EX-99.17(E) 7 0007.txt S.A.I. FOR THE ACQUIRING FUND Credit Suisse Warburg Pincus Capital Funds -------------------------------------------------------------------------------- 466 LEXINGTON AVENUE, NEW YORK, NEW YORK 10017 Toll Free (800) 225-8011 -------------------------------------------------------------------------------- STATEMENT OF ADDITIONAL INFORMATION dated February 28, 2001 The Credit Suisse Warburg Pincus Capital Funds is a "series fund" comprised of the following diversified, open-end investment management companies, commonly known as "mutual funds": Credit Suisse Warburg Pincus Blue Chip Fund, Credit Suisse Warburg Pincus Value Fund, Credit Suisse Warburg Pincus Small Company Value Fund, Credit Suisse Warburg Pincus Fixed Income II Fund and Credit Suisse Warburg Pincus Municipal Trust Fund (individually, a "Fund" and collectively, the "Capital Funds" or the "Funds"). The Credit Suisse Warburg Pincus Capital Funds is empowered to expand the series by establishing additional Funds with investment objectives and policies that differ from those of the current Funds. The Credit Suisse Warburg Pincus Capital Funds also may offer additional classes of shares. This Statement of Additional Information (the "SAI") is not a prospectus and should be read in conjunction with the Credit Suisse Warburg Pincus Capital Funds' current Prospectus dated February 28, 2001 (the "Prospectus"), as supplemented from time to time, which is incorporated herein by reference. A copy of the Prospectus may be obtained by contacting the Credit Suisse Warburg Pincus Capital Funds at the address or telephone number listed above. TABLE OF CONTENTS PAGE Fund History..................................................................4 Description Of The Funds And Their Investments And Risks......................6 Management Of The Funds......................................................49 Investment Advisory And Other Services.......................................56 Brokerage Allocation And Other Practices.....................................69 Capital Stock And Organization...............................................75 Purchases, Redemptions, Exchanges And Pricing Of Fund Shares.................79 Shareholder Investment Account...............................................94 Net Asset Value..............................................................97 Taxes, Dividends, And Distributions.........................................100 Performance Information.....................................................108 General Information.........................................................112 Financial Statements........................................................113 Appendix I - Description Of Security Ratings................................A-1 -3- -------------------------------------------------------------------------------- FUND HISTORY -------------------------------------------------------------------------------- The Credit Suisse Warburg Pincus Capital Funds (formerly the DLJ Focus Funds) were organized under the laws of the Commonwealth of Massachusetts on November 26, 1985 as a "business trust" under the name "Winthrop Focus Funds." On January 19, 1999, the name was changed from "Winthrop Focus Funds" to "DLJ Winthrop Focus Funds"; on July 31, 2000 to "DLJ Focus Funds" and subsequently to "Credit Suisse Warburg Pincus Capital Funds" on January 18, 2001. In addition, on the latest date the names of Growth Fund, Growth and Income Fund, Small Company Value Fund, Fixed Income Fund and Municipal Trust Fund Series were changed to Credit Suisse Warburg Pincus Blue Chip Fund, Credit Suisse Warburg Pincus Value Fund, Credit Suisse Warburg Pincus Small Company Value Fund, Credit Suisse Warburg Pincus Fixed Income II Fund and Credit Suisse Warburg Pincus Municipal Trust Fund, respectively. The Board of Trustees of the Credit Suisse Warburg Pincus Capital Funds has approved, subject to shareholder approval at special meetings of shareholders scheduled for March 23, 2001, the transfer to the Acquiring Fund listed below of all of the assets and liabilities of the Acquired Fund in exchange for shares of the Acquiring Fund. -4- Acquired Fund Acquiring Fund ------------- -------------- Credit Suisse Warburg Pincus Fixed Income II Fund Warburg Pincus Fixed Income Fund Credit Suisse Warburg Pincus Municipal Trust Fund Warburg, Pincus Municipal Bond Fund, Inc. Each of the Acquiring Funds has an investment objective and strategies substantially similar to the investment objective and strategies of the Acquired Fund to be acquired by it. Shareholders of each Acquired Fund would receive on a tax-free basis shares of the relevant Acquiring Fund with the same net asset value as their shares of the Acquired Fund. The investment advisory fees of the Acquiring Funds would in each case be the same as the relevant Acquired Funds, and Credit Suisse Asset Management, LLC ("CSAM" or the "Adviser") has agreed to reimburse expenses of each Acquiring Fund as necessary so that for the two-year period following the consummation of each acquisition the annualized expense ratio of each Acquired Fund would not increase above its expense ratio for the 60-day period prior to consummation of the acquisitions. Each acquisition would be consummated promptly after receipt of shareholder approval. The Board of Trustees of the Credit Suisse Warburg Pincus Capital Funds has approved the transfer of all of the assets and liabilities of the Warburg, Pincus Small Company Value II Fund, Inc. and the Warburg, Pincus Value II Fund, Inc. in exchange for shares of the Credit Suisse Warburg Pincus Small Company Value Fund and the Credit Suisse Warburg Pincus Value Fund, respectively. These acquisitions are subject to the approval of shareholders of the relevant Warburg, Pincus Fund and, if approved, would be consummated in early June, 2001. -5- -------------------------------------------------------------------------------- DESCRIPTION OF THE FUNDS AND THEIR INVESTMENTS AND RISKS -------------------------------------------------------------------------------- (a) Classification Each of the Funds is a diversified open-end management investment company. (b) Investment Strategies and Risks The following investment policies and restrictions supplement, and should be read in conjunction with, the information set forth under the heading "Credit Suisse Warburg Pincus Funds' Investment Objectives and Policies" in the Prospectus. Except as noted in the Prospectus and in this SAI, the Funds' investment policies are not fundamental and may be changed by the Trustees of the Credit Suisse Warburg Pincus Capital Funds without shareholder approval; however, shareholders will be notified prior to a significant change in such policies. A Fund's fundamental investment restrictions may not be changed without shareholder approval as defined in "Investment Restrictions" in this SAI. Credit Suisse Warburg Pincus Capital Funds' investment adviser is CSAM. I. Credit Suisse Warburg Pincus Blue Chip Fund, Credit Suisse Warburg Pincus Small Company Value Fund and Credit Suisse Warburg Pincus Value Fund The investment objective of the Credit Suisse Warburg Pincus Blue Chip Fund is long-term capital appreciation. It seeks to achieve this objective by investing principally in common stock, securities convertible into common stock and other equity -6- securities (i.e., preferred stock, interests in master limited partnerships) of well-known and established companies (generally, companies in operation for more than three years) which, in the opinion of the Adviser, have the potential for long-term capital appreciation. There can be no assurance that the Credit Suisse Warburg Pincus Blue Chip Fund's investment objective will be achieved. The investment objective of the Credit Suisse Warburg Pincus Value Fund is long-term capital appreciation and continuity of income. It seeks to achieve this objective by investing principally in dividend-paying common stock and diversifying its investments among different industries and different companies. Accordingly, the Value Fund invests in securities on the basis of the Adviser's evaluation of their investment merit and their potential for appreciation in value and/or income. The selection of securities on the basis of their capital appreciation or income potential cannot ensure against possible loss in value. There can be no assurance that the Credit Suisse Warburg Pincus Value Fund's investment objective will be achieved. The investment objective of the Credit Suisse Warburg Pincus Small Company Value Fund is a high level of growth of capital. It seeks to achieve this objective by investing principally in common stock and securities convertible into common stock, but it may, when deemed appropriate by the Adviser, invest part of its assets in preferred stock, other equity securities, bonds or other debt securities as described below. There can be no assurance that the Credit Suisse Warburg Pincus Small Company Value Fund's investment objective will be achieved. The Credit Suisse Warburg Pincus Small Company Value Fund will pursue its investment objective by employing a value-oriented investment approach. The -7- Adviser's research efforts may also play a greater role in selecting securities for the Credit Suisse Warburg Pincus Small Company Value Fund than in a fund that invests in larger, more established companies. The Credit Suisse Warburg Pincus Small Company Value Fund seeks securities that appear to be underpriced and are issued by companies with proven management, consistent earnings, sound finances and strong potential for market growth. By investing in such companies, the Small Company Value Fund tries to enhance the potential for appreciation and limit the risk of decline in the value of its portfolio. The Credit Suisse Warburg Pincus Small Company Value Fund focuses on the fundamentals of each small-cap company instead of trying to anticipate what changes might occur in the stock market, the economy, or the political environment. This approach differs from that used by many other funds investing in small-cap company stocks. Those funds often buy stocks of companies they believe will have above-average earnings growth, based on anticipated future developments. In contrast, the Credit Suisse Warburg Pincus Small Company Value Fund's securities are generally selected with the belief that they are currently undervalued based on existing conditions, and that their earning power or franchise value does not appear to be reflected in their current stock price. In addition, to further reduce risk, the Credit Suisse Warburg Pincus Small Company Value Fund diversifies its holdings among many companies and industries. Other factors considered in the selection of securities include whether a company has an established presence in its industry, a product or market niche or whether management owns a significant stake in the company's operation. -8- For a further description of the Funds' investment objectives and policies, see "Credit Suisse Warburg Pincus Funds' Investment Objective and Policies" in the Prospectus. Warrants The Credit Suisse Warburg Pincus Blue Chip Fund and the Credit Suisse Warburg Pincus Small Company Value Fund each may invest up to 5% of their respective total assets in warrants. Warrants may be considered more speculative than certain other types of investments in that they do not entitle a holder to dividends or voting rights with respect to the securities which may be purchased, nor do they represent any rights in the assets of the issuing company. Also, the value of a warrant does not necessarily change in proportion to the value of the underlying securities and a warrant ceases to have value if it is not exercised prior to the expiration date. Foreign Securities The Credit Suisse Warburg Pincus Blue Chip Fund and the Credit Suisse Warburg Pincus Value Fund may invest up to 10% of the value of their respective total assets in securities of issuers doing business primarily outside the U.S. or domiciled outside the U.S. ("foreign securities") and the Credit Suisse Warburg Pincus Small Company Value Fund may invest up to 20% of the value of its total assets in foreign securities. Investment in foreign securities involves certain risks not ordinarily associated with investments in securities of domestic issuers. These risks include fluctuations in foreign exchange rates, future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws or restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of -9- assets, confiscatory taxation, political or social instability or diplomatic developments which could adversely affect investments in those countries. There may be less publicly available information about a foreign company than about a U.S. company, and foreign companies may not be subject to accounting, auditing and financial reporting standards and requirements comparable to or as uniform as those to which U.S. companies are subject. Non-U.S. securities markets, while experiencing increases in the volume of securities traded, generally have substantially less volume than U.S. markets, and securities of many foreign companies are less liquid and their prices more volatile than securities of comparable U.S. companies. Transaction costs associated with investing in non-U.S. securities markets generally are higher than in the U.S. There is generally less government supervision and regulation of exchanges, brokers and issuers than in the U.S. The Funds might have greater difficulty taking appropriate legal action in non-U.S. courts. Non-U.S. markets also have different clearance and settlement procedures, which in some markets have at times failed to keep pace with the volume of transactions, thereby creating substantial delays and settlement failures that could adversely affect a Fund's performance. Dividend and interest income from non-U.S. securities will generally be subject to withholding taxes by the country in which the issuer is located and may not be recoverable by the Funds or investors. Investment-Grade Securities The Credit Suisse Warburg Pincus Blue Chip Fund and Credit Suisse Warburg Pincus Small Company Value Fund may invest up to 35% of the value of their respective total assets in investment-grade fixed-income -10- securities, while the Credit Suisse Warburg Pincus Value Fund may invest in investment-grade fixed-income securities without limitation. Investment-grade obligations are those obligations rated BBB or better by Standard and Poor's Ratings Group ("S&P") or Baa or better by Moody's Investors Service, Inc. ("Moody's") in the case of long-term obligations and equivalently rated obligations in the case of short-term obligations, or unrated instruments believed by the Adviser to be of comparable quality to such rated instruments. Issuers with securities rated BBB by S&P are regarded by S&P as having an adequate capacity to pay interest and repay principal. While such securities normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely, in the opinion of S&P, to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Securities rated Baa by Moody's are considered by Moody's to be medium-grade obligations; they are neither highly protected nor poorly secured; interest payments and principal security appear to be adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time; in the opinion of Moody's, they lack outstanding investment characteristics and in fact have speculative characteristics as well. Fixed-income securities in which the Funds may invest include asset and mortgage backed securities. Prepayments of principal may be made at any time on the obligations underlying asset and mortgage backed securities and are passed on to the holders of the asset and mortgage backed securities. As a result, if a Fund purchases such a security at a premium, faster than expected prepayments will reduce, and slower than expected prepayments will increase, yield to maturity. Conversely, if a Fund purchases these securities at a discount, faster than expected -11- prepayments will increase, while slower than expected prepayments will reduce, yield to maturity. Options The Credit Suisse Warburg Pincus Blue Chip Fund and the Credit Suisse Warburg Pincus Value Fund may write covered calls on securities or securities indices for purposes of hedging against a decline in the value of the respective portfolio securities. The Credit Suisse Warburg Pincus Small Company Value Fund may write covered calls, purchase calls and write covered put options on securities and securities indices both for hedging and return enhancement purposes. A call option on a security gives the purchaser of the option, upon payment of a premium to the writer of the option, the right to purchase from the writer of the option a specified number of shares of a specified security on or before a fixed date, at a predetermined price. A call option on a securities index represents the holder's right to obtain from the writer in cash a fixed multiple of the amount by which the exercise price is less than the value of the underlying securities index on the exercise date. So long as a Fund remains obligated as a writer of a covered call option, it will forego the opportunity to profit from increases in the market price of the underlying security or index above the exercise price of the option. A Fund will not write a call option on a security unless at all times during the option period the Fund owns either (i) the optioned securities, or securities convertible into or carrying rights to acquire the optioned securities at no additional cost, or (ii) an offsetting call option on the same securities at the same or a lower strike price. When a Fund writes a call option on a securities index, it will establish a segregated account with its custodian into which it will deposit cash or -12- other liquid unencumbered assets, marked-to-market daily, or a combination of both, with a value equal to or greater than the market value of the option and will maintain the account while the option is open. If either the Credit Suisse Warburg Pincus Blue Chip Fund, the Credit Suisse Warburg Pincus Value Fund or the Credit Suisse Warburg Pincus Small Company Value Fund desires to sell a particular security from its portfolio on which it has written an option, such Fund will seek to effect a closing purchase transaction with respect to such option prior to or concurrently with the sale of the portfolio security. A Fund may also enter into a closing purchase transaction in order to terminate its obligation under an option it has written. A closing purchase transaction is a transaction in which an investor who is obligated as the writer of an option terminates his obligation by purchasing an option on the same security and same terms as the previously written option. There can be no assurances that a closing purchase transaction can be effected. If a closing purchase transaction cannot be effected, a Fund will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise. A Fund will realize a profit from a closing purchase transaction for an option it has written if the cost of such transaction is less than the premium received from the writing of the option and will realize a loss if the cost of such transaction is more than the premium received. The Credit Suisse Warburg Pincus Blue Chip Fund and Credit Suisse Warburg Pincus Value Fund will only purchase call options in closing purchase transactions. As indicated above, the Credit Suisse Warburg Pincus Small Company Value Fund may write or purchase a put option on securities or securities indices. A put option is a contract that gives the holder of the option the right, in return for a premium, to sell to the -13- writer of the option the underlying security at a specified price. The seller of the put, on the other hand, has the obligation to buy the underlying security at the exercise price. The Credit Suisse Warburg Pincus Small Company Value Fund will only write "covered" put options (i.e., so long as the Fund is obligated under the put, it will have on deposit cash or other liquid unencumbered assets, marked-to-market daily, or a combination of both, with a value equal to or greater than the exercise price of the underlying securities or index). It is possible that, as a result of writing a put, the Fund may have to purchase the underlying securities at an amount greater than their market price at the time of writing the put. If the Credit Suisse Warburg Pincus Small Company Value Fund purchases an option, it runs the risk that the option will expire "out of the money", resulting in a loss equal to the amount of the premium paid plus any transaction costs. Thus, in some periods the Credit Suisse Warburg Pincus Small Company Value Fund may receive a lower total return in connection with its options transactions than it would have received from the underlying securities had options not been purchased. Neither the Credit Suisse Warburg Pincus Blue Chip Fund nor the Credit Suisse Warburg Pincus Value Fund may write a covered call option if, as a result thereof, the aggregate value of such Fund's portfolio securities subject to outstanding call options (valued at the lower of the option price or the market value of the underlying securities) or the amount deposited in a segregated account would exceed 5% of such Fund's total assets. The Credit Suisse Warburg Pincus Small Company Value Fund may not purchase options if, as a result, the aggregate cost of all outstanding options exceeds 10% of its total assets. -14- Because exercises of index options are settled in cash, a call writer such as the Credit Suisse Warburg Pincus Blue Chip Fund, the Credit Suisse Warburg Pincus Value Fund or the Credit Suisse Warburg Pincus Small Company Value Fund cannot determine the amount of its settlement obligation in advance and, unlike call writing on specific stocks, cannot provide in advance for, or cover, its potential obligations by acquiring and holding a particular security. Price movements in a Fund's portfolio probably will not correlate precisely with movements in the level of an index underlying an option and, therefore, a Fund bears the risk that the price of the securities held by such Fund may not increase as much as the index on which a Fund has written a covered call option. In such event, a Fund would bear a loss on the covered call option that it has written that is not completely offset by movements in the price of such Fund's portfolio. It is also possible that the index underlying a covered call may rise when the Fund's portfolio does not rise. If this occurred, a Fund would incur a loss on the call that would not be offset by an increase in the value of its portfolio and might also experience a loss in its portfolio. However, because the value of a diversified portfolio will, over time, generally tend to move in the same direction as the market, movements in the value of a Fund in the opposite direction as the market would be likely to occur for only a short period or to a small degree. Unless a Fund that has written a call option has other liquid assets which are sufficient to satisfy the exercise of a call on an index, such Fund would be required to liquidate portfolio securities in order to satisfy the exercise. -15- When a Fund has written a call on an index, there is also a risk that the market may decline between the time such Fund has a call exercised against it, at a price which is fixed as of the closing level of the index on the