting services for the Funds and assists in related
aspects of the Funds' operations. For its administrative services, PFPC receives
a fee calculated at an annual rate of .12% on each Fund's first $250 million in
average daily net assets, .10% on the next $250 million in average daily net
assets, .08% on the next $250 million in average daily net assets and .05% of
the average daily net assets over $750 million, subject in each case to a
minimum annual fee and exclusive out-of-pocket expenses. PFPC has its principal
offices at 400 Bellevue Parkway, Wilmington, Delaware 19809.
CSAM and the Funds' co-administrators may voluntarily waive a
portion of their fees from time to time and temporarily limit the expenses to be
borne by the Funds.
Each class of shares of a Fund bears its proportionate share of
fees payable to CSAM, Counsellors Service and PFPC in the proportion that its
assets bear to the aggregate assets of the Fund at the time of calculation.
These fees are calculated at an annual rate based on a percentage of a Fund's
average daily net assets. The advisory fees earned by CSAM's predecessor,
Warburg, and the co-administration fees earned by PFPC and Counsellors Service,
respectively, for the last three fiscal years are described below.
Warburg Advisory Fees
(portions of fees waived, if any, noted in parenthesis)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Fiscal year ended Fiscal year ended Fiscal year ended
Fund October 31, 1996 October 31, 1997 October 31, 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Japan Growth $ 149,987 ($149,987) $260,741 ($143,819) $438,025 ($ 73,158)
- ------------------------------------------------------------------------------------------------------------
Japan Small Company $2,721,814 ($573,600) $927,417* ($357,562) $526,522 ($288,783)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* Effective at the close of business on May 23, 1997, Warburg ceased to
engage SPARX Investment & Research, USA, Inc. ("SPARX") as sub-investment
adviser to the Japan Small Company Fund. Up until that time, Warburg paid
SPARX from its advisory fee at an annual rate of .625% of the average
daily net assets of the Fund.
PFPC Co-Administration Fees
(portions of fees waived, if any, noted in parenthesis)
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<PAGE> 63
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Fiscal year ended Fiscal year ended Fiscal year ended
Fund October 31, 1996 October 31, 1997 October 31, 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Japan Growth $ 14,399 ($11,644) $25,031 ($25,031) $49,934 ($42,040)
- ------------------------------------------------------------------------------------------------------------
Japan Small $260,256 ($53,976) $89,032 ($20,262) $58,033 ($50,546)
Company
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Counsellors Service Co-Administration Fees
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Fiscal year ended Fiscal year ended Fiscal year ended
Fund October 31, 1996 October 31, 1997 October 31, 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Japan Growth $11,999 $20,859 $35,042
- ------------------------------------------------------------------------------------------------------------
Japan Small $217,745 $74,193 $42,122
Company
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Custodian and Transfer Agent
State Street Bank and Trust Company ("State Street") serves as
custodian of each of the Fund's non-U.S. assets, and PFPC Trust Company ("PFPC
Trust") serves as custodian of each of the Fund's U.S. assets. Pursuant to
separate custodian agreements (the "Custodian Agreements"), State Street and
PFPC Trust each (i) maintain a separate account or accounts in the name of the
Funds, (ii) hold and transfer portfolio securities on account of the Funds,
(iii) make receipts and disbursements of money on behalf of the Funds, (iv)
collect and receive all income and other payments and distributions for the
account of the Funds' portfolio securities and (v) make periodic reports to the
Boards concerning the Funds' custodial arrangements. With approval of the Board,
State Street is authorized to select one or more foreign banking institutions
and foreign securities depositories to serve as sub-custodian on behalf of the
Funds, and PNC is authorized to select one or more domestic banks or trust
companies to serve as sub-custodian on behalf of the Funds. With approval of the
Board, PFPC Trust is authorized to select one or more domestic banks or trust
companies to serve as sub-custodian on behalf of the Funds. PFPC Trust has
entered into a sub-custodian agreement with PNC Bank, National Association
("PNC"), pursuant to which PNC provides asset safekeeping and securities
clearing services. PFPC Trust and PNC are indirect, wholly owned subsidiaries of
PNC Bank Corp. and their principal business address is 200 Stevens Drive,
Lester, Pennsylvania 19113. The principal business address of State Street is
225 Franklin Street, Boston, Massachusetts 02110.
State Street also serves as the shareholder servicing, transfer
and dividend disbursing agent of the Funds pursuant to a Transfer Agency and
Service Agreement, under which State Street (i) issues and redeems shares of the
Funds, (ii) addresses and mails all communications by the Funds to record owners
of Fund shares, including reports to shareholders, dividend and distribution
notices and proxy material for meetings of shareholders, (iii) maintains
shareholder accounts and, if requested, sub-accounts and (iv) makes periodic
reports to the Boards concerning the transfer agent's operations with respect to
the Funds. State Street has delegated to Boston Financial Data Services, Inc.,
an
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<PAGE> 64
affiliate of State Street ("BFDS"), responsibility for most shareholder
servicing functions. BFDS's principal business address is 2 Heritage Drive,
North Quincy, Massachusetts 02171.
Organization of the Funds
The Funds are open-end management investment companies within
the meaning of the 1940 Act. The Japan Growth Fund was incorporated on October
10, 1995 under the laws of the State of Maryland under the name "Warburg, Pincus
Japan Growth Fund, Inc.," and the Japan Small Company Fund was incorporated on
July 26, 1994 under the laws of the State of Maryland under the name "Warburg,
Pincus Japan OTC Fund, Inc." On August 21, 1998, the Fund amended its charter to
change its name to "Warburg, Pincus Japan Small Company Fund, Inc." Each of the
Funds is a non-diversified management investment company.
Although each Fund is authorized to offer two classes of
shares, Common Shares and Advisor Shares, the Japan Small Company Fund currently
offers only Common Shares. The Japan Growth Fund offers both Common and Advisor
Shares, the Advisor Shares pursuant to a separate prospectus. Unless otherwise
indicated, references to a "Fund" apply to each class of shares of that Fund.
