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PROSPECTUS
The Fund's Common Share Prospectus, dated December 29, 1995, as
revised January 29, 1996, is incorporated by reference to the Prospectus that
forms part of the definitive materials filed on January 31, 1996, pursuant to
Rule 497(e), by Warburg, Pincus International Equity Fund, Inc. (Securities
Act File No. 33-27031; Investment Co. Act File No. 811-5765).
<PAGE>2
Rule 497(c)
Securities Act File No. 33-63655
Investment Company Act File No. 811-07371
PROSPECTUS
WARBURG PINCUS ADVISOR
JAPAN
GROWTH
FUND
December 29, 1995
[Logo]
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WARBURG PINCUS ADVISOR FUNDS
P.O. BOX 9030
BOSTON, MASSACHUSETTS 02205-9030
TELEPHONE NUMBER: (800) 888-6878
December 29, 1995
PROSPECTUS
Warburg Pincus Advisor Funds are a family of open-end mutual funds that are
offered to investors who wish to buy shares through an investment professional,
to financial institutions investing on behalf of their customers and to
retirement plans that elect to make one or more Advisor Funds an investment
option for participants in the plans. One Advisor Fund is described in this
Prospectus:
WARBURG PINCUS JAPAN GROWTH FUND seeks long-term growth of capital by investing
primarily in equity securities of Japanese issuers.
International investing entails special risk considerations, including currency
fluctuations, lower liquidity, economic instability, political uncertainty and
differences in accounting methods. See 'Risk Factors and Special
Considerations.'
The Fund currently offers two classes of shares, one of which, the Advisor
Shares, is offered pursuant to this Prospectus. The Advisor Shares of the Fund,
as well as Advisor Shares of certain other Warburg Pincus-advised funds, are
sold under the name 'Warburg Pincus Advisor Funds.' Individual investors may
purchase Advisor Shares only through institutional shareholders of record,
broker-dealers, financial institutions, depository institutions, retirement
plans and other financial intermediaries ('Institutions'). The Advisor Shares
impose a 12b-1 fee of up to .75% per annum, which is the economic equivalent of
a sales charge. The Fund's Common Shares are available for purchase by
individuals directly and are offered by a separate prospectus.
NO MINIMUM INVESTMENT
There is no minimum amount of initial or subsequent purchases of shares imposed
on Institutions. See 'How to Purchase Shares.'
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Fund, contained in a Statement of Additional Information, has been filed with
the Securities and Exchange Commission (the 'SEC') and is available to investors
without charge by calling Warburg Pincus Advisor Funds at (800) 888-6878.
Information regarding the status of shareholder accounts may also be obtained by
calling Warburg Pincus Advisor Funds at (800) 888-6878. The Statement of
Additional Information, as amended or supplemented from time to time, bears the
same date as this Prospectus and is incorporated by reference in its entirety
into this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED OR ENDORSED
BY ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
INVESTMENTS IN SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE>4
THE FUND'S EXPENSES
The Fund currently offers two separate classes of shares: Common Shares and
Advisor Shares. See 'General Information.' Because of the higher fees paid by
Advisor Shares, the total return on such shares can be expected to be lower than
the total return on Common Shares.
<TABLE>
<S> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)..................................................................................... 0
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees....................................................................................... .80%
12b-1 Fees............................................................................................ .75%*
Other Expenses........................................................................................ .70%
----
Total Fund Operating Expenses (after fee waivers)`D'.................................................. 2.25%
EXAMPLE
You would pay the following expenses
on a $1,000 investment, assuming (1) 5% annual return
and (2) redemption at the end of each time period:
1 year................................................................................................ $23
3 years............................................................................................... $70
</TABLE>
[FN]
- ------------
* Current 12b-1 fees are .50% out of a maximum .75% authorized under the
Advisor Shares' Distribution Plan. At least a portion of these fees should
be considered by the investor to be the economic equivalent of a sales
charge.
`D' Absent the anticipated waiver of fees by the Fund's investment adviser and
co-administrator, Management Fees for the Fund would equal 1.25%, Other
Expenses would equal .75%, and Total Fund Operating Expenses would equal
2.75%. Other Expenses are based on annualized estimates of expenses for the
fiscal year ending October 31, 1996, net of any fee waivers or expense
reimbursements. Although Management Fees are higher than those paid by most
other investment companies, including money market and fixed income funds,
the Fund's investment adviser believes that they are comparable to fees
charged by other mutual funds with similar policies and strategies. The
investment adviser and co-administrator are under no obligation to continue
these waivers.
------------------------
The expense table shows the costs and expenses that an investor will bear
directly or indirectly as an Advisor Shareholder of the Fund. Institutions also
may charge their clients fees in connection with investments in the Advisor
Shares, which fees are not reflected in the table. The Example should not be
considered a representation of past or future expenses; actual Fund expenses may
be greater or less than those shown. Moreover, while the Example assumes a 5%
annual return, the Fund's actual performance will vary and may result in a
return greater or less than 5%. Long-term shareholders may pay more than the
economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc. (the 'NASD').
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<PAGE>5
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks long-term growth of capital. This objective is a fundamental
policy and may not be amended without first obtaining the approval of a majority
of the outstanding shares of the Fund. Any investment involves risk and,
therefore, there can be no assurance that the Fund will achieve its investment
objective. See 'Portfolio Investments' and 'Certain Investment Strategies' for
descriptions of certain types of investments the Fund may make.
The Fund is a non-diversified management investment company that pursues
its objective by investing primarily in equity securities of Japanese issuers
that present attractive opportunities for growth. Under current market
conditions the Fund intends to invest at least 80% of its total assets -- but
will invest no less than 65% of its assets under normal market conditions -- in
common and preferred stocks, warrants and other rights, securities convertible
into or exchangeable for common stocks and American Depository Receipts ('ADRs')
of Japanese issuers.
Warburg, Pincus Counsellors, Inc., the Fund's investment adviser
('Warburg'), believes that Japanese industry is in the process of deregulation
and restructuring. The Fund is designed to provide an opportunity to participate
in the dynamic structural changes in the Japanese industrial system through
investment in higher growth companies that can be expected to benefit from these
changes. The Fund will seek to identify and invest in Japanese issuers that are
showing or are expected to show a rapid or high rate of growth, based on
comparisons with Japanese or non-Japanese companies in the same industry or
other considerations. The Fund will also invest in Japanese companies that
Warburg believes are undervalued based on price/earnings ratios, comparisons
with Japanese or non-Japanese companies or other factors.
Unlike the Warburg Pincus Japan OTC Fund, which invests primarily in
over-the-counter securities, the Fund may invest in companies of any size,
whether traded on an exchange or over-the-counter. Currently, there are eight
exchanges in Japan -- the Tokyo, Osaka, Nagoya, Kyoto, Hiroshima, Fukuoka,
Niigata and Sapporo exchanges -- and two over-the-counter markets -- JASDAQ and
the Frontier Market. The Fund considers Japanese issuers to be (i) companies (A)
organized under the laws of Japan, or (B) whose principal business activities
are conducted in Japan and which derive at least 50% of their revenues or
profits from goods produced or sold, investments made, or services performed in
Japan, or have at least 50% of their assets in one or more such countries, or
(C) which have issued securities which are traded principally in Japan, and (ii)
Japanese governmental entities or political subdivisions. Determinations as to
the eligibility of issuers under the foregoing definition will be made by
Warburg based on publicly available information and inquiries made to the
companies. The portion of the Fund's assets not invested in Japanese issuers may
be invested in securities of other Asian issuers. The Fund does not, except
during temporary defensive periods, intend to invest in securities of non-Asian
issuers. From time to time, the Fund may hedge part or all of its exposure to
the Japanese yen, thereby reducing or substantially eliminating any favorable or
unfavorable impact of changes in the value of the yen in relation to the U.S.
dollar.
PORTFOLIO INVESTMENTS
INVESTMENT GRADE DEBT. The Fund may invest up to 35% of its total assets in
investment grade debt securities (other than money market obligations) for the
purpose of seeking capital appreciation. The interest income to be derived may
be considered as one factor in selecting debt securities for investment by
Warburg. Because the market value of debt obligations can be expected to vary
inversely to changes in prevailing interest rates, investing in debt obligations
may provide an opportunity for capital appreciation when interest rates are
expected to decline. The success of such
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<PAGE>6
a strategy is dependent upon Warburg's ability to accurately forecast changes in
interest rates. The market value of debt obligations may also be expected to
vary depending upon, among other factors, the ability of the issuer to repay
principal and interest, any change in investment rating and general economic
conditions.
A security will be deemed to be investment grade if it is rated within the
four highest grades by Moody's Investors Service, Inc. ('Moody's') or Standard &
Poor's Ratings Group ('S&P') or, if unrated, is determined to be of comparable
quality by Warburg. Bonds rated in the fourth highest grade have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case with higher grade bonds. Subsequent to its purchase by
the Fund, an issue of securities may cease to be rated or its rating may be
reduced below the minimum required for purchase by the Fund. Neither event will
require sale of such securities, although Warburg will consider such event in
its determination of whether the Fund should continue to hold the securities.
The Fund does not currently intend during the coming year to hold more than 5%
of its net assets in securities rated below investment grade, including
convertible and non-convertible debt securities downgraded below investment
grade subsequent to acquisition by the Fund.
When Warburg believes that a defensive posture is warranted, the Fund may
invest temporarily without limit in U.S. and foreign investment grade debt
obligations, other securities of U.S. companies and in domestic and foreign
money market obligations, including repurchase agreements.
MONEY MARKET OBLIGATIONS. The Fund is authorized to invest, under normal
circumstances, up to 20% of its total assets in domestic and foreign short-term
(one year or less remaining to maturity) and medium-term (five years or less
remaining to maturity) money market obligations and for temporary defensive
purposes may invest in these securities without limit. These instruments consist
of obligations issued or guaranteed by the U.S. government or a foreign
government, their agencies or instrumentalities; bank obligations (including
certificates of deposit, time deposits and bankers' acceptances of domestic or
foreign banks, domestic savings and loans and similar institutions) that are
high quality investments or, if unrated, deemed by Warburg to be high quality
investments; commercial paper rated no lower than A-2 by S&P or Prime-2 by
Moody's or the equivalent from another major rating service or, if unrated, of
an issuer having an outstanding, unsecured debt issue then rated within the
three highest rating categories; and repurchase agreements with respect to the
foregoing.
Repurchase Agreements. The Fund may invest in repurchase agreement
transactions with member banks of the Federal Reserve System and certain
non-bank dealers. Repurchase agreements are contracts under which the buyer of a
security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under the terms of a typical repurchase agreement,
the Fund would acquire any underlying security for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the underlying
securities will at all times be at least equal to the total amount of the
purchase obligation, including interest. The Fund bears a risk of loss in the
event that the other party to a repurchase agreement defaults on its obligations
or becomes bankrupt and the Fund is delayed or prevented from exercising its
right to dispose of the collateral securities, including the risk of a possible
decline in the value of the underlying securities during the period while the
Fund seeks
4
<PAGE>7
to assert this right. Warburg, acting under the supervision of the Fund's Board
of Directors (the 'Board'), monitors the creditworthiness of those bank and
non-bank dealers with which the Fund enters into repurchase agreements to
evaluate this risk. A repurchase agreement is considered to be a loan under the
Investment Company Act of 1940, as amended (the '1940 Act').
Money Market Mutual Funds. Where Warburg believes that it would be
beneficial to the Fund and appropriate considering the factors of return and
liquidity, the Fund may invest up to 5% of its assets in securities of money
market mutual funds that are unaffiliated with the Fund, Warburg or the Fund's
co-administrator, PFPC Inc. ('PFPC'). As a shareholder in any mutual fund, the
Fund will bear its ratable share of the mutual fund's expenses, including
management fees, and will remain subject to payment of the Fund's administration
fees and other expenses with respect to assets so invested.
U.S. GOVERNMENT SECURITIES. U.S. government securities in which the Fund may
invest include: direct obligations of the U.S. Treasury and obligations issued
by U.S. government agencies and instrumentalities, including instruments that
are supported by the full faith and credit of the United States, instruments
that are supported by the right of the issuer to borrow from the U.S. Treasury
and instruments that are supported by the credit of the instrumentality.
CONVERTIBLE SECURITIES. Convertible securities in which the Fund may invest,
including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an investor
to benefit from increases in the market price of the underlying common stock.
Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. The value of convertible securities fluctuates in relation to
changes in interest rates like bonds and, in addition, fluctuates in relation to
the underlying common stock. Subsequent to purchase by the Fund, convertible
securities may cease to be rated or a rating may be reduced below the minimum
required for purchase by the Fund. Neither event will require sale of such
securities, although Warburg will consider such event in its determination of
whether the Fund should continue to hold the securities. The Fund does not
currently intend during the coming year to hold more than 5% of its net assets
in securities rated below investment grade, including convertible and
non-convertible debt securities downgraded below investment grade subsequent to
acquisition by the Fund.
RISK FACTORS AND SPECIAL
CONSIDERATIONS
Investing in common stocks and securities convertible into common stocks is
subject to the inherent risk of fluctuations in the prices of such securities.
For certain additional risks relating to the Fund's investments, see 'Portfolio
Investments' beginning at page 3 and 'Certain Investment Strategies' beginning
at page 9.
JAPANESE INVESTMENTS. Investing in Japanese securities may involve the risks
described below associated with investing in foreign securities generally. In
addition, because the Fund invests primarily in Japan, the Fund will be subject
to general economic and political conditions in Japan. The Fund should be
considered a vehicle for diversification, but the Fund itself is not
diversified.
Securities in Japan are denominated and quoted in 'yen.' Yen are fully
convertible and transferable based on floating exchange rates into all
currencies, without administrative or legal restrictions for both non-residents
and residents of Japan. In determining the net asset value of shares of the
Fund, assets or liabilities initially expressed in terms of Japanese yen will be
translated into U.S. dollars at the current selling rate of Japanese yen against
U.S. dollars. As a result, in the absence of a successful
5
<PAGE>8
currency hedge, the value of the Fund's assets as measured in U.S. dollars may
be affected favorably or unfavorably by fluctuations in the value of Japanese
yen relative to the U.S. dollar.
The Fund's assets may be invested in securities traded through JASDAQ.
JASDAQ traded securities can be volatile, which may result in the Fund's net
asset value fluctuating in response. Trading of equity securities through the
JASDAQ market is conducted by securities firms in Japan, primarily through an
organization which acts as a 'matching agent,' as opposed to a recognized stock
exchange. Consequently, securities traded through JASDAQ may, from time to time,
and especially in falling markets, become illiquid and experience short-term
price volatility and wide spreads between bid and offer prices. This combination
of limited liquidity and price volatility may have an adverse effect on the
Fund's investments traded through JASDAQ. In periods of rapid price increases,
the limited liquidity of JASDAQ may restrict the Fund's ability to adjust its
portfolio quickly in order to take full advantage of a significant market
increase, and conversely, during periods of rapid price declines, it may
restrict the ability of the Fund to dispose of securities quickly in order to
realize gains previously made or to limit losses on securities held in its
portfolio. In addition, although JASDAQ has generally experienced sustained
growth in aggregate market capitalization and trading volume, there have been
periods in which aggregate market capitalization and trading volume have
declined. The Frontier Market is expected to present greater liquidity,
volatility and trading considerations than JASDAQ.