date of exercise, and the time such Fund is able to sell stocks in its portfolio. As with stock options, the Fund will not learn that an index option has been exercised until the day following the exercise date but, unlike a call on stock where a Fund would be able to deliver the underlying securities in settlement, such Fund may have to sell part of its investment portfolio in order to make settlement in cash, and the price of such investments might decline before they can be sold. This timing risk makes certain strategies involving more than one option substantially riskier with index options than with stock options. For example, even if an index call which a Fund has written is "covered" by an index call held by such Fund with the same strike price, such Fund will bear the risk that the level of the index may decline between the close of trading on the date the exercise notice is filed with the clearing corporation and the close of trading on the date such Fund exercises the call it holds or the time such Fund sells the call which, in either case, would occur no earlier than the day following the day the exercise notice was filed. If a Fund holds an index option and exercises it before final determination of the closing index value for that day, it runs the risk that the level of the underlying index may change before closing. If such a change causes the exercised option to fall out-of-the-money, the Fund will be required to pay the difference between the closing index value and the exercise price of the option (times the applicable multiplier) to the assigned writer. Although a Fund may be able to minimize this risk by withholding exercise instructions until just before the daily cutoff time or by selling rather than -16- exercising an option when the index level is close to the exercise price, it may not be possible to eliminate this risk entirely because the cutoff times for index options may be earlier than those fixed for other types of options and may occur before definitive closing index values are announced. Financial Futures and Options Thereon The Credit Suisse Warburg Pincus Small Company Value Fund may also seek to increase its return or to hedge all or a portion of its portfolio investments through the use of financial instruments currently or hereafter available, such as financial futures contracts and options thereon. On the futures markets, the Adviser may, with respect to the Credit Suisse Warburg Pincus Small Company Value Fund, adopt an overall strategy in response to expected market movements. Such a strategy would involve the purchase or sale of securities index futures contracts and related options traded on regulated exchanges, to the extent permitted by the Commodity Futures Trading Commission ("CFTC"), for bona fide hedging purposes or for other appropriate risk management purposes permitted under regulations promulgated by the CFTC. A securities index futures contract is an agreement to take or make delivery of an amount of cash equal to the difference between the value of the index at the beginning and at the end of the contract period. The Credit Suisse Warburg Pincus Small Company Value Fund may enter into securities index futures contracts in anticipation of or during a market decline to attempt to offset the decrease in the market value of securities in its portfolio that might otherwise result. An option on a futures contract gives the purchaser the right, but not the obligation, to assume a position in a futures contract (a long position if the option is a call -17- and a short position if the option is a put) at a specified exercise price at any time during the option exercise period. 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 the option, the assumption of offsetting futures positions by the holder and writer of the option will be accompanied by delivery of the accumulated cash balance in the writer's futures margin account which represents the amount by which the market price of the futures contract, at exercise, 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. With respect to stock indices, options are traded on futures contracts for various U.S. and foreign stock indices, including the S&P 500 Stock Index and the NYSE Composite Index. The holder or writer of an option may terminate its position by selling or purchasing an option of the same series. There is no guarantee that such closing transactions can be effected. The Credit Suisse Warburg Pincus Small Company Value Fund may only invest in futures contracts and related options to the extent that the Fund would not be required to register with the CFTC. The Credit Suisse Warburg Pincus Small Company Value Fund will not engage in financial futures or related options transactions for speculative purposes but only in an effort to hedge portfolio risks as described above. In accordance with the foregoing, under current regulations the Credit Suisse Warburg Pincus Small Company Value Fund may not purchase or sell futures contracts if, immediately thereafter, the sum of the amount of initial margin deposits on the Fund's open futures positions and premiums on open positions thereon would exceed 5% of the market value of the Credit Suisse Warburg Pincus Small Company Value Fund's total -18- assets. Certain provisions of the federal tax laws may limit the extent to which the Credit Suisse Warburg Pincus Small Company Value Fund may engage in options and financial futures transactions. Such transactions may also affect the amount, character and timing of income, gain or loss recognized by the Fund for federal tax purposes. The Credit Suisse Warburg Pincus Small Company Value Fund's successful use of options and financial futures depends on the ability of the Adviser to predict the direction of the market and is subject to various additional risks. The investment techniques and skills required to develop and implement a successful options and futures strategy are different from those required to select equity and debt securities for investment. The correlation between movements in the price of an option or future and the price of securities index futures and options may decline if the composition of the Fund's portfolio diverges from the composition of the index underlying such index futures and options. In addition, the ability of the Fund to close out an option or futures position depends on the existence of a liquid secondary market for those contracts. There is no assurance that liquid secondary markets will exist for any particular option or futures contract at any particular time. A Fund's losses on futures transactions could be unlimited. New and innovative financial instruments continue to be developed and the Credit Suisse Warburg Pincus Small Company Value Fund may invest in any such instrument as may be developed to the extent that the utilization of such instrument is consistent with its investment objective and policies and the regulatory requirements applicable to the Fund. -19- Risks of Options, Currency Exchange Contracts and Financial Futures Strategies Participation in the options or futures markets and in currency exchange transactions involves investment risks and transaction costs to which a Fund would not be subject absent the use of these strategies. If the Adviser's predictions of movements in the direction of the securities, foreign currency and interest rate markets are inaccurate, the adverse consequences to a Fund may leave the Fund in a worse position than if such strategies were not used. The loss from entering into futures contracts is potentially unlimited. Risks inherent in the use of options, foreign currency and futures contracts and options on futures contracts include (1) dependence on the investment manager's ability to predict correctly movements in the direction of interest rates, securities prices and currency markets; (2) imperfect correlation between the price of options and futures contracts and options thereon and movements in the prices of securities or currencies being hedged; (3) skills needed to use these strategies which are different from those needed to select portfolio securities; (4) the possible absence of a liquid secondary market for any particular instrument at any time; (5) the possible need to defer closing out certain hedged positions to avoid adverse tax consequences; and (6) the possible inability of a Fund to purchase or sell a portfolio security at a time that otherwise would be favorable for it to do so, or the possible need for a Fund to sell a portfolio security at a disadvantageous time, due to the need for such Fund to maintain "cover" or to segregate securities in connection with hedging transactions. Small Company Stocks At least 65% of the Credit Suisse Warburg Pincus Small Company Value Fund's total assets normally will be invested in equity securities of small market -20- capitalization companies, which for the purposes of this Fund, are those companies with a market capitalization of $2 billion or less at the time of the Fund's investment. While small-cap company stocks generally pay low or no dividends, they are considered to offer greater potential for appreciation than securities of companies with larger market capitalizations. Small-cap company stocks generally also have higher risk and volatility, because most are not as broadly traded as stocks of companies with larger capitalizations and their prices thus may fluctuate more widely and abruptly. Small-cap company securities generally are also less researched. Special Situation Companies The Credit Suisse Warburg Pincus Small Company Value Fund may also invest in securities of companies in special situations, that is, in securities the values of which may be affected by particular developments unrelated to business conditions generally, and which may fluctuate without relation to general market trends. In general, a special situation company is a company whose securities could reasonably be expected to be accorded market recognition within a foreseeable period of time at an appreciated value solely by reason of a development particularly or uniquely applicable to that company. The principal risk associated with an investment in special situation companies is that if the anticipated development does not occur, the investment is likely not to appreciate or may decline. Examples of special situation companies are companies being reorganized or merged, having unusual new products, enjoying particular tax advantages, or acquiring new management. The Credit Suisse Warburg Pincus Small Company Value Fund will not, however, invest more than 10% of its assets (at the time -21- of purchase) in equity securities of companies (including predecessors) that have less than three years of operations. Short-Term Portfolio Transactions The Credit Suisse Warburg Pincus Small Company Value Fund may engage in short-term portfolio transactions in an attempt to generate capital gains when deemed appropriate by the Adviser under the circumstances, taking into consideration the market analysis factors of any particular security and the technical conditions of the securities markets in general. In accordance with the investment policy of engaging in short-term portfolio transactions, the Credit Suisse Warburg Pincus Small Company Value Fund has no restrictions with respect to portfolio turnover and the rate of portfolio turnover is not considered a prohibitive factor by the Adviser when considering short-term portfolio transactions. As a result of this policy, it is possible that the Credit Suisse Warburg Pincus Small Company Value Fund's annual portfolio turnover rate may exceed 100%, although the Adviser anticipates that such rate will not exceed 100%. Because it is difficult to predict accurately portfolio turnover rates, actual turnover may be higher or lower. The portfolio turnover rate is computed by dividing the lesser of the amount of the securities purchased or the securities sold by the average monthly value of securities owned during the year, excluding securities whose maturities at the time of acquisition were one year or less. A high degree of portfolio turnover results in increased transaction costs. IOs and POs Although the Credit Suisse Warburg Pincus Small Company Value Fund has no present intention to so invest, the Credit Suisse Warburg Pincus Small Company -22- Value Fund may invest in securities representing interests in a pool of mortgages or other assets the cash flow of which has been separated into its interest and principal components, commonly known as "IOs" (interest only) and "POs" (principal only). IOs and POs issued by parties other than agencies or instrumentalities of the U.S. Government are considered, under current guidelines of the staff of the Securities and Exchange Commission, to be illiquid securities. Additional Investment Policies of the Credit Suisse Warburg Pincus Blue Chip Fund and Credit Suisse Warburg Pincus Value Fund The following additional policies have been adopted by the Credit Suisse Warburg Pincus Blue Chip Fund and the Credit Suisse Warburg Pincus Value Fund and may be changed by the Trustees without shareholder approval: 1. The Funds will not make or maintain a short position (other than short sales against the box) or write, purchase or sell puts, calls, straddles, spreads or combinations thereof, provided, however, that the Funds may write covered call options and purchase call options in closing purchase transactions. 2. The Funds will not invest in oil, gas or other mineral exploration or development programs, but this shall not prohibit the Funds from investing in securities of companies engaged in oil, gas or mineral activities or investigations. II. Credit Suisse Warburg Pincus Fixed Income II Fund The investment objective of the Credit Suisse Warburg Pincus Fixed Income II Fund is to provide as high a level of total return as is consistent with capital preservation by investing principally in debt securities, including, without limitation, convertible and nonconvertible debt securities of foreign and domestic companies, -23- including both well-known and established and new and lesser-known companies. Total return means the sum of net investment income (if any) and realized and unrealized gains less losses. Capital preservation means minimizing the risk of capital loss in a period of falling prices (rising interest rates) for debt securities. Specifically, the investment policies of the Credit Suisse Warburg Pincus Fixed Income II Fund permit it to invest, without restriction, in the following types of securities: (1) Bonds, including municipal bonds (taxable and tax-exempt, including, among others, special and general obligation bonds and industrial development bonds) and other debt securities, which are rated Aaa, Aa, A or MIG-1 by Moody's or AAA, AA, A or SP-1 by S&P; (2) U.S. Government Securities; (3) Obligations issued or guaranteed by national or state bank holding companies, which obligations are not rated as a matter of policy by either Moody's or S&P, but which, in the opinion of the Adviser (on the basis of criteria believed by the Adviser to be comparable to that used by nationally recognized statistical rating organizations for assigning ratings), meet the Credit Suisse Warburg Pincus Fixed Income II Fund's investment objective; and (4) Commercial paper rated Prime-1 by Moody's or A-1+ or A-1 by S&P. The Credit Suisse Warburg Pincus Fixed Income II Fund may also invest not more than 25% (in the aggregate) of its total assets at the time of investment in (i) debt securities rated Baa or MIG-2 by Moody's or BBB or SP-2 by S&P, to the extent -24- that such investments would, in the opinion of the Adviser, be consistent with the Credit Suisse Warburg Pincus Fixed Income II Fund's investment objective. See "Additional Information on Investment Policies and Risks" in the Prospectus for a description of securities rated BBB by S&P and Baa by Moody's and of asset and mortgage-backed securities. As a matter of fundamental policy, which cannot be changed without approval by the vote of a majority of the Credit Suisse Warburg Pincus Fixed Income II Fund's outstanding voting securities (as defined in this SAI), the Credit Suisse Warburg Pincus Fixed Income II Fund will invest at least 80% of the value of its total assets at the time of investment in debt securities. In normal circumstances, the Credit Suisse Warburg Pincus Fixed Income II Fund will invest at least 65% of the value of its total assets at the time of investment in fixed-income securities. However, the Credit Suisse Warburg Pincus Fixed Income II Fund reserves the right to hold cash and short-term fixed-income securities and to enter into repurchase agreements as necessary for temporary defensive or emergency purposes as determined by the Adviser without regard for the above limitations. The Credit Suisse Warburg Pincus Fixed Income II Fund may also invest in restricted securities and in instruments having no ready market if such purchases at the time thereof would not cause more than 10% of the value of its net assets to be invested in not readily marketable assets. The Credit Suisse Warburg Pincus Fixed Income II Fund generally does not intend to acquire common stocks or equity securities exchangeable for common stock or rights or warrants to subscribe for or purchase common stock, except that, with respect -25- to convertible debt securities, the Fund may acquire common stock through the exercise of conversion rights in situations where it believes such exercise is in the best interest of the Credit Suisse Warburg Pincus Fixed Income II Fund and its shareholders. In such event, the Credit Suisse Warburg Pincus Fixed Income II Fund will sell the common stock resulting from such conversion as soon as practicable. The Credit Suisse Warburg Pincus Fixed Income II Fund may acquire debt securities, including convertible and non-convertible debt securities which may have voting rights, but in no case will the Credit Suisse Warburg Pincus Fixed Income II Fund acquire more than 10% of the voting securities of any one issuer. The relative size of the Credit Suisse Warburg Pincus Fixed Income II Fund's investments in any grade or type of security will vary from time to time. Critical factors which are considered in the selection of securities or other investment alternatives include trends in the determinates of interest rates, corporate profits and management capabilities and practices. The Credit Suisse Warburg Pincus Fixed Income II Fund may use a variety of techniques in seeking to attain its investment objective. In making investment decisions, for example, the Credit Suisse Warburg Pincus Fixed Income II Fund seeks to balance favorable factors, such as high yields to maturity and high current rates of income, against unfavorable factors, such as increased risk which accompanies longer maturities. The Credit Suisse Warburg Pincus Fixed Income II Fund may use trading to attain its investment objectives and policies. Trading may be used in anticipation of market developments or to take advantage of yield disparities between major sectors of the investment-grade market. For example, the Credit Suisse Warburg Pincus Fixed -26- Income II Fund may employ trading in order to (i) shorten the average maturity of the portfolio in anticipation of higher interest rates, (ii) lengthen the average maturity of the portfolio in anticipation of lower interest rates, (iii) change the average coupon of the portfolio when yield disparities occur between debt securities selling at differing levels of premium or discount, (iv) sell one type of debt security (e.g., industrial bonds) and buy another type of debt security (e.g., Federal agency bonds or notes) when disparities arise in the relative value of each, and (v) sell one class of fixed-income securities (e.g., preferred stocks) and buy another class (e.g., publicly offered utility bonds) when disparities arise in the relative values of each. Debt securities acquired for the Credit Suisse Warburg Pincus Fixed Income II Fund's portfolio may be subject to call by the issuer prior to maturity, in which case the Credit Suisse Warburg Pincus Fixed Income II Fund may be forced to sell such securities at prices below market value. The Credit Suisse Warburg Pincus Fixed Income II Fund may seek protection against calls at prices below market value. Such protection may be sought by (i) purchasing securities with high call prices relative to their market prices, (ii) purchasing securities with sinking fund features which are selling at a premium where the period before inception of the sinking fund payments is relatively long, (iii) selling a security whose market price has risen above its call price and purchasing another security of comparable quality whose market price is below its call price and (iv) substituting for a security with a refunding date a comparable security with a more distant refunding date. Depending on market conditions, debt securities may be purchased at a discount or premium from face value, producing a yield of more or less than the coupon rate. The market value of the Credit Suisse Warburg Pincus Fixed -27- Income II Fund's assets will reflect yields generally available on debt securities of similar quality. When such yields (i.e., interest rates) decline, the market value of the Credit Suisse Warburg Pincus Fixed Income II Fund's assets already invested can be expected to rise. Similarly, when such yields increase, the market value of the Fund's assets already invested can be expected to decline. III. Credit Suisse Warburg Pincus Municipal Trust Fund The investment objective of the Credit Suisse Warburg Pincus Municipal Trust Fund is to provide as high a level of total return as is consistent with capital preservation by investing principally in high grade tax-exempt municipal securities. This investment objective, unlike that of most other municipal bond funds, is not to provide current income which is exempt from federal and/or state income tax. Total return means the sum of net investment income (if any) and realized and unrealized gains less losses. The Credit Suisse Warburg Pincus Municipal Trust Fund intends to distribute annually its net capital gains. Any such distributions will be taxable to a shareholder as capital gain. See "Taxes, Dividends, and Distributions." The Credit Suisse Warburg Pincus Municipal Trust Fund attempts to provide high total return by actively managing the maturities of the bonds in the portfolio in response to the Adviser's anticipation of the movement of interest rates and its assessment of the relative yields. The Fund will shorten the portfolio's maturities when the Adviser believes that interest rates will rise and lengthen maturities when the Adviser believes that rates will fall. To a lesser extent, the Credit Suisse Warburg Pincus Municipal Trust Fund will also attempt to enhance total return by selecting municipal -28- securities which the Adviser believes are undervalued. The success of these strategies depends upon the Adviser's ability to accurately forecast changes in interest rates and to properly assess the value of municipal securities. The investor should be aware that there can be no assurances that the Credit Suisse Warburg Pincus Municipal Trust Fund's investment strategies will be successful. Under normal circumstances, it is the Credit Suisse Warburg Pincus Municipal Trust Fund's policy to invest at least 80% of the value of its net assets at the time of