Each Fund's charter authorizes its Board to issue three billion
full and fractional shares of capital stock, $.001 par value per share, of which
one billion shares are designated Common Shares and two billion shares are
designated Advisor Shares. Under each Fund's charter documents, the Board has
the power to 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. A Board may similarly
classify or reclassify any class of its shares into one or more series and,
without shareholder approval, may increase the number of authorized shares of
the Fund.
All shareholders of each Fund in each class, upon liquidation,
will participate ratably in the Fund's net assets. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Directors can elect all Directors. Shares are transferable
but have no preemptive, conversion or subscription rights.
Distribution and Shareholder Servicing
CSAMSI, 466 Lexington Avenue, New York, New York 10017-3147,
acts as distributor to each of the Funds.
Common Shares. The Japan Growth Fund and the Japan Small
Company Fund have each entered into a Shareholder Servicing and Distribution
Plan (the "Common Shares 12b-1 Plan"), pursuant to Rule 12b-1 under the 1940
Act, pursuant to which each Fund pays CSAMSI, in consideration for Services (as
defined below), a fee calculated at an annual rate of .25% of the average daily
net assets of the Common Shares of the Fund. Services performed by CSAMSI
include (i) the sale of the Common Shares, as set forth in the Common Shares
12b-1 Plan ("Selling Services"), (ii) ongoing servicing and/or maintenance of
the accounts of Common Shareholders of the Funds, as set forth in the Common
Shares
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<PAGE> 65
12b-1 Plan ("Shareholder Services"), and (iii) sub-transfer agency services,
subaccounting services or administrative services related to the sale of the
Common Shares, as set forth in the Common Shares 12b-1 Plan ("Administrative
Services" and collectively with Selling Services and Administrative Services,
"Services") including, without limitation, (a) payments reflecting an
allocation of overhead and other office expenses of CSAMSI related to providing
Services; (b) payments made to, and reimbursement of expenses of, persons who
provide support services in connection with the distribution of the Common
Shares including, but not limited to, office space and equipment, telephone
facilities, answering routine inquiries regarding the Funds, and providing any
other Shareholder Services; (c) payments made to compensate selected dealers or
other authorized persons for providing any Services; (d) costs relating to the
formulation and implementation of marketing and promotional activities for the
Common Shares, including, but not limited to, direct mail promotions and
television, radio, newspaper, magazine and other mass media advertising, and
related travel and entertainment expenses; (e) costs of printing and
distributing prospectuses, statements of additional information and reports of
the Funds to prospective shareholders of the Funds; and (f) costs involved in
obtaining whatever information, analyses and reports with respect to marketing
and promotional activities that the Funds may, from time to time, deem
advisable.
Pursuant to the Common Shares 12b-1 Plan, CSAMSI provides the
Boards with periodic reports of amounts expended under the 12b-1 Plan and the
purpose for which the expenditures were made.
For the fiscal year ended October 31, 1998, the Common Shares
of the Japan Growth Fund and the Japan Small Company Fund paid $87,542 and
$105,301, respectively, pursuant to the Common Shares 12b-1 Plan, all of which
was expended on advertising, marketing communications and public relations.
Each Fund has authorized certain broker-dealers, financial
institutions, recordkeeping organizations and other industry professions
(collectively ''Service Organizations'') or, if applicable, their designees to
enter confirmed purchase and redemption orders on behalf of their clients and
customers, with payment to follow no later than the Fund's pricing on the
following business day. If payment is not received by such time, the Service
Organization could be held liable for resulting fees or losses. The Fund may be
deemed to have received a purchase or redemption order when a Service
Organization, or, if applicable its authorized designee, accepts the order. Such
orders received by the Fund in proper form will be priced at the Fund's net
asset value next computed after they are accepted by the Service Organization or
its authorized designee. Service Organizations may impose transaction or
administrative charges or other direct fees, which charges or fees would not be
imposed if Fund shares are purchased directly from the Funds.
For administration, subaccounting, transfer agency and/or
other services, CSAM or its affiliates may pay Service Organizations a fee up
to .40% of the average annual value of accounts with the Funds maintained by
such Service Organizations. Service Organization may also be reimbursed for
marketing costs. The Service Fee payable to any one Service Organization is
determined based upon a number of factors, including the nature and quality of
services provided, the operations processing requirements of the relationship
and the standardized fee schedule of the Service Organization or recordkeeper.
The Funds may reimburse part of the Service Fee at rates they would normally
pay to the transfer agent for providing the services.
Advisor Shares. The Japan Growth Fund has entered into an
agreement (the "Agreement") with institutional shareholders of record,
broker-dealers, financial institutions, depository institutions, retirement
plans and financial intermediaries ("Institutions") to provide certain
distribution, shareholder servicing, administrative and/or accounting services
for their clients or customers (or participants in the case of retirement plans)
("Customers") who are beneficial owners of Advisor Shares. Agreements will be
governed by a distribution plan (the "Advisor Shares 12b-1 Plan") pursuant to
Rule 12b-1 under the 1940 Act. Advisor Shares of the Fund bear expenses paid
pursuant to the Advisor Shares 12b-1 Plan at an annual rate not to exceed .75%
of the average daily net asset value of the Fund's outstanding Advisor Shares.
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<PAGE> 66
Advisor Shares are currently bearing expenses of .50% of average daily net
assets. The Advisor Shares 12b-1 Plan requires the Board, at least quarterly,
to receive and review written reports of amounts expended under the Advisor
Shares 12b-1 Plan and the purpose for which such expenditures were made. For
the fiscal year ended October 31, 1998, the Advisor Shares of the Japan Growth
Fund paid $127, all of which were paid to Institutions.