At December 31, 1994, 581 issues were traded through JASDAQ, having an
aggregate market capitalization of approximately 14 trillion yen (approximately
$136 billion as of December 28, 1995). The entry requirements for JASDAQ
generally require a minimum of 2 million shares outstanding at the time of
registration, a minimum of 200 shareholders, minimum pre-tax profits of 10 yen
(approximately $.10 as of December 28, 1995) per share over the prior fiscal
year and net worth of 200 million yen (approximately $1.95 million as of
December 28, 1995). JASDAQ has generally attracted small growth companies or
companies whose major shareholders wish to sell only a small portion of the
company's equity.
The Frontier Market is a recently developed second over-the-counter market
and is under the jurisdiction of JASDAQ, which is overseen by the Japanese
Securities and Exchange Commission. The Frontier Market has less stringent entry
requirements than those described above for JASDAQ and is designed to enable
early stage companies access to capital markets. Frontier Market companies need
not have a history of earnings, provided their spending on research and
development equals at least 3% of revenues. In addition, companies traded
through the Frontier Market are not required to have 2 million shares
outstanding at the time of registration. As a result, investments in companies
traded through the Frontier Market may involve a greater degree of risk than
companies traded through JASDAQ. As of the date of this Prospectus, there were
not yet any registrations on the Frontier Market.
The decline in the Japanese securities markets since 1989 has contributed
to a weakness in the Japanese economy, and the impact of a further decline
cannot be ascertained. The common stocks of many Japanese companies continue to
trade at high price-earnings ratios in comparison with those in the United
States, even after the recent market decline. Differences in accounting methods
make it difficult to compare the earnings of Japanese companies with those of
companies in other countries, especially the United States.
Japan is largely dependent upon foreign economies for raw materials.
International trade is important to Japan's economy, as exports provide the
means to pay for many of the raw materials it must import. Because of the
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<PAGE>9
concentration of Japanese exports in highly visible products such as
automobiles, machine tools and semiconductors, and the large trade surpluses
ensuing therefrom, Japan has entered a difficult phase in its relations with its
trading partners, particularly with respect to the United States, with whom the
trade imbalance is the greatest.
Japan has a parliamentary form of government. In 1993 a coalition
government was formed which, for the first time since 1955, did not include the
Liberal Democratic Party. Since mid-1993, there have been several changes in
leadership in Japan. What, if any, effect the current political situation will
have on prospective regulatory reforms on the economy in Japan cannot be
predicted. Recent and future developments in Japan and neighboring Asian
countries may lead to changes in policy that might adversely affect the Fund's
investing there. For additional information, see 'Japan and its Securities
Markets' beginning at page 28 of the Statement of Additional Information.
EMERGING MARKETS. The Fund may invest in securities of issuers located in less
developed Asian countries considered to be 'emerging markets.' Investing in
securities of issuers located in emerging markets involves not only the risks
described below with respect to investing in foreign securities, but also other
risks, including exposure to economic structures that are generally less diverse
and mature than, and to political systems that can be expected to have less
stability than, those of developed countries. Other characteristics of emerging
markets that may affect investment there include certain national policies that
may restrict investment by foreigners in issuers or industries deemed sensitive
to relevant national interests and the absence of developed legal structures
governing private and foreign investments and private property. The typically
small size of the markets for securities of issuers located in emerging markets
and the possibility of a low or nonexistent volume of trading in those
securities may also result in a lack of liquidity and in price volatility of
those securities.
EMERGING GROWTH AND SMALL COMPANIES. Investing in securities of emerging growth
and small-sized companies, which may include JASDAQ and Frontier Market
securities, may involve greater risks since these securities may have limited
marketability and, thus, may be more volatile. Because smaller companies
normally have fewer shares outstanding than larger companies, it may be more
difficult for the Fund to buy or sell significant amounts of such shares without
an unfavorable impact on prevailing prices. In addition, small- and medium-sized
companies are typically subject to a greater degree of changes in earnings and
business prospects than are larger, more established companies. There is
typically less publicly available information concerning smaller companies than
for larger, more established ones. Although investing in securities of emerging
growth companies offers potential for above-average returns if the companies are
successful, the risk exists that the companies will not succeed and the prices
of the companies' shares could significantly decline in value. Therefore, an
investment in the Fund may involve a greater degree of risk than an investment
in other mutual funds that seek growth of capital by investing in better-known,
larger companies.
NON-PUBLICLY TRADED SECURITIES; RULE 144A SECURITIES. The Fund may purchase
securities that are not registered under the Securities Act of 1933, as amended
(the '1933 Act'), but that can be sold to 'qualified institutional buyers' in
accordance with Rule 144A under the 1933 Act ('Rule 144A Securities'). An
investment in Rule 144A Securities will be considered illiquid and therefore
subject to the Fund's limitation on the purchase of illiquid securities, unless
the Fund's governing Board determines on an ongoing basis that an adequate
trading market exists for the security. In addition to an adequate trading
market, the Board will also consider factors such as trading activity,
availability of
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<PAGE>10
reliable price information and other relevant information in determining whether
a Rule 144A Security is liquid. This investment practice could have the effect
of increasing the level of illiquidity in the Funds to the extent that qualified
institutional buyers become uninterested for a time in purchasing Rule 144A
Securities. The Board will carefully monitor any investments by the Fund in Rule
144A Securities. The Board may adopt guidelines and delegate to Warburg the
daily function of determining and monitoring the liquidity of Rule 144A
Securities, although the Board will retain ultimate responsibility for any
determination regarding liquidity.
Non-publicly traded securities (including Rule 144A Securities) may involve
a high degree of business and financial risk and may result in substantial
losses. These securities may be less liquid than publicly traded securities, and
the Fund may take longer to liquidate these positions than would be the case for
publicly traded securities. Although these securities may be resold in privately
negotiated transactions, the prices realized on such sales could be less than
those originally paid by the Fund. Further, companies whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements applicable to companies whose securities are publicly
traded. The Fund's investment in illiquid securities is subject to the risk that
should the Fund desire to sell any of these securities when a ready buyer is not
available at a price that is deemed to be representative of their value, the
value of the Fund's net assets could be adversely affected.
NON-DIVERSIFIED STATUS. The Fund is classified as a non-diversified investment
company under the 1940 Act, which means that the Fund is not limited by the 1940
Act in the proportion of its assets that it may invest in the obligations of a
single issuer. The Fund will, however, comply with diversification requirements
imposed by the Internal Revenue Code of 1986, as amended (the 'Code'), for
qualification as a regulated investment company. As a non-diversified investment
company, the Fund may invest a greater proportion of its assets in the
obligations of a small number of issuers and, as a result, may be subject to
greater risk with respect to portfolio securities. To the extent that the Fund
assumes large positions in the securities of a small number of issuers, its
return may fluctuate to a greater extent than that of a diversified company as a
result of changes in the financial condition or in the market's assessment of
the issuers.
PORTFOLIO TRANSACTIONS AND
TURNOVER RATE
The Fund will attempt to purchase securities with the intent of holding
them for investment but may purchase and sell portfolio securities whenever
Warburg believes it to be in the best interests of the Fund. The Fund will not
consider portfolio turnover rate a limiting factor in making investment
decisions consistent with its investment objective and policies. It is not
possible to predict the Fund's portfolio turnover rate. However, it is
anticipated that the Fund's annual turnover rate should not exceed 100%. High
portfolio turnover rates (100% or more) may result in dealer mark ups or
underwriting commissions as well as other transaction costs, including
correspondingly higher brokerage commissions. In addition, short-term gains
realized from portfolio turnover may be taxable to shareholders as ordinary
income. See 'Dividends, Distributions and Taxes -- Taxes' below and 'Investment
Policies -- Portfolio Transactions' in the Statement of Additional Information.
All orders for transactions in securities or options on behalf of the Fund
are placed by Warburg with broker-dealers that it selects, including Counsellors
Securities Inc., the Fund's distributor ('Counsellors Securities'). The Fund may
utilize Counsellors Securities in connection with a purchase or sale of
securities when Warburg believes that the charge for the transaction does not
exceed usual and customary levels
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<PAGE>11
and when doing so is consistent with guidelines adopted by the Board.
CERTAIN INVESTMENT STRATEGIES
Although there is no intention of doing so during the coming year, the Fund
is authorized to engage in the following investment strategies: (i) purchasing
securities on a when-issued basis and purchasing or selling securities for
delayed delivery, (ii) lending portfolio securities and (iii) entering into
reverse repurchase agreements and dollar rolls. The Fund may invest up to 5% of
its net assets in each of mortgage-backed securities and asset-backed
securities. The Fund may also invest in zero coupon securities, although the
Fund currently anticipates that during the coming year zero coupon securities
will not exceed 5% of net assets. Detailed information concerning the Fund's
strategies and related risks is contained below and in the Fund's Statement of
Additional Information.
FOREIGN SECURITIES. The Fund will ordinarily hold no less than 65% of its total
assets in Japanese securities. There are certain risks involved in investing in
securities of companies and governments of foreign nations which are in addition
to the usual risks inherent in domestic investments. These risks include those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, future adverse political and economic developments and the possible
imposition of currency exchange blockages or other foreign governmental laws or
restrictions, reduced availability of public information concerning issuers, the
lack of uniform accounting, auditing and financial reporting standards and other
regulatory practices and requirements that are often generally less rigorous
than those applied in the United States. Moreover, securities of many foreign
companies may be less liquid and their prices more volatile than those of
securities of comparable U.S. companies. Certain foreign countries are known to
experience long delays between the trade and settlement dates of securities
purchased or sold. In addition, with respect to certain foreign countries, there
is the possibility of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of funds or other assets of the Fund,
including the withholding of dividends. Foreign securities may be subject to
foreign government taxes that would reduce the net yield on such securities.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments positions. Investment in foreign securities will also result in higher
operating expenses due to the cost of converting foreign currency into U.S.
dollars, the payment of fixed brokerage commissions on foreign exchanges, which
generally are higher than commissions on U.S. exchanges, higher valuation and
communications costs and the expense of maintaining securities with foreign
custodians.
OPTIONS, FUTURES AND CURRENCY TRANSACTIONS. At the discretion of Warburg, the
Fund may, but is not required to, engage in a number of strategies involving
options, futures and forward currency contracts. These strategies, commonly
referred to as 'derivatives,' may be used (i) for the purpose of hedging against
a decline in value of the Fund's current or anticipated portfolio holdings, (ii)
as a substitute for purchasing or selling portfolio securities or (iii) to seek
to generate income to offset expenses or increase return. TRANSACTIONS THAT ARE
NOT CONSIDERED HEDGING SHOULD BE CONSIDERED SPECULATIVE AND MAY SERVE TO
INCREASE THE FUND'S INVESTMENT RISK. Transaction costs and any premiums
associated with these strategies, and any losses incurred, will affect the
Fund's net asset value and performance. Therefore, an investment in the Fund may
involve a greater risk than an investment in other mutual funds that do not
utilize these strategies. The Fund's use of these strategies may be limited by
position and exercise limits established by
9
<PAGE>12
securities and commodities exchanges and the NASD and by the Code.
Securities and Stock Index Options. The Fund may write put and call options
on up to 25% of the net asset value of the stock and debt securities in its
portfolio and will realize fees (referred to as 'premiums') for granting the
rights evidenced by the options; the Fund may also utilize up to 10% of its
assets to purchase options on stocks and debt securities that are traded on U.S.
and foreign exchanges, as well as over-the-counter ('OTC') options. The
purchaser of a put option on a security has the right to compel the purchase by
the writer of the underlying security, while the purchaser of a call option has
the right to purchase the underlying security from the writer. In addition to
purchasing and writing options on securities, the Fund may also utilize up to
10% of its total assets to purchase exchange-listed and OTC put and call options
on stock indexes, and may also write such options. A stock index measures the
movement of a certain group of stocks by assigning relative values to the common
stocks included in the index.
The potential loss associated with purchasing an option is limited to the
premium paid, and the premium would partially offset any gains achieved from its
use. However, for an option writer the exposure to adverse price movements in
the underlying security or index is potentially unlimited during the exercise
period. Writing securities options may result in substantial losses to the Fund,
force the sale or purchase of portfolio securities at inopportune times or at
less advantageous prices, limit the amount of appreciation the Fund could
realize on its investments or require the Fund to hold securities it would
otherwise sell.
Futures Contracts and Related Options. The Fund may enter into foreign
currency, interest rate and stock index futures contracts and purchase and write
(sell) related options that are traded on an exchange designated by the
Commodity Futures Trading Commission (the 'CFTC') or, if consistent with CFTC
regulations, on foreign exchanges. These futures contracts are standardized
contracts for the future delivery of foreign currency or an interest rate
sensitive security or, in the case of stock index and certain other futures
contracts, are settled in cash with reference to a specified multiplier times
the change in the specified index, exchange rate or interest rate. An option on
a futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract.
Aggregate initial margin and premiums required to establish positions other
than those considered by the CFTC to be 'bona fide hedging' will not exceed 5%
of the Fund's net asset value, after taking into account unrealized profits and
unrealized losses on any such contracts. Although the Fund is limited in the
amount of assets that may be invested in futures transactions, there is no
overall limit on the percentage of Fund assets that may be at risk with respect
to futures activities.
Currency Exchange Transactions. The Fund will conduct its currency exchange
transactions either (i) on a spot (i.e., cash) basis at the rate prevailing in
the currency exchange market, (ii) through entering into futures contracts or
options on futures contracts (as described above), (iii) through entering into
forward contracts to purchase or sell currency or (iv) by purchasing
exchange-traded currency options. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date at a price
set at the time of the contract. An option on a foreign currency operates
similarly to an option on a security. Risks associated with currency forward
contracts and purchasing currency options are similar to those described in this
Prospectus for futures contracts and securities and stock index options. In
addition, the use of currency transactions could result in losses from the
imposition of foreign exchange controls, suspension of settlement or other
governmental actions or unexpected events.
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Hedging Considerations. The Fund may engage in options, futures and
currency transactions for, among other reasons, hedging purposes. A hedge is
designed to offset a loss on a portfolio position with a gain in the hedge
position; at the same time, however, a properly correlated hedge will result in
a gain in the portfolio position being offset by a loss in the hedge position.
As a result, the use of options, futures contracts and currency exchange
transactions for hedging purposes could limit any potential gain from an
increase in value of the position hedged. In addition, the movement in the
portfolio position hedged may not be of the same magnitude as movement in the
hedge. The Fund will engage in hedging transactions only when deemed advisable
by Warburg, and successful use of hedging transactions will depend on Warburg's
ability to correctly predict movements in the hedge and the hedged position and
the correlation between them, which could prove to be inaccurate. Even a
well-conceived hedge may be unsuccessful to some degree because of unexpected
market behavior or trends.
Additional Considerations. To the extent that the Fund engages in the
strategies described above, the Fund may experience losses greater than if these
strategies had not been utilized. In addition to the risks described above,
these instruments may be illiquid and/or subject to trading limits, and the Fund
may be unable to close out an option or futures position without incurring
substantial losses, if at all. The Fund is also subject to the risk of a default
by a counterparty to an off-exchange transaction.