investment in tax-exempt municipal securities. However, the Credit Suisse Warburg Pincus Municipal Trust Fund reserves the right to hold cash and short-term fixed-income securities and to enter into repurchase agreements as necessary for temporary defensive or emergency purposes as determined by the Adviser without regard for the above limitation. The Credit Suisse Warburg Pincus Municipal Trust Fund seeks to achieve its objective by investing primarily in a diversified portfolio of high grade, intermediate term municipal securities. Municipal securities fall into two principal classes: bonds and notes, both of which may have fixed, variable or floating rates of interest. The investment policies of the Municipal Trust Fund permit it to invest, without restriction, in tax-exempt municipal bonds and notes which are rated Aaa, Aa, A or MIG-1 by Moody's or AAA, AA, A or SP-1 by S&P. The Municipal Trust Fund may also invest not more than 25% (in the aggregate) of its total assets at the time of investment in (i) municipal securities rated Baa or MIG-2 by Moody's or BBB or SP-2 by S&P and (ii) commercial paper rated Prime-2 by Moody's or A-2 by S&P, to the extent that such investments -29- would, in the opinion of the Adviser, be consistent with the Municipal Trust Fund's investment objective. Non-rated municipal securities will also be considered for investment by the Credit Suisse Warburg Pincus Municipal Trust Fund when the Adviser believes that the financial condition of the issuers of such obligations and the protection afforded by the terms of the obligations themselves limit the risk to the Credit Suisse Warburg Pincus Municipal Trust Fund to a degree comparable to that of rated securities which are consistent with the Credit Suisse Warburg Pincus Municipal Trust Fund's objective and policies. Municipal securities include municipal bonds as well as short-term (i.e., maturing in under one year to as much as three years) municipal notes, demand notes and tax-exempt commercial paper. In the event the Credit Suisse Warburg Pincus Municipal Trust Fund invests in demand notes, the Adviser will continually monitor the ability of the obligor under such notes to meet its obligations. Typically, municipal bonds are issued to obtain funds used to construct a wide range of public facilities, such as schools, hospitals, housing, mass transportation systems, airports, highways and bridges. The funds may also be used for general operating expenses, refunding of outstanding obligations and loans to other public institutions and facilities. Municipal bonds fall into two general classes: general obligation bonds and revenue or special obligation bonds. Payment of principal of and interest on general obligation bonds is secured by the issuer's pledge of its faith, credit and taxing power. Payment on revenue or special obligation bonds is met only from the revenues obtained from a particular facility or class of facilities or, in some cases, from the proceeds of a -30- special excise tax or other specific revenue source but not from general tax and other unrestricted revenues of the issuer. The term "issuer" means the agency, authority, instrumentality or other political subdivision whose assets and revenues are available for the payment of principal of and interest on the bonds. Certain types of private activity bonds are also considered municipal bonds if the interest thereon is exempt from federal income tax. Private activity bonds are issued by or on behalf of public authorities to obtain funds for various privately-operated manufacturing facilities, airports, housing projects, resource recovery programs, solid waste disposal facilities, student loan programs and water and sewage disposal facilities. Private activity bonds are in most cases revenue bonds and do not generally constitute the pledge of the credit or taxing power of the issuer of such bonds. The payment of the principal and interest on such industrial revenue bonds depends solely on the ability of the user of the facilities financed by the bonds to meet its financial obligations and the pledge, if any, of real and personal property so financed as security for such payment. Municipal notes in which the Credit Suisse Warburg Pincus Municipal Trust Fund may invest include demand notes, which are tax-exempt obligations that have stated maturities in excess of one year, but permit the holder to sell back the security (at par) to the issuer within 1 to 7 days' notice. The payment of principal and interest by the issuer of these obligations will ordinarily be guaranteed by letters of credit offered by banks. The interest rate on a demand note may be based upon a known lending rate, such as a bank's prime rate, and may be adjusted when such rate changes, or the interest rate on a demand note may be a market rate that is adjusted at specified intervals. -31- Other short-term obligations constituting municipal notes include tax anticipation notes, revenue anticipation notes and bond anticipation notes, and tax-exempt commercial paper. Tax anticipation notes are issued to finance working capital needs of municipalities. Generally, they are issued in anticipation of various seasonal tax revenues, such as income, sales, use and business taxes. Revenue anticipation notes are issued in expectation of receipt of other types of revenues, such as federal revenues available under the Federal Revenue Sharing Programs. Bond anticipation notes are issued to provide interim financing until long-term financing can be arranged. In most such cases, the long-term bonds provide the money for the repayment of the notes. Tax-exempt commercial paper is a short-term obligation with a stated maturity of 365 days or less (however, issuers typically do not issue such obligations with maturities longer than seven days). Such obligations are issued by state and local municipalities to finance seasonal working capital needs or as short-term financing in anticipation of longer-term financing. There are, of course, variations in the terms of, and the security underlying, municipal securities, both within a particular rating classification and between such classifications, depending on many factors. The ratings of Moody's and S&P represent their respective opinions of the quality of the municipal securities rated by them. It should be emphasized that such ratings are general and are not absolute standards of quality. Consequently, municipal securities with the same maturity, coupon and rating may have different yields, while the municipal securities of the same maturity -32- and coupon, but with different ratings may have the same yield. The Adviser appraises independently the fundamental quality of the securities included in the Fund's portfolio. Yields on municipal securities are dependent on a variety of factors, including the general conditions of the municipal securities market, the size of a particular offering, the maturity of the obligation and the rating of the issue. Municipal securities with longer maturities tend to produce higher yields and are generally subject to greater price movements than obligations with shorter maturities. An increase in interest rates generally will reduce the market value of portfolio investments, and a decline in interest rates generally will increase the value of portfolio investments. The achievement of the Fund's investment objectives depends in part on the continuing ability of the issuers of municipal securities in which the Fund invests to meet their obligations for the payment of principal and interest when due. Municipal securities historically have not been subject to registration with the Securities and Exchange Commission, although from time to time there have been proposals which would require registration in the future. After purchase by the Credit Suisse Warburg Pincus Municipal Trust Fund, a municipal security may cease to be rated or its rating may be reduced below the minimum required for purchase by the Credit Suisse Warburg Pincus Municipal Trust Fund. Neither event requires the sale of such security by the Credit Suisse Warburg Pincus Municipal Trust Fund, but the Adviser will consider such event in its determination of whether the Credit Suisse Warburg Pincus Municipal Trust Fund should continue to hold the security. To the extent that the ratings given by Moody's or S&P may change as a result of changes in such organizations or their rating systems, the -33- Adviser will attempt to use such changed ratings in a manner consistent with the Fund's quality criteria as described in the Prospectus. Obligations of issuers of municipal securities are subject to the provisions of bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors, such as the Federal Bankruptcy Code. In addition, the obligations of such issuers may become subject to laws enacted in the future by Congress, state legislatures, or referenda extending the time for payment of principal and/or interest, or imposing other constraints upon enforcement of such obligations or upon the ability of municipalities to levy taxes. There is also the possibility that, as a result of litigation or other conditions, the ability of any issuer to pay, when due, the principal or the interest on its municipal bonds may be materially affected. From time to time, proposals have been introduced before Congress for the purpose of restricting or eliminating the federal income tax exemption for interest on municipal securities. It can be expected that similar proposals may be introduced in the future. If such a proposal were enacted, the availability of municipal securities for investment by the Fund and the value of the Fund's portfolio would be affected. Additionally, the Fund would reevaluate its investment objectives and policies. IV. Additional General Investment Policies The following general investment policies supplement those set forth above for each Fund. Short Sales ("Against the Box") Except for the Credit Suisse Warburg Pincus Municipal Trust Fund, a Fund may effect short sales "against the box." While a short sale is a sale of a security -34- the Fund does not own, it is "against the box" if at all times during which a short position is open, the Fund owns an equal amount of the securities, or, by virtue of the ownership of securities, has the right, without further consideration, to obtain an equal amount of the securities sold short. No more than 10% of each Fund's net assets (taken at the then current market value) will be held as collateral for its short sales at any time. Neither the Credit Suisse Warburg Pincus Blue Chip Fund, the Credit Suisse Warburg Pincus Fixed Income II Fund nor the Credit Suisse Warburg Pincus Value Fund have an intention of entering into short sales against the box in the foreseeable future. Repurchase Agreements A Fund may enter into repurchase agreements with respect to marketable obligations of, or guaranteed by, the U.S. Government, its agencies or instrumentalities ("U.S. Government Securities"). While the maturities of the underlying securities may exceed one year, the term of the repurchase agreement must always be less than one year. Repurchase agreements often are for short periods such as one day or one week, but may be longer. In the event that a vendor defaults on its repurchase obligation, a Fund might suffer a loss to the extent that the proceeds from the sale of the collateral were less than the repurchase price. If the vendor becomes the subject of bankruptcy proceedings, a Fund might be delayed in selling the collateral. Reverse Repurchase Agreements The Credit Suisse Warburg Pincus Blue Chip Fund, Credit Suisse Warburg Pincus Small Company Value Fund, Credit Suisse Warburg Pincus Fixed Income II Fund and Credit Suisse Warburg Pincus Municipal Trust Fund each may enter into reverse repurchase agreements. Under a reverse repurchase agreement, a Fund -35- would sell securities and agree to repurchase them at a mutually agreed upon date and price. At the time a Fund enters into a reverse repurchase agreement, it would establish and maintain with an approved custodian a segregated account containing liquid high-grade debt securities having a value not less than the repurchase price. Reverse repurchase agreements involve the risk that the market value of the securities subject to such agreement could decline below the repurchase price to be paid by a Fund for such securities. In the event the buyer of securities under a reverse repurchase agreement filed for bankruptcy or became insolvent, such buyer (or receiver for such buyer) would receive an extension of time to determine whether to enforce the Fund's obligations to repurchase the securities and the Fund's use of the proceeds of the reverse repurchase could effectively be restricted pending such decision. Reverse repurchase agreements create leverage, a speculative factor, but are not considered senior securities by the Funds or the Securities and Exchange Commission to the extent liquid, unencumbered assets, marked to market daily, are segregated in an amount at least equal to the amount of the liability. Securities Lending The Credit Suisse Warburg Pincus Blue Chip Fund, Credit Suisse Warburg Pincus Small Company Value Fund, Credit Suisse Warburg Pincus Fixed Income II Fund and Credit Suisse Warburg Pincus Municipal Trust Fund each may seek to receive or increase income by lending their respective portfolio securities. Under present regulatory policies, such loans may be made to member firms of the New York Stock Exchange and are required to be secured continuously by collateral held by Citibank, N.A. (the "Custodian") consisting of cash, cash equivalents or U.S. -36- Government Securities maintained in an amount at least equal to the market value of the securities loaned. The Funds have the right to call such a loan and obtain the securities loaned at any time on five days' notice. As is the case with any extension of credit, loans of portfolio securities involve special risks in the event that the borrower is unable to repay the loan, including delays or inability to recover the loaned securities or foreclose against the collateral. The aggregate value of securities loaned by a Fund may not exceed 25% of the value of its total assets at the time such loan is made. Restricted Securities The Credit Suisse Warburg Pincus Blue Chip Fund, the Credit Suisse Warburg Pincus Value Fund, the Credit Suisse Warburg Pincus Fixed Income II Fund and the Credit Suisse Warburg Pincus Municipal Trust Fund may invest in restricted securities and all of the Funds may invest in other assets having no ready market if such purchases at the time thereof would not cause more than 10% (or 15% in the case of the Credit Suisse Warburg Pincus Municipal Trust Fund) of the value of a Fund's net assets to be invested in assets which are not readily marketable. Restricted securities may be sold only in privately negotiated transactions, in a public offering with respect to which a registration statement is in effect under the Securities Act of 1933 or pursuant to Rule 144 promulgated under such Act. Where registration is available or required, the Fund may be obligated to pay all or part of the registration expense, and a considerable period of time may elapse between the time of the decision to sell and the time that the Fund may be permitted to sell a security under an effective registration statement. If during such a period adverse market conditions were to develop, the Fund might obtain a less favorable price than that which prevailed when it decided to sell. Securities salable -37- without restriction among qualified institutional investors pursuant to rules promulgated under the Securities Act of 1933 (e.g., Rule 144A) are not considered to be subject to legal restrictions on transfer and may be considered liquid if they satisfy liquidity standards established by the Board of Trustees. The continued liquidity of such securities is less certain than that of publicly traded securities, and accordingly the Board of Trustees will monitor their liquidity. Restricted securities will be valued in such manner as the Trustees of Credit Suisse Warburg Pincus Capital Funds in good faith deem appropriate to reflect their fair value. The staff of the SEC has taken the position that purchased over the counter ("OTC") options and the assets used as cover for written OTC options are illiquid securities. However, a Fund may treat the securities it uses as cover for written OTC options on U.S. Government Securities as liquid, provided the Fund satisfies the following condition: A Fund may sell OTC options on U.S. Government Securities only to qualified dealers who agree that the Fund may repurchase options it writes for a maximum price to be calculated by a predetermined formula. In such cases, OTC options would be considered liquid only to the extent that the maximum repurchase price exceeds the intrinsic value of the option. When Issued, Delayed Delivery Securities and Forward Commitments The Funds may, to the extent consistent with their other investment policies and restrictions, enter into forward commitments for the purchase or sale of securities, including on a "when issued" or "delayed delivery" basis in excess of customary settlement periods for the type of security involved. In some cases, a forward commitment may be conditioned upon the occurrence of a subsequent event, such as -38- approval and consummation of a merger, corporate reorganization or debt restructuring, i.e., a when, as and if issued security. When such transactions are negotiated, the price is fixed at the time of the commitment, with payment and delivery taking place in the future, generally a month or more after the date of the commitment. While the Funds will only enter into a forward commitment with the intention of actually acquiring the security, the Funds may sell the security before the settlement date if it is deemed advisable. Securities purchased under a forward commitment are subject to market fluctuations, and no interest (or dividends) accrues to a Fund prior to the settlement date. The Funds will segregate with the Custodian cash or other liquid, unencumbered assets, in an aggregate amount at least equal to the amount of their respective outstanding forward commitments. Stand-By Commitments The Credit Suisse Warburg Pincus Municipal Trust Fund may invest in stand-by commitments which may involve certain additional expenses. The Custodian will maintain a segregated account containing liquid securities having value equal to, or greater than, such securities. The price of such securities, which is generally expressed in yield terms, is fixed at the time the commitment to purchase is made, but delivery and payment for such securities takes place at a later time. Normally the settlement date occurs within ten days to one month after the purchase of the issue. The value of such securities may fluctuate prior to their settlement, thereby creating an unrealized gain or loss to the Fund. Such securities are examples of what the SEC considers "illiquid securities" because the settlement date occurs more than seven days after the purchase. -39- State Undertakings The Funds also have entered into agreements with certain States which (a) limit investment in warrants to not more than 5% of the value of each Fund's net assets (only 2% of the value of each Fund's net assets may be invested in warrants not listed on the New York or American Stock Exchange), (b) generally prohibit any investment in oil, gas and other mineral leases, and (c) prohibit purchases or sales of real property (including limited partnership interests, but excluding readily marketable interests in real estate investment trusts or readily marketable securities of companies which invest in real estate). The Credit Suisse Warburg Pincus Small Company Value Fund has entered into additional agreements with certain States which (a) limit to not more than 5% of its total assets investments in not readily marketable securities, (b) prohibit investment in commodities and commodity futures contracts, and (c) limit investment in options, financial futures and stock index futures to 5% of the value of its net assets. The Credit Suisse Warburg Pincus Municipal Trust Fund has entered into additional agreements with certain States which (a) prohibit the purchase of securities of companies which have been in operation for less than three years, (b) limit to no more than 10% of its total assets its investments in equity securities and to no more than 5% of its total assets its investment in equity securities which are not readily marketable, and (c) limit to no more than 5% of its total assets its aggregate investment in puts, calls, straddles, spreads, and any combinations thereof. -40- The Funds intend to withdraw such undertakings at the earliest practicable date. Such withdrawals are not expected to have a material effect on the portfolio of the affected Fund. (c) Investment Restrictions The following restrictions are fundamental policies. Fundamental policies are those which cannot be changed without the approval of the holders of a majority of the Fund's outstanding voting securities. A "majority of the Fund's outstanding voting securities," when used in this SAI, means the lesser of (i) 67% of the voting shares represented at a meeting at which more than 50% of the outstanding voting shares are present in person or represented by proxy or (ii) more than 50% of the outstanding voting shares. The following fundamental investment restrictions are in addition to those set forth elsewhere in this SAI. A Fund may not: 1. Purchase the securities of any one issuer other than the United States Government or any of its agencies or instrumentalities, if immediately after such purchase more than 5% of the value of the Fund's assets would be invested in such issuer or the Fund would own more than 10% of the outstanding voting securities of such issuer, except that up to 25% of the value of the Fund's total assets may be invested without regard to such 5% and 10% limitations; -41- 2. Invest more than 25% of its total assets in the securities of issuers conducting their principal business activities in any one industry, provided that, for purposes of this policy, consumer finance companies, industrial finance companies and gas, electric, water and telephone utility companies are each considered to be separate industries, and provided further, that there is no limitation for the Credit Suisse Warburg Pincus Fixed Income II Fund, the Credit Suisse Warburg Pincus Municipal Trust Fund, the Credit Suisse Warburg Pincus Small Company Value Fund or the Credit Suisse Warburg Pincus Value Fund in respect of investments in U.S. Government Securities or, for the Credit Suisse Warburg Pincus Fixed Income II Fund, the Credit Suisse Warburg Pincus Municipal Trust Fund and the Credit Suisse Warburg Pincus Small Company Value Fund, in municipal bonds (including industrial development bonds). A Fund may be deemed to be concentrated to the extent that it invests more than 25% of its total assets in taxable municipal securities issued by a single issuer; 3. Purchase securities on margin, but a Fund may obtain such short-term credits from banks as may be necessary for the clearance of purchases and sales of securities; 4. Make loans of its assets to any person, except for (i) the purchase of publicly distributed debt securities, (ii) the purchase of non-publicly distributed securities subject to paragraph 7, (iii) the