Certain Institutions may receive service fees from the CSAMSI,
CSAM or their affiliates for providing recordkeeping or other services in
connection with investments in the funds. Institutions may also be reimbursed
for marketing and other costs. The service fee may be up to 0.10% per year of
the value of fund accounts maintained by the firm. Fees payable to any
particular Institution are determined based upon a number of factors, including
the nature and quality of the services provided, the operations processing
requirements of the relationship and the standardized fee schedule of the
Institutions. The funds may reimburse part of the service fee at rates they
would normally pay to the transfer agent for providing the services. To the
extent that CSAMSI, CSAM or their affiliates provide additional compensation or
reimbursements for market expenses, such payments would not represent an
additional expense to the Funds or their shareholders.
An Institution with which the Fund has entered into an
Agreement with respect to its Advisor Shares may charge a Customer one or more
of the following types of fees, as agreed upon by the Institution and the
Customer, with respect to the cash management or other services provided by the
Institution: (i) account fees (a fixed amount per month or per year); (ii)
transaction fees (a fixed amount per transaction processed); (iii) compensation
balance requirements (a minimum dollar amount a Customer must maintain in order
to obtain the services offered); or (iv) account maintenance fees (a periodic
charge based upon the percentage of assets in the account or of the dividend
paid on those assets). Services provided by an Institution to Customers are in
addition to, and not duplicative of, the services to be provided under the
Fund's co-administration and distribution and shareholder servicing
arrangements. A Customer of an Institution should read the relevant Prospectus
and this Statement of Additional Information in conjunction with the Agreement
and other literature describing the services and related fees that would be
provided by the Institution to its Customers prior to any purchase of the Fund's
shares. Prospectuses are available from the Fund's distributor upon request. No
preference will be shown in the selection of Fund portfolio investments for the
instruments of Institutions.
General. The Common Shares 12b-1 Plans and the Advisor Shares
12b-1 Plans will continue in effect for so long as their continuance is
specifically approved at least annually by the Boards, including a majority of
the Directors who are not interested persons of the Funds and who have no direct
or indirect financial interest in the operation of the Distribution Plans or the
12b-1 Plans, as the case may be ("Independent Directors"). Any material
amendment of a Common Shares 12b-1 Plan or an Advisor Shares 12b-1 Plan would
require the approval of the Boards in the same manner. Neither the Common Shares
12b-1 Plans nor the Advisor Shares 12b-1 Plans may be amended to increase
materially the amount to be spent thereunder without shareholder approval of the
relevant class of shares. Each Common Shares 12b-1 Plan or Advisor Shares 12b-1
Plan may be terminated at any time, without penalty, by
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<PAGE> 67
vote of a majority of the Independent Directors or by a vote of a majority of
the outstanding voting securities of the relevant class of shares of each Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of each Fund's shares is equal to the per
share net asset value of the relevant class of shares of the Fund.
Under the 1940 Act, a Fund may suspend the right of redemption
or postpone the date of payment upon redemption for any period during which the
NYSE is closed, other than customary weekend and holiday closings, or during
which trading on the NYSE is restricted, or during which (as determined by the
SEC) an emergency exists as a result of which disposal or fair valuation of
portfolio securities is not reasonably practicable, or for such other periods as
the SEC may permit. (A Fund may also suspend or postpone the recordation of an
exchange of its shares upon the occurrence of any of the foregoing conditions.)
If conditions exist which make payment of redemption proceeds
wholly in cash unwise or undesirable, each Fund may make payment wholly or
partly in securities or other investment instruments which may not constitute
securities as such term is defined in the applicable securities laws. If a
redemption is paid wholly or partly in securities or other property, a
shareholder would incur transaction costs in disposing of the redemption
proceeds. Each Fund will comply with Rule 18f-1 promulgated under the 1940 Act
with respect to redemptions in kind.
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the "Plan") is available to
shareholders who wish to receive specific amounts of cash periodically.
Withdrawals may be made under the Plan by redeeming as many shares of the
relevant Fund as may be necessary to cover the stipulated withdrawal payment. To
the extent that withdrawals exceed dividends, distributions and appreciation of
a shareholder's investment in a Fund, there will be a reduction in the value of
the shareholder's investment and continued withdrawal payments may reduce the
shareholder's investment and ultimately exhaust it. Withdrawal payments should
not be considered as income from investment in a Fund.
EXCHANGE PRIVILEGE
An exchange privilege with certain other funds advised by CSAM
is available to investors in each Fund. A Common Shareholder may exchange
Common Shares of a Fund for Common Shares of another Fund or for Common Shares
of another Warburg Pincus Fund at their respective net asset values. An
Advisor Shareholder may exchange Advisor Shares of a Fund for Advisor Shares of
another Warburg Pincus Fund at their respective net asset values.
If an exchange request is received by Warburg Pincus Funds or
their agent prior to the close of regular trading on the NYSE, the exchange will
be made at each Fund's net asset value determined at the end of that business
day. Exchanges will be effected without a
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<PAGE> 68
sales charge but must satisfy the minimum dollar amount necessary for new
purchases. The Fund may refuse exchange purchases at any time without prior
notice.
The exchange privilege is available to shareholders residing
in any state in which the shares being acquired may legally be sold. When an
investor effects an exchange of shares, the exchange is treated for federal
income tax purposes as a redemption. Therefore, the investor may realize a
taxable gain or loss in connection with the exchange. Investors wishing to
exchange shares of a Fund for shares in another Warburg Pincus Fund should
review the prospectus of the other fund prior to making an exchange. For
further information regarding the exchange privilege or to obtain a current
prospectus for another Warburg Pincus Fund, an investor should contact Warburg
Pincus Funds at 1-800-222-8977.