Asset Coverage. The Fund will comply with applicable regulatory
requirements designed to eliminate any potential for leverage with respect to
options written by the Fund on securities, indexes and currencies; currency,
interest rate and stock index futures contracts and options on these futures
contracts; and forward currency contracts. The use of these strategies may
require that the Fund maintain cash or certain liquid high-grade debt
obligations or other assets that are acceptable as collateral to the appropriate
regulatory authority in a segregated account with its custodian or a designated
sub-custodian to the extent the Fund's obligations with respect to these
strategies are not otherwise 'covered' through ownership of the underlying
security, financial instrument or currency or by other portfolio positions or by
other means consistent with applicable regulatory policies. Segregated assets
cannot be sold or transferred unless equivalent assets are substituted in their
place or it is no longer necessary to segregate them. As a result, there is a
possibility that segregation of a large percentage of the Fund's assets could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
SHORT SALES AGAINST THE BOX. The Fund may enter into a short sale of securities
such that when the short position is open the Fund owns an equal amount of the
securities sold short or owns preferred stocks or debt securities, convertible
or exchangeable without payment of further consideration, into an equal number
of securities sold short. This kind of short sale, which is referred to as one
'against the box,' will be entered into by the Fund for the purpose of receiving
a portion of the interest earned by the executing broker from the proceeds of
the sale. The proceeds of the sale will generally be held by the broker until
the settlement date when the Fund delivers securities to close out its short
position. Although prior to delivery the Fund will have to pay an amount equal
to any dividends paid on the securities sold short, the Fund will receive the
dividends from the securities sold short or the dividends from the preferred
stock or interest from the debt securities convertible or exchangeable into the
securities sold short, plus a portion of the interest earned from the proceeds
of the short sale. The Fund will deposit, in a segregated account with its
custodian or a qualified subcustodian, the securities sold short or convertible
or exchangeable preferred stocks or debt securities in connection
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<PAGE>14
with short sales against the box. The Fund will endeavor to offset transaction
costs associated with short sales against the box with the income from the
investment of the cash proceeds. Not more than 10% of the Fund's net assets
(taken at current value) may be held as collateral for short sales against the
box at any one time.
The extent to which the Fund may make short sales may be limited by Code
requirements for qualification as a regulated investment company. See
'Dividends, Distributions and Taxes' for other tax considerations applicable to
short sales.
INVESTMENT GUIDELINES
The Fund may invest up to 10% of its net assets in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable, including (i) securities issued as part of a privately
negotiated transaction between an issuer and one or more purchasers; (ii)
repurchase agreements with maturities greater than seven days; (iii) time
deposits maturing in more than seven calendar days; and (iv) certain Rule 144A
Securities. Up to 5% of the Fund's total assets may be invested in the
securities of issuers which have been in continuous operation for less than
three years, and up to an additional 5% of its total assets may be invested in
warrants. The Fund may borrow from banks for temporary or emergency purposes,
such as meeting anticipated redemption requests, provided that borrowings by the
Fund may not exceed 30% of its total assets, and may pledge its assets to the
extent necessary to secure permitted borrowings. Whenever borrowings (including
reverse repurchase agreements) exceed 5% of the value of the Fund's net assets,
the Fund will not make any investments (including roll-overs). Except for the
limitations on borrowing, the investment guidelines set forth in this paragraph
may be changed at any time without shareholder consent by vote of the Board,
subject to the limitations contained in the 1940 Act. A complete list of
investment restrictions that the Fund has adopted identifying additional
restrictions that cannot be changed without the approval of the majority of the
Fund's outstanding shares is contained in the Statement of Additional
Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. The Fund employs Warburg as its investment adviser. Warburg,
subject to the control of the Fund's officers and the Board, manages the
investment and reinvestment of the assets of the Fund in accordance with the
Fund's investment objective and stated investment policies. Warburg makes
investment decisions for the Fund and places orders to purchase or sell
securities on behalf of the Fund. Warburg also employs a support staff of
management personnel to provide services to the Fund and furnishes the Fund with
office space, furnishings and equipment.
For the services provided by Warburg, the Fund pays Warburg a fee
calculated at an annual rate of 1.25% of the Fund's average daily net assets.
The advisory agreement between the Fund and Warburg provides that Warburg will
reimburse the Fund to the extent certain expenses that are described in the
Statement of Additional Information exceed applicable state expense limitations.
Warburg and the Fund's co-administrators may voluntarily waive a portion of
their fees from time to time and temporarily limit the expenses to be paid by
the Fund.
Warburg is a professional investment counselling firm which provides
investment services to investment companies, employee benefit plans, endowment
funds, foundations and other institutions and individuals. As of November 30,
1995, Warburg managed approximately $11.9 billion of assets, including
approximately $6.2 billion of assets of twenty-three investment companies or
portfolios. Incorporated in 1970, Warburg is a wholly owned subsidiary of
Warburg, Pincus Counsellors G.P. ('Warburg G.P.'), a New York general
partnership. E.M. Warburg, Pincus &
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<PAGE>15
Co., Inc. ('EMW') controls Warburg through its ownership of a class of voting
preferred stock of Warburg. Warburg G.P. has no business other than being a
holding company of Warburg and its subsidiaries. Warburg's address is 466
Lexington Avenue, New York, New York 10017-3147.
PORTFOLIO MANAGER. P. Nicholas Edwards is the Fund's portfolio manager. Mr.
Edwards has been with Warburg since August 1995, before which time he was a
director at Jardine Fleming Investment Advisers, Tokyo. He was a vice president
of Robert Fleming, Inc. in New York City from 1988 to 1991.
CO-ADMINISTRATORS. The Fund employs Counsellors Funds Service, Inc.
('Counsellors Service'), a wholly owned subsidiary of Warburg, as a co-
administrator. As co-administrator, Counsellors Service provides shareholder
liaison services to the Fund including responding to shareholder inquiries and
providing information on shareholder investments. Counsellors Service also
performs a variety of other services, including furnishing certain executive and
administrative services, acting as liaison between the Fund and its various
service providers, furnishing corporate secretarial services, which include
preparing materials for meetings of the Board, preparing proxy statements and
annual, semiannual and quarterly reports, assisting in other regulatory filings
as necessary and monitoring and developing compliance procedures for the Fund.
As compensation, the Fund pays Counsellors Service a fee calculated at an annual
rate of .10% of its average daily net assets.
The Fund employs PFPC, an indirect, wholly owned subsidiary of PNC Bank
Corp., as a co-administrator. As a co-administrator, PFPC calculates the Fund's
net asset value, provides all accounting services for the Fund and assists in
related aspects of the Fund's operations. As compensation, the Fund pays to PFPC
a fee calculated at an annual rate of .12% of the Fund's first $250 million in
average daily net assets, .10% of the next $250 million in average daily net
assets, .08% of the next $250 million in average daily net assets, and .05% of
average daily net assets over $750 million, subject to a minimum annual fee and
exclusive of out-of-pocket expenses. PFPC has its principal offices at 400
Bellevue Parkway, Wilmington, Delaware 19809.
CUSTODIANS. PNC Bank, National Association ('PNC'), serves as custodian of the
Fund's U.S. assets, and Fiduciary Trust Company International ('Fiduciary')
serves as custodian of the Fund's non-U.S. assets. Like PFPC, PNC is a
subsidiary of PNC Bank Corp. and its principal business address is Broad and
Chestnut Streets, Philadelphia, Pennsylvania 19101. Fiduciary's principal
business address is Two World Trade Center, New York, New York 10048.
TRANSFER AGENT. State Street Bank and Trust Company ('State Street') acts as
shareholder servicing agent, transfer agent and dividend disbursing agent for
the Fund. It has delegated to Boston Financial Data Services, Inc., a 50% owned
subsidiary ('BFDS'), responsibility for most shareholder servicing functions.
State Street's principal business address is 225 Franklin Street, Boston,
Massachusetts 02110. BFDS's principal business address is 2 Heritage Drive,
North Quincy, Massachusetts 02171.
DISTRIBUTOR. Counsellors Securities serves as distributor of the shares of the
Fund. Counsellors Securities is a wholly owned subsidiary of Warburg and is
located at 466 Lexington Avenue, New York, New York 10017-3147. No compensation
is payable by the Advisor Shares to Counsellors Securities for distribution
services.
Warburg or its affiliates may, at their own expense, provide promotional
incentives to parties who support the sale of shares of the Fund, consisting of
securities dealers who have sold Fund shares or others, including banks and
other financial institutions, under special arrangements. In some instances,
these incentives may be offered only to certain institutions whose
representatives provide services in connection with the
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<PAGE>16
sale or expected sale of significant amounts of Fund shares.
DIRECTORS AND OFFICERS. The officers of the Fund manage its day-to-day
operations and are directly responsible to the Board. The Board sets broad
policies for the Fund and chooses its officers. A list of the Directors and
officers of the Fund and a brief statement of their present positions and
principal occupations during the past five years is set forth in the Statement
of Additional Information.
HOW TO PURCHASE SHARES
Individual investors may only purchase Warburg Pincus Advisor Fund shares
through Institutions. The Fund reserves the right to make Advisor Shares
available to other investors in the future. References in this Prospectus to
shareholders or investors also include Institutions which may act as record
holders of the Advisor Shares.
Each Institution separately determines the rules applicable to its
customers investing in the Fund, including minimum initial and subsequent
investment requirements and the procedures to be followed to effect purchases,
redemptions and exchanges of Advisor Shares. There is no minimum amount of
initial or subsequent purchases of Advisor Shares imposed on Institutions,
although the Fund reserves the right to impose minimums in the future.
Orders for the purchase of Advisor Shares are placed with an Institution by
its customers. The Institution is responsible for the prompt transmission of the
order to the Fund or its agent.
Institutions may purchase Advisor Shares by telephoning the Fund and
sending payment by wire. After telephoning (800) 888-6878 for instructions, an
Institution should then wire federal funds to Counsellors Securities Inc. using
the following wire address:
State Street Bank and Trust Co.
225 Franklin St.
Boston, MA 02101
ABA# 0110 000 28
Attn: Mutual Funds/Custody Dept.
Warburg Pincus Advisor Japan Growth Fund
DDA# 9904-649-2
[Shareowner name]
[Shareowner account number]
Orders by wire will not be accepted until a completed account application
has been received in proper form, and an account number has been established. If
a telephone order is received by the close of regular trading on the New York
Stock Exchange (the 'NYSE') (currently 4:00 p.m., Eastern time) and payment by
wire is received on the same day in proper form in accordance with instructions
set forth above, the shares will be priced according to the net asset value of
the Fund on that day and are entitled to dividends and distributions beginning
on that day. If payment by wire is received in proper form by the close of the
NYSE without a prior telephone order, the purchase will be priced according to
the net asset value of the Fund on that day and is entitled to dividends and
distributions beginning on that day. However, if a wire in proper form that is
not preceded by a telephone order is received after the close of regular trading
on the NYSE, the payment will be held uninvested until the order is effected at
the close of business on the next business day. Payment for orders that are not
accepted will be returned after prompt inquiry. Certain organizations or
Institutions that have entered into agreements with the Fund or its agent may
enter confirmed purchase orders on behalf of customers, with payment to follow
no later than three business days following the day the order is effected. If
payment is not received by such time, the organization could be held liable for
resulting fees or losses.
After an investor has made his initial investment, additional shares may be
purchased at any time by mail or by wire in the manner outlined
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<PAGE>17
above. Wire payments for initial and subsequent investments should be preceded
by an order placed with the Fund or its agent and should clearly indicate the
investor's account number. In the interest of economy and convenience, physical
certificates representing shares in the Fund are not normally issued.
The Fund understands that some broker-dealers (other than Counsellors
Securities), financial institutions, securities dealers and other industry
professionals may impose certain conditions on their clients or customers that
invest in the Fund, which are in addition to or different than those described
in this Prospectus, and may charge their clients or customers direct fees.
Certain features of the Fund, such as initial and subsequent investment
minimums, redemption fees and certain trading restrictions, may be modified or
waived in these programs, and administrative charges may be imposed for the
services rendered. Therefore, a client or customer should contact the
organization acting on his behalf concerning the fees (if any) charged in
connection with a purchase or redemption of Fund shares and should read this
Prospectus in light of the terms governing his accounts with the organization.
HOW TO REDEEM AND EXCHANGE
SHARES
REDEMPTION OF SHARES. An investor may redeem (sell) shares on any day that the
Fund's net asset value is calculated (see 'Net Asset Value' below). Requests for
the redemption (or exchange) of Advisor Shares are placed with an Institution by
its customers, which is then responsible for the prompt transmission of the
request to the Fund or its agent.
Institutions may redeem Advisor Shares by calling Warburg Pincus Advisor
Funds at (800) 888-6878 between 9:00 a.m. and 4:00 p.m. (Eastern time) on any
day on which the Fund's net asset value is calculated. An investor making a
telephone withdrawal should state (i) the name of the Fund, (ii) the account
number of the Fund, (iii) the name of the investor(s) appearing on the Fund's
records, (iv) the amount to be withdrawn and (v) the name of the person
requesting the redemption.
After receipt of the redemption request, the redemption proceeds will be
wired to the investor's bank as indicated in the account application previously
filled out by the investor. The Fund does not currently impose a service charge
for effecting wire transfers but reserves the right to do so in the future.
During periods of significant economic or market change, telephone redemptions
may be difficult to implement. If an investor is unable to contact Warburg
Pincus Advisor Funds by telephone, an investor may deliver the redemption
request to Warburg Pincus Advisor Funds by mail at Warburg Pincus Advisor Funds,
P.O. Box 9030, Boston, Massachusetts 02205-9030.
If a redemption order is received prior to the close of regular trading on
the NYSE, the redemption order will be effected at the net asset value per share
as determined on that day. If a redemption order is received after the close of
regular trading on the NYSE, the redemption order will be effected at the net
asset value as next determined. Except as noted above, redemption proceeds will
normally be wired to an investor on the next business day following the date a
redemption order is effected. If, however, in the judgment of Warburg, immediate
payment would adversely affect the Fund, the Fund reserves the right to pay the
redemption proceeds within seven days after the redemption order is effected.
Furthermore, the Fund may suspend the right of redemption or postpone the date
of payment upon redemption (as well as suspend or postpone the recordation of an
exchange of shares) for such periods as are permitted under the 1940 Act.
The proceeds paid upon redemption may be more or less than the amount
invested depending upon a share's net asset value at the time of redemption. If
an investor redeems all the shares
15
<PAGE>18
in his account, all dividends and distributions declared up to and including the
date of redemption are paid along with the proceeds of the redemption.
EXCHANGE OF SHARES. An Institution may exchange Advisor Shares of the Fund for
Advisor Shares of the other Warburg Pincus Advisor Funds at their respective net
asset values. Exchanges may be effected in the manner described under
'Redemption of Shares' above. If an exchange request is received by Warburg
Pincus Advisor Funds prior to 4:00 p.m. (Eastern time), the exchange will be
made at each fund's net asset value determined at the end of that business day.
Exchanges may be effected without a sales charge. The exchange privilege may be
modified or terminated at any time upon 60 days' notice to shareholders.