lending of portfolio securities, and (iv) the entering of repurchase agreements; -42- 5. Borrow money except for (i) the short-term credits from banks referred to in paragraph 3 above and (ii) borrowings from banks for temporary or emergency purposes, including the meeting of redemption requests which might require the disposition of securities. Borrowing in the aggregate may not exceed 15%, and borrowing for purposes other than meeting redemptions may not exceed 5% of the value of the Fund's total assets (including all amounts borrowed) less liabilities (not including all amounts borrowed) at the time the borrowing is made. Outstanding borrowings in excess of 5% of the value of the Fund's total assets will be repaid before any subsequent investments are made. This restriction and asset limitation on borrowing shall not prohibit the Funds from entering into reverse repurchase agreements; 6. Mortgage, pledge or hypothecate any of its assets, except as may be necessary in connection with permissible borrowings mentioned in paragraph 5 and except, with respect to the Credit Suisse Warburg Pincus Small Company Value Fund and the Credit Suisse Warburg Pincus Value Fund, in connection with hedging transactions, short sales (against the box), when issued and forward commitment transactions and similar investment strategies; 7. Act as an underwriter of securities of other issuers, except that a Fund may acquire restricted or not readily marketable securities under circumstances where, if such securities were sold, the Funds or the Advisor might be -43- deemed to be an underwriter for purposes of the Securities Act of 1933 and except, with respect to the Credit Suisse Warburg Pincus Small Company Value Fund, to the extent that in connection with the disposition of portfolio securities such Fund may be deemed to be an underwriter; 8. Invest more than 10%, or 15% in the case of the Credit Suisse Warburg Pincus Municipal Trust Fund, of the value of its net assets in the aggregate in restricted securities or other instruments not having a ready market, including repurchase agreements not terminable within seven days; provided that the Credit Suisse Warburg Pincus Small Company Value Fund will not invest in restricted securities. Securities freely saleable among qualified institutional investors under special rules adopted by the Securities and Exchange Commission ("Rule 144A Securities") are not considered to be subject to legal restrictions on transfer and may be considered liquid if they satisfy liquidity standards established by the Board of Trustees. The continued liquidity of such securities is not as well assured as that of publicly traded securities, and accordingly, the Board of Trustees will monitor their liquidity. Restricted securities will be valued in such manner as the Trustees of Credit Suisse Warburg Pincus Capital Funds in good faith deem appropriate to reflect their value; 9. With respect to the Credit Suisse Warburg Pincus Blue Chip Fund, the Credit Suisse Warburg Pincus Fixed Income II Fund, the Credit Suisse Warburg Pincus Municipal Trust Fund and the Credit Suisse Warburg -44- Pincus Value Fund, invest in the securities of any issuer which has a record of less than three years of continuous operation (including the operation of any predecessor) if such purchase at the time thereof would cause more than 10% of the value of the total assets of the Fund to be invested in the securities of such issuer or issuers; 10. With respect to the Credit Suisse Warburg Pincus Blue Chip Fund, the Credit Suisse Warburg Pincus Fixed Income II Fund, the Credit Suisse Warburg Pincus Municipal Trust Fund and the Credit Suisse Warburg Pincus Value Fund, purchase or retain the securities of any issuer if, to the knowledge of Credit Suisse Warburg Pincus Capital Fund's management, those officers and Trustees of the Credit Suisse Warburg Pincus Capital Fund and its Adviser who each own beneficially more than one-half of 1% of the outstanding securities of such issuer together own more than 5% of the securities of such issuer; 11. With respect to the Credit Suisse Warburg Pincus Blue Chip Fund, the Credit Suisse Warburg Pincus Fixed Income II Fund, the Credit Suisse Warburg Pincus Municipal Trust Fund and the Credit Suisse Warburg Pincus Value Fund, invest more than 5% of the value of its total assets at the time an investment is made in the non-convertible preferred stock of issuers whose non-convertible preferred stock is not readily marketable, subject to the limitation in paragraph 8; -45- 12. With respect to the Credit Suisse Warburg Pincus Blue Chip Fund, the Credit Suisse Warburg Pincus Fixed Income II Fund, the Credit Suisse Warburg Pincus Municipal Trust Fund and the Credit Suisse Warburg Pincus Value Fund, participate on a joint or joint and several basis in any securities trading account; 13. Issue any senior security within the meaning of the Investment Company Act of 1940 (except to the extent that when-issued securities transactions, forward commitments, stand-by commitments or reverse repurchase agreements may be considered senior securities and except, with respect to the Credit Suisse Warburg Pincus Small Company Value Fund and the Credit Suisse Warburg Pincus Value Fund, that the hedging transactions in which such Funds may engage and similar investment strategies are not treated as senior securities); 14. Invest in real estate (other than money market securities secured by real estate or interests therein or money market securities issued by companies which invest in real estate or interests therein and, with respect to the Credit Suisse Warburg Pincus Small Company Value Fund and the Credit Suisse Warburg Pincus Value Fund, other than mortgage-backed securities and similar instruments), or commodities or commodity contracts except, with respect to the Credit Suisse Warburg Pincus Small Company Value Fund, for hedging purposes; -46- 15. With respect to the Credit Suisse Warburg Pincus Blue Chip Fund, the Credit Suisse Warburg Pincus Fixed Income II Fund, the Credit Suisse Warburg Pincus Municipal Trust Fund and the Credit Suisse Warburg Pincus Value Fund, invest in the securities of other investment companies or investment trusts except by purchase in the open market where no commission or profit to a sponsor or dealer results from such purchase other than the customary broker's commission, or except when such purchase, though not in the open market, is part of a plan of merger, acquisition or transfer of assets, or consolidation and except, with respect to the Credit Suisse Warburg Pincus Value Fund, for purchases of securities of money market funds; 16. Invest in companies for the purpose of exercising control or management; or 17. With respect to the Credit Suisse Warburg Pincus Municipal Trust Fund, make short sales of securities. The Funds do not consider the segregation of assets in connection with any of their investment practices to be a mortgage, pledge or hypothecation of such assets. The following fundamental investment restrictions are applicable only to the Credit Suisse Warburg Pincus Fixed Income II Fund and may not be changed with respect to the Credit Suisse Warburg Pincus Fixed Income II Fund without the approval -47- of the shareholders of the Credit Suisse Warburg Pincus Fixed Income II Fund (as described above). The Credit Suisse Warburg Pincus Fixed Income II Fund may not: 1. Write, purchase or sell puts, calls, straddles or spreads, or combinations thereof; or 2. Invest in oil, gas or other mineral exploration or development programs. (d) Temporary Defensive Position The Credit Suisse Warburg Pincus Blue Chip Fund reserves the right, when the Adviser determines it appropriate, to invest in investment-grade short-term fixed-income securities and other investment-grade debt securities, enter into repurchase agreements and hold cash for temporary defensive purposes. The Credit Suisse Warburg Pincus Fixed Income II Fund may enter into repurchase agreements, terminable within 7 days or less, with respect to issues of the U.S. Treasury, with member banks of the Federal Reserve System or primary dealers in U.S. Government Securities, without limit for temporary defensive purposes. The Credit Suisse Warburg Pincus Municipal Trust Fund reserves the right to hold cash and short-term fixed-income securities and to enter into repurchase agreements as necessary for temporary defensive or emergency purposes, without limit, as determined by the Adviser. -48- -------------------------------------------------------------------------------- MANAGEMENT OF THE FUNDS -------------------------------------------------------------------------------- (a) Trustees The Credit Suisse Warburg Pincus Capital Funds has Trustees who, in addition to overseeing the actions of the Funds' Adviser and Distributor, decide upon matters of general policy. The Trustees also review the actions of the officers of the Credit Suisse Warburg Pincus Capital Funds who conduct and supervise the daily business operations of the Funds. The Trustees and principal officers of the Credit Suisse Warburg Pincus Capital Funds, their ages and their primary occupations during the past five years are set forth below. Position(s) Held with Credit Suisse Warburg Pincus Principal Occupation(s) Name, Address and Age (1) Capital Funds During Past 5 Years ------------------------- ------------------ ----------------------- *G. MOFFETT COCHRAN (49) Chairman of the President, Managing Board of Trustees Director and Member of the and President Management Committee of CSAM; former Chairman of DLJAM, with which he had been associated since prior to 1993; formerly Senior Vice President with Bessemer Trust Companies. Trustee of Credit Suisse Warburg Pincus Opportunity Funds, Credit Suisse Warburg Pincus Select Funds and DLJ High Yield Bond Fund. RICHARD J. HANLON (34) Vice President Director of CSAM, which he joined as a result of Credit Suisse's acquisition of DLJ; previously Senior Vice President of DLJAM, with which he had been associated since 1994. Prior to his becoming associated with Credit Suisse Warburg Pincus Funds and the Adviser, Mr. Hanlon was a portfolio manager at Manufacturers Hanover/Chemical Bank. -49- Position(s) Held with Credit Suisse Warburg Pincus Principal Occupation(s) Name, Address and Age (1) Capital Funds During Past 5 Years ------------------------- ------------------ ----------------------- STIG HOST (74) Trustee Oil company executive; Member of the Boards-International Energy Corp., International Marine Sales, Inc., Kriti Exploration Inc., Alliance International Fund, Alliance New Europe Fund, Alliance All Asia Investment Fund, Alexander Host Foundation, American Scandinavian Foundation, Trustee of Credit Suisse Warburg Pincus Opportunity Funds, Credit Suisse Warburg Pincus Select Funds and DLJ High Yield Bond Fund. His address is 103 Oneida Drive, Greenwich, CT 06830. MARTIN JAFFE (54)* Trustee, Vice Chief Financial Officer, President, Managing Director and Treasurer and Member of the Management Secretary Committee of CSAM; former Chief Operating Officer of DLJAM, with which he had been associated since prior to 1993. Trustee of Credit Suisse Warburg Pincus Opportunity Funds, Credit Suisse Warburg Pincus Select Funds and DLJ High Yield Bond Fund. CATHY A. JAMESON (46) Vice President Managing Director of CSAM, which she joined as a result of Credit Suisse's acquisition of DLJ; previously Managing Director of DLJAM, with which she had been associated since prior to 1993. BRIAN A. KAMMERER (43) Vice President Director of CSAM, which he joined as a result of Credit Suisse's acquisition of DLJ; previously Senior Vice President of DLJAM with which he had been associated since prior to 1993. PETER F. KROGH (63) Trustee Dean Emeritus and Distinguished Professor of International Affairs at the Edmund A. Walsh School of Foreign Service, Georgetown University; Moderator of PBS foreign affairs television series; Member of Board of The Carlisle Companies Inc. Member of Selection Committee for Truman Scholars and Henry Luce Scholars. Senior Associate of Center for Strategic and International Studies; Trustee of numerous world affairs organizations. Trustee/Director of Credit Suisse Warburg Pincus Opportunity Funds, Credit Suisse Warburg Pincus Select Funds, DLJ High Yield Bond Fund and other CSAM-advised investment companies. His address is 3417 N. Street NW, Washington, DC 20007. -50- Position(s) Held with Credit Suisse Warburg Pincus Principal Occupation(s) Name, Address and Age (1) Capital Funds During Past 5 Years ------------------------- ------------------ ----------------------- MARYBETH B. LEITHEAD (37) Vice President Director of CSAM, which she joined as a result of Credit Suisse's acquisition of DLJ; previously Senior Vice President of DLJAM, with which she had been associated since 1993. HUGH M. NEUBURGER (56) Vice President Managing Director of CSAM, which he joined as a result of Credit Suisse's acquisition of DLJ; previously Managing Director of DLJAM, with which he had been associated since March 1995. Prior to his association with Credit Suisse Warburg Pincus Capital Funds and the Adviser, Mr. Neuburger was the President of Hugh M. Neuburger, Inc., a consulting firm. JOHN J. SHEEHAN (69) Trustee Owns own consulting firm; Former President and CEO of National Computer Analysts, Inc., Principal Negotiator for NCA, Director of National Accounts for Large Financial Institutions Group. Trustee of Credit Suisse Warburg Pincus Opportunity Funds, Credit Suisse Warburg Pincus Select Funds and DLJ High Yield Bond Fund. His address is 4 Bennington Place, Newton, PA18940. ROGER W. VOGEL (43) Vice President Managing Director of CSAM, which he joined as a result of Credit Suisse's acquisition of DLJ; previously Managing Director of DLJAM, a position he held since July 1993. ROBERT E. FISCHER (69) Trustee Trustee of the Credit Suisse Warburg Pincus Opportunity Funds, Credit Suisse Warburg Pincus Select Funds and DLJ High Yield Bond Fund. Has been Partner at the law firm of Wolf, Block, Schorr and Solis-Cohen LLP (or its predecessor firm), since prior to 1993. WILMOT H. KIDD, III (59) Trustee Trustee of the Credit Suisse Warburg Pincus Opportunity Funds, Credit Suisse Warburg Pincus Select Funds, has been President of Central Securities Corporation, since prior to 1993. ---------- (1) Unless otherwise specified, the address of each of such persons is 466 Lexington Avenue, New York, New York 10017. -51- * Those Trustees whose names are preceded by an asterisk are "interested persons" of Credit Suisse Warburg Pincus Capital Funds as defined by the Investment Company Act of 1940. Messrs. Host, Fischer, Kidd, Krogh and Sheehan are members of the Audit Committee, whose function is to oversee and monitor the integrity of the Funds' financial reporting processes. Messrs. Cochran and Jaffe are members of the Executive Committee a function of which is to declare dividends on behalf of the Trustees. Messrs. Host and Sheehan are members of the Valuation Committee whose function is to value the securities of each Fund in emergency situations. To rationalize the management of the Funds and the Warburg Pincus family of funds managed by CSAM ("Warburg Pincus Funds"), CSAM has proposed, and the Board of Trustees has approved for submission to shareholders at a meeting scheduled for March 23, 2001 the replacement of all the current Trustees of the Funds, other than Peter F. Krogh, with trustees of the Warburg Pincus Funds. Additionally, the Board of Trustees has appointed James P. McCaughan as Chairman of the Trust, effective March 23, 2001. The following table sets forth the aggregate compensation paid by the Credit Suisse Warburg Pincus Capital Funds to the Trustees who are not affiliated with the Adviser for the fiscal year ended October 31, 2000 and the aggregate compensation paid to such Trustees for service on the Funds' Boards and that of all other investment companies that are part of the same fund complex. Below are listed the Trustees who have served the Credit Suisse Warburg Pincus Capital Funds during its most recent fiscal year. -52- Compensation Table
Pension or Total Compensation Retirement Benefits from Credit Suisse Aggregate Accrued As Part of Warburg Pincus Compensation From Credit Suisse Capital Funds and Credit Suisse Warburg Pincus Estimated Annual Fund Complex Paid to Warburg Pincus Capital Funds Benefits Upon Trustees in Current Name and Position Capital Funds (1) Expenses Retirement Fiscal Year(2) --------------------- ---------------------- --------------------- ------------------ ----------------------- Robert L. Bast* $ 4,000 None None $ 4,000 (Trustee) Stig Host 11,250 None None 22,000 (Trustee) Peter F. Krogh 11,250 None None 22,000 (Trustee) Dennis G. Little* 4,000 None None 4,000 (Trustee) William H. Mathers* 4,500 None None 4,500 (Trustee) John J. Sheehan 10,250 None None 19,500 (Trustee) William C. Simpson** 2,000 None None 2,000 (Trustee) Robert E. Fischer 6,250 None None 30,500 (Trustee) Wilmot H. Kidd III 6,250 None None 30,500 (Trustee)
* Retired, April 27, 2000. ** Deceased, April, 2000. (1) The Capital Funds anticipate paying each independent Trustee approximately $11,000 in each calendar year. (2) As of October 31, 2000, the Fund Complex consisted of three open-end investment companies (DLJ Focus Funds, DLJ Opportunity Funds and DLJ Select Funds, which were subsequently renamed the Credit Suisse Warburg Pincus Capital Funds, the Credit Suisse Warburg Pincus Opportunity Funds and the Credit Suisse Warburg Pincus Select Funds, respectively) with a total of 12 series and one closed-end investment company (DLJ High Yield Bond Fund). The Trustees of Credit Suisse Warburg Pincus Capital Funds who are officers or employees of the Adviser or any of its affiliates receive no remuneration from Credit Suisse Warburg Pincus Capital Funds. Effective May 16, 2000, each of the Trustees who is not affiliated with the Adviser will be paid a $2,500 fee for each board meeting attended, a $250 fee for each Audit Committee meeting attended, a $500 fee for each special meeting attended and an annual retainer of $500. For the year ended October 31, 2000, such remuneration totaled $59,750. -53- (b) Control Persons None. (c) Principal Holders To the best of the Fund's knowledge as of January 31, 2001, no shareholder owned 5% or more of the outstanding Class A, Class B, Class C, Class D or Common Class shares of the Credit Suisse Warburg Pincus Blue Chip Fund, the Credit Suisse Warburg Pincus Small Company Value Fund, the Credit Suisse Warburg Pincus Value Fund, the Credit Suisse Warburg Pincus Municipal Trust Fund or the Credit Suisse Warburg Pincus Fixed Income II Fund. The Adviser manages accounts over which it has discretionary power to vote or dispose of securities held in such accounts and which accounts hold in the aggregate, as of January 31, 2001, 263,579 shares (2.3%) of the Credit Suisse Warburg Pincus Blue Chip Fund, 233,704 shares (2.1%) of the Credit Suisse Warburg Pincus Value Fund, 1,626,676 shares (15.3%) of the Credit Suisse Warburg Pincus Small Company Value Fund, 476,924 shares (3.5%) of the Credit Suisse Warburg Pincus Fixed Income II Fund, and 572,009 shares (25.9%) of the Credit Suisse Warburg Pincus Municipal Trust Fund. Set forth below is certain information as to persons who owned 5% or more of a Fund's outstanding shares as of January 31, 2001: Name and Address % of Class Nature of Ownership Bankers Trust Company 11.67% Beneficial Estate of Robert Winthrop P.O. Box 9005 Church Street Station New York, NY 10008 -54- ----------------- (d) Management Ownership As of January 31, 2001, the Trustees and officers of Credit Suisse Warburg Pincus Capital Funds as a group owned beneficially less than 1.0% of any class of any Fund. -55- -------------------------------------------------------------------------------- INVESTMENT ADVISORY AND OTHER SERVICES -------------------------------------------------------------------------------- (a) Investment Adviser CSAM, with principal offices at 466 Lexington Avenue, New York, New York 10017 has been retained under an interim investment advisory agreement ("Interim Investment Advisory Agreement") as Credit Suisse Warburg Pincus Capital Funds' investment adviser (see "Fund Management" in the Prospectus) effective November 3, 2000. Credit Suisse Group ("Credit Suisse") acquired Donaldson, Lufkin & Jenrette, Inc. ("DLJ"), including its subsidiary, DLJAM, the previous investment adviser of the Credit Suisse Warburg Pincus Capital Funds, and has combined the investment advisory business of DLJAM with its existing U.S. asset management business, CSAM (the "Acquisition"). CSAM is part of Credit Suisse Asset Management, which is the institutional asset management and mutual fund arm of Credit Suisse. Credit Suisse is a global financial services company, providing a comprehensive range of banking and insurance products. Prior to the Acquisition, DLJAM was a wholly-owned subsidiary of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ Securities"), the former distributor of the Funds' shares, a wholly-owned subsidiary of DLJ, which was, in turn an independently operated, indirect subsidiary of AXA Financial, Inc., a holding company controlled by AXA, a French insurance holding company. Following the Acquisition, DLJAM was merged with Credit Suisse Investment Corporation ("CSIC"), the parent -56- company of CSAM. CSIC subsequently changed its name to CSAM Americas Holding Corp. and CSIC contributed all of its assets and liabilities, including its investment advisory agreements, to CSAM. CSAM is an indirect wholly-owned U.S. subsidiary of 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), of which CSAM is a member; 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. Credit Suisse Asset Management companies managed approximately $93 billion in the U.S. and $298 billion globally as of December 31, 2000. CSAM's sole member is CSAM Americas Holding Corp. located at 466 Lexington Avenue, New York, New York 10017, which is wholly-owned by Credit Suisse Asset Management Holding Corp., of the same address, which in turn is wholly-owned by Credit Suisse First Boston, Inc., located at 11 Madison Avenue, New York, New York 10010, which is indirectly wholly-owned by Credit Suisse Group. The Interim Investment Advisory Agreement became effective on November 3, 2000. The Interim Investment Advisory Agreement replaced an earlier, substantially identical agreement (the "Previous Investment Advisory Agreement") with DLJAM that terminated pursuant to the terms of the existing agreement. The provisions -57- of the Interim Investment Advisory Agreement and the Previous Investment Advisory Agreement are the same, except for the identity of the parties, the commencement and termination dates and the payment of fees. On October 26, 2000, the Trustees approved the Interim Investment Advisory Agreement with DLJAM, which was assigned to CSAM as part of the Acquisition. The Interim Investment Advisory Agreement terminates, pursuant to its terms, upon the earlier of 150 days from November 3, 2000, which is April 2, 2001, or the date of approval by the shareholders, voting separately by series, of a new investment advisory agreement. CSAM has proposed, and the Board of Trustees of the Credit Suisse Warburg Pincus Capital Funds have approved for submission to shareholders at meetings scheduled for March 23, 2001, a new investment advisory agreement with CSAM on the same economic terms as the