The Funds reserve the right to refuse exchange purchases by
any person or group if, in CSAM's judgment, a Fund would be unable to invest
the money effectively in accordance with its investment objective and policies,
or would otherwise potentially be adversely affected. Examples of when an
exchange purchase could be refused are when the Fund receives or anticipates
receiving large exchange orders at or about the same time and/or when a pattern
of exchanges within a short period of time (often associated with a "market
timing" strategy) is discerned. The Funds reserve the right to terminate or
modify the exchange privilege at any time upon 30 days' notice to shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is a summary of the material United States
federal income tax considerations regarding the purchase, ownership and
disposition of shares in the Funds. 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 Funds. The summary is based on
the laws in effect on the date of this Statement of Additional Information,
which are subject to change.
The Funds and Their Investments
Each Fund intends to continue to qualify to be treated as a
regulated investment company each taxable year under the Code. To so qualify, a
Fund must, among other things: (a) derive at least 90% of its gross income in
each taxable year from dividends, interest, payments with respect to securities,
loans and gains from the sale or other disposition of stock or securities or
foreign currencies, or other income (including, but not limited to, gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; and (b) diversify its
holdings so that, at the end of each quarter of the Fund's taxable year, (i) at
least 50% of the market value of the Fund's assets is represented by cash,
securities of other regulated investment companies, United States government
securities and other securities, with such other securities limited, in respect
of any one issuer, to an amount not greater than 5% of the Fund's assets and not
greater than 10% of the outstanding voting securities of such issuer and (ii)
not more than 25% of the value of its assets is invested in the securities
(other than United States government securities or securities of other regulated
investment companies) of any one issuer or any two or more issuers that the
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<PAGE> 69
Fund controls and are determined to be engaged in the same or similar trades or
businesses or related trades or businesses. Each Fund expects that all of its
foreign currency gains will be directly related to its principal business of
investing in stocks and securities.
As a regulated investment company, a Fund will not be subject
to United States federal income tax on its net investment income (i.e., income
other than its net realized long- and short-term capital gains) and its net
realized long- and short-term capital gains, if any, that it distributes to its
shareholders, provided that an amount equal to at least 90% of the sum of its
investment company taxable income (i.e., 90% of its taxable income minus the
excess, if any, of its net realized long-term capital gains over its net
realized short-term capital losses (including any capital loss carryovers), plus
or minus certain other adjustments as specified in the Code) for the taxable
year is distributed, but will be subject to tax at regular corporate rates on
any taxable income or gains that it does not distribute. Any dividend declared
by a Fund in October, November or December of any calendar year and payable to
shareholders of record on a specified date in such a month shall be deemed to
have been received by each shareholder on December 31 of such calendar year and
to have been paid by the Fund not later than such December 31, provided that
such dividend is actually paid by the Fund during January of the following
calendar year.
Each Fund intends to distribute annually to its shareholders
substantially all of its investment company taxable income. The Board of
Directors of the Fund will determine annually whether to distribute any net
realized long-term capital gains in excess of net realized short-term capital
losses (including any capital loss carryovers). Each Fund currently expects to
distribute any excess annually to its shareholders. However, if a Fund retains
for investment an amount equal to all or a portion of its net long-term capital
gains in excess of its net short-term capital losses and capital loss
carryovers, it will be subject to a corporate tax (currently at a rate of 35%)
on the amount retained. In that event, the Fund will designate such retained
amounts as undistributed capital gains in a notice to its shareholders who (a)
will be required to include in income for United Stares federal income tax
purposes, as long-term capital gains, their proportionate shares of the
undistributed amount, (b) will be entitled to credit their proportionate shares
of the 35% tax paid by the Fund on the undistributed amount against their
United States federal income tax liabilities, if any, and to claim refunds to
the extent their credits exceed their liabilities, if any, and (c) will be
entitled to increase their tax basis, for United States federal income tax
purposes, in their shares by an amount equal to 65% of the amount of
undistributed capital gains included in the shareholder's income.
Organizations or persons not subject to federal income tax on such capital
gains will be entitled to a refund of their pro rata share of such taxes paid
by the Fund upon filing appropriate returns or claims for refund with the
Internal Revenue Service (the "IRS").
The Code imposes a 4% nondeductible excise tax on each Fund to
the extent the Fund does not distribute by the end of any calendar year at
least 98% of its net investment income for that year and 98% of the net amount
of its capital gains (both long-and short-term) for the one-year period ending,
as a general rule, on October 31 of that year. For this purpose, however, any
income or gain retained by the Fund that is subject to corporate income tax
will be considered to have been distributed by year-end. In addition, the
minimum
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<PAGE> 70
amounts that must be distributed in any year to avoid the excise tax will be
increased or decreased to reflect any underdistribution or overdistribution, as
the case may be, from the previous year. Each Fund anticipates that it will pay
such dividends and will make such distributions as are necessary in order to
avoid the application of this tax.
If, in any taxable year, a Fund fails to qualify as a regulated
investment company under the Code or fails to meet the distribution requirement,
it would be taxed in the same manner as an ordinary corporation and
distributions to its shareholders would not be deductible by the Fund in
computing its taxable income. In addition, in the event of a failure to qualify,
the Fund's distributions, to the extent derived from the Fund's current or
accumulated earnings and profits would constitute dividends (eligible for the
corporate dividends-received deduction) which are taxable to shareholders as
ordinary income, even though those distributions might otherwise (at least in
part) have been treated in the shareholders' hands as long-term capital gains.
If a Fund fails to qualify as a regulated investment company in any year, it
must pay out its earnings and profits accumulated in that year in order to
qualify again as a regulated investment company. In addition, if a Fund failed
to qualify as a regulated investment company for a period greater than one
taxable year, the Fund may be required to recognize any net built-in gains (the
excess of the aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
A Fund's short sales against the box, if any, and transactions
in foreign currencies, forward contracts, options and futures contracts
(including options and futures contracts on foreign currencies) will be subject
to special provisions of the Code that, among other things, may affect the
character of gains and losses realized by the Fund (i.e., may affect whether
gains or losses are ordinary or capital), accelerate recognition of income to
the Fund and defer Fund losses. These rules could therefore affect the
character, amount and timing of distributions to shareholders. These provisions
also (a) will require the Fund to mark-to-market certain types of the positions
in its portfolio (i.e., treat them as if they were closed out) and (b) may cause
the Fund to recognize income without receiving cash with which to pay dividends
or make distributions in amounts necessary to satisfy the distribution
requirements for avoiding income and excise taxes. Each Fund will monitor its
transactions, will make the appropriate tax elections and will make the
appropriate entries in its books and records when it engages in short sales or
acquires any foreign currency, forward contract, option, futures contract or
hedged investment in order to mitigate the effect of these rules and prevent
disqualification of the Fund as a regulated investment company.