The exchange privilege is available to shareholders residing in any state
in which the Advisor Shares being acquired may legally be sold. When an investor
effects an exchange of shares, the exchange is treated for federal income tax
purposes as a redemption. Therefore, the investor may realize a taxable gain or
loss in connection with the exchange. Investors wishing to exchange Advisor
Shares of the Fund for shares in another Warburg Pincus Advisor Fund should
review the prospectus of the other fund prior to making an exchange. For further
information regarding the exchange privilege or to obtain a current prospectus
for another Warburg Pincus Advisor Fund, an investor should contact Warburg
Pincus Advisor Funds at (800) 888-6878.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. The Fund calculates its dividends from net
investment income. Net investment income includes interest accrued and dividends
earned on the Fund's portfolio securities for the applicable period less
applicable expenses. The Fund declares dividends from its net investment income
and net realized short-term and long-term capital gains annually and pays them
in the calendar year in which they are declared, generally in November or
December. Net investment income earned on weekends and when the NYSE is not open
will be computed as of the next business day. Unless an investor instructs the
Fund to pay dividends or distributions in cash, dividends and distributions will
automatically be reinvested in additional Advisor Shares of the Fund at net
asset value. The election to receive dividends in cash may be made on the
account application or, subsequently, by writing to Warburg Pincus Advisor Funds
at the address set forth under 'How to Redeem and Exchange Shares' or by calling
Warburg Pincus Advisor Funds at (800) 888-6878.
The Fund may be required to withhold for U.S. federal income taxes 31% of
all distributions payable to shareholders who fail to provide the Fund with
their correct taxpayer identification number or to make required certifications,
or who have been notified by the U.S. Internal Revenue Service that they are
subject to backup withholding.
TAXES. The Fund intends to continue to qualify each year as a 'regulated
investment company' within the meaning of the Code. The Fund, if it qualifies as
a regulated investment company, will be subject to a 4% non-deductible excise
tax measured with respect to certain undistributed amounts of ordinary income
and capital gain. The Fund expects to pay such additional dividends and to make
such additional distributions as are necessary to avoid the application of this
tax.
Dividends paid from net investment income and distributions of net realized
short-term capital gains are taxable to investors as ordinary income, and
distributions derived from net realized long-term capital gains will be taxable
to investors as long-term capital gains, in each case regardless of how long
investors have held Advisor Shares or whether received in cash or reinvested in
additional Advisor Shares. As a general rule, an investor's gain or loss on a
sale or redemption of its Fund shares will be a long-term capital gain or loss
if it has held its shares for more than one year and will be a short-term
16
<PAGE>19
capital gain or loss if it has held its shares for one year or less. However,
any loss realized upon the sale or redemption of shares within six months from
the date of their purchase will be treated as a long-term capital loss to the
extent of any amounts treated as distributions of long-term capital gain during
such six-month period with respect to such shares. Investors may be
proportionately liable for taxes on income and gains of the Fund, but investors
not subject to tax on their income will not be required to pay tax on amounts
distributed to them. The Fund's investment activities will not result in
unrelated business taxable income to a tax-exempt investor. The Fund's
dividends, to the extent not derived from dividends attributable to certain
types of stock issued by U.S. domestic corporations, will not qualify for the
dividends received deduction for corporations.
Dividends and interest received by the Fund may be subject to withholding
and other taxes imposed by foreign countries. However, tax conventions between
certain countries and the United States may reduce or eliminate such taxes. If
the Fund qualifies as a regulated investment company, if certain asset and
distribution requirements are satisfied and if more than 50% of the Fund's total
assets at the close of its fiscal year consist of stock or securities of foreign
corporations, the Fund may elect for U.S. income tax purposes to treat foreign
income taxes paid by it as paid by its shareholders. The Fund may qualify for
and make this election in some, but not necessarily all, of its taxable years.
If the Fund were to make an election, shareholders of the Fund would be required
to take into account an amount equal to their pro rata portions of such foreign
taxes in computing their taxable income and then treat an amount equal to those
foreign taxes as a U.S. federal income tax deduction or as a foreign tax credit
against their U.S. federal income taxes. Shortly after any year for which it
makes such an election, the Fund will report to its shareholders the amount per
share of such foreign income tax that must be included in each shareholder's
gross income and the amount which will be available for the deduction or credit.
No deduction for foreign taxes may be claimed by a shareholder who does not
itemize deductions. Certain limitations will be imposed on the extent to which
the credit (but not the deduction) for foreign taxes may be claimed.
Certain provisions of the Code may require that a gain recognized by the
Fund upon the closing of a short sale be treated as a short-term capital gain,
and that a loss recognized by the Fund upon the closing of a short sale be
treated as a long-term capital loss, regardless of the amount of time that the
Fund held the securities used to close the short sale. The Fund's use of short
sales may also affect the holding periods of certain securities held by the Fund
if such securities are 'substantially identical' to securities used by the Fund
to close the short sale. The Fund's short selling activities will not result in
unrelated business taxable income to a tax-exempt investor.
In the opinion of Japanese counsel for the Fund, the operations of the Fund
will not subject the Fund to any Japanese income, capital gains or other taxes
except for withholding taxes on interest and dividends paid to the Fund by
Japanese corporations and securities transaction taxes payable in the event of
sales of portfolio securities in Japan. In the opinion of such counsel, under
the tax convention between the United States and Japan (the 'Convention') as
currently in force, a Japanese withholding tax at a rate of 15% is, with certain
exceptions, imposed upon dividends paid by Japanese corporations to the Fund.
Pursuant to the present terms of the Convention, interest received by the Fund
from sources within Japan is subject to a Japanese withholding tax at a rate of
10%.
GENERAL. Statements as to the tax status of each investor's dividends and
distributions are mailed annually. Each investor will also receive, if
applicable, various written notices after the close of the Fund's prior taxable
year with respect to certain dividends and distributions which were received
from the Fund during the Fund's prior taxable year. Investors should consult
their own
17
<PAGE>20
tax advisers with specific reference to their own tax situations, including
their state and local tax liabilities. Individuals investing in the Fund through
Institutions should consult those Institutions or their own tax advisers
regarding the tax consequences of investing in the Fund.
NET ASSET VALUE
The Fund's net asset value per share is calculated as of the close of
regular trading on the NYSE (currently 4:00 p.m., Eastern time) on each business
day, Monday through Friday, except on days when the NYSE is closed. The NYSE is
currently scheduled to be closed on New Year's Day, Washington's Birthday, Good
Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day
and Christmas Day, and on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday, respectively. The net asset value
per share of the Fund generally changes each day.
The net asset value per Advisor Share of the Fund is computed by adding the
Advisor Shares' pro rata share of the value of the Fund's assets, deducting the
Advisor Shares' pro rata share of the Fund's liabilities and the liabilities
specifically allocated to Advisor Shares and then dividing the result by the
total number of outstanding Advisor Shares.
Securities listed on a U.S. securities exchange (including securities
traded through the NASDAQ National Market System) or foreign securities exchange
or traded in an over-the-counter market will be valued at the most recent sale
price when the valuation is made. Debt obligations that mature in 60 days or
less from the valuation date are valued on the basis of amortized cost, unless
the Board determines that using this valuation method would not reflect the
investments' value. Securities, options and futures contracts for which market
quotations are not readily available and other assets will be valued at their
fair value as determined in good faith pursuant to consistently applied
procedures established by the Board. Further information regarding valuation
policies is contained in the Statement of Additional Information.
PERFORMANCE
The Fund quotes the performance of Advisor Shares separately from Common
Shares. The net asset value of the Advisor Shares is listed in The Wall Street
Journal each business day under the heading Warburg Pincus Advisor Funds. From
time to time, the Fund may advertise the average annual total return of Advisor
Shares over various periods of time. These total return figures show the average
percentage change in value of an investment in the Advisor Shares from the
beginning of the measuring period to the end of the measuring period. The
figures reflect changes in the price of the Advisor Shares assuming that any
income dividends and/or capital gain distributions made by the Fund during the
period were reinvested in Advisor Shares. Total return will be shown for recent
one-, five- and ten-year periods, and may be shown for other periods as well
(such as on a year-by-year, quarterly or current year-to-date basis).
When considering average total return figures for periods longer than one
year, it is important to note that the Fund's annual total return for one year
in the period might have been greater or less than the average for the entire
period. When considering total return figures for periods shorter than one year,
investors should bear in mind that the Fund seeks long-term appreciation and
that such return may not be representative of the Fund's return over a longer
market cycle. The Fund may also advertise aggregate total return figures of
Advisor Shares for various periods, representing the cumulative change in value
of an investment in the Advisor Shares for the specific period (again reflecting
changes in share prices and assuming reinvestment of dividends and
distributions). Aggregate and average total returns may be shown by means of
schedules, charts or graphs, and may indicate various components of total return
(i.e., change in value of initial investment, income dividends and capital gain
distributions).
18
<PAGE>21
Investors should note that total return figures are based on historical
earnings and are not intended to indicate future performance. The Statement of
Additional Information describes the method used to determine the total return.
Current total return figures may be obtained by calling Warburg Pincus Advisor
Funds at (800) 888-6878.
In reports or other communications to investors or in advertising material,
the Fund may describe general economic and market conditions affecting the Fund.
The Fund may compare its performance with (i) that of other mutual funds as
listed in the rankings prepared by Lipper Analytical Services, Inc. or similar
investment services that monitor the performance of mutual funds or as set forth
in the publications listed below; (ii) the Morgan Stanley Capital International
Europe, Australia and Far East ('EAFE') Index; the Salomon Russell Global Equity
Index; the FT-Actuaries World Indices (jointly compiled by The Financial Times,
Ltd., Goldman, Sachs & Co. and NatWest Securities Ltd.); the S&P 500; the Nikkei
over-the-counter average; the JASDAQ Index; the Nikkei 225 and 300 Stock Indexes
and the Topix Index, all of which are unmanaged indexes of common stocks; or
(iii) other appropriate indexes of investment securities or with data developed
by Warburg derived from such indexes. The Fund may also include evaluations of
the Fund published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as The Wall Street Journal,
Investor's Daily, Money, Inc., Institutional Investor, Barron's, Fortune,
Forbes, Business Week, Mutual Fund Magazine, Morningstar, Inc. and Financial
Times.
In reports or other communications to investors or in advertising, the Fund
may also describe the general biography or work experience of the portfolio
managers of the Fund and may include quotations attributable to the portfolio
managers describing approaches taken in managing the Fund's investments,
research methodology underlying stock selection or the Fund's investment
objective. In addition, the Fund and its portfolio managers may render periodic
updates of Fund activity, which may include a discussion of significant
portfolio holdings and analysis of holdings by industry, country, credit quality
and other characteristics. The Fund may also discuss measures of risk, the
continuum of risk and return relating to different investments and the potential
impact of foreign stocks on a portfolio otherwise composed of domestic
securities. Morningstar, Inc. rates funds in broad categories based on
risk/reward analyses over various time periods. In addition, the Fund may from
time to time compare the expense ratio of Advisor Shares to that of investment
companies with similar objectives and policies, based on data generated by
Lipper Analytical Services, Inc. or similar investment services that monitor
mutual funds.
GENERAL INFORMATION
ORGANIZATION. The Fund was incorporated on October 10, 1995 under the laws of
the State of Maryland under the name 'Warburg, Pincus Japan Growth Fund, Inc.'
The Fund's charter authorizes the Board to issue three billion full and
fractional shares of capital stock, $.001 par value per share, of which one
billion shares are designated Advisor Shares. Under the Fund's charter
documents, the Board has the power to classify or reclassify any unissued shares
of the Fund into one or more additional classes by setting or changing in any
one or more respects their relative rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption. The Board may similarly classify or reclassify any class of its
shares into one or more series and, without shareholder approval, may increase
the number of authorized shares of the Fund.
MULTI-CLASS STRUCTURE. The Fund offers a separate class of shares, the Common
Shares, directly to individuals pursuant to a separate prospectus. Shares of
each class represent equal pro rata
19
<PAGE>22
interests in the Fund and accrue dividends and calculate net asset value and
performance quotations in the same manner, except that Advisor Shares bear fees
payable by the Fund to Institutions for services they provide to the beneficial
owners of such shares and enjoy certain exclusive voting rights on matters
relating to these fees. Because of the higher fees paid by the Advisor Shares,
the total return on such shares can be expected to be lower than the total
return on Common Shares. Investors may obtain information concerning the Common
Shares from their investment professional or by calling Counsellors Securities
at (800) 888-6878.
VOTING RIGHTS. Investors in the Fund are entitled to one vote for each full
share held and fractional votes for fractional shares held. Shareholders of the
Fund will vote in the aggregate except where otherwise required by law and
except that each class will vote separately on certain matters pertaining to its
distribution and shareholder servicing arrangements. There will normally be no
meetings of investors for the purpose of electing members of the Board unless
and until such time as less than a majority of the members holding office have
been elected by investors. Any Director of the Fund may be removed from office
upon the vote of shareholders holding at least a majority of the Fund's
outstanding shares, at a meeting called for that purpose. A meeting will be
called for the purpose of voting on the removal of a Board member at the written
request of holders of 10% of the outstanding shares of the Fund.
SHAREHOLDER COMMUNICATIONS. Each investor will receive a quarterly statement of
its account, as well as a statement of its account after any transaction that
affects its share balance or share registration (other than the reinvestment of
dividends or distributions). The Fund will also send to its investors a
semiannual report and an audited annual report, each of which includes a list of
the investment securities held by the Fund and a statement of the performance of
the Fund. Periodic listings of the investment securities held by the Fund may be
obtained by calling Warburg Pincus Advisor Funds at (800) 888-6878. Each
Institution that is the record owner of Advisor Shares on behalf of its
customers will send a statement to those customers periodically showing their
indirect interest in Advisor Shares, as well as providing other information
about the Fund. See 'Shareholder Servicing.'
The common share prospectuses of certain other Warburg Pincus Funds are
combined with the Fund's Common Share Prospectus. Each fund offers only its own
shares, yet it is possible that the Fund may become liable for a misstatement,
inaccuracy or omission in that prospectus with regard to another fund.
SHAREHOLDER SERVICING
The Fund is authorized to offer Advisor Shares exclusively through
Institutions whose clients or customers (or participants in the case of
retirement plans) ('Customers') are owners of Advisor Shares. Either those
Institutions or companies providing certain services to Customers (together,
'Service Organizations') will enter into agreements ('Agreements') with the Fund
and/or Counsellors Securities pursuant to a Distribution Plan as described
below. Such entities may provide certain distribution, shareholder servicing,
administrative and/or accounting services for its Customers. Distribution
services would be marketing or other services in connection with the promotion
and sale of Advisor Shares. Shareholder services that may be provided include
responding to Customer inquiries, providing information on Customer investments
and providing other shareholder liaison services. Administrative and accounting
services related to the sale of Advisor Shares may include (i) aggregating and
processing purchase and redemption requests from Customers and placing net
purchase and redemption orders with the Fund's transfer agent, (ii) processing
dividend payments from the Fund on behalf of Customers and (iii) providing
sub-accounting related to the sale of Advisor Shares beneficially owned by
Customers or the information to the Fund necessary for sub-accounting. The Board
has approved a Distribution Plan (the 'Plan') pursu-
20
<PAGE>23
ant to Rule 12b-1 under the 1940 Act under which each participating Service
Organization will be paid, out of the assets of the Fund (either directly or by
Counsellors Securities on behalf of the Fund), a negotiated fee on an annual
basis not to exceed .75% (up to a .25% annual service fee and a .50% annual
distribution fee) of the value of the average daily net assets of its Customers
invested in Advisor Shares. The current 12b-1 fee is .50% per annum. The Board
evaluates the appropriateness of the Plan on a continuing basis and in doing so
considers all relevant factors.