Interim Investment Advisory Agreement. The Interim Investment Advisory Agreement provides for termination at any time without penalty on ten days' prior written notice, by a vote of the holders of a majority of the Fund's outstanding voting securities or by a vote of a majority of the Board of Trustees or by the Adviser on sixty days' prior written notice, and will automatically terminate in the event of its assignment. For the fiscal years ending October 31, 2000, 1999 and 1998 the Credit Suisse Warburg Pincus Blue Chip Fund paid the Adviser fees of $1,338,293, $984,475 and $791,152 respectively; the Credit Suisse Warburg Pincus Small Company Value Fund paid the Adviser fees of $1,622,703, $1,826,662 and $2,257,326 respectively; the Credit Suisse Warburg Pincus Fixed Income II Fund paid the Adviser fees of $837,673, $641,978 and $347,059 respectively; the Credit Suisse Warburg Pincus Value Fund paid -58- the Adviser fees of $1,442,618, $1,377,123 and $1,138,550 respectively; and the Credit Suisse Warburg Pincus Municipal Trust Fund paid the Adviser fees of $163,791, $247,109 and $252,180 respectively. During the fiscal years ended October 31, 2000, 1999 and 1998, the Adviser reimbursed the Credit Suisse Warburg Pincus Fixed Income II Fund $188,370, $157,981 and $164,206 respectively, and the Credit Suisse Warburg Pincus Municipal Trust Fund $138,175, $163,442 and $165,742 respectively, for operating expenses. As required by Rule 15a-4(b)(2)(vi) of the 1940 Act, the Interim Investment Advisory Agreement provides that fees earned by CSAM with respect to each series of the Credit Suisse Warburg Pincus Capital Funds will be deposited into an interest-bearing escrow account with Citibank, N.A., and will only be paid to CSAM if a majority of the shareholders of such series approves a new investment advisory agreement for that series. If shareholders of a series do not approve a new investment advisory agreement, CSAM will receive as compensation or reimbursement in respect of such series the lesser of: (i) the fee under such Interim Investment Advisory Agreement; or (ii) the costs of providing services during the term of such Interim Investment Advisory Agreement (plus, in each case, interest earned on that amount while in escrow). Pursuant to the terms of the Interim Investment Advisory Agreement, the Adviser may retain, at its own expense, a sub-adviser to assist in the performance of its services to Credit Suisse Warburg Pincus Capital Funds, although such an arrangement is not currently contemplated. Certain other clients of the Adviser may have investment objectives and policies similar to those of the Credit Suisse Warburg Pincus Capital Funds. The Adviser -59- may, from time to time, make recommendations which result in the purchase or sale of a particular security by its other clients simultaneously with the Credit Suisse Warburg Pincus Capital Funds. If transactions on behalf of more than one client during the same period increase the demand for securities being purchased or the supply of the securities being sold, there may be an adverse effect on price. It is the policy of the Adviser to allocate advisory recommendations and the placing of orders in a manner which is deemed equitable by the Adviser to the accounts involved, including the Credit Suisse Warburg Pincus Capital Funds. When two or more of the clients of the Adviser (including the Credit Suisse Warburg Pincus Capital Funds) are purchasing the same security on a given day from the same broker-dealer, such transactions may be averaged as to price. The Fund intends to enter into arrangements with certain broker-dealers (including affiliates of the Distributor) whose customers are Credit Suisse Warburg Pincus Capital Funds shareholders pursuant to which the broker-dealers may perform shareholder servicing functions, such as opening new shareholder accounts, processing purchase and redemption transactions, and responding to certain inquiries regarding a Fund's performance and the status of shareholder accounts. A Fund may pay for the electronic communications equipment maintained at the broker-dealers' offices that permits access to the Fund's computer files and, in addition, may reimburse the broker-dealers at cost for personnel expenses involved in providing the services. Effective February 1, 2001, the Funds retained Credit Suisse Asset Management Securities, Inc. ("CSAMSI") and PFPC, Inc. ("PFPC") as co-administrators to each of the Funds for a total rate not to exceed .18% of each Funds' average -60- daily net assets. DLJAM, and then CSAM, provided administrative services to the Funds without charge. However, CSAM has agreed to assume DLJAM's undertaking to limit total annual operating expenses until October 31, 2001, and to limit average annual expenses from the date of the acquisition of DLJ, November 3, 2000, until November 3, 2002 to the annualized levels previously paid by each of the Funds measured over the 60-day period ended on the date of the acquisition of DLJ. Consequently, it is not anticipated that there will be any increase in the average annualized expense ratio of each Fund until November 3, 2002 as a result of the retention of new co-administrators. Further, accounting services previously provided by PFPC pursuant to a separate agreement will be provided by PFPC under its new co-administration agreement. Effective February 6, 2001, State Street Bank and Trust Company ("State Street") became the transfer agent for the Funds' Common Class (former Class R) shares. The Board has approved the retention of State Street as transfer agent for the Funds' other classes of shares. (b) Principal Underwriter, Distributor and Rule 12b-1 Plans CSAMSI, located at 466 Lexington Avenue, New York, New York 10017 (the "Distributor") became the distributor of the Credit Suisse Warburg Pincus Capital Funds on December 18, 2000. The principal underwriter of the Credit Suisse Warburg Pincus Capital Funds is also CSAMSI. Pursuant to Rule 12b-1 adopted by the Securities and Exchange Commission under the Investment Company Act of 1940, Credit Suisse Warburg Pincus -61- Capital Funds has adopted a Distribution Agreement (the "Distribution Agreement") and 12b-1 Plans for Class A shares, Class B shares, Class C shares and Common Class shares of each Fund, and for Advisor Class shares of the Credit Suisse Warburg Pincus Value Fund, to permit Credit Suisse Warburg Pincus Capital Funds to compensate the Distributor for activities associated with the distribution of shares. Pursuant to the Distribution Agreement and the 12b-1 Plans, the officers, Adviser or Distributor of Credit Suisse Warburg Pincus Capital Funds report the amounts expended under the Distribution Agreement and the purposes for which such expenditures were made to the Trustees of Credit Suisse Warburg Pincus Capital Funds on a quarterly basis. Also, the 12b-1 Plans provide that the selection and nomination of disinterested Trustees (as defined in the Investment Company Act of 1940) are committed to the discretion of the disinterested Trustees then in office. The Distribution Agreement and 12b-1 Plans may be continued annually if approved by a majority vote of the Trustees, including a majority of the Trustees who neither are interested persons of Credit Suisse Warburg Pincus Capital Funds nor have any direct or indirect financial interest in the Distribution Agreement, the 12b-1 Plans or in any other agreement related to the 12b-1 Plans, cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement and 12b-1 Plans for the Class A shares and Class B shares were initially approved by the Trustees, including a majority of the disinterested Trustees, on October 19, 1995. The Class A 12b-1 Plans were approved by shareholders at a special meeting on February 7, 1996. The Class B 12b-1 Plans were approved by the sole Class B shareholder of each Fund on February 27, 1996. The 12b-1 -62- Plans were last approved by the Board of Trustees on August 3, 2000. Prior to February 28, 1996, the Funds operated under 12b-1 Plans pursuant to which each Fund reimbursed the Distributor up to .50 of 1% of the average daily net assets of such Fund. The Distribution Agreement and 12b-1 Plans for the Class C shares were initially approved by the Trustees, including a majority of the disinterested Trustees, on January 27, 2000. The Class C 12b-1 Plans were approved by the sole Class C shareholder of each Fund on February 25, 2000. The Common Class 12b-1 Plans were initially approved by the Trustees, including a majority of the disinterested Trustees, on May 16, 2000. The Common Class 12b-1 Plans were approved by the sole Common Class shareholder of each Fund on July 31, 2000. The Advisor Class 12b-1 Plans were initially approved by the Trustees, including a majority of the disinterested Trustees, on December 18, 2000. As approved, the Class A Plans currently provide that a service fee of .25 of 1% per year of the average daily net assets of the Class A shares of the Fund may be paid as compensation to the Distributor for its services. The Class B Plans currently provide that: (i) an asset based sales charge of .75 of 1% per year and (ii) a service fee of .25 of 1% per year, in each case, of the average daily net assets of the Class B shares of the Fund may be paid as compensation to the Distributor for its services. The Class C Plans currently provide that: (i) an asset based sales charge of .75 of 1% per year and (ii) a service fee of .25 of 1% per year, in each case, of the average daily net assets of the Class C shares of the Fund may be paid as compensation to the Distributor for its services. The Common Class Plans provide that a service fee of .25 of 1% per year of the average daily net assets of the Common Class shares of the Fund may be paid as compensation to the Distributor for its services. Advisor Class shares will be offered -63- without a front end sales load or a contingent deferred sales charge but will be charged a shareholder service fee payable at an annual rate of up to .25%, and a distribution and/or services fee payable at an annual rate of up to .50% of the average daily net assets of such class. The aggregate distribution and/or shareholder services fee payable by the Advisor Class may not exceed .75% of the average daily net assets relating to that class. The Board of Trustees is currently limiting the amount payable to .50 of 1% of the average daily net assets relating to that class. Payments may be made to an institution directly out of assets of the Fund attributable to the class or by the Distributor on the Fund's behalf. The Distributor, the Adviser or their affiliates may make additional payments to institutions for providing distribution, administrative, accounting and/or other services with respect to Advisor Class shares. Under certain circumstances, the Fund, on behalf of the Series, may reimburse a portion of these payments. All material amendments to the 12b-1 Plans must be approved by a vote of the Trustees, including a majority of the Trustees who neither are interested persons of Credit Suisse Warburg Pincus Capital Funds nor have any direct or indirect financial interest in the 12b-1 Plans or any related agreement, cast in person at a meeting called for the purpose of voting on such approval. In addition to such Trustee approval, the 12b-1 Plans may not be amended in order to increase materially the costs which the Funds may bear pursuant to the 12b-1 Plans without the approval of a majority of the outstanding shares of each class of shares of each Fund, voting separately. The 12b-1 Plans may be terminated without penalty at any time by a majority vote of the disinterested Trustees, by a majority vote of the outstanding shares of each class of shares of each Fund, voting separately, or by the Adviser. Any agreement related to the 12b-1 Plans may be -64- terminated at any time, without payment of any penalty, by a majority vote of the independent Trustees or by majority vote of the outstanding shares of each class of shares of each Fund, voting separately, and will terminate automatically in the event of assignment. The 12b-1 Plans require that the Board of Trustees shall review at least quarterly a written report of the payments made pursuant to each Plan and the purpose for which such payments were made. For the year ended October 31, 2000, distribution fees paid or payable with respect to Class A shares, Class B shares, Class C shares and Common Class shares for each fund were as follows: Class A Class B Class C Common Class Fund Shares Shares Shares Shares -------------------------------------------------------------------------------- Credit Suisse Warburg Pincus $444,797 $428,149 $12,245 $225 Blue Chip Fund Credit Suisse Warburg Pincus $109,539 $35,617 $2 $7 Fixed Income II Fund Credit Suisse Warburg Pincus $524,059 $176,261 $363 $19 Small Company Value Fund Credit Suisse Warburg Pincus $475,998 $408,174 $1,130 $36 Value Fund Credit Suisse Warburg Pincus $72,659 $9,984 $2 $11 Municipal Trust Fund During the year ended October 31, 2000, the Distributor received from each Fund the following amounts as initial sales charges, which are paid in respect of Class A shares, and contingent deferred sales charges ("CDSC"), which are paid in respect of Class B shares and Class C shares: -65- Fund Initial Sales CDSC Charges -------------------------------------------------------------------------------- Credit Suisse Warburg Pincus Blue $48,092 $85,629 Chip Fund Credit Suisse Warburg Pincus Fixed $971 $24,343 Income II Fund Credit Suisse Warburg Pincus Small $10,639 $58,650 Company Value Fund Credit Suisse Warburg Pincus Value $31,290 $85,470 Fund Credit Suisse Warburg Pincus $65 $1,296 Municipal Trust Fund During the year ended October 31, 2000, the Distributor expended $1,977,691 in respect of the Credit Suisse Warburg Pincus Blue Chip Fund in distributing such Fund's shares. Of such amount, it is estimated that $178,767 was spent on advertising; $9,266 was spent on printing and mailing of prospectuses to other than current shareholders; $0 was spent on compensation to underwriters; $1,204,090 was spent on compensation to broker-dealers; $549,873 was spent on compensation to sales personnel; and $35,695 was spent on other distributing and consulting costs. During the year ended October 31, 2000, the Distributor expended $344,299 in respect of the Credit Suisse Warburg Pincus Fixed Income II Fund in distributing such Fund's shares. Of such amount, it is estimated that $41,639 was spent on advertising; $507 was spent on printing and mailing of prospectuses to other than current shareholders; $0 was spent on compensation to underwriters; $166,998 was spent on compensation to broker-dealers; $127,184 was spent on compensation to sales personnel; and $7,971 was spent on other distributing and consulting costs. During the year ended October 31, 2000, the Distributor expended $1,391,526 in respect of the Credit Suisse Warburg Pincus Small Company Value Fund in distributing such Fund's shares. Of such amount, it is estimated that $198,344 was spent on advertising; $3,024 was spent on printing and mailing of prospectuses to other -66- than current shareholders; $0 was spent on compensation to underwriters; $570,381 was spent on compensation to broker-dealers; $596,256 was spent on compensation to sales personnel; and $23,521 was spent on other distributing and consulting costs. During the year ended October 31, 2000, the Distributor expended $1,718,969 in respect of the Credit Suisse Warburg Pincus Value Fund in distributing such Fund's shares. Of such amount, it is estimated that $134,379 was spent on advertising; $6,992 was spent on printing and mailing of prospectuses to other than current shareholders; $0 was spent on compensation to underwriters; $851,641 was spent on compensation to broker-dealers; $686,229 was spent on compensation to sales personnel; and $39,728 was spent on other distributing and consulting costs. During the year ended October 31, 2000, the Distributor expended $180,389 in respect of the Credit Suisse Warburg Pincus Municipal Trust Fund in distributing such Fund's shares. Of such amount, it is estimated that $17,835 was spent on advertising; $299 was spent on printing and mailing of prospectuses to other than current shareholders; $0 was spent on compensation to underwriters; $68,248 was spent on compensation to broker-dealers; $88,757 was spent on compensation to sales personnel; and $5,250 was spent on other distributing and consulting costs. The Distribution Agreement also provides that the Distributor will serve as distributor for the Class D shares without compensation from the Funds. The Distributor anticipates commencing distribution of Advisor Class shares as of February 28, 2001. -67- (c) Other Service Providers Citibank, N.A. serves as Custodian for the Funds' portfolio securities and cash and in that capacity maintains certain records pursuant to an agreement with the Credit Suisse Warburg Pincus Capital Funds. PFPC, Inc., 211 S. Gulph Road, King of Prussia, PA 19406-3101, serves as Transfer Agent to the Class A, B, C and D shares of the Credit Suisse Warburg Pincus Capital Funds and provides customary transfer agency services to the Funds, including the handling of shareholder communications, the processing of shareholder transactions, the maintenance of shareholder account records, the payment of dividends and distributions and related functions. Boston Financial Data Services, Inc., 66 Brooks Drive, Braintree, MA 02184, serves as Transfer Agent to the Common Class and Advisor Class shares of the Credit Suisse Warburg Pincus Capital Funds. Ernst & Young LLP, 787 Seventh Avenue, New York, NY 10019, serves as the independent auditor of the Credit Suisse Warburg Pincus Capital Funds. -68- -------------------------------------------------------------------------------- BROKERAGE ALLOCATION AND OTHER PRACTICES -------------------------------------------------------------------------------- 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 and execution will be obtained. The purchase price paid by a Fund to underwriters of newly issued securities usually includes a concession paid by the issuer to the underwriter, and purchases of securities from dealers, acting as either principals or agents in the after market, are normally executed at a price between the bid and asked price, which includes a dealer's mark-up or mark-down. Transactions on U.S. stock exchanges and some foreign stock exchanges involve the payment of negotiated brokerage commissions. On exchanges on which commissions are negotiated, the cost of transactions may vary among different brokers. On most foreign exchanges, commissions are generally fixed. There is generally no stated commission in the case of securities traded in domestic or foreign over-the-counter markets, but the price of securities traded in over-the-counter markets includes an undisclosed commission or mark-up. 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. In selecting broker-dealers, the Adviser does business exclusively with those broker-dealers that, in the Adviser's judgment, can be expected to provide the best service. The service has two main aspects: the execution of buy and sell orders and the provision of research. In negotiating commissions with broker-dealers, the Adviser will pay no more for execution and research services than it considers either, or both together, to be worth. The worth of execution service depends on the ability of the broker-dealer to minimize costs of securities purchased and to maximize prices obtained for securities sold. The worth of research depends on its usefulness in optimizing portfolio composition and its changes over time. Commissions for the combination of execution and research services that meet the Adviser's standards may be higher than for execution services alone or for services that fall below the Adviser's standards. The Adviser believes that these arrangements may benefit all clients and not necessarily only the accounts in which the particular investment transactions occur that are so executed. Further, the Adviser will only receive brokerage or research service in connection with securities transactions that are consistent with the "safe harbor" provisions of Section 28(e) of the Securities Exchange Act of 1934 when paying such higher commissions. Research services may include research on specific industries or companies, macroeconomic analyses, analyses of national and international events and trends, evaluations of thinly traded securities, computerized trading screening techniques and securities ranking services, and general research services. Investment decisions for a Fund concerning specific portfolio securities are made independently from those for other clients advised by the Adviser. Such other investment clients may invest in the same securities as a Fund. When purchases or sales of the same security are made at substantially the same time on behalf of such other clients, transactions are averaged as to price and available investments allocated as to amount, in a manner which the Adviser believes to be equitable to each client, including a Fund. In some instances, this investment procedure may adversely affect the price paid or received by a Fund or the size of the position obtained or sold for a Fund. To the extent permitted by law, securities may be aggregated with those to be sold or purchased for a Fund with those to be sold or purchased for such other investment clients in order to obtain best execution. All orders for transactions in securities or options on behalf of a Fund are placed by the Adviser with broker-dealers that it selects, including Credit Suisse First Boston ("CSFB"), CSAMSI and affiliates of Credit Suisse. A Fund may utilize CSFB, CSAMSI or affiliates of Credit Suisse in connection with a purchase or sale of securities when the Adviser believes that the charge for the transaction does not exceed usual and customary levels and when doing so is consistent with guidelines adopted by the Board. In no instance will portfolio securities be purchased from or sold to CSAM, CSAMSI or CSFB or any affiliated person of the foregoing entities except as permitted by SEC exemptive order or by applicable law. In addition, the Funds will not give preference to any institutions with whom a Fund enters into distribution or shareholder servicing agreements concerning the provision of distribution services or support services. If permitted for a Fund, transactions for such Fund may be effected on foreign securities exchanges. In transactions for securities not actively traded on a foreign securities exchange, such Fund will deal directly with the dealers who make a market in the securities involved, except in those circumstances where better prices and execution are available elsewhere. Such dealers usually are acting as principal for their own account. On occasion, securities may be purchased directly from the issuer. Such portfolio securities are generally traded on a net basis and do not normally involve brokerage commissions. Securities firms may receive brokerage commissions on certain portfolio transactions, including options, futures and options on futures transactions and the purchase and sale of underlying securities upon exercise of options. A Fund may participate, if and when practicable, in bidding for the purchase of securities for a 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 the Adviser, in its sole discretion, believes such practice to be otherwise in a Fund's interest. -69- During the fiscal year ended October 31, 2000, commissions of $126,881, $460,009 and $299,222 related to transactions of $108,890,562, $257,745,654 and $125,702,605 were paid to brokers that provided research or other services to the Credit Suisse Warburg Pincus Blue Chip Fund, the Credit Suisse Warburg Pincus Value Fund and the Credit Suisse Warburg Pincus Small Company Value Fund, respectively. -70- -71- The tables below show certain information regarding the payment of commissions by the Credit Suisse Warburg Pincus Blue Chip Fund, the Credit Suisse Warburg Pincus Small Company Value Fund and the Credit Suisse Warburg Pincus Value Fund for the three years ending October 31, 2000. -72-