A Fund's investments in zero coupon securities, if any, may
create special tax consequences. Zero coupon securities do not make interest
payments, although a portion of the difference between a zero coupon security's
face value and its purchase price is imputed as income to the Fund each year
even though the Fund receives no cash distribution until maturity. Under the
U.S. federal tax laws, the Fund will not be subject to tax on this income if it
pays dividends to its shareholders substantially equal to all the income
received from, or imputed with respect to, its investments during the year,
including its zero coupon securities. These dividends ordinarily will constitute
taxable income to the shareholders of the Fund.
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<PAGE> 71
Foreign Taxes
In the opinion of Japanese counsel for the Funds, the
operations of the Funds will not subject the Funds to any Japanese income,
capital gains or other taxes except for withholding taxes on interest and
dividends paid to the Funds 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 Funds. Pursuant to the present terms of the
Convention, interest received by the Funds from sources within Japan is subject
to a Japanese withholding tax at a rate of 10%.
Each Fund may elect for U.S. income tax purposes to treat
foreign income taxes paid by it as paid by its shareholders if: (i) the Fund
qualifies as a regulated investment company, (ii) certain asset and distribution
requirements are satisfied, and (iii) more than 50% of the Fund's total assets
at the close of its fiscal year consists of stock or securities of foreign
corporations. Each Fund may qualify for and make this election in some, but not
necessarily all, of its taxable years. If a Fund were to make an election,
shareholders of the Fund would be required to take into account an amount equal
to their pro rata portions of such foreign taxes in computing their taxable
income and then treat an amount equal to those foreign taxes as a U.S. federal
income tax deduction or as a foreign tax credit against their U.S. federal
income taxes. Shortly after any year for which it makes such an election, a Fund
will report to its shareholders the amount per share of such foreign income tax
that must be included in each shareholder's gross income and the amount which
will be available for the deduction or credit. No deduction for foreign taxes
may be claimed by a shareholder who does not itemize deductions. Certain
limitations will be imposed on the extent to which the credit (but not the
deduction) for foreign taxes may be claimed.
Passive Foreign Investment Companies
If a Fund purchases shares in certain foreign investment
entities, called "passive foreign investment companies" (a "PFIC"), it may be
subject to United States federal income tax on a portion of any "excess
distribution" or gain from the disposition of such shares even if such income is
distributed as a taxable dividend by the Fund to its shareholders. Additional
charges in the nature of interest may be imposed on the Fund in respect of
deferred taxes arising from such distributions or gains. If a Fund were to
invest in a PFIC and elected to treat the PFIC as a "qualified electing fund"
under the Code, in lieu of the foregoing requirements, the Fund might be
required to include in income each year a portion of the ordinary earnings and
net capital gains of the qualified electing fund, even if not distributed to the
Fund, and such amounts would be subject to the 90% and excise tax distribution
requirements described above. In order to make this election, the Fund would be
required to obtain certain annual information from the passive foreign
investment companies in which it invests, which may be difficult or not possible
to obtain.
58
<PAGE> 72
Alternatively, a Fund may make a mark-to-market election that
will result in a Fund being treated as if it had sold and repurchased all of the
PFIC stock at the end of each year. In this case, the Fund would report gains as
ordinary income and would deduct losses as ordinary losses to the extent of
previously recognized gains. The election, once made, would be effective for all
subsequent taxable years of the Fund, unless revoked with the consent of the
IRS. By making the election, the Fund could potentially ameliorate the adverse
tax consequences with respect to its ownership of shares in a PFIC, but in any
particular year may be required to recognize income in excess of the
distributions it receives from PFICs and its proceeds from dispositions of PFIC
company stock. A Fund may have to distribute this "phantom" income and gain to
satisfy its distribution requirement and to avoid imposition of the 4% excise
tax. The Fund will make the appropriate tax elections, if possible, and take any
additional steps that are necessary to mitigate the effect of these rules.
Dividends and Distributions
Dividends of net investment income and distributions of net
realized short-term capital gains are taxable to a United States shareholder as
ordinary income, whether paid in cash or in shares. Distributions of
net-long-term capital gains, if any, that the Fund designates as capital gains
dividends are taxable as long-term capital gains, whether paid in cash or in
shares and regardless of how long a shareholder has held shares of the Fund.
Dividends and distributions paid by the Fund (except for the portion thereof, if
any, attributable to dividends on stock of U.S. corporations received by the
Fund) will not qualify for the deduction for dividends received by corporations.
Distributions in excess of the Fund's current and accumulated earnings and
profits will, as to each shareholder, be treated as a tax-free return of
capital, to the extent of a shareholder's basis in his shares of the Fund, and
as a capital gain thereafter (if the shareholder holds his shares of the Fund as
capital assets).
Shareholders receiving dividends or distributions in the form
of additional shares should be treated for United States federal income tax
purposes as receiving a distribution in the amount equal to the amount of money
that the shareholders receiving cash dividends or distributions will receive,
and should have a cost basis in the shares received equal to such amount.
Investors considering buying shares just prior to a dividend or
capital gain distribution should be aware that, although the price of shares
just purchased at that time may reflect the amount of the forthcoming
distribution, such dividend or distribution may nevertheless be taxable to them.