Warburg, Counsellors Securities and Counsellors Service or any of their
affiliates may, from time to time, at their own expense, provide compensation to
Service Organizations. To the extent they do so, such compensation does not
represent an additional expense to the Fund or its shareholders. In addition,
Warburg, Counsellors Securities or any of their affiliates may, from
time to time, at their own expense, pay certain Fund transfer agent fees and
expenses related to accounts of Customers. A Service Organization may use a
portion of the fees paid pursuant to the Plan to compensate the Fund's custodian
or transfer agent for costs related to accounts of Customers.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE FUND'S
STATEMENT OF ADDITIONAL INFORMATION OR THE FUND'S OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF SHARES OF THE FUND, AND IF GIVEN OR MADE, SUCH
OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF THE
ADVISOR SHARES IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER MAY
NOT LAWFULLY BE MADE.
21
<PAGE>24
ADJPG-1-1295
Warburg Pincus Advisor Fund
Counsellors Securities Inc., distributor
Table of Contents
<TABLE>
<S> <C>
1 THE FUND'S EXPENSES
3 FINANCIAL HIGHLIGHTS
4 INVESTMENT OBJECTIVE AND POLICIES
4 PORTFOLIO INVESTMENTS
6 RISK FACTORS AND SPECIAL CONSIDERATIONS
6 PORTFOLIO TRANSACTIONS AND TURNOVER RATE
6 CERTAIN INVESTMENT STRATEGIES
11 INVESTMENT GUIDELINES
11 MANAGEMENT OF THE FUND
13 HOW TO PURCHASE SHARES
14 HOW TO REDEEM AND EXCHANGE SHARES
15 DIVIDENDS, DISTRIBUTIONS AND TAXES
16 NET ASSET VALUE
17 PERFORMANCE
18 GENERAL INFORMATION
19 SHAREHOLDER SERVICING
</TABLE>
[LOGO]
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as `D'
<PAGE>25
Rule 497(c)
Securities Act File No. 33-63655
Investment Company Act File No. 811-07371
STATEMENT OF ADDITIONAL INFORMATION
December 29, 1995
________________________
WARBURG PINCUS JAPAN GROWTH FUND
P.O Box 9030, Boston, Massachusetts 02205-9030
For information, call (800) 888-6878
________________________
Contents
Page
Investment Objective . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Japan and Its Securities Markets . . . . . . . . . . . . . . . . . . . . 29
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . 40
Additional Purchase and Redemption Information . . . . . . . . . . . . . 47
Exchange Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Additional Information Concerning Taxes . . . . . . . . . . . . . . . . . 48
Determination of Performance . . . . . . . . . . . . . . . . . . . . . . 51
Accountants and Counsel . . . . . . . . . . . . . . . . . . . . . . . . . 54
Financial Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Appendix - Description of Ratings . . . . . . . . . . . . . . . . . . . . A-1
Report of Coopers & Lybrand L.L.P.,
Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . A-5
This Statement of Additional Information is meant to be read in
conjunction with the combined Prospectus for the Common Shares of Warburg
Pincus Japan Growth Fund (the "Fund"), Warburg Pincus Emerging Markets Fund,
Warburg Pincus International Equity Fund and Warburg Pincus Japan OTC Fund and
with the Prospectus for the Advisor Shares of the Fund, each dated December
29, 1995, as amended or supplemented from time to time, and is incorporated by
reference in its entirety into those Prospectuses. Because this Statement of
Additional Information is not itself a prospectus, no investment in shares of
the Fund should be made solely upon the information contained herein. Copies
of the Fund's Prospectuses and information regarding the Fund's current
performance may be obtained by calling the Fund at (800) 927-2874.
Information regarding the status of shareholder accounts may be obtained by
calling the Fund at (800) 888-6878 or by writing to the Fund, P.O. Box 9030,
Boston, Massachusetts 02205-9030.
<PAGE>26
INVESTMENT OBJECTIVE
The investment objective of the Fund is long-term growth of capital.
INVESTMENT POLICIES
The following policies supplement the descriptions of the Fund's
investment objective and policies in the Prospectuses.
As described in the Prospectuses, the Fund will maintain at least
65% of its total assets in equity securities of Japanese issuers. In
addition, the Fund may invest up to 35% of its total assets in securities of
other Asian issuers. Asian issuers are (i) companies (A) organized under the
laws of an Asian country or its predecessors, or (B) whose principal business
activities are conducted in one or more Asian countries, and which derive at
least 50% of their revenues or profits from goods produced or sold,
investments made, or services performed in one or more Asian countries, or
have at least 50% of their assets in one or more such countries, or (C) which
have issued securities which are traded principally in an Asian country, and
(ii) governments, governmental entities or political subdivisions of Asian
countries. Determinations as to the eligibility of issuers under the
foregoing definition will be made by the investment advisers based on publicly
available information and inquiries made to the companies. The Fund considers
Asia to be comprised of the contiguous eastern Eurasian land mass and adjacent
islands, including the countries of Taiwan, Korea, Indonesia, China, Hong
Kong, Turkey, India, Malaysia, Pakistan, the Philippines, Sri Lanka, Singapore
and Thailand. For purposes of applying the foregoing limitations, if a
company meets the definition of an Asian issuer as a result of relationships
with respect to more than one Asian country, the Fund may consider the company
to be associated with any of such countries. Due to the rapidly evolving
nature of Asian markets, the Fund reserves the ability to consider additional
countries to be included in Asia if market conditions should develop so as to
warrant such a change in investment policy.
Options, Futures and Currency Exchange Transactions
Securities Options. The Fund may write covered put and call options
on stock and debt securities and may purchase such options that are traded on
foreign and U.S. exchanges, as well as over-the-counter ("OTC").
The Fund realizes fees (referred to as "premiums") for granting the
rights evidenced by the options it has written. A put option embodies the
right of its purchaser to compel the writer of the option to purchase from the
option holder an underlying security at a specified price for a specified time
period or at a specified time. In contrast, a call option embodies the right
of its purchaser to compel the writer of the option to sell to the option
holder an underlying security at a specified price for a specified time period
or at a specified time.
<PAGE>27
The principal reason for writing covered options on a security is to
attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. In return for a premium, the Fund
as the writer of a covered call option forfeits the right to any appreciation
in the value of the underlying security above the strike price for the life of
the option (or until a closing purchase transaction can be effected).
Nevertheless, the Fund as a put or call writer retains the risk of a decline
in the price of the underlying security. The size of the premiums that the
Fund may receive may be adversely affected as new or existing institutions,
including other investment companies, engage in or increase their
option-writing activities.
If security prices rise, a put writer would generally expect to
profit, although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that the
writer will also profit, because it should be able to close out the option at
a lower price. If security prices fall, the put writer would expect to suffer
a loss. This loss should be less than the loss from purchasing the underlying
instrument directly, however, because the premium received for writing the
option should mitigate the effects of the decline.
In the case of options written by the Fund that are deemed covered
by virtue of the Fund's holding convertible or exchangeable preferred stock or
debt securities, the time required to convert or exchange and obtain physical
delivery of the underlying common stock with respect to which the Fund has
written options may exceed the time within which the Fund must make delivery
in accordance with an exercise notice. In these instances, the Fund may
purchase or temporarily borrow the underlying securities for purposes of
physical delivery. By so doing, the Fund will not bear any market risk, since
the Fund will have the absolute right to receive from the issuer of the
underlying security an equal number of shares to replace the borrowed
securities, but the Fund may incur additional transaction costs or interest
expenses in connection with any such purchase or borrowing.
Additional risks exist with respect to certain of the securities for
which the Fund may write covered call options. For example, if the Fund
writes covered call options on mortgage-backed securities, the mortgage-backed
securities that it holds as cover may, because of scheduled amortization or
unscheduled prepayments, cease to be sufficient cover. If this occurs, the
Fund will compensate for the decline in the value of the cover by purchasing
an appropriate additional amount of mortgage-backed securities.
Options written by the Fund will normally have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. The Fund may write (i) in-the-money call
options when Warburg, Pincus Counsellors, Inc., the Fund's investment adviser
("Warburg"), expects that the price of the underlying security will remain
flat or decline moderately during the option period, (ii) at-the-money call
options when Warburg expects
<PAGE>28
that the price of the underlying security will remain flat or advance
moderately during the option period and (iii) out-of-the-money call options
when Warburg expects that the premiums received from writing the call option
plus the appreciation in market price of the underlying security up to the
exercise price will be greater than the appreciation in the price of the
underlying security alone. In any of the preceding situations, if the market
price of the underlying security declines and the security is sold at this
lower price, the amount of any realized loss will be offset wholly or in part
by the premium received. Out-of-the-money, at-the-money and in-the-money put
options (the reverse of call options as to the relation of exercise price to
market price) may be used in the same market environments that such call
options are used in equivalent transactions. To secure its obligation to
deliver the underlying security when it writes a call option, the Fund will be
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the Clearing Corporation and of the securities
exchange on which the option is written.
Prior to their expirations, put and call options may be sold in
closing sale or purchase transactions (sales or purchases by the Fund prior to
the exercise of options that it has purchased or written, respectively, of
options of the same series) in which the Fund may realize a profit or loss
from the sale. An option position may be closed out only where there exists a
secondary market for an option of the same series on a recognized securities
exchange or in the over-the-counter market. When the Fund has purchased an
option and engages in a closing sale transaction, whether the Fund realizes a
profit or loss will depend upon whether the amount received in the closing
sale transaction is more or less than the premium the Fund initially paid for
the original option plus the related transaction costs. Similarly, in cases
where the Fund has written an option, it will realize a profit if the cost of
the closing purchase transaction is less than the premium received upon
writing the original option and will incur a loss if the cost of the closing
purchase transaction exceeds the premium received upon writing the original
option. The Fund may engage in a closing purchase transaction to realize a
profit, to prevent an underlying security with respect to which it has written
an option from being called or put or, in the case of a call option, to
unfreeze an underlying security (thereby permitting its sale or the writing of
a new option on the security prior to the outstanding option's expiration).
The obligation of the Fund under an option it has written would be terminated
by a closing purchase transaction, but the Fund would not be deemed to own an
option as a result of the transaction. So long as the obligation of the Fund
as the writer of an option continues, the Fund may be assigned an exercise
notice by the broker-dealer through which the option was sold, requiring the
Fund to deliver the underlying security against payment of the exercise price.
This obligation terminates when the option expires or the Fund effects a
closing purchase transaction. The Fund can no longer effect a closing
purchase transaction with respect to an option once it has been assigned an
exercise notice.
There is no assurance that sufficient trading interest will exist to
create a liquid secondary market on a securities exchange for any particular
option or at any particular time, and for some options no such secondary
market may exist. A liquid secondary market in an option may cease to exist
for a variety of reasons. In the past, for example, higher than
<PAGE>29
anticipated trading activity or order flow or other unforeseen events have at
times rendered certain of the facilities of the Options Clearing Corporation
(the "Clearing Corporation") and various securities exchanges inadequate and
resulted in the institution of special procedures, such as trading rotations,
restrictions on certain types of orders or trading halts or suspensions in one
or more options. There can be no assurance that similar events, or events
that may otherwise interfere with the timely execution of customers' orders,
will not recur. In such event, it might not be possible to effect closing
transactions in particular options. Moreover, the Fund's ability to terminate
options positions established in the over-the-counter market may be more
limited than for exchange-traded options and may also involve the risk that
securities dealers participating in over-the-counter transactions would fail
to meet their obligations to the Fund. The Fund, however, intends to purchase
over-the-counter options only from dealers whose debt securities, as
determined by Warburg, are considered to be investment grade. If, as a
covered call option writer, the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. In either case, the Fund would continue to be at market risk on the
security and could face higher transaction costs, including brokerage
commissions.
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class which may be held
or written, or exercised within certain time periods by an investor or group
of investors acting in concert (regardless of whether the options are written
on the same or different securities exchanges or are held, written or
exercised in one or more accounts or through one or more brokers). It is
possible that the Fund and other clients of Warburg and certain of its
affiliates may be considered to be such a group. A securities exchange may
order the liquidation of positions found to be in violation of these limits
and it may impose certain other sanctions. These limits may restrict the
number of options the Fund will be able to purchase on a particular security.
Stock Index Options. The Fund may purchase and write
exchange-listed and OTC put and call options on stock indexes. A stock index
measures the movement of a certain group of stocks by assigning relative
values to the common stocks included in the index, fluctuating with changes in
the market values of the stocks included in the index. Some stock index
options are based on a broad market index, such as the NYSE Composite Index,
or a narrower market index such as the Standard & Poor's 100. Indexes may
also be based on a particular industry or market segment. Examples of stock
index derivatives which the Fund may utilize are the Nikkei 225 Index, the
Nikkei 300 Index, the OTC (JASDAQ) Index and the Topix Index.
Options on stock indexes are similar to options on stock except that
(i) the expiration cycles of stock index options are monthly, while those of
stock options are currently quarterly, and (ii) the delivery requirements are
different. Instead of giving the right to take or make delivery of stock at a
specified price, an option on a stock index gives the holder the right to
receive a cash "exercise settlement amount" equal to (a) the amount, if any,
by which the fixed exercise price of the option exceeds (in the case of a put)
or is less
<PAGE>30
than (in the case of a call) the closing value of the underlying index on the
date of exercise, multiplied by (b) a fixed "index multiplier." Receipt of
this cash amount will depend upon the closing level of the stock index upon
which the option is based being greater than, in the case of a call, or less
than, in the case of a put, the exercise price of the index and the exercise
price of the option times a specified multiple. The writer of the option is
obligated, in return for the premium received, to make delivery of this
amount. Stock index options may be offset by entering into closing
transactions as described above for securities options.
OTC Options. The Fund may purchase OTC or dealer options or sell
covered OTC options. Unlike exchange-listed options where an intermediary or
clearing corporation, such as the Clearing Corporation, assures that all
transactions in such options are properly executed, the responsibility for
performing all transactions with respect to OTC options rests solely with the
writer and the holder of those options. A listed call option writer, for
example, is obligated to deliver the underlying stock to the clearing
organization if the option is exercised, and the clearing organization is then
obligated to pay the writer the exercise price of the option. If the Fund
were to purchase a dealer option, however, it would rely on the dealer from
whom it purchased the option to perform if the option were exercised. If the
dealer fails to honor the exercise of the option by the Fund, the Fund would
lose the premium it paid for the option and the expected benefit of the
transaction.
Listed options generally have a continuous liquid market while
dealer options have none. Consequently, the Fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when the Fund writes a
dealer option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the
dealer to which the Fund originally wrote the option. Although the Fund will
seek to enter into dealer options only with dealers who will agree to and that
are expected to be capable of entering into closing transactions with the
Fund, there can be no assurance that the Fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. The
inability to enter into a closing transaction may result in material losses to
the Fund. Until the Fund, as a covered OTC call option writer, is able to
effect a closing purchase transaction, it will not be able to liquidate
securities (or other assets) used to cover the written option until the option
expires or is exercised. This requirement may impair the Fund's ability to
sell portfolio securities or, with respect to currency options, currencies at
a time when such sale might be advantageous. In the event of insolvency of
the other party, the Fund may be unable to liquidate a dealer option.