Fiscal Years ended October 31, --------------------------------- 2000 1999 1998 -------- -------- -------- Total brokerage commissions incurred by the Credit Suisse Warburg Pincus Blue Chip Fund ....................................... $126,881 $150,653 $63,125 Total dollar amount paid to Autranet, Inc. .......................... $7,099 $24,637 $0 Percentage of total brokerage commissions paid to Autranet, Inc. .... 5.6% 16.4% 0% Percentage of aggregate dollar amount of transactions involving the payment of commissions to Autranet, Inc. ........................ 1.3% Total dollar amount paid to Donaldson, Lufkin & Jenrette Securities Corporation .............................................. $0 $19,912 $11,200 Percentage of total brokerage commissions paid to Donaldson, Lufkin & Jenrette Securities Corporation ............................ 0% 13.2% 17.7% Percentage of aggregate dollar amount of transactions involving the payment of commissions to Donaldson, Lufkin & Jenrette Securities Corporation .............................................. 0% 10.6% 11.9% Fiscal Years ended October 31, --------------------------------- 2000 1999 1998 -------- -------- -------- Total brokerage commissions incurred by the Credit Suisse Warburg Pincus Small Company Value Fund ............................. $299,222 $338,342 $468,261 Total dollar amount paid to Autranet, Inc. .......................... $4,108 $24,070 $59,082 Percentage of total brokerage commissions paid to Autranet, Inc. .... 1.4% 7.1% 12.6% Percentage of aggregate dollar amount of transactions involving the payment of commissions to Autranet, Inc. ........................ 0.3%
-73-
Fiscal Years ended October 31, --------------------------------- 2000 1999 1998 -------- -------- -------- Total brokerage commissions incurred by the Credit Suisse Warburg Pincus Value Fund ........................................... $460,009 $120,954 $141,358 Total dollar amount paid to Autranet, Inc. .......................... $46,757 $25,758 $29,410 Percentage of total brokerage commissions paid to Autranet, Inc. .... 10.2% 21.3% 20.8% Percentage of aggregate dollar amount of transactions involving the payment of commissions to Autranet, Inc. ........................ 6.0% Total dollar amount paid to Donaldson, Lufkin & Jenrette Securities Corporation .............................................. $600 $1,050 0 Percentage of total broker commissions paid to Donaldson, Lufkin & Jenrette Securities Corporation ............................ 0.1% 0.6% 0 Percentage of aggregate dollar amount of transactions involving the payment of commissions to Donaldson, Lufkin & Jenrette Securities Corporation .............................................. 0.1% 0.9% 0
-74- -------------------------------------------------------------------------------- CAPITAL STOCK AND ORGANIZATION -------------------------------------------------------------------------------- Each Fund of the Credit Suisse Warburg Pincus Capital Funds is authorized to issue an unlimited number of shares of beneficial interest per share divided into four classes, designated Class A, Class B, Class C and Common Class. In addition, Credit Suisse Warburg Pincus Blue Chip Fund, Credit Suisse Warburg Pincus Value Fund, Credit Suisse Warburg Pincus Small Company Value Fund and Credit Suisse Warburg Pincus Fixed Income II Fund are also authorized to issue an unlimited number of shares of beneficial interest per share, designated Class D and the Credit Suisse Warburg Pincus Value Fund is also authorized to issue an unlimited number of shares of beneficial interest per share, designated Advisor Class. Each class of shares represents an interest in the same assets of a Fund and is identical in all respects except that (i) each class is subject to different sales charges and distribution and/or service fees (except for Class D shares, which are not subject to any sales charges and distribution and/or service fees), which may affect performance, (ii) each class has exclusive voting rights on any matter submitted to shareholders that relates solely to its arrangement and has separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of any other class, (iii) each class has a different exchange privilege, (iv) only Class B shares have a conversion feature, (v) Class D shares are solely available for purchase by employees of Credit Suisse First Boston ("CSFB") and its subsidiaries that are eligible to participate in the Employee Savings and Retirement Plan of Credit Suisse First Boston, certain investment advisory or brokerage clients of -75- CSAM or its affiliates, and certain employee benefit plans for employees of CSAM or its affiliates (CSFB employees should contact the CSFB Hotline at 1-800-588-6200 concerning how to purchase Class D shares), (vi) Common Class shares have slightly different procedures for buying and selling shares and available services, as described in the Prospectus under "How to Buy and Sell Shares" and "Additional Shareholder Services," and (vii) Advisor Class shares are available for purchase through certain institutions and financial services firms and are not available to individual investors directly. In accordance with the Credit Suisse Warburg Pincus Capital Funds' Amended and Restated Agreement and Declaration of Trust, the Trustees may authorize the creation of additional series and classes within such series, with such preferences, privileges, limitations and voting and dividend rights as the Trustees may determine. Currently, each Fund is offering four classes of shares, designated Class A, Class B, Class C and Common Class for each of the Credit Suisse Warburg Pincus Capital Funds and, in addition, Class D shares for the Credit Suisse Warburg Pincus Blue Chip Fund, Credit Suisse Warburg Pincus Value Fund, Credit Suisse Warburg Pincus Small Company Value Fund and Credit Suisse Warburg Pincus Fixed Income II Fund, and Advisor Class shares for the Credit Suisse Warburg Pincus Value Fund. The Trust was formed on November 26, 1985 as a "business trust" under the laws of The Commonwealth of Massachusetts. Under Massachusetts law, shareholders of a business trust, unlike shareholders of a corporation, could be held personally liable as partners for the obligations of the trust under certain circumstances. The Amended and Restated Agreement and Declaration of Trust, however, provides that shareholders of Credit Suisse Warburg Pincus Capital Funds shall not be subject to any -76- personal liability for the acts or obligations of Credit Suisse Warburg Pincus Capital Funds and that every written obligation, contract, instrument or undertaking made by Credit Suisse Warburg Pincus Capital Funds shall contain a provision to that effect. Upon payment of any liability, the shareholder will be entitled to reimbursement from the general assets of the appropriate Fund. The Trustees intend to conduct the operation of Credit Suisse Warburg Pincus Capital Funds, with the advice of counsel, in such a way as to avoid, to the extent possible, ultimate liability of the shareholders for liabilities of Credit Suisse Warburg Pincus Capital Funds. The Amended and Restated Agreement and Declaration of Trust further provide that no Trustee, officer, employee or agent of Credit Suisse Warburg Pincus Capital Funds is liable to Credit Suisse Warburg Pincus Capital Funds or to a shareholder, nor is any Trustee, officer, employee or agent liable to any third persons in connection with the affairs of Credit Suisse Warburg Pincus Capital Funds, except such liability as may arise from his or its own bad faith, willful misfeasance, gross negligence or reckless disregard of his or its duties. It also provides that all third parties shall look solely to the property of Credit Suisse Warburg Pincus Capital Funds or the property of the appropriate Fund for satisfaction of claims arising in connection with the affairs of Credit Suisse Warburg Pincus Capital Funds or of the particular Fund, respectively. With the exceptions stated, the Amended and Restated Agreement and Declaration of Trust permits the Trustees to provide for the indemnification of Trustees, officers, employees or agents of Credit Suisse Warburg Pincus Capital Funds against all liability in connection with the affairs of Credit Suisse Warburg Pincus Capital Funds. -77- All shares of Credit Suisse Warburg Pincus Capital Funds when duly issued will be fully paid and non-assessable. The Trustees are authorized to re-classify and issue any unissued shares to any number of additional series or classes without shareholder approval. Accordingly, the Trustees in the future, for reasons such as the desire to establish one or more additional Funds with different investment objectives, policies or restrictions, may create additional series or classes of shares. Any issuance of shares of such additional series or classes would be governed by the Investment Company Act of 1940 and the laws of the Commonwealth of Massachusetts. -78- -------------------------------------------------------------------------------- PURCHASES, REDEMPTIONS, EXCHANGES AND PRICING OF FUND SHARES -------------------------------------------------------------------------------- The following information supplements that set forth in the Prospectus under the heading "How to Buy and Sell Shares" and "Other Shareholder Information." (a) Purchases Shares of the Funds are offered at the respective net asset value per share ("NAV") next determined following receipt of a purchase order in proper form by Credit Suisse Warburg Pincus Capital Funds or by the Distributor plus, in the case of Class A shares of each Fund, an initial sales charge imposed at the time of purchase or, in the case of Class B shares or Class C shares of each Fund, subject to a contingent deferred sales charge or "CDSC" upon redemption. Common Class shares of each Fund and Advisor Class shares of the Credit Suisse Warburg Pincus Value Fund are offered without any sales charge (but are subject to a distribution and/or servicing fee). Class D shares of the Credit Suisse Warburg Pincus Blue Chip Fund, the Credit Suisse Warburg Pincus Value Fund, the Credit Suisse Warburg Pincus Small Company Value Fund and the Credit Suisse Warburg Pincus Fixed Income II Fund are offered to employees of CSFB and its subsidiaries that are eligible to participate in the Employee Savings and Retirement Plan of Credit Suisse First Boston, certain investment advisory or brokerage clients of CSAM or its affiliates, and certain employee benefit plans for employees of CSAM or its affiliates at NAV without any sales charge. The Funds calculate NAV as of the close of -79- the regular session of the New York Stock Exchange, which is generally 4:00 p.m. New York City time on each day that trading is conducted on the New York Stock Exchange. Each class of shares of a Fund represents an interest in the same assets of such Fund and is identical in all respects except that (i) each class is subject to different sales charges and distribution and/or service fees (except for Class D shares, which are not subject to any sales charges and distribution and/or service fees), which may affect performance, (ii) each class has exclusive voting rights on any matter submitted to shareholders that relates solely to its arrangement and has separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of any other class, (iii) each class has a different exchange privilege, (iv) only Class B shares have a conversion feature, (v) Class D shares are solely available for purchase by employees of CSFB and its subsidiaries that are eligible to participate in the Employee Savings and Retirement Plan of Credit Suisse First Boston, certain investment advisory or brokerage clients of CSAM or its affiliates, and certain employee benefit plans for employees of CSAM or its affiliates (CSFB employees should contact the CSFB Hotline at 1-800-588-6200 concerning how to purchase Class D shares), (vi) Common Class shares have slightly different procedures for buying and selling shares and available services, as described in the Prospectus under "How to Buy and Sell Shares" and "Additional Shareholder Services," and (vii) Advisor Class shares are available for purchase through certain institutions and financial services firms and are not available to individual investors directly. In accordance with the Credit Suisse Warburg Pincus Capital Funds' Amended and Restated Agreement and Declaration of Trust, the Trustees may authorize the creation of additional series and classes within such series, -80- with such preferences, privileges, limitations and voting and dividend rights as the Trustees may determine. To open a new account by wire for Class A, Class B or Class C shares, first call Credit Suisse Warburg Pincus Funds at 1-800-225-8011 (option #2) to obtain an account number. A representative will instruct you to send a completed, signed application to the Transfer Agent. Accounts cannot be opened without a completed, signed application and a fund account number. Contact your bank to arrange a wire transfer to: Boston Safe Deposit & Trust ABA #011001234 For: PFPC, Inc. A/C #006068 Attn: Credit Suisse Warburg Pincus Funds Your wire instructions must also include: --the name of the Fund in which the money is to be invested, --your account number at the Fund, and --the name(s) of the account holder(s) For Common Class shares, call the Shareholder Service Center at 1-800-WARBURG (800 927-2874) to obtain an application by mail or fax. Applications can also be downloaded from the Internet Web site at: www.warburg.com. Contact your bank to arrange a wire transfer to: State Street Bank and Trust Company ABA# 0110 000 28 Attn: Mutual Funds/Custody Dept. [Credit Suisse Warburg Pincus Fund Name] DDA# 9904-649-2 F/F/C: [Account Number and Registrations Orders for the purchase of shares of a Fund become effective at the next transaction time after Federal funds or bank wire monies become available to Citibank, -81- N.A. ("Citibank") for a shareholder's investment. Federal funds are a bank's deposits in a Federal Reserve Bank. These funds can be transferred by Federal Reserve wire from the account of one member bank to that of another member bank on the same day and are considered to be immediately available funds; similar immediate availability is accorded monies received at Citibank by bank wire. Investors should note that their banks may impose a charge for this service. Money transmitted by a check drawn on a member of the Federal Reserve System is converted to Federal Funds in one business day following receipt. Checks drawn on banks which are not members of the Federal Reserve System may take longer. All payments (including checks from individual investors) must be in United States dollars. All shares purchased are confirmed to each shareholder and are credited to such shareholder's account at NAV and with respect to Class A shares, less any applicable sales charge. To avoid unnecessary expense to the Funds and to facilitate the immediate redemption of shares, share certificates are not issued except upon the written request of a shareholder and payment of a fee in the amount of $50 for such share issuance. The Funds retain the right to waive such fee in their sole discretion. Shareholders maintaining Fund accounts through brokerage firms and other institutions should be aware that such institutions may necessarily set deadlines for receipt of transaction orders from their clients that are earlier than the transaction times of the Fund itself so that the institutions may properly process such orders prior to their transmittal to the Fund or the Distributor. Should an investor place a transaction order with such an institution after its deadline, the institution may not effect the order with the Fund until the next business day. Accordingly, an investor should familiarize himself or -82- herself with the deadlines set by his or her institution. (For example, a brokerage firm may accept purchase orders from its customers up to 2:15 p.m. for issuance at the 4:00 p.m. transaction time and price.) A brokerage firm acting on behalf of a customer in connection with transactions in Fund shares is subject to the same legal obligations imposed on it generally in connection with transactions in securities for a customer, including the obligation to act promptly and accurately. A Fund may also issue its shares in return for securities or other assets, subject to approval of the Board of Trustees. (b) Contingent Deferred Sales Charges Redemptions of Class B shares will be subject to a contingent deferred sales charge or CDSC declining from 4% to zero over a four-year period. Redemptions of Class C shares will be subject to a CDSC of 1% if such redemptions occur within one year of purchase of the shares redeemed. The CDSC for Class B shares and Class C shares will be waived for the following shareholders or transactions: (1) shares received pursuant to the exchange privilege which are currently exempt from a CDSC; (2) liquidations, distributions or loans from the following types of retirement plans: (i) retirement plans qualified under section 401(k) of the Code; (ii) plans described in section 403(b) of the Code; and (iii) deferred compensation plans described in section 457 of the Code; (3) redemptions as a result of shareholder death or disability (as defined in the Code); -83- (4) redemptions made pursuant to the Credit Suisse Warburg Pincus Capital Funds' systematic withdrawal plan up to 1% monthly or 3% quarterly of the account's total purchase payments (excluding dividend reinvestment) not to exceed 12% of total purchase payments over any 12 month rolling period (systematic withdrawals elected on a semi-annual or annual basis are not eligible for the waiver); and (5) a redemption related to minimum distributions from retirement plans or accounts at age 70 1/2, which are required without penalty pursuant to the Internal Revenue Code. Redemptions effected by Credit Suisse Warburg Pincus Capital Funds pursuant to its right to liquidate a shareholder's account with a current net asset value of less than $250 will not be subject to the CDSC. The CDSC will be deducted from the redemption proceeds and reduce the amount paid to you. In the case of Class B shares and Class C shares, a CDSC will be applied on the lesser of the original purchase price or the current value of the shares being identified for redemption. Increases in the value of your shares identified for redemption or shares acquired through reinvestment of dividends or distributions are not subject to a CDSC. The amount of any CDSC will be paid to and retained by the Distributor. The amount of the CDSC, if any, will vary depending on the number of years from the time of payment for the purchase of shares until the time of redemption of such shares. Solely for purposes of determining the number of years from the time of any payment for the purchase of shares, all payments during a month will be aggregated and deemed to have been made on the last day of the month. The CDSC will be calculated -84- from the first day of the month after the initial purchase, excluding the time shares were held in a money market fund, if the initial purchase was made in such money market fund. -85- The following table sets forth the rates of the CDSC applicable to redemptions of Class B shares: Contingent Deferred Sales Charge as a Percentage of the Lesser of Dollars Year Since Purchase Invested or Redemption Payment Made Proceeds ---------------------- ---------------------- First................. 4.0% Second................ 3.0% Third................. 2.0% Fourth................ 1.0% Fifth................. 0.0% Sixth................. 0.0% Seventh............... 