If a Fund is the holder of record of any stock on the record
date for any dividends payable with respect to such stock, such dividends are
included in the Fund's gross income not as of the date received but as of the
later of (a) the date such stock became ex-dividend with respect to such
dividends (i.e., the date on which a buyer of the stock would not be entitled
to receive the declared, but unpaid, dividends) or (b) the date the Fund
acquired such stock. Accordingly, in order to satisfy its income distribution
requirements, the Fund
59
<PAGE> 73
may be required to pay dividends based on anticipated earnings, and shareholders
may receive dividends in an earlier year than would otherwise be the case.
Sales of Shares
Upon the sale or exchange of his shares, a shareholder will
realize a taxable gain or loss equal to the difference between the amount
realized and his basis in his shares. Such gain or loss will be treated as
capital gain or loss, if the shares are capital assets in the shareholder's
hands, and will be long-term capital gain or loss if the shares are held for
more than one year and short-term capital gain or loss if the shares are held
for one year or less. Any loss realized on a sale or exchange will be disallowed
to the extent the shares disposed of are replaced, including replacement through
the reinvesting of dividends and capital gains distributions in a Fund, within a
61-day period beginning 30 days before and ending 30 days after the disposition
of the shares. In such a case, the basis of the shares acquired will be
increased to reflect the disallowed loss. Any loss realized by a shareholder on
the sale of a Fund share held by the shareholder for six months or less will be
treated for United States federal income tax purposes as a long-term capital
loss to the extent of any distributions or deemed distributions of long-term
capital gains received by the shareholder with respect to such share.
Backup Withholding
A Fund may be required to withhold, for United States federal
income tax purposes, 31% of the dividends, distributions and redemption proceeds
payable to shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the IRS that they are subject to backup withholding. Certain
shareholders are exempt from backup withholding. Backup withholding is not an
additional tax and any amount withheld may be credited against a shareholder's
United States federal income tax liabilities.
Notices
Shareholders will be notified annually by the relevant Fund as
to the United States federal income tax status of the dividends, distributions
and deemed distributions attributable to undistributed capital gains (discussed
above in "The Funds and Their Investments") made by the Fund to its
shareholders. Furthermore, shareholders will also receive, if appropriate,
various written notices after the close of the Fund's taxable year regarding the
United States federal income tax status of certain dividends, distributions and
deemed distributions that were paid (or that are treated as having been paid) by
the Fund to its shareholders during the preceding taxable year.
Other Taxation
Distributions also may be subject to additional state, local
and foreign taxes depending on each shareholder's particular situation.
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<PAGE> 74
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN MATERIAL TAX CONSEQUENCES AFFECTING
THE FUNDS 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 FUNDS.
DETERMINATION OF PERFORMANCE
From time to time, a Fund may quote the total return of its
Common Shares and/or Advisor Shares in advertisements or in reports and other
communications to shareholders. The net asset value of Common Shares is listed
in The Wall Street Journal each business day under the heading "Warburg Pincus
Funds." Current total return figures may be obtained by calling Warburg Pincus
Funds at 800-927-2874.
With respect to the Funds' Common and Advisor Shares, the
average annual total return for the periods ended October 31, 1998 were as
follows (performance figures calculated without waiver of fees by a Fund's
service provider(s), if any, are noted in parentheses):
TOTAL RETURN
COMMON SHARES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Fund (Inception Date) One-Year Five-Year Since Inception
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Japan Growth (11.81)% (12.22)% N/A N/A (4.34)% (5.06)%
(12/29/95)
- ------------------------------------------------------------------------------------------------------------
Japan Small Company (10.61)% (11.54)% N/A N/A (11.72)% (12.52)%
(9/30/94)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE> 75
ADVISOR SHARES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Fund (Inception Date) One-Year Five-Year Since Inception
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Japan Growth (11.93)% (12.54)% N/A N/A (4.74)% (5.48)%
(12/29/95)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
These total return figures show the average percentage change
in value of an investment in a Fund from the beginning of the measurement period
to the end of the measurement period. The figures reflect changes in the price
of the Fund's shares assuming that any income dividends and/or capital gain
distributions made by the Fund during the period were reinvested in shares of
the Fund. Total return will be shown for recent one-, five- and ten-year
periods, and may be shown for other periods as well (such as from commencement
of the Fund's operations or on a year-by-year, quarterly or current year-to-date
basis).
These figures are calculated by finding the average annual
compounded rates of return for the one-, five- and ten-(or such shorter period
as the relevant class of shares has been offered) year periods that would equate
the initial amount invested to the ending redeemable value according to the
following formula: P (1 + T)(n) = ERV. For purposes of this formula, "P" is a
hypothetical investment of $1,000; "T" is average annual total return; "n" is
number of years; and "ERV" is the ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the one-, five- or ten-year periods (or
fractional portion thereof). Total return or "T" is computed by finding the
average annual change in the value of an initial $1,000 investment over the
period and assumes that all dividends and distributions are reinvested during
the period. Investors should note that this performance may not be
representative of the Fund's total returns in longer market cycles.
These total return figures show the average percentage change
in value of an investment in the Common Shares from the beginning of the
measuring period to the end of the measuring period. The figures reflect changes
in the price of Common Shares assuming that any income dividends and/or capital
gain distributions made by the Fund during the period were reinvested in Common
Shares of the Fund. Total return will be shown for recent one-, five- and
ten-year periods, and may be shown for other periods as well (such as from
commencement of the Fund's operations or on a year-by-year, quarterly or current
year-to-date basis).
When considering average total return figures for periods
longer than one year, it is important to note that the annual total return for
one year in the period might have been greater or less than the average for the
entire period. When considering total return figures for periods shorter than
one year, investors should bear in mind that each Fund seeks long-term
appreciation and that such return may not be representative of any Fund's return
over a longer market cycle. Each Fund may also advertise aggregate total return
figures of its Common Shares for various periods, representing the cumulative
change in value of an investment in the Common Shares of the specific period
(again reflecting changes in share prices and assuming reinvestment of dividends
and distributions). Aggregate and average total returns may be shown by means of
schedules, charts or graphs and may indicate various components of total
62
<PAGE> 76
return (i.e., change in value of initial investment, income dividends and
capital gain distributions).