Futures Activities. The Fund may enter into foreign currency,
interest rate and stock index futures contracts and purchase and write (sell)
related options traded on exchanges designated by the Commodity Futures
Trading Commission (the "CFTC") or consistent with CFTC regulations on foreign
exchanges. These transactions may be entered into for "bona fide hedging"
purposes as defined in CFTC regulations and other permissible purposes
including hedging against changes in the value of portfolio securities due to
<PAGE>31
anticipated changes in currency values, interest rates and/or market
conditions and increasing return.
The Fund will not enter into futures contracts and related options
for which the aggregate initial margin and premiums (discussed below) required
to establish positions other than those considered to be "bona fide hedging"
by the CFTC exceed 5% of the Fund's net asset value after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into. The Fund reserves the right to engage in transactions involving futures
contracts and options on futures contracts to the extent allowed by CFTC
regulations in effect from time to time and in accordance with the Fund's
policies. There is no overall limit on the percentage of Fund assets that may
be at risk with respect to futures activities. The ability of the Fund to
trade in futures contracts and options on futures contracts may be limited by
the requirements of the Internal Revenue Code of 1986, as amended (the
"Code"), applicable to a regulated investment company.
Futures Contracts. A foreign currency futures contract provides for
the future sale by one party and the purchase by the other party of a certain
amount of a specified non-U.S. currency at a specified price, date, time and
place. An interest rate futures contract provides for the future sale by one
party and the purchase by the other party of a certain amount of a specific
interest rate sensitive financial instrument (debt security) at a specified
price, date, time and place. Stock indexes are capitalization weighted
indexes which reflect the market value of the stock listed on the indexes. A
stock index futures contract is an agreement to be settled by delivery of an
amount of cash equal to a specified multiplier times the difference between
the value of the index at the close of the last trading day on the contract
and the price at which the agreement is made.
No consideration is paid or received by the Fund upon entering into
a futures contract. Instead, the Fund is required to deposit in a segregated
account with its custodian an amount of cash or cash equivalents, such as U.S.
government securities or other liquid high-grade debt obligations, equal to
approximately 1% to 10% of the contract amount (this amount is subject to
change by the exchange on which the contract is traded, and brokers may charge
a higher amount). This amount is known as "initial margin" and is in the
nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. The broker will have access to
amounts in the margin account if the Fund fails to meet its contractual
obligations. Subsequent payments, known as "variation margin," to and from
the broker, will be made daily as the currency, financial instrument or stock
index underlying the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"marking-to-market." The Fund will also incur brokerage costs in connection
with entering into futures transactions.
At any time prior to the expiration of a futures contract, the Fund
may elect to close the position by taking an opposite position, which will
operate to terminate the Fund's existing position in the contract. Positions
in futures contracts and options on futures
<PAGE>32
contracts (described below) may be closed out only on the exchange on which
they were entered into (or through a linked exchange). No secondary market
for such contracts exists. Although the Fund intends to enter into futures
contracts only if there is an active market for such contracts, there is no
assurance that an active market will exist at any particular time. Most
futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit or trading may be suspended for specified periods during the
day. It is possible that futures contract prices could move to the daily
limit for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions at an advantageous price
and subjecting the Fund to substantial losses. In such event, and in the
event of adverse price movements, the Fund would be required to make daily
cash payments of variation margin. In such situations, if the fund had
insufficient cash, it might have to sell securities to meet daily variation
margin requirements at a time when it would be disadvantageous to do so. In
addition, if the transaction is entered into for hedging purposes, in such
circumstances the Fund may realize a loss on a futures contract or option that
is not offset by an increase in the value of the hedged position. Losses
incurred in futures transactions and the costs of these transactions will
affect the Fund's performance.
Options on Futures Contracts. The Fund may purchase and write put
and call options on foreign currency, interest rate and stock index futures
contracts and may enter into closing transactions with respect to such options
to terminate existing positions. There is no guarantee that such closing
transactions can be effected; the ability to establish and close out positions
on such options will be subject to the existence of a liquid market.
An option on a currency, interest rate or stock index futures
contract, as contrasted with the direct investment in such a contract, gives
the purchaser the right, in return for the premium paid, to assume a position
in a futures contract at a specified exercise price at any time prior to the
expiration date of the option. The writer of the option is required upon
exercise to assume an offsetting futures position (a short position if the
option is a call and a long position if the option is a put). Upon exercise
of an option, the delivery of the futures position by the writer of the option
to the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
futures contract. The potential loss related to the purchase of an option on
futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the point of
sale, there are no daily cash payments by the purchaser to reflect changes in
the value of the underlying contract; however, the value of the option does
change daily and that change would be reflected in the net asset value of the
Fund.
Currency Exchange Transactions. The value in U.S. dollars of the
assets of the Fund that are invested in foreign securities may be affected
favorably or unfavorably by changes in exchange control regulations, and the
Fund may incur costs in connection with
<PAGE>33
conversion between various currencies. Currency exchange transactions may be
from any non-U.S. currency into U.S. dollars or into other appropriate
currencies. The Fund will conduct its currency exchange transactions (i) on a
spot (i.e., cash) basis at the rate prevailing in the currency exchange
market, (ii) through entering into futures contracts or options on such
contracts (as described above), (iii) through entering into forward contracts
to purchase or sell currency or (iv) by purchasing exchange-traded currency
options.
Forward Currency Contracts. A forward currency contract involves
an obligation to purchase or sell a specific currency at a future date, which
may be any fixed number of days from the date of the contract as agreed upon
by the parties, at a price set at the time of the contract. These contracts
are entered into in the interbank market conducted directly between currency
traders (usually large commercial banks and brokers) and their customers.
Forward currency contracts are similar to currency futures contracts, except
that futures contracts are traded on commodities exchanges and are
standardized as to contract size and delivery date.
At or before the maturity of a forward contract, the Fund may either
sell a portfolio security and make delivery of the currency, or retain the
security and fully or partially offset its contractual obligation to deliver
the currency by negotiating with its trading partner to purchase a second,
offsetting contract. If the Fund retains the portfolio security and engages
in an offsetting transaction, the Fund, at the time of execution of the
offsetting transaction, will incur a gain or a loss to the extent that
movement has occurred in forward contract prices.
Currency Options. The Fund may purchase exchange-traded put and
call options on foreign currencies. Put options convey the right to sell the
underlying currency at a price which is anticipated to be higher than the spot
price of the currency at the time the option is exercised. Call options
convey the right to buy the underlying currency at a price which is expected
to be lower than the spot price of the currency at the time the option is
exercised.
Currency Hedging. The Fund's currency hedging will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward currency with respect
to specific receivables or payables of the Fund generally accruing in
connection with the purchase or sale of its portfolio securities. Position
hedging is the sale of forward currency with respect to portfolio security
positions. The Fund may not position hedge to an extent greater than the
aggregate market value (at the time of entering into the hedge) of the hedged
securities.
A decline in the U.S. dollar value of a foreign currency in which
the Fund's securities are denominated will reduce the U.S. dollar value of the
securities, even if their value in the foreign currency remains constant. The
use of currency hedges does not eliminate fluctuations in the underlying
prices of the securities, but it does establish a rate of exchange that can be
achieved in the future. For example, in order to protect against
<PAGE>34
diminutions in the U.S. dollar value of securities it holds, the Fund may
purchase currency put options. If the value of the currency does decline, the
Fund will have the right to sell the currency for a fixed amount in dollars
and will thereby offset, in whole or in part, the adverse effect on the U.S.
dollar value of its securities that otherwise would have resulted.
Conversely, if a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby potentially
increasing the cost of the securities, the Fund may purchase call options on
the particular currency. The purchase of these options could offset, at least
partially, the effects of the adverse movements in exchange rates. The
benefit to the Fund derived from purchases of currency options, like the
benefit derived from other types of options, will be reduced by premiums and
other transaction costs. Because transactions in currency exchange are
generally conducted on a principal basis, no fees or commissions are generally
involved. Currency hedging involves some of the same risks and considerations
as other transactions with similar instruments. Although currency hedges
limit the risk of loss due to a decline in the value of a hedged currency, at
the same time, they also limit any potential gain that might result should the
value of the currency increase. If a devaluation is generally anticipated,
the Fund may not be able to contract to sell a currency at a price above the
devaluation level it anticipates.
While the values of currency futures and options on futures, forward
currency contracts and currency options may be expected to correlate with
exchange rates, they will not reflect other factors that may affect the value
of the Fund's investments and a currency hedge may not be entirely successful
in mitigating changes in the value of the Fund's investments denominated in
that currency. A currency hedge, for example, should protect a Yen-
denominated bond against a decline in the Yen, but will not protect the Fund
against a price decline if the issuer's creditworthiness deteriorates.
Hedging. In addition to entering into options, futures and currency
exchange transactions for other purposes, including generating current income
to offset expenses or increase return, the Fund may enter into these
transactions as hedges to reduce investment risk, generally by making an
investment expected to move in the opposite direction of a portfolio position.
A hedge is designed to offset a loss in a portfolio position with a gain in
the hedged position; at the same time, however, a properly correlated hedge
will result in a gain in the portfolio position being offset by a loss in the
hedged position. As a result, the use of options, futures, contracts and
currency exchange transactions for hedging purposes could limit any potential
gain from an increase in the value of the position hedged. In addition, the
movement in the portfolio position hedged may not be of the same magnitude as
movement in the hedge. With respect to futures contracts, since the value of
portfolio securities will far exceed the value of the futures contracts sold
by the Fund, an increase in the value of the futures contracts could only
mitigate, but not totally offset, the decline in the value of the Fund's
assets.
In hedging transactions based on an index, whether the Fund will
realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indexes, in an
<PAGE>35
industry or market segment, rather than movements in the price of a particular
stock. The risk of imperfect correlation increases as the composition of the
Fund's portfolio varies from the composition of the index. In an effort to
compensate for imperfect correlation of relative movements in the hedged
position and the hedge, the Fund's hedge positions may be in a greater or
lesser dollar amount than the dollar amount of the hedged position. Such
"over hedging" or "under hedging" may adversely affect the Fund's net
investment results if market movements are not as anticipated when the hedge
is established. Stock index futures transactions may be subject to additional
correlation risks. First, all participants in the futures market are subject
to margin deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors may close futures contracts
through offsetting transactions which would distort the normal relationship
between the stock index and futures markets. Secondly, from the point of view
of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market also may cause
temporary price distortions. Because of the possibility of price distortions
in the futures market and the imperfect correlation between movements in the
stock index and movements in the price of stock index futures, a correct
forecast of general market trends by Warburg still may not result in a
successful hedging transaction.
The Fund will engage in hedging transactions only when deemed
advisable by Warburg, and successful use by the Fund of hedging transactions
will be subject to Warburg's ability to predict trends in currency, interest
rate or securities markets, as the case may be, and to correctly predict
movements in the directions of the hedge and the hedged position and the
correlation between them, which predictions could prove to be inaccurate.
This requires different skills and techniques than predicting changes in the
price of individual securities, and there can be no assurance that the use of
these strategies will be successful. Even a well-conceived hedge may be
unsuccessful to some degree because of unexpected market behavior or trends.
Losses incurred in hedging transactions and the costs of these transactions
will affect the Fund's performance.
Asset Coverage for Forward Contracts, Options, Futures and Options
on Futures. As described in the Prospectuses, the Fund will comply with
guidelines established by the SEC with respect to coverage of forward currency
contracts; options written by the Fund on currencies, securities and indexes;
and currency, interest rate and index futures contracts and options on these
futures contracts. These guidelines may, in certain instances, require
segregation by the Fund of cash or liquid high-grade debt securities or other
securities that are acceptable as collateral to the appropriate regulatory
authority.
For example, a call option written by the Fund on securities may
require the Fund to hold the securities subject to the call (or securities
convertible into the securities without additional consideration) or to
segregate assets (as described above) sufficient to purchase and deliver the
securities if the call is exercised. A call option written by the Fund on an
index may require the Fund to own portfolio securities that correlate with the
index or to segregate assets (as described above) equal to the excess of the
index value over the
<PAGE>36
exercise price on a current basis. A put option written by the Fund may
require the Fund to segregate assets (as described above) equal to the
exercise price. The Fund could purchase a put option if the strike price of
that option is the same or higher than the strike price of a put option sold
by the Fund. If the Fund holds a futures or forward contract, the Fund could
purchase a put option on the same futures or forward contract with a strike
price as high or higher than the price of the contract held. The Fund may
enter into fully or partially offsetting transactions so that its net
position, coupled with any segregated assets (equal to any remaining
obligation), equals its net obligation. Asset coverage may be achieved by
other means when consistent with applicable regulatory policies.
Additional Information on Other Investment Practices
Foreign Investments. Investors should recognize that investing in
foreign companies involves certain risks, including those discussed below,
which are not typically associated with investing in U.S. issuers. See "Japan
and Its Securities Markets" for a discussion of factors relating to Japanese
investments specifically.
Foreign Currency Exchange. Since the Fund will be investing in
securities denominated in Japanese yen and currencies of other Asian
countries, and since the Fund may temporarily hold funds in bank deposits or
other money market investments denominated
in foreign currencies, the Fund may be affected favorably or unfavorably by
exchange control regulations or changes in the exchange rate between such
currencies and the dollar. A change in the value of a foreign currency
relative to the U.S. dollar will result in a corresponding change in the
dollar value of the Fund assets denominated in that foreign currency. Changes
in foreign currency exchange rates may also affect the value of dividends and
interest earned, gains and losses realized on the sale of securities and net
investment income and gains, if any, to be distributed to shareholders by the
Fund. The rate of exchange between the U.S. dollar and other currencies is
determined by the forces of supply and demand in the foreign exchange markets.
Changes in the exchange rate may result over time from the interaction of many
factors directly or indirectly affecting economic and political conditions in
the United States and a particular foreign country, including economic and
political developments in other countries. Of particular importance are rates
of inflation, interest rate levels, the balance of payments and the extent of
government surpluses or deficits in the United States and the particular
foreign country, all of which are in turn sensitive to the monetary, fiscal
and trade policies pursued by the governments of the United States and foreign
countries important to international trade and finance. Governmental
intervention may also play a significant role. National governments rarely
voluntarily allow their currencies to float freely in response to economic
forces. Sovereign governments use a variety of techniques, such as
intervention by a country's central bank or imposition of regulatory controls
or taxes, to affect the exchange rates of their currencies. See "Japan and
Its Securities Markets -- Economic Background -- Currency Fluctuation" below.
The Fund may use hedging techniques with the objective of protecting against
loss through the fluctuation of the value of the yen against the U.S. dollar,
particularly the forward market in
<PAGE>37
foreign exchange, currency options and currency futures. See "Currency
Transactions" and "Futures Activities" above.
Information. The majority of the securities held by the Fund will
not be registered with, nor the issuers thereof be subject to reporting
requirements of, the U.S. Securities and Exchange Commission (the "SEC").
Accordingly, there may be less publicly available information about the
securities and about the foreign company or government issuing them than is
available about a domestic company or government entity. Foreign companies
are generally not subject to uniform financial reporting standards, practices
and requirements comparable to those applicable to U.S. companies.
Political Instability. With respect to some foreign countries,
there is the possibility of expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the Fund, political or
social instability, or domestic developments which could affect U.S.
investments in those and neighboring countries. For example, tensions in Asia
have increased following the announcement in March 1993 by The Democratic
People's Republic of Korea ("North Korea") of its intention to withdraw from
participation in the Nuclear Non-Proliferation Treaty and its refusal to allow
the International Atomic Energy Agency to conduct full inspections of its
nuclear facilities. Military action involving North Korea or the economic
deterioration of North Korea could adversely affect the entire region and the
performance of the Fund.