0.0% For federal income tax purposes, the amount of the CDSC will reduce the gain or increase the loss, as the case may be, on the amount recognized on the redemption of shares. (c) Redemptions Payment of the redemption price may be made either in cash or in portfolio securities (selected at the discretion of the Trustees and taken at their value used in determining the redemption price), or partly in cash and partly in portfolio securities. However, payments will be made wholly in cash unless the Trustees believe that economic conditions exist which would make such a practice detrimental to the best interest of Credit Suisse Warburg Pincus Capital Funds. Credit Suisse Warburg Pincus Capital Funds has filed a formal election with the Securities and Exchange Commission pursuant to which Credit Suisse Warburg Pincus Capital Funds will only effect a redemption in portfolio securities where the particular shareholder of record is redeeming -86- more than $250,000 or 1% of a Fund's total net assets, whichever is less, during any 90 day period. In the opinion of Credit Suisse Warburg Pincus Capital Funds' management, however, the amount of a redemption request would have to be significantly greater than $250,000 or 1% of total net assets of a Fund before a redemption wholly or partly in portfolio securities would be made. If payment for shares redeemed is made wholly or partly in portfolio securities, brokerage costs may be incurred by the investor in converting the securities to cash. See the Prospectus for a description of the CDSC which may be applicable to certain redemptions. To redeem shares represented by share certificates, investors should forward the appropriate share certificates, endorsed in blank or with blank stock powers attached, to Credit Suisse Warburg Pincus Capital Funds with the request that the shares represented thereby or a specified portfolio thereof be redeemed at the next determined net asset value per share. The share assignment form on the reverse side of each share certificate surrendered to Credit Suisse Warburg Pincus Capital Funds for redemption must be signed by the registered owner or owners exactly as the registered name appears on the face of the certificate or, in the alternative, a stock power signed in the same manner may be attached to the share certificate or certificates, or, where tender is made by mail, separately mailed to Credit Suisse Warburg Pincus Capital Funds. The signature or signatures on the assignment form must be guaranteed in the manner described below. If the total value of the shares being redeemed exceeds $50,000 (before deducting any applicable CDSC) or a redemption request directs proceeds to a party other than the registered account owner(s), the signature or signatures on the letter or the endorsement must be guaranteed by an "eligible guarantor institution" as defined in Rule -87- 17Ad-15 under the Securities Exchange Act of 1934. Eligible guarantor institutions include banks, brokers, dealers, credit unions, national securities exchanges, registered securities associations, clearing agencies and savings associations. A broker-dealer guaranteeing signatures must be a member of a clearing corporation or maintain net capital of at least $100,000. Credit unions must be authorized to issue signature guarantees. Signature guarantees will be accepted from any eligible guarantor institution which participates in a signature guarantee program. Additional documents may be required for redemption of corporate, partnership or fiduciary accounts. The requirement for a guaranteed signature is for the protection of the shareholder in that it is intended to prevent an unauthorized person from redeeming his shares and obtaining the redemption proceeds. (d) Exchanges Class A, Class B, Class C or Common Class shares of a Fund may be exchanged by mail or telephone for shares of the same class of another Fund or for shares of the Credit Suisse Warburg Pincus Opportunity Funds or Credit Suisse Warburg Pincus Select Funds, each investment companies managed by the Adviser and an affiliate of the Adviser. The Credit Suisse Warburg Pincus Opportunity Funds are currently comprised of five portfolios: the Credit Suisse Warburg Pincus Developing Markets Fund, and the Credit Suisse Warburg Pincus International Equity II Fund (the "Opportunity International Funds") and together with the Credit Suisse Warburg Pincus High Income Fund (the "Credit Suisse Warburg Pincus Opportunity Long-term Funds"), and Credit Suisse Warburg Pincus Municipal Money Fund and Credit Suisse Warburg Pincus U.S. -88- Government Money Fund (the "Credit Suisse Warburg Pincus Opportunity Money Funds"). The Credit Suisse Warburg Pincus Select Funds are currently comprised of two portfolios: The Credit Suisse Warburg Pincus Strategic Growth Fund and Credit Suisse Warburg Pincus Technology Fund. Shares exchanged from a Fund must be exchanged for the same class of shares of the Credit Suisse Warburg Pincus Opportunity Long-term Funds or Credit Suisse Warburg Pincus Select Funds. Class A, Class B and Class C shares may also be exchanged for shares of the Credit Suisse Warburg Pincus Opportunity Money Funds. In addition, Class A shares may be exchanged for Common Class shares of other Credit Suisse Warburg Pincus Capital Funds, Credit Suisse Warburg Pincus Opportunity Long-term Funds, or Credit Suisse Warburg Pincus Select Funds. After about July 1, 2001, Common Class shares of Credit Suisse Warburg Pincus Funds may be exchanged for Common Class shares of funds in the Warburg, Pincus family of funds (and vice versa). Each Credit Suisse Warburg Pincus Opportunity Long-term Fund and Credit Suisse Warburg Pincus Select Fund portfolio offers four classes of shares: Class A shares, Class B shares, Class C shares and Common Class shares. Class A shares are sold with a front-end sales charge of up to 5.75% for the Opportunity International Funds and Credit Suisse Warburg Pincus Select Funds and up to 4.75% for the Credit Suisse Warburg Pincus High Income Fund. In addition, Class A shares of the Credit Suisse Warburg Pincus Opportunity Long-term Funds and Credit Suisse Warburg Pincus Select Funds are sold with a 12b-1 fee of .25% annually. Class B shares are sold with a CDSC which declines from 4% to zero, depending on the period of time the shares are held, and a 12b-1 fee of 1% annually. Class C shares are sold subject to a CDSC of 1% if such -89- shares are redeemed within one year of purchase, and a 12b-1 fee of 1% annually. Common Class shares are subject to a 12b-1 fee of .25% annually. In addition, the Credit Suisse Warburg Pincus High Income Fund, Credit Suisse Warburg Pincus International Equity II Fund and Credit Suisse Warburg Pincus Technology Fund offer Class D shares which are sold without an initial sales charge or CDSC at net asset value to employees of CSFB and its subsidiaries that are eligible to participate in the Employee Savings and Retirement Plan of Credit Suisse First Boston, certain investment advisory or brokerage clients of CSAM or its affiliates, and certain employee benefit plans for employees of CSAM or its affiliates. Class D shareholders of the Credit Suisse Warburg Pincus Value Fund who received Class D shares in exchange for their shares of the Warburg, Pincus Value Fund II, Inc., but who are not otherwise eligible Class D shareholders, may exchange such Class D shares for Common Class shares of other Credit Suisse Warburg Pincus Funds. Such shareholders may exchange their (i) Class D shares of the Credit Suisse Warburg Pincus Value Fund for Common Class shares of other Credit Suisse Warburg Pincus Funds, and (ii) Common Class shares of other Credit Suisse Warburg Pincus Funds for Class D shares of the Credit Suisse Warburg Pincus Value Fund as long as such shareholders maintain a balance in the Credit Suisse Warburg Pincus Value Fund. Each Credit Suisse Warburg Pincus Opportunity Money Fund Portfolio currently offers only one class of shares, and is subject to a 12 b-1 fee of .25% annually. Class A shares subject to a CDSC as described in the Prospectus and Class B shares and Class C shares which are exchanged for shares of the Credit Suisse Warburg Pincus Opportunity Funds and Credit Suisse Warburg Pincus Select Funds will continue to be subject to the same CDSC at the same rate and for the same period of time as they were prior to exchange. The telephone exchange privilege will be offered automatically -90- unless a shareholder declines such option on the Share Purchase Application found in the Funds' Prospectus, or by writing to the Funds' Transfer Agent, PFPC, Inc., 211 S. Gulph Road, King of Prussia, PA 19406-3101, Attn: Credit Suisse Warburg Pincus Funds. Participants within the Employee Savings and Retirement Plan of Credit Suisse First Boston should contact the CSFB Hotline at 1-800-588-6200 for information regarding the exchange of Class D shares. In the case of each of the Credit Suisse Warburg Pincus Opportunity Funds and Credit Suisse Warburg Pincus Select Funds, the exchange privilege is available only in those jurisdictions where shares of the relevant Fund may be legally sold. Prospectuses for the Credit Suisse Warburg Pincus Opportunity Funds may be obtained at the address or telephone number listed on the cover page of the Prospectus. An exchange is effected on the basis of each Fund's relative NAV next computed following receipt of an order for such exchange from the shareholder. In addition, the exchange privilege is available only when payment for the shares to be redeemed has been made and the shares exchanged are held by the Transfer Agent or Distributor. Only those shareholders who have had shares in a Fund for at least seven days may exchange all or part of those shares for shares of another Fund or one of the Credit Suisse Warburg Pincus Opportunity Funds or Credit Suisse Warburg Pincus Select Funds and no partial exchange may be made if, as a result, the shareholders' interest in a Fund would be reduced to less than $250. The minimum initial exchange into another Fund is $1,000. All exchanges into the Credit Suisse Warburg Pincus Opportunity Funds or Credit Suisse Warburg Pincus Select Funds are subject to the minimum investment requirements and any other applicable terms set forth in the Prospectus for the relevant -91- Fund whose shares are being acquired. If for these or other reasons the exchange cannot be effected, the shareholder will be so notified. A shareholder of Credit Suisse Warburg Pincus Capital Funds who has exchanged shares for shares of the Credit Suisse Warburg Pincus Opportunity Funds or Credit Suisse Warburg Pincus Select Funds will have all of the rights and privileges of a shareholder of the relevant Credit Suisse Warburg Pincus Opportunity Fund or Credit Suisse Warburg Pincus Select Funds. The exchange privilege is intended to provide shareholders with a convenient way to switch their investments when their objectives or perceived market conditions suggest a change. The exchange privilege is not meant to afford shareholders an investment vehicle to play short-term swings in the stock market by engaging in frequent transactions in and out of the Funds. Shareholders who engage in such frequent transactions may be prohibited or restricted from placing future exchange orders. (e) Systematic Withdrawal Plan Shares of a Fund owned by a participant in Credit Suisse Warburg Pincus Capital Funds' systematic withdrawal plan will be redeemed as necessary to meet withdrawal payments. A CDSC which would otherwise be imposed will be waived in connection with redemptions made pursuant to Credit Suisse Warburg Pincus Capital Funds' systematic withdrawal plan of up to 1% monthly or 3% quarterly of an account (excluding dividend reinvestments) not to exceed 12% over any 12 month rolling period; however, the CDSC will not be waived for systematic withdrawals elected on a semi-annual or annual basis. See "How to Buy and Sell Shares" in the Prospectus for a -92- description of the CDSC. A shareholder's systematic withdrawal plan may be terminated at any time by the shareholder or Credit Suisse Warburg Pincus Capital Funds. Redemption of shares for withdrawal purposes may reduce or even liquidate an account. While an occasional lump sum investment may be made by a shareholder who is maintaining a systematic withdrawal plan, such investment should normally be an amount equivalent to three times the annual withdrawal or $5,000 whichever is less. -93- -------------------------------------------------------------------------------- SHAREHOLDER INVESTMENT ACCOUNT -------------------------------------------------------------------------------- Each Fund may be a suitable investment vehicle for part or all of the assets held in various tax-sheltered retirement plans, such as those listed below. Semper Trust Company serves as custodian under these prototype retirement plans and charges an annual account maintenance of $15 per participant, regardless of the number of Funds selected. Persons desiring information concerning these plans should write or telephone the Capital Funds' Transfer Agent. While the Credit Suisse Warburg Pincus Capital Funds reserves the right to suspend sales of its shares in response to conditions in the securities markets or for other reasons, it is anticipated that any such suspension of sales would not apply to sales to the types of plans listed below. (a) Individual Retirement Accounts ("IRA") The Adviser has available a prototype form of a traditional IRA for investment in shares of any one or more Funds. Under the Code, individuals may currently make tax-deferred IRA contributions of up to $2,000 annually. Married individuals filing jointly may make tax-deferred contributions of up to $2,000 for each spouse if the combined compensation of both spouses is at least equal to the contributed amount. Contributions to a traditional IRA may be wholly or partly tax-deductible, depending upon the contributor's income level and participation in an employer-sponsored retirement plan. The income earned on shares held in a traditional IRA is not subject to federal income tax until withdrawn in accordance with the Code. Investors -94- may be subject to penalties or additional taxes on contributions to or withdrawals from traditional IRAs under certain circumstances. The Adviser has available a prototype form of the new Roth IRA. Unlike traditional IRAs, contributions to a Roth IRA are not currently deductible. However, amounts within a Roth IRA account will accumulate tax-free, and qualified distributions from a Fund held within such an account will not be included in a shareholder's taxable income. An individual may contribute a maximum of $2,000 annually to a Roth IRA ($4,000 for joint returns). However, such limit is calculated in the aggregate with contributions to traditional IRAs. Roth IRAs are not available to individuals above certain income levels. The Adviser also has available a prototype form of the new Education IRA for investment in shares of any one or more Credit Suisse Warburg Pincus Capital Funds. Like the Roth IRA, contributions are not currently deductible. However, the investment earnings accumulate tax-free, and qualifying distributions used for higher education expenses are not taxable. An individual may contribute a maximum of $500 per account annually. In addition, Educational IRA's are not available to individuals above certain income levels. (b) Simplified Employee Pension Plan ("SEP/IRA") A SEP/IRA is available for investment and may be established on a group basis by an employer who wishes to sponsor a tax-sheltered retirement program by making IRA contributions on behalf of all eligible employees. -95- (c) Savings Incentive Match Plan for Employees ("SIMPLE") -- SIMPLE IRA and SIMPLE 401(k) SIMPLE plans offer employers with 100 or fewer eligible employees who earned at least $5,000 from the employer in the preceding calendar year the ability to establish a retirement plan that permits employee contributions. An employer may also elect to make additional contributions to these Plans. Please telephone Credit Suisse Warburg Pincus Capital Funds' shareholder servicing representatives at (800) 225-8011 for more information. (d) Employer-Sponsored Retirement Plans The Adviser has a prototype retirement plan available which provides for investment of plan assets in shares of any one or more of the Capital Funds. The prototype retirement plan may be used by sole proprietors and partnerships as well as corporations to establish a tax qualified profit sharing plan or money purchase pension plan (or both) of their own. Under the prototype retirement plan, an employer may make annual tax-deductible contributions for allocation to the accounts of the plan participants to the maximum extent permitted by the federal tax law for the type of plan implemented. The Adviser has received favorable opinion letters from the IRS stating that the prototype retirement plan is acceptable by qualified employers. (e) Self-Directed Retirement Plans Shares of the Credit Suisse Warburg Pincus Capital Funds may be suitable for self-directed IRA accounts and prototype retirement plans. -96- -------------------------------------------------------------------------------- NET ASSET VALUE -------------------------------------------------------------------------------- Net asset value per share is computed each Fund Business Day in accordance with the Credit Suisse Warburg Pincus Capital Funds' Amended and Restated Agreement and Declaration of Trust and By-Laws. For this purpose, a Fund Business Day is any day on which the New York Stock Exchange is open for business, typically, Monday through Friday exclusive of New Year's Day, Martin Luther King Jr. Day, Presidents Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day and Good Friday. The Funds calculate net asset value on each Fund Business Day, as of the close of the regular session of the New York Stock Exchange, generally 4:00 p.m. New York City time. The NAV is calculated by taking the sum of the value of a Fund's investments and any cash or other assets, subtracting liabilities, and dividing by the total number of shares outstanding. All expenses, including the fees payable to the Adviser, are accrued daily. The net asset value is calculated separately for each class of shares. Although the legal rights of each class of shares are substantially identical, the different expenses attributable to each class will result in different net asset values and dividends. The net asset value of Class B and Class C shares will generally be lower than the net asset value of Class A shares as a result of the larger distribution and service fees imposed on Class B and Class C shares. The net asset value of Class A shares, Common Class shares and Advisor Class shares will generally be lower than the net asset value of Class D shares because Class D shares are not subject to any distribution or service fees. -97- It is expected that the net asset value of Class A shares, Class B shares, Class C shares, Class D shares, Common Class shares and Advisor Class shares will tend to converge immediately after the recording of dividends, if any, which will differ in amount by approximately the differential of the accrual of distribution fees. For purposes of the computation of net asset value, each of the Funds value securities held in their respective portfolios as follows: readily marketable portfolio securities listed on the New York Stock Exchange are valued, except as indicated below, at the last sale price at the close of the New York Stock Exchange on the business day as of which such value is being determined. If there has been no sale on such day, the securities are valued at the mean of the closing bid and asked prices on such day, unless it is determined that such mean does not reasonably reflect true market value, in which case such value shall be taken at such amount as shall be deemed reasonable by Trustees of Credit Suisse Warburg Pincus Capital Funds, but not less than said bid price nor more than said asked price. If no bid or asked prices are quoted on such day, then the security is valued by such method as the Trustees of Credit Suisse Warburg Pincus Capital Funds shall determine in good faith to reflect its fair value. Readily marketable securities, including certain options, not listed on the New York Stock Exchange but listed on other national securities exchanges or admitted to trading on the Nasdaq National Market are valued in a like manner. Portfolio securities traded on more than one national securities exchange are valued at the last sale price on the business day as of which such value is being determined at the close of the exchange representing the principal market for such securities. -98- Readily marketable securities, including certain options traded only in the over-the-counter market, and listed securities whose primary market is believed by the Adviser to be over-the-counter (excluding those admitted to trading on The Nasdaq National Market) are valued at the mean of the current bid and asked prices as reported by The Nasdaq National Market, or in the case of securities not quoted on The Nasdaq National Market, the National Quotation Bureau, Inc. or such other comparable source that the Trustees of the Fund deem appropriate to reflect their fair market value. However, fixed-income securities (except short-term securities) may be valued on the basis of prices provided by a pricing service when such prices are believed by the Adviser to reflect the fair market value of such securities. The prices provided by a pricing service are determined without regard to bid or last sale prices but take into account institutional size trading in similar groups of securities and any developments related to specific securities. The money market securities in which each Fund invests are traded primarily in the over-the-counter market and are valued at the mean between most recent bid and asked prices as obtained from dealers that make markets in such securities, except for securities having 60 days or less remaining until maturity which are stated at amortized cost. Portfolio securities underlying listed call options will be valued at their market prices and reflected in net assets accordingly. Premiums received on call options written by the Fund will be included in the liability section of the Statement of Assets and Liabilities as a deferred credit and subsequently adjusted (marked-to-market) to the current market value of the option written. Investments for which market quotations are not readily available are valued at fair value as determined in good faith by the Trustees of Credit Suisse Warburg Pincus Capital Funds. -99- -------------------------------------------------------------------------------- TAXES, DIVIDENDS, AND DISTRIBUTIONS -------------------------------------------------------------------------------- Each of the Funds has elected to qualify and intends to remain qualified as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As a regulated investment company, a Fund will not be subject to federal income taxes if at least 90% of its net investment income and net short-term capital gains less any available capital loss carryforwards are distributed to shareholders within allowable time limits. However, a Fund will be subject to tax on its income and gains to the extent that it does not distribute to its shareholders an amount equal to such income and gains. In addition, a Fund will be subject to a nondeductible 4% excise tax to the extent that it does not make distributions to its shareholders on a basis such that the distributions are taxed to shareholders in the same year in which the related income or gain was realized by such Fund. To the extent possible, each Fund intends to make such distributions as may be necessary to avoid this excise tax. Each Fund normally will distribute substantially all of its net investment income and net capital gain, if any, to shareholders in the form of dividends to be paid from time to time. Any dividends or distributions paid shortly after the purchase of shares by an investor may have the effect of reducing the per share value of the shares owned by the investor by the per share amount of the dividends or distributions. Furthermore, such dividends and distributions, although in effect a return of capital, are subject to income taxes. -100- In the event that total distributions (including distributed or designated net capital gain) of a Fund for a taxable year exceed its investment company taxable income and net capital gain, a portion of each distribution generally will be treated as a tax return of capital. Distributions treated as a return of capital reduce a shareholder's basis in its shares and could result in a tax on capital gain either when a distribution is in excess of basis or, more likely, when a shareholder redeems shares. Upon a redemption or other disposition of shares of a Fund, a shareholder will generally recognize gain or loss in an amount equal to the difference between the amount realized and the shareholder's tax basis in such shares. Generally, such gain or loss will be capital gain or loss and will be long-term capital gain or loss if the shareholder's holding period for such shares exceeds one year. Long-term capital gain of a non-corporate shareholder is generally subject to a maximum tax rate of 20% in respect of property held for more than one year. Dividends distributed by a Fund will be eligible for the dividends-received deduction available to corporate shareholders only to the extent of the portion of the Fund's gross income which consists of dividends received on equity securities issued by domestic corporations with respect to which such Fund meets the same holding period, risk of loss, and borrowing limitations applicable to the Fund's shareholders. Section 246 of the Code generally permits the dividends-received deduction to corporate shareholders only if the shares with respect to which the dividends were paid have been held for more than 45 days. If the holding period is not satisfied, the dividends-received deduction is disallowed, regardless of whether the shares with respect to which the dividends were paid have been sold or otherwise disposed of. The holding period requirements are -101- separately applicable to each block of shares acquired, including each block of shares received in payment of the Fund's dividends. The Internal Revenue Service ("IRS") has specific regulations