A Fund may advertise, from time to time, comparisons of the
performance of its Common Shares and/or Advisor Shares with that of one or more
other mutual funds with similar investment objectives. A Fund may advertise
average annual calendar year-to-date and calendar quarter returns, which are
calculated according to the formula set forth in the preceding paragraph, except
that the relevant measuring period would be the number of months that have
elapsed in the current calendar year or most recent three months, as the case
may be. Investors should note that this performance may not be representative of
the Fund's total return in longer market cycles.
The performance of a class of Fund shares will vary from time
to time depending upon market conditions, the composition of a Fund's portfolio
and operating expenses allocable to it. As described above, total return is
based on historical earnings and is not intended to indicate future
performance. Consequently, any given performance quotation should not be
considered as representative of performance for any specified period in the
future. Performance information may be useful as a basis for comparison with
other investment alternatives. However, a Fund's performance will fluctuate,
unlike certain bank deposits or other investments which pay a fixed yield for a
stated period of time. Any fees charged by Institutions or other institutional
investors directly to their customers in connection with investments in Fund
shares are not reflected in a Fund's total return, and such fees, if charged,
will reduce the actual return received by customers on their investments.
A Fund may compare its performance with (i) that of other
mutual funds with similar investment objectives and policies, which may be based
on the rankings prepared by Lipper Analytical Services, Inc. or similar
investment services that monitor the performance of mutual funds; (ii) in the
case of the Japan Growth Fund, the Morgan Stanley Capital International Europe,
Australasia, Far East ("EAFE") Index, the Salomon Russell Global Equity Index,
the FT-Actuaries World Indices, the S&P 500 Index, the Nikkei over-the-counter
average, the JASDAQ Index, the Nikkei 225 and 300 Stock Indexes and the Tokyo
Stock Exchange Index, which are unmanaged indexes of common stock; and in the
case of the Japan Small Company Fund, the JASDAQ Index and the Morgan Stanley
Japan Small Company Index; or (iii) other appropriate indexes of investment
securities or with data developed by Warburg derived from such indexes. A Fund
may also include evaluations of the Fund published by nationally recognized
ranking services and by financial publications such as Barron's, Business Week,
Financial Times, Forbes, Fortune, Inc., Institutional Investor, Investor's
Business Daily, Money, Morningstar, Mutual Fund Magazine, SmartMoney, The Wall
Street Journal and Worth. Morningstar, Inc. rates funds in broad categories
based on risk/reward analyses over various time periods. In addition, each Fund
may from time to time compare 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.
63
<PAGE> 77
Warburg 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
(EAFE) Europe, Australasia, Far East 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 27
years. The following table compares annual total returns of the EAFE Index and
the S&P 500 Index for the calendar years shown.
EAFE INDEX VS. S&P 500 INDEX
1972-1998
ANNUAL TOTAL RETURN+
<TABLE>
<CAPTION>
YEAR EAFE INDEX S&P 500 INDEX
---- ---------- -------------
<S> <C> <C>
1972* 33.28 15.63
1973* -16.82 -17.37
1974* -25.60 -29.72
1975 31.21 31.55
1976 -.36 19.15
1977* 14.61 -11.50
1978* 28.91 1.06
1979 1.82 12.31
1980 19.01 25.77
1981* -4.85 -9.73
1982 -4.63 14.76
1983* 20.91 17.27
1984* 5.02 1.40
1985* 52.97 26.33
1986* 66.80 14.62
1987* 23.18 2.03
1988* 26.66 12.40
1989 9.22 27.25
1990 -24.71 -6.56
1991 10.19 26.31
1992 -13.89 4.46
1993* 30.49 7.06
1994* 6.24 -1.54
1995 9.42 34.11
1996 4.40 20.26
</TABLE>
64
<PAGE> 78
EAFE INDEX VS. S&P 500 INDEX
1972-1998
ANNUAL TOTAL RETURN+
<TABLE>
<CAPTION>
YEAR EAFE INDEX S&P 500 INDEX
---- ---------- -------------
<S> <C> <C>
1997 0.24 31.01
1998 18.29 26.23
</TABLE>
- ---------------------
+ Without reinvestment of dividends.
* The EAFE Index has outperformed the S&P 500 Index 14 out of the last 27
years.
The quoted performance information shown above is not intended
to indicate the future performance of the Funds.
Advertising or supplemental sales literature relating to the
Japan Growth Fund and the Japan Small Company Fund may describe the percentage
decline from all-time high levels for certain foreign stock markets. It may also
describe how such Funds differ from the EAFE Index in composition. The Japan
Growth Fund and the Japan Small Company Fund may also discuss in advertising and
sales literature the history of Japanese stock markets, including the Tokyo
Stock Exchange and OTC market. Sales literature and advertising may also discuss
trends in the economy and corporate structure in Japan, including the contrast
between the sales growth, profit growth, price/earnings ratios, and return on
equity (ROE) of companies; it may discuss the cultural changes taking place
among consumers in Japan, including increasing cost-consciousness and
accumulation of purchasing power and wealth among Japanese consumers, and the
ability of new companies to take advantage of these trends. The sales literature
for these Funds may also discuss current statistics and projections of the
volume, market capitalization, sector weightings and number of issues traded on
Japanese exchanges and in Japanese OTC markets, and may include graphs of such
statistics in advertising and other sales literature.