Delays. Securities of some foreign companies are less liquid and
their prices are more volatile than securities of comparable U.S. companies.
Certain foreign countries are known to experience long delays between the
trade and settlement dates of securities purchased or sold. Due to the
increased exposure of the Fund to market and foreign exchange fluctuations
brought about by such delays, and due to the corresponding negative impact on
Fund liquidity, the Fund will avoid investing in countries which are known to
experience settlement delays which may expose the Fund to unreasonable risk of
loss.
Foreign Taxes and Increased Expenses. The operating expenses of the
Fund can be expected to be higher than that of an investment company investing
exclusively in U.S. securities, since the expenses of the Fund, such as
custodial costs, valuation costs and communication costs, as well as the rate
of the investment advisory fees, though similar to such expense of some other
international funds, are higher than those costs incurred by other investment
companies.
General. In general, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. The Fund may invest in
securities of foreign governments (or agencies or instrumentalities thereof),
and many, if not all, of the foregoing considerations apply to such
investments as well.
<PAGE>38
Foreign Debt Securities. The returns on foreign debt securities
reflect interest rates and other market conditions prevailing in those
countries and the effect of gains and losses in the denominated currencies
against the U.S. dollar, which have had a substantial impact on investment in
foreign fixed-income securities. The relative performance of various
countries' fixed-income markets historically has reflected wide variations
relating to the unique characteristics of each country's economy. Year-to-
year fluctuations in certain markets have been significant, and negative
returns have been experienced in various markets from time to time.
The foreign government securities in which the Fund may invest
generally consist of obligations issued or backed by national, state or
provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt
obligations of supranational entities, which include international
organizations designated or backed by governmental entities to promote
economic reconstruction or development, international banking institutions and
related government agencies. Examples include the International Bank for
Reconstruction and Development (the "World Bank"), the European Coal and Steel
Community, the Asian Development Bank and the InterAmerican Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt
securities of quasi-governmental agencies are issued by entities owned by
either a national, state or equivalent government or are obligations of a
political unit that is not backed by the national government's full faith and
credit and general taxing powers. An example of a multinational currency unit
is the European Currency Unit ("ECU"). An ECU represents specified amounts of
the currencies of certain member states of the European Economic Community.
The specific amounts of currencies comprising the ECU may be adjusted by the
Council of Ministers of the European Community to reflect changes in relative
values of the underlying currencies.
U.S. Government Securities. The Fund may invest in debt obligations
of varying maturities issued or guaranteed by the United States government,
its agencies or instrumentalities ("U.S. government securities"). Direct
obligations of the U.S. Treasury include a variety of securities that differ
in their interest rates, maturities and dates of issuance. U.S. government
securities also include securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Loan Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association ("GNMA"), General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home
Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit Banks,
Federal Land Banks, Federal National Mortgage Association ("FNMA"), Maritime
Administration, Tennessee Valley Authority, District of Columbia Armory Board
and Student Loan Marketing Association. The Fund may also invest in
instruments that are supported by the right of the issuer to borrow from the
U.S. Treasury and instruments that are supported by the credit of the
<PAGE>39
instrumentality. Because the U.S. government is not obligated by law to
provide support to an instrumentality it sponsors, the Fund will invest in
obligations issued by such an instrumentality only if Warburg determines that
the credit risk with respect to the instrumentality does not make its
securities unsuitable for investment by the Fund.
Below Investment Grade Securities. Although the Fund may invest
only in investment grade non-convertible debt securities (as described in the
Prospectuses), it may invest in below investment grade convertible debt and
preferred securities and it is not required to dispose of securities
downgraded below investment grade subsequent to acquisition by the Fund.
While the market values of medium- and lower-rated securities and unrated
securities of comparable quality tend to react less to fluctuations in
interest rate levels than do those of higher-rated securities, the market
values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
higher-quality securities. In addition, medium- and lower-rated securities
and comparable unrated securities generally present a higher degree of credit
risk. Issuers of medium- and lower-rated securities and unrated securities
are often highly leveraged and may not have more traditional methods of
financing available to them so that their ability to service their obligations
during an economic downturn or during sustained periods of rising interest
rates may be impaired. The risk of loss due to default by such issuers is
significantly greater because medium- and lower-rated securities and unrated
securities generally are unsecured and frequently are subordinated to the
prior payment of senior indebtedness.
The market for medium- and lower-rated and unrated securities is
relatively new and has not weathered a major economic recession. Any such
recession could disrupt severely the market for such securities and may
adversely affect the value of such securities and the ability of the issuers
of such securities to repay principal and pay interest thereon.
The Fund may have difficulty disposing of certain of these
securities because there may be a thin trading market. Because there is no
established retail secondary market for many of these securities, the Fund
anticipates that these securities could be sold only to a limited number of
dealers or institutional investors. To the extent a secondary trading market
for these securities does exist, it generally is not as liquid as the
secondary market for higher-rated securities. The lack of a liquid secondary
market, as well as adverse publicity and investor perception with respect to
these securities, may have an adverse impact on market price and the Fund's
ability to dispose of particular issues when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities also may make it more difficult for
the Fund to obtain accurate market quotations for purposes of valuing the Fund
and calculating its net asset value.
The market value of securities in medium- and lower-rated categories
is more volatile than that of higher quality securities. Factors adversely
impacting the market value of these securities will adversely impact the
Fund's net asset value. The Fund will rely on
<PAGE>40
the judgment, analysis and experience of Warburg in evaluating the
creditworthiness of an issuer. In this evaluation, Warburg will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. Normally, medium-
and lower-rated and comparable unrated securities are not intended for
short-term investment. The Fund may incur additional expenses to the extent
it is required to seek recovery upon a default in the payment of principal or
interest on its portfolio holdings of such securities. Recent adverse
publicity regarding lower-rated securities may have depressed the prices for
such securities to some extent. Whether investor perceptions will continue to
have a negative effect on the price of such securities is uncertain.
Mortgage-Backed Securities. The Fund may invest up to 5% of its net
assets in mortgage-backed securities, such as those issued by GNMA, FNMA,
FHLMC or certain foreign issuers. Mortgage-backed securities represent direct
or indirect participations in, or are secured by and payable from, mortgage
loans secured by real property. The mortgages backing these securities
include, among other mortgage instruments, conventional 30-year fixed-rate
mortgages, 15-year fixed-rate mortgages, graduated payment mortgages and
adjustable rate mortgages. The government or the issuing agency typically
guarantees the payment of interest and principal of these securities.
However, the guarantees do not extend to the securities' yield or value, which
are likely to vary inversely with fluctuations in interest rates, nor do the
guarantees extend to the yield or value of the Fund's shares. These
securities generally are "pass-through" instruments, through which the holders
receive a share of all interest and principal payments from the mortgages
underlying the securities, net of certain fees.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and
the associated average life assumption. The average life of pass-through
pools varies with the maturities of the underlying mortgage loans. A pool's
term may be shortened by unscheduled or early payments of principal on the
underlying mortgages. The occurrence of mortgage prepayments is affected by
various factors, including the level of interest rates, general economic
conditions, the location, scheduled maturity and age of the mortgage and other
social and demographic conditions. Because prepayment rates of individual
pools vary widely, it is not possible to predict accurately the average life
of a particular pool. For pools of fixed-rate 30-year mortgages, a common
industry practice in the U.S. has been to assume that prepayments will result
in a 12-year average life. At present, pools, particularly those with loans
with other maturities or different characteristics, are priced on an
assumption of average life determined for each pool. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening
the actual average life of a pool of mortgage-related securities. Conversely,
in periods of rising rates the rate of prepayment tends to decrease, thereby
lengthening the actual average life of the pool. However, these effects may
not be present, or may differ in degree, if the mortgage loans in the pools
have adjustable interest rates or other special payment terms, such as a
prepayment charge. Actual prepayment experience may cause the yield of
mortgage-backed securities to differ
<PAGE>41
from the assumed average life yield. Reinvestment of prepayments may occur at
higher or lower interest rates than the original investment, thus affecting
the Fund's yield.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to
the annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificate holders and to any guarantor, such as GNMA,
and due to any yield retained by the issuer. Actual yield to the holder may
vary from the coupon rate, even if adjustable, if the mortgage-backed
securities are purchased or traded in the secondary market at a premium or
discount. In addition, there is normally some delay between the time the
issuer receives mortgage payments from the servicer and the time the issuer
makes the payments on the mortgage-backed securities, and this delay reduces
the effective yield to the holder of such securities.
Asset-Backed Securities. The Fund may invest up to 5% of its net
assets in asset-backed securities, which represent participations in, or are
secured by and payable from, assets such as motor vehicle installment sales,
installment loan contracts, leases of various types of real and personal
property and receivables from revolving credit (credit card) agreements. Such
assets are securitized through the use of trusts and special purpose
corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution
unaffiliated with the trust or corporation.
Asset-backed securities present certain risks that are not presented
by other securities in which the Fund may invest. Automobile receivables
generally are secured by automobiles. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations.
If the servicer were to sell these obligations to another party, there is a
risk that the purchaser would acquire an interest superior to that of the
holders of the asset-backed securities. In addition, because of the large
number of vehicles involved in a typical issuance and technical requirements
under state laws, the trustee for the holders of the automobile receivables
may not have a proper security interest in the underlying automobiles.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Credit card receivables are generally unsecured, and the debtors are entitled
to the protection of a number of state and federal consumer credit laws, many
of which give such debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due. Because asset-backed
securities are relatively new, the market experience in these securities is
limited, and the market's ability to sustain liquidity through all phases of
the market cycle has not been tested.
Zero Coupon Securities. The Fund may invest in "zero coupon" U.S.
Treasury, foreign government and U.S. and foreign corporate debt securities,
which are bills, notes and bonds that have been stripped of their unmatured
interest coupons and custodial receipts or certificates of participation
representing interests in such stripped debt
<PAGE>42
obligations and coupons. The Fund currently anticipates that during the
coming year zero coupon securities will not exceed 5% of its net assets. A
zero coupon security pays no interest to its holder prior to maturity.
Accordingly, such securities usually trade at a deep discount from their face
or par value and will be subject to greater fluctuations of market value in
response to changing interest rates than debt obligations of comparable
maturities that make current distributions of interest. The Fund anticipates
that it will not normally hold zero coupon securities to maturity. Federal
tax law requires that a holder of a zero coupon security accrue a portion of
the discount at which the security was purchased as income each year, even
though the holder receives no interest payment on the security during the
year. Such accrued discount will be includible in determining the amount of
dividends the Fund must pay each year and, in order to generate cash necessary
to pay such dividends, the Fund may liquidate portfolio securities at a time
when it would not otherwise have done so.
Securities of Other Investment Companies. The Fund may invest in
securities of other investment companies to the extent permitted under the
Investment Company Act of 1940, as amended (the "1940 Act"). Presently, under
the 1940 Act, the Fund may hold securities of another investment company in
amounts which (i) do not exceed 3% of the total outstanding voting stock of
such company, (ii) do not exceed 5% of the value of the Fund's total assets
and (iii) when added to all other investment company securities held by the
Fund, do not exceed 10% of the value of the Fund's total assets.
Lending of Portfolio Securities. The Fund may lend portfolio
securities to brokers, dealers and other financial organizations that meet
capital and other credit requirements or other criteria established by the
Fund's Board of Directors (the "Board"). These loans, if and when made, may
not exceed 20% of the Fund's total assets taken at value. The Fund will not
lend portfolio securities to affiliates of Warburg unless it has applied for
and received specific authority to do so from the SEC. Loans of portfolio
securities will be collateralized by cash, letters of credit or U.S.
government securities, which are maintained at all times in an amount equal to
at least 100% of the current market value of the loaned securities. Any gain
or loss in the market price of the securities loaned that might occur during
the term of the loan would be for the account of the Fund. From time to time,
the Fund may return a part of the interest earned from the investment of
collateral received for securities loaned to the borrower and/or a third party
that is unaffiliated with the Fund and that is acting as a "finder."
By lending its securities, the Fund can increase its income by
continuing to receive interest and any dividends on the loaned securities as
well as by either investing the collateral received for securities loaned
in short-term instruments or obtaining yield in the form of interest paid by
the borrower when U.S. government securities are used as collateral. Although
the generation of income is not an investment objective of the Fund, income
received could be used to pay the Fund's expenses and would increase an
investor's total return. The Fund will adhere to the following conditions
whenever its portfolio securities are loaned: (i) the Fund must receive at
least 100% cash collateral or equivalent
<PAGE>43
securities of the type discussed in the preceding paragraph from the borrower;
(ii) the borrower must increase such collateral whenever the market value of
the securities rises above the level of such collateral; (iii) the Fund must
be able to terminate the loan at any time; (iv) the Fund must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions on the loaned securities and any increase in market value; (v)
the Fund may pay only reasonable custodian fees in connection with the loan;
and (vi) voting rights on the loaned securities may pass to the borrower,
provided, however, that if a material event adversely affecting the investment
occurs, the Board must terminate the loan and regain the right to vote the
securities. Loan agreements involve certain risks in the event of default or
insolvency of the other party including possible delays or restrictions upon
the Fund's ability to recover the loaned securities or dispose of the
collateral for the loan.
When-Issued Securities and Delayed-Delivery Transactions. The Fund
may utilize up to 20% of its total assets to purchase securities on a
"when-issued" basis or purchase or sell securities for delayed delivery (i.e.,
payment or delivery occur beyond the normal settlement date at a stated price
and yield). When-issued transactions normally settle within 30-45 days. The
Fund will enter into a when-issued transaction for the purpose of acquiring
portfolio securities and not for the purpose of leverage, but may sell the
securities before the settlement date if Warburg deems it advantageous to do
so. The payment obligation and the interest rate that will be received on
when-issued securities are fixed at the time the buyer enters into the com-
mitment. Due to fluctuations in the value of securities purchased or sold on
a when-issued or delayed-delivery basis, the yields obtained on such
securities may be higher or lower than the yields available in the market on
the dates when the investments are actually delivered to the buyers.
When the Fund agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash, U.S. government securities or
other liquid high-grade debt obligations or other securities that are
acceptable as collateral to the appropriate regulatory authority equal to the
amount of the commitment in a segregated account. Normally, the custodian
will set aside portfolio securities to satisfy a purchase commitment, and in
such a case the Fund may be required subsequently to place additional assets
in the segregated account in order to ensure that the value of the account
remains equal to the amount of the Fund's commitment. It may be expected that
the Fund's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets
aside cash. When the Fund engages in when-issued or delayed-delivery
transactions, it relies on the other party to consummate the trade. Failure
of the seller to do so may result in the Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
Short Sales "Against the Box". In a short sale, the Fund sells a
borrowed security and has a corresponding obligation to the lender to return
the identical security. The seller does not immediately deliver the
securities sold and is said to have a short position in those securities until
delivery occurs. If the Fund engages in a short sale, the collateral for the
short position will be maintained by the Fund's custodian or qualified sub-
custodian.
<PAGE>44
While the short sale is open, the Fund will maintain in a segregated account
an amount of securities equal in kind and amount to the securities sold short
or securities convertible into or exchangeable for such equivalent securities.
These securities constitute the Fund's long position.