governing the identification of shares to be redeemed by a shareholder that wishes to redeem some, but not all, of its shares. For purposes of determining whether this holding period requirement has been met, the day of acquisition and any day after the first 45 days after the date on which such shares become ex-dividend must be disregarded. In addition, the holding period is suspended during periods in which the stock is subject to diminished risk of loss including, for example, because the holder has acquired a put option or sold a call option (other than certain covered call options where the exercise price is not substantially below the selling price) or otherwise hedged his position. A corporate shareholder would not be entitled to a dividends-received deduction for dividends paid or accrued after September 5, 1997 unless the 45 day holding period were satisfied over a period immediately before or immediately after the shareholder became entitled to receive the dividend. A transition rule provides that the provision will not apply to dividends received within two years of the date of enactment if (1) the dividend is paid with respect to stock held on June 8, 1997, and all times thereafter until the dividend is received; (2) the stock is continuously subject to a diminished risk of loss (as described above) on June 8, 1997, and all times thereafter until the dividend is received; and (3) such stock and related position was identified by the taxpayer by September 30, 1997. The dividends-received deduction will also be reduced for shareholders who incur indebtedness that is directly attributable to the purchase of shares by the -102- percentage of the cost of such shares. Such reduction depends on the particular facts and circumstances of each situation and accordingly shareholders are urged to consult their tax advisers. Under section 1059 of the Code, a corporation which receives an "extraordinary dividend" and disposes of the stock with respect to which such dividend was paid is required to reduce its basis in such stock (but not below zero) by the amount of the dividend which was not taxed because of the dividends-received deduction, with such basis reduction generally being treated as having occurred immediately before the sale or disposition of such stock unless such stock has not been held for at least two years prior to the date of declaration, announcement or agreement about the extraordinary dividend. To the extent such untaxed amount exceeds the shareholder's basis, such excess will be taxed as gain upon sale or disposition of such stock. An extraordinary dividend generally is any dividend that equals or exceeds 10% of the shareholder's basis in the stock (5% in the case of preferred stock). For this purpose, generally, all dividends having ex-dividend dates within any 85-day period and, if such dividends total more than 20% of the shareholder's basis in its stock, all dividends having ex-dividend dates within one year, must be aggregated. The shareholder may elect to determine the status of extraordinary dividends by reference to the fair market value of the stock as of the date before the ex-dividend date, rather than by reference to the adjusted basis of such stock (provided the shareholder establishes the fair market value to the satisfaction of the Commissioner of the IRS). In determining whether the above mentioned two-year holding period has been met, the same rules apply as are applicable to the 45-day holding period requirement for the dividends-received deduction. -103- Each Fund intends to declare and pay dividends and capital gains distributions so as to avoid imposition of the 4% federal excise tax referred to above. Accordingly, each Fund expects to distribute during the calendar year an amount at least equal to the sum of (i) 98% of its calendar year net investment income, (ii) 98% of its net capital gain income (the excess of short and long-term capital gain over short and long-term capital loss) for each one-year period ending October 31, and (iii) 100% of any undistributed net investment income or capital gain from the prior year which has not been distributed by such Fund. Dividends declared in October, November, or December and made payable to shareholders of record in such month would be deemed paid by a Fund and taxable to its shareholders on December 31 of such year provided that such dividends are actually paid during or before January of the following year. A Fund may make a deemed distribution with respect to its net capital gain by paying the tax with respect to the net capital gain and then designating, but not distributing, all or a portion of such gain as a capital gain dividend. Such Fund's shareholders will treat such designated amounts as net capital gain on their income tax returns, but will receive a credit or refund equal to federal income taxes paid by such Fund with respect to such capital gains. In addition, shareholders will increase their basis in the Fund's shares by the difference between the amount of such includible gains and the tax deemed paid by such shareholders in respect of such gains. If a capital gain dividend is paid with respect to any shares of a Fund which are sold at a loss after being held for less than six months, any loss realized upon the sale of such shares will be treated as long-term capital loss to the extent of such capital gain dividend. Any loss realized on the sale of shares will be disallowed to the extent the shares disposed of are replaced within a period of 61 days -104- beginning 30 days before the disposition of such shares. In such case, the basis of shares acquired will be adjusted to reflect the disallowed loss. Some of the investment practices of the Credit Suisse Warburg Pincus Blue Chip Fund, Credit Suisse Warburg Pincus Small Company Value Fund and the Credit Suisse Warburg Pincus Value Fund are subject to special provisions that, among other things, may defer the use of certain losses of such Funds and affect the holding periods of the securities held by the Funds and the character of the gains or losses realized. These provisions may also require the Credit Suisse Warburg Pincus Blue Chip Fund, the Credit Suisse Warburg Pincus Small Company Value Fund and the Credit Suisse Warburg Pincus Value Fund to mark-to-market some of the positions in their portfolio (i.e., treat them as if they were closed out), which may cause such Funds to recognize income without receiving cash with which to make distributions in amounts necessary to satisfy the distribution requirements for qualification as a regulated investment company and for avoiding income and excise taxes. Each Fund will monitor its transactions and may make certain tax elections in order to mitigate the effect of these rules and prevent disqualification of the Fund as a regulated investment company. Dividend and interest income from non-U.S. equity and debt securities may be subject to a withholding tax imposed by the country in which the issuer is located. Each Fund expects to claim a deduction or foreign tax credit with respect to any such withholding tax, to the extent allowable under the Code, regulations thereunder, or an applicable treaty. Since a Fund's investment policies would preclude it from investing more than 50% of the value of the total assets of such Fund in non-U.S. equity and debt -105- securities, shareholders are not expected to be eligible for a pass-through of the credit for foreign taxes paid. For shareholders' federal income tax purposes, distributions to shareholders out of tax-exempt interest income (less expenses applicable thereto) earned by the Credit Suisse Warburg Pincus Municipal Trust Fund are not subject to federal income tax if, at the close of each quarter of the Credit Suisse Warburg Pincus Municipal Trust Fund's taxable year, at least 50% of the value of the Credit Suisse Warburg Pincus Municipal Trust Fund's total assets consist of tax-exempt obligations. The Fund intends to meet this requirement. However, under current tax law, some individuals and corporations may be subject to an alternative minimum tax (the "AMT") with respect to their receipt of certain distributions of tax-exempt interest income from the Credit Suisse Warburg Pincus Municipal Trust Fund. Distributions of taxable interest income, other investment income, and short-term capital gains are taxable to shareholders as ordinary income. Since the Credit Suisse Warburg Pincus Municipal Trust Fund's investment income is derived from interest rather than dividends, no portion of such distributions is eligible for the dividends-received deduction available to corporations. Long-term capital gains, if any, distributed by the Credit Suisse Warburg Pincus Municipal Trust Fund to a shareholder are taxable to the shareholder as long-term capital gain, regardless of the length of time the shareholder may have held the Credit Suisse Warburg Pincus Municipal Trust Fund shares. Each Fund is required to withhold and remit to the U.S. Treasury 31% of the dividends or proceeds of any redemptions or exchanges of shares with respect to any shareholder who fails to furnish his or her Fund with a correct taxpayer identification -106- number, who has been notified by the U.S. Treasury that he or she has under-reported dividend or interest income or who fails to certify to his or her Fund that he or she is not subject to such withholding. An individual's tax identification number is generally his or her social security number. Shareholders will be notified annually by the Funds as to the Federal tax status of dividends and distributions paid during the calendar year. Dividends and distributions may also be subject to state and local taxes. State and local tax treatment may vary according to applicable laws. The foregoing discussion is a general summary of certain current federal income tax laws regarding the Funds and relates solely to the application of that law to (i) citizens or residents of the United States, (ii) domestic corporations or partnerships, or (iii) entities otherwise subject to U.S. taxation on a net income basis. The discussion does not purport to deal with all of the federal income tax consequences applicable to the Funds, or to all categories of investors, some of whom may be subject to special rules. Each prospective and current shareholder should consult with his or her own professional tax adviser regarding federal, state and local tax consequences of ownership of shares of the Funds. -107- -------------------------------------------------------------------------------- PERFORMANCE INFORMATION -------------------------------------------------------------------------------- Presented below is certain performance information with respect to an investment in Class A, Class B and Class D shares of beneficial interest of the Funds. Prior to February 28, 1996, Class A shares were not offered. Accordingly, the information presented below with respect to Class A shares has been obtained from the financial statements for the Funds' prior fiscal years. Because Common Class shares were issued on August 1, 2000, Class C shares were issued as of February 28, 2000, and Advisor Class shares have not been issued as of the date of this SAI, no performance information is included for these classes of shares. Total returns shown reflect the impact of expense waivers and/or reimbursements by the investment advisor. Absent such waivers/reimbursements, total returns would be lower. (a) Average Annual Total Return The average annual total return of Class A shares for the one, five and ten year periods ended October 31, 2000 was 7.80%, 21.03% and 16.76% for the Credit Suisse Warburg Pincus Blue Chip Fund and 0.31%, 3.88% and 6.20% for the Credit Suisse Warburg Pincus Fixed Income II Fund, respectively. The average annual total return of Class A shares for the one, five and ten year periods ended October 31, 2000 for the Credit Suisse Warburg Pincus Small Company Value Fund (which was previously named the Winthrop Aggressive Growth Fund and which includes its predecessor, the Neuwirth Fund, Inc.) and the Credit Suisse Warburg Pincus Value Fund (which includes its predecessor, the Pine Street Fund, Inc.) was 14.70%, 10.13% and 15.75% for the Credit Suisse Warburg Pincus Small Company Value Fund and 2.22%, 17.38% -108- and 15.71% for the Credit Suisse Warburg Pincus Value Fund, respectively. The average annual total return of Class A shares for the one and five year periods ended October 31, 2000 for the Credit Suisse Warburg Pincus Municipal Trust Fund was 0.21% and 3.28% respectively and 3.54% for the period July 28, 1993 (commencement of operations) through October 31, 2000. The average annual total return for Class B shares for the one year period ended October 31, 2000 was 9.58%, 0.57%, 16.80%, 3.66% and 0.45% and for the period February 28, 1996 (commencement of offering of Class B shares) through October 31, 2000 was 20.25%, 4.15%, 9.72%, 16.23% and 3.45%, for the Credit Suisse Warburg Pincus Blue Chip Fund, the Credit Suisse Warburg Pincus Fixed Income II Fund, the Credit Suisse Warburg Pincus Small Company Value Fund, the Credit Suisse Warburg Pincus Value Fund and the Credit Suisse Warburg Pincus Municipal Trust Fund, respectively. The average annual total return for Class D shares for the one year period ended October 31, 2000 was 8.75%, 5.62%, and 14.69% for the Credit Suisse Warburg Pincus Value Fund, the Credit Suisse Warburg Pincus Fixed Income II Fund, and the Credit Suisse Warburg Pincus Blue Chip Fund, respectively, and for the period April 30, 1999 (commencement of offering Class D shares for Credit Suisse Warburg Pincus Value Funds and Credit Suisse Warburg Pincus Fixed Income II Fund) or May 13, 1999 (commencement of offering of Class D shares for Credit Suisse Warburg Pincus Blue Chip Fund), as the case may be, through October 31, 2000 the total return for Class D shares for the Credit Suisse Warburg Pincus Value Fund, the Credit Suisse Warburg -109- Pincus Fixed Income II Fund and the Credit Suisse Warburg Pincus Blue Chip Fund was 5.25%, 3.72% and 13.01%, respectively. The Fund commenced offering Class C shares on February 28, 2000 and Common Class shares on August 1, 2000. Therefore, the Fund does not yet have a full calendar year of performance indicated for these classes. These amounts were computed by assuming a hypothetical initial investment of $1,000. It was then assumed that all of the dividends and distributions by each of the Funds over the relevant time periods were reinvested. It was then assumed that with respect to the Class A shares of the Credit Suisse Warburg Pincus Blue Chip Fund, the Credit Suisse Warburg Pincus Small Company Value Fund and the Credit Suisse Warburg Pincus Value Fund, the maximum initial sales charge of 5.75% was deducted at the time of investment and, with respect to the Class A shares of the Credit Suisse Warburg Pincus Fixed Income II Fund and the Credit Suisse Warburg Pincus Municipal Trust Fund, the maximum initial sales charge of 4.75% was deducted at the time of investment. With respect to the Class B shares of each of the Credit Suisse Warburg Pincus Capital Funds, it was assumed that at the end of these periods the entire amount was redeemed and the appropriate sales load, if any, was deducted. The average annual total return was then calculated by using the annual rate required for the initial payment to grow to the amount which would have been received upon redemption (i.e., the average annual compounded rate of return). The results shown should not be considered an indication of future performance from an investment in any Fund today. -110- (b) Computation of the Credit Suisse Warburg Pincus Fixed Income II Fund's and Credit Suisse Warburg Pincus Municipal Trust Fund's 30-Day Yield Quotation The 30-day yield for each of the Credit Suisse Warburg Pincus Fixed Income II Fund and the Credit Suisse Warburg Pincus Municipal Trust Fund for the period ended October 31, 2000 was with respect to Class A shares, 5.49% and 3.66%, respectively; with respect to Class B shares, 5.01% and 3.11%, respectively; with respect to Class C shares, 4.86% and 2.61%, respectively; with respect to Common Class shares, 5.77% and 3.89%, respectively; and with respect to Class D shares, 6.02% for the Credit Suisse Warburg Pincus Fixed Income II Fund. The Fund's yield is based on a 30-day period and is computed by dividing the net investment income per share earned during the period by the maximum offering price per share on the last day of the period, according to the following formula: YIELD = 2[(a-b/cd+1)^6-1] Where: a = dividends and interest earned during the period. b = expenses accrued for the period (net of reimbursements). c = the average daily number of shares outstanding during the period that were entitled to receive dividends. d = the maximum offering price per share on the last day of the period. -111- -------------------------------------------------------------------------------- GENERAL INFORMATION -------------------------------------------------------------------------------- (a) Counsel and Auditors Sullivan & Cromwell, 125 Broad Street, New York, New York 10004, serves as legal counsel for the Credit Suisse Warburg Pincus Capital Funds. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019, has been appointed as independent auditors for the Credit Suisse Warburg Pincus Capital Funds. (b) Additional Information This Statement of Additional Information does not contain all the information set forth in the Registration Statement filed by Credit Suisse Warburg Pincus Capital Funds with the Securities and Exchange Commission under the Securities Act of 1933. Copies of the Registration Statement may be obtained at a reasonable charge from the Commission or may be examined, without charge, at the offices of the Commission in Washington, D.C. -112- -------------------------------------------------------------------------------- FINANCIAL STATEMENTS -------------------------------------------------------------------------------- The audited financial statements of the Funds for the fiscal year ended October 31, 2000 and the report of the Funds' independent auditors in connection therewith are included in the October 31, 2000 Annual Report to Shareholders. The audited financial statements included in the Annual Report are incorporated by reference into this Statement of Additional Information. You can obtain a copy of the Fund's Annual Report by writing the address or calling the telephone numbers set forth on the cover of this Statement of Additional Information. -113- -------------------------------------------------------------------------------- Appendix I - Description of Security Ratings -------------------------------------------------------------------------------- Bond Ratings Municipal and Corporate Bonds. The four highest ratings of Moody's Investors Service, Inc. ("Moody's") for municipal corporate bonds are Aaa, Aa, A and Baa. Bonds rated Aaa are judged to be of high quality by all standards. Together with the Aa group, they comprise what are generally known as high-grade bonds. Moody's states that Aa bonds 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. Bonds which are rated A are judged by Moody's to possess many favorable investment attributes and are considered "upper medium grade obligations." Factors giving security to principal and interest of A-rated bonds are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Bonds rated Baa are considered as medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal 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. The generic ratings Aa through Baa may be modified by the addition of the numerals 1, 2 or 3. The modifier 1 indicates that the security ranks in the A-1 higher end of the rating category; the modifier 2 indicates a mid-range rating; and the modifier 3 indicates that the issue ranks in the lower end of such rating category. Moody's highest ratings for short-term municipal loans is MIG-1. Moody's states that short-term municipal securities rated MIG-1 are of the best quality, enjoying strong protection from established cash flows of funds for their servicing and broad-based access to the market for refinancing, or both. Loans bearing the MIG-2 designation are judged to be of high quality, with margins of protection ample although not so large as in the MIG-1 group. The four highest ratings of Standard & Poor's Ratings Group ("S&P") for municipal and corporate bonds are AAA, AA, A and BBB. Bonds rated AAA have the highest rating assigned by S&P to a debt obligation and indicate an extremely strong capacity to pay interest and repay principal. Bonds rated AA also qualify as high-quality debt obligations and have a very strong capacity to pay interest and repay principal and in the majority of instances differ from AAA issues only in a small degree. Bonds rated A have a strong capacity to pay interest and repay principal although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than bonds in higher rated categories. The BBB rating, which is the lowest "investment-grade" security rating of S&P, indicates an adequate capacity to pay principal and interest. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this category than for bonds in the A category. The ratings AA through BBB may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within such rating categories. A-2 Notes rated SP-1 have a very strong capacity to pay principal and interest. Those issues determined by S&P to possess overwhelming safety characteristics are given an SP-1+ rating. Notes rated SP-2 have a satisfactory capacity to pay principal and interest. Notes rated SP-3 have a speculative capacity to pay principal and interest. The rating scale for notes is closely related to long-term bond ratings; notes rated SP-1+ compare with bonds rated AAA, AA+, AA and AA-; notes rated SP-1 compare with bonds rated A+, A and A-; and notes rated SP-2 compare with bonds rated BBB+, BBB and BBB-. Other Municipal Securities and Commercial Paper "Prime-1" is the highest rating assigned by Moody's for other short-term municipal securities and commercial paper, and "A-1+" and "A-1" are the two highest ratings for commercial paper assigned by S&P (S&P does not rate short-term tax-free obligations). Moody's uses the numbers 1, 2 and 3 to denote relative strength within its highest classification of "Prime", while S&P uses the numbers 1+, 1, 2 and 3 to denote relative strength within the highest classification of "A". Issuers rated "Prime" by Moody's have the following characteristics: their short-term debt obligations carry the smallest degree of investment risk, margins or support for current indebtedness are large or stable with cash flow and asset protection well assured, current liquidity provides ample coverage of near-term liabilities and unused alternative financing arrangements are generally available. While protective elements may change over the intermediate or longer term, such changes are most likely to impair the fundamentally strong position of short-term obligations. Commercial paper issuers rated "A" by S&P have the following characteristics: liquidity ratios are better than industry average, long-term debt rating is A-3 A or better, the issuer has access to at least two additional channels of borrowing, the basic earnings and cash flow are in an upward trend. Typically, the issuer is a strong company, is in a well-established industry and has superior management. A-4