In its reports, investor communications or advertisements, each
Fund may also include: (i) its total return performance; (ii) its performance
compared with various indexes or other mutual funds; (iii) published evaluations
by nationally recognized ranking services and financial publications; (iv)
descriptions and updates concerning its strategies and portfolio investments;
(v) its goals, risk factors and expenses compared with other mutual funds; (vi)
analysis of its investments by industry, country, credit quality and other
characteristics; (vii) a discussion of the risk/return continuum relating to
different investments; (viii) the general biography or work experience of the
portfolio managers of the Funds; (ix) portfolio manager commentary or market
updates; (x) research methodology underlying stock selection or a Fund's
investment objective; and (xi) other information of interest to investors.
INDEPENDENT ACCOUNTANTS AND COUNSEL
PricewaterhouseCoopers LLP ("PwC"), with principal offices at
2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as independent
accountants for each
65
<PAGE> 79
Fund. The financial statements that are incorporated by reference in this
Statement of Additional Information have been audited by PwC, and have been
included herein in reliance upon the report of such firm of independent
accountants given upon their authority as experts in accounting and auditing.
Willkie Farr & Gallagher serves as counsel for each Fund and
provides legal services from time to time for CSAM, CSAMSI, and Counsellors
Service.
MISCELLANEOUS
The Funds are not sponsored, endorsed, sold or promoted by
Warburg, Pincus & Co. Warburg, Pincus & Co. makes no representation or warranty,
express or implied, to the owners of the Funds or any member of the public
regarding the advisability of investing in securities generally or in the Funds
particularly. Warburg, Pincus & Co. licenses certain trademarks and trade names
of Warburg, Pincus & Co., and is not responsible for and has not participated in
the calculation of the Funds' net asset value, nor is Warburg, Pincus & Co. a
distributor of the Funds. Warburg, Pincus & Co. has no obligation or liability
in connection with the administration, marketing or trading of the Funds.
As of January 29, 1999, the name, address and percentage of
ownership of each person that owns of record 5% or more of a class of each
Fund's outstanding shares were as follows:
Japan Growth Fund
<TABLE>
<S> <C> <C>
COMMON SHARES Charles Schwab & Co., Inc.* 33.72%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corporation* 31.64%
FBO Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
Donaldson Lufkin & Jenrette* 9.90%
Securities Corp. Pershing Division
Mutual Fund Balancing
1 Pershing Plaza Fl. 14
Jersey City, NJ 07399-0001
Susquehanna Financial Group Inc.* 5.48%
401 E. City Avenue, Suite 220
Bala Cynwyd, PA 19004-1117
</TABLE>
66
<PAGE> 80
<TABLE>
<S> <C> <C>
ADVISOR SHARES U.S. Clearing Corporation* 38.60%
FBO 500-23759-12
26 Broadway
New York, NY 10004-1798
CIBC Oppenheimer Corp.* 31.48%
FBO 064-16436-14
P.O. Box 3484
Church Street Station
New York, NY 10008-3484
CIBC Oppenheimer Corp.* 15.76%
FBO 064-17999-11
P.O. Box 3484
Church Street Station
New York, NY 10008-3484
Donaldson Lufkin & Jenrette Securities* 8.22%
P.O. Box 2052
Jersey City, NJ 07303-2052
Warburg Pincus Asset Mgmt. 5.02%
Attn: Stephen Distler
466 Lexington Avenue, 10th Fl.
New York, NY 10017-3140
</TABLE>
Japan Small Company Fund
<TABLE>
<S> <C> <C>
COMMON SHARES Charles Schwab & Co., Inc.* 33.96%
Special Custody Account for the Exclusive Benefit of
Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
National Financial Services Corporation* 31.16%
FBO Customers
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
Donaldson Lufkin & Jenrette* 8.63%
Securities Corp. Pershing Division
Mutual Fund Balancing
1 Pershing Plaza Fl. 14
Jersey City, NJ 07399-00001
</TABLE>
- ------------------
* The Funds believe that these entities are not the beneficial owners of
shares held of record by it.
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<PAGE> 81
FINANCIAL STATEMENTS
Each Fund's audited financial report dated October 31, 1998,
which either accompanies this Statement of Additional Information or has
previously been provided to the investor to whom this Statement of Additional
Information is being sent, is incorporated herein by reference with respect to
all information regarding the relevant Fund included therein. Each Fund will
furnish without charge a copy of the annual reports upon request by calling
Warburg Pincus Funds at 800-927-2874.
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<PAGE> 82
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 with a plus sign designation. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating
assigned by Moody's Investors Service, Inc. ("Moody's"). Issuers rated Prime-1
(or related supporting institutions) are considered to have a superior capacity
for repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics of issuers rated Prime-1 but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
Corporate Bond Ratings
The following summarizes the ratings used by S&P for corporate
bonds:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA - Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB - This is the lowest investment grade. Debt rated BBB is
regarded as having an adequate capacity to pay interest and repay principal.
Although it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for bonds in this category than
for bonds in higher rated categories.
BB, B and CCC - Debt rated BB and B are regarded, on balance,
as predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB represents a
lower degree of speculation than B, and CCC the highest degree of speculation.
While such bonds will likely have some quality
1
<PAGE> 83
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 BB- rating.
CCC - Debt rated CCC has a currently identifiable
vulnerability to default and is dependent upon favorable business, financial
and economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic conditions,
it is not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt rating. The C
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on
which no interest is being paid. Such debt is rated between debt rated C and
debt rated D.
To provide more detailed indications of credit quality, the
ratings may be modified by the addition of a plus or minus sign to show
relative standing within this major rating category.
D - Debt rated D is in payment default. The D rating category
is used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
The following summarizes the ratings used by Moody's for
corporate bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest
2
<PAGE> 84
payments are protected by a large or exceptionally stable margin and principal
is secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers (1, 2 and 3) with respect
to the bonds rated "Aa" through "B." The modifier 1 indicates that the bond
being rated ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
bond ranks in the lower end of its generic rating category.
Caa - Bonds that are rated Caa are of poor standing. These
issues may be in default or present elements of danger may exist with respect
to principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C 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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