The Fund does not intend to engage in short sales against the box
for investment purposes. The Fund may, however, make a short sale as a hedge,
when it believes that the price of a security may decline, causing a decline
in the value of a security owned by the Fund (or a security convertible or
exchangeable for such security), or when the Fund wants to sell the security
at an attractive current price, but also wishes to defer recognition of gain
or loss for U.S. federal income tax purposes and for purposes of satisfying
certain tests applicable to regulated investment companies under the Code. In
such case, any future losses in the Fund's long position should be offset by a
gain in the short position and, conversely, any gain in the long position
should be reduced by a loss in the short position. The extent to which such
gains or losses are reduced will depend upon the amount of the security sold
short relative to the amount the Fund owns. There will be certain additional
transactions costs associated with short sales against the box, but the Fund
will endeavor to offset these costs with the income from the investment of the
cash proceeds of short sales.
Securities of Smaller Companies and Emerging Growth Companies. The
Fund's investment in over-the-counter securities, including those traded
through JASDAQ or on the Frontier Market (as described in the Prospectuses),
involves considerations that are not applicable to investing in securities of
established, larger-capitalization issuers, including reduced and less
reliable information about issuers and markets, less stringent accounting
standards, illiquidity of securities and markets, higher brokerage commissions
and fees and greater market risk in general. In addition, securities of
emerging growth and smaller companies may involve greater risks since these
securities may have limited marketability and, thus, may be more volatile.
American, European and Continental Depositary Receipts. The assets
of the Fund may be invested in the securities of foreign issuers in the form
of American Depositary Receipts ("ADRs") and European Depositary Receipts
("EDRs"). These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are
receipts typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. EDRs,
which are sometimes referred to as Continental Depositary Receipts ("CDRs"),
are receipts issued in Europe typically by non-U.S. banks and trust companies
that evidence ownership of either foreign or domestic securities. Generally,
ADRs in registered form are designed for use in U.S. securities markets and
EDRs and CDRs in bearer form are designed for use in European securities
markets.
Warrants. The Fund may invest up to 5% of net assets in warrants
(valued at the lower of cost or market) (other than warrants acquired by the
Fund as part of a unit or
<PAGE>45
attached to securities at the time of purchase). Because a warrant does not
carry with it the right to dividends or voting rights with respect to the
securities which it entitles a holder to purchase, and because it does not
represent any rights in the assets of the issuer, warrants may be considered
more speculative than certain other types of investments. Also, the value of
a warrant does not necessarily change with the value of the underlying
securities and a warrant ceases to have value if it is not exercised prior to
its expiration date.
Non-Publicly Traded and Illiquid Securities. The Fund may not
invest more than 10% of its net assets in non-publicly traded and illiquid
securities, including securities that are illiquid by virtue of the absence of
a readily available market, repurchase agreements which have a maturity of
longer than seven days and time deposits maturing in more than seven days.
Securities that have legal or contractual restrictions on resale but have a
readily available market are not considered illiquid for purposes of this
limitation. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
Historically, illiquid securities have included securities subject
to contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which have
not been registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market. Mutual funds do not typically hold a significant
amount of these restricted or other illiquid securities because of the
potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on
resale to the general public or to certain institutions may not be indicative
of the liquidity of such investments.
Rule 144A Securities. Rule 144A under the Securities Act adopted by
the SEC allows for a broader institutional trading market for securities
otherwise subject to restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the
Securities Act for resales of certain securities to qualified institutional
buyers. Warburg anticipates that the market for certain restricted securities
such as
<PAGE>46
institutional commercial paper will expand further as a result of this
regulation and use of automated systems for the trading, clearance and
settlement of unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of Securities Dealers,
Inc.
An investment in Rule 144A Securities will be considered illiquid
and therefore subject to the Fund's limit on the purchase of illiquid
securities unless the Board or its delegates determines that the Rule 144A
Securities are liquid. In reaching liquidity decisions, the Board or its
delegates may consider, inter alia, the following factors: (i) the
unregistered nature of the security; (ii) the frequency of trades and quotes
for the security; (iii) the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; (iv) dealer
undertakings to make a market in the security and (v) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer).
Borrowing. The Fund may borrow up to 30% of its total assets for
temporary or emergency purposes, including to meet portfolio redemption
requests so as to permit the orderly disposition of portfolio securities or to
facilitate settlement transactions on portfolio securities. Investments
(including roll-overs) will not be made when borrowings exceed 5% of the
Fund's net assets. Although the principal of such borrowings will be fixed,
the Fund's assets may change in value during the time the borrowing is
outstanding. The Fund expects that some of its borrowings may be made on a
secured basis. In such situations, either the custodian will segregate the
pledged assets for the benefit of the lender or arrangements will be made with
a suitable subcustodian, which may include the lender.
Reverse Repurchase Agreements and Dollar Rolls. The Fund may enter
into reverse repurchase agreements with the same parties with whom it may
enter into repurchase agreements. Reverse repurchase agreements involve the
sale of securities held by the Fund pursuant to its agreement to repurchase
them at a mutually agreed upon date, price and rate of interest. At the time
the Fund enters into a reverse repurchase agreement, it will establish and
maintain a segregated account with an approved custodian containing cash or
liquid high-grade debt securities having a value not less than the repurchase
price (including accrued interest). The assets contained in the segregated
account will be marked-to-market daily and additional assets will be placed in
such account on any day in which the assets fall below the repurchase price
(plus accrued interest). The Fund's liquidity and ability to manage its
assets might be affected when it sets aside cash or portfolio securities to
cover such commitments. Reverse repurchase agreements involve the risk that
the market value of the securities retained in lieu of sale may decline below
the price of the securities the Fund has sold but is obligated to repurchase.
In the event the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, such buyer or its trustee or
receiver may receive an extension of time to determine whether to enforce a
Fund's obligation to repurchase the securities, and the Fund's use of the
proceeds of the reverse repurchase agreement may effectively be restricted
pending such decision.
<PAGE>47
The Fund also may enter into "dollar rolls," in which the Fund sells
fixed-income securities for delivery in the current month and simultaneously
contracts to repurchase similar but not identical (same type, coupon and
maturity) securities on a specified future date. During the roll period, the
Fund would forego principal and interest paid on such securities. The Fund
would be compensated by the difference between the current sales price and the
forward price for the future purchase, as well as by the interest earned on
the cash proceeds of the initial sale. At the time the Fund enters into a
dollar roll transaction, it will place in a segregated account maintained with
an approved custodian cash or other liquid high-grade debt obligations having
a value not less than the repurchase price (including accrued interest) and
will subsequently monitor the account to ensure that its value is maintained.
Reverse repurchase agreements are considered to be borrowings under the 1940
Act.
Other Investment Limitations
The investment limitations numbered 1 through 9 may not be changed
without the affirmative vote of the holders of a majority of the Fund's
outstanding shares. Such majority is defined as the lesser of (i) 67% or more
of the shares present at the meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy, or (ii)
more than 50% of the outstanding shares. Investment limitations 10 through 16
may be changed by a vote of the Board at any time.
The Fund may not:
1. Borrow money except that the Fund may (a) borrow from banks for
temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the
Fund's total assets at the time of such borrowing. For purposes of this
restriction, the entry into currency transactions, options, futures contracts,
options on futures contracts, forward commitment transactions and dollar roll
transactions that are not accounted for as financings (and the segregation of
assets in connection with any of the foregoing) shall not constitute
borrowing.
2. Purchase any securities which would cause 25% or more of the
value of the Fund's total assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of U.S.
government securities.
3. Make loans, except that the Fund may purchase or hold
fixed-income securities, including loan participations, assignments and
structured securities, lend portfolio securities and enter into repurchase
agreements.
<PAGE>48
4. Underwrite any securities issued by others except to the extent
that the investment in restricted securities and the sale of securities in
accordance with the Fund's investment objective, policies and limitations may
be deemed to be underwriting.
5. Purchase or sell real estate or invest in oil, gas or mineral
exploration or development programs, except that the Fund may invest in (a)
securities secured by real estate, mortgages or interests therein and (b)
securities of companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
6. Make short sales of securities or maintain a short position,
except that the Fund may maintain short positions in forward currency
contracts, options, futures contracts and options on futures contracts and
enter into short sales "against the box."
7. Purchase securities on margin, except that the Fund may obtain
any short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with transactions in currencies,
options, futures contracts or related options will not be deemed to be a
purchase of securities on margin.
8. Invest in commodities, except that the Fund may purchase and
sell futures contracts, including those relating to securities, currencies and
indices, and options on futures contracts, securities, currencies or indices,
and purchase and sell currencies on a forward commitment or delayed-delivery
basis.
9. Issue any senior security except as permitted in these
investment limitations.
10. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition, reorganization or offer
of exchange, or as otherwise permitted under the 1940 Act.
11. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and to the extent related to
the deposit of assets in escrow and in connection with the writing of covered
put and call options and purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures
contracts, and options on futures contracts.
12. Invest more than 10% of the Fund's net assets in securities
which may be illiquid because of legal or contractual restrictions on resale
or securities for which there are no readily available market quotations. For
purposes of this limitation, repurchase agreements with maturities greater
than seven days shall be considered illiquid securities.
<PAGE>49
13. Purchase any security if as a result the Fund would then have
more than 5% of its total assets invested in securities of companies
(including predecessors) that have been in continuous operation for fewer than
three years ("unseasoned companies").
14. Purchase or retain securities of any company if any of the
Fund's officers or Directors or any officer or director of Warburg
individually owns more than 1/2 of 1% of the outstanding securities of such
company and together they own beneficially more than 5% of the securities.
15. Invest in warrants (other than warrants acquired by the Fund as
part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would exceed
5% of the value of the Fund's net assets.
16. Make additional investments (including roll-overs) if the
Fund's borrowings exceed 5% of its net assets.
Certain non-fundamental investment limitations are currently
required by one or more states in which shares of the Fund are sold. These
may be more restrictive than the limitations set forth above. Should the Fund
determine that any such commitment is no longer in the best interest of the
Fund and its shareholders, the Fund will revoke the commitment by terminating
the sale of Fund shares in the state involved. In addition, the relevant
state may change or eliminate its policy regarding such investment
limitations.
If a percentage restriction (other than the percentage limitation
set forth in No. 1 above) is adhered to at the time of an investment, a later
increase or decrease in the percentage of assets resulting from a change in
the values of portfolio securities or in the amount of the Fund's assets will
not constitute a violation of such restriction.
Portfolio Valuation
The Prospectuses discuss the time at which the net asset value of
the Fund is determined for purposes of sales and redemptions. The following
is a description of the procedures used by the Fund in valuing its assets.
Securities listed on a U.S. securities exchange (including
securities traded through the NASDAQ National Market System) or foreign
securities exchange or traded in an over-the-counter market will be valued at
the most recent sale as of the time the valuation is made or, in the absence
of sales, at the mean between the bid and asked quotations. If there are no
such quotations, the value of the securities will be taken to be the highest
bid
<PAGE>50
quotation on the exchange or market. Options or futures contracts will be
valued similarly. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the
primary market for such security. Short-term obligations with maturities of
60 days or less are valued at amortized cost, which constitutes fair value as
determined by the Board. Amortized cost involves valuing a portfolio
instrument at its initial cost and thereafter assuming a constant amortization
to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. The
amortized cost method of valuation may also be used with respect to other debt
obligations with 60 days or less remaining to maturity. In determining the
market value of portfolio investments, the Fund may employ outside
organizations (a "Pricing Service") which may use a matrix, formula or other
objective method that takes into consideration market indexes, matrices, yield
curves and other specific adjustments. The procedures of Pricing Services are
reviewed periodically by the officers of the Fund under the general
supervision and responsibility of the Board, which may replace a Pricing
Service at any time. Securities, options and futures contracts for which
market quotations are not available and certain other assets of the Fund will
be valued at their fair value as determined in good faith pursuant to
consistently applied procedures established by the Board. In addition, the
Board or its delegates may value a security at fair value if it determines
that such security's value determined by the methodology set forth above does
not reflect its fair value.
Trading in securities in Japan and other Asian countries is
completed at various times prior to the close of business on each business day
in New York (i.e., a day on which the New York Stock Exchange (the "NYSE") is
open for trading). In addition, securities trading in a particular country or
countries may not take place on all business days in New York. Furthermore,
trading takes place in various foreign markets on days which are not business
days in New York and days on which the Fund's net asset value is not
calculated. As a result, calculation of the Fund's net asset value does not
take place contemporaneously with the determination of the prices of the
majority of the Fund's securities. Events affecting the values of portfolio
securities that occur between the time their prices are determined and the
close of regular trading on the NYSE will not be reflected in the Fund's
calculation of net asset value unless the Board or its delegates deems that
the particular event would materially affect net asset value, in which case an
adjustment may be made. All assets and liabilities initially expressed in
foreign currency values will be converted into U.S. dollar values at the
prevailing exchange rate as quoted by a Pricing Service. If such quotations
are not available, the rate of exchange will be determined in good faith
pursuant to consistently applied procedures established by the Board.
Portfolio Transactions
Warburg is responsible for establishing, reviewing and, where
necessary, modifying the 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
<PAGE>51
over-the-counter, depending on where it appears that the best price or
execution will be obtained. The purchase price paid by the 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.
Warburg will select specific portfolio investments and effect
transactions for the Fund and in doing so seeks to obtain the overall best
execution of portfolio transactions. In evaluating prices and executions,
Warburg will consider the factors it deems relevant, which may include the
breadth of the market in the security, the price of the security, the
financial condition and execution capability of a broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on
a continuing basis. Warburg may, in its discretion, effect transactions in
portfolio securities with dealers who provide brokerage and research services
(as those terms are defined in Section 28(e) of the Securities Exchange Act of
1934) to the Fund and/or other accounts over which Warburg exercises
investment discretion. Warburg may place portfolio transactions with a broker
or dealer with whom it has negotiated a commission that is in excess of the
commission another broker or dealer would have charged for effecting the
transaction if Warburg determines in good faith that such amount of commission
was reasonable in relation to the value of such brokerage and research
services provided by such broker or dealer viewed in terms of either that
particular transaction or of the overall responsibilities of Warburg.
Research and other services received may be useful to Warburg in serving both
the Fund and its other clients and, conversely, research or other services
obtained by the placement of business of other clients may be useful to
Warburg in carrying out its obligations to the Fund. Research may include
furnishing advice, either directly or through publications or writings, as to
the value of securities, the advisability of purchasing or selling specific
securities and the availability of securities or purchasers or sellers of
securities; furnishing seminars, information, analyses and reports concerning
issuers, industries, securities, trading markets and methods, legislative
developments, changes in accounting practices, economic factors and trends and
portfolio strategy; access to research analysts, corporate management
personnel, industry experts, economists and government officials; comparative
performance evaluation and technical measurement services and quotation
services; and products and other services (such as third party publications,
reports and analyses, and computer and electronic access, equipment, software,
information and accessories that deliver, process or otherwise utilize
information, including the research described above) that assist Warburg in
carrying out its
<PAGE>52
responsibilities. Research received from brokers or dealers is supplemental
to Warburg's own research program. The fees to Warburg under its advisory
agreement with the Fund are not reduced by reason of its receiving any
brokerage and research services.
Investment decisions for the Fund concerning specific portfolio
securities are made independently from those for other clients advised by
Warburg. Such other investment clients may invest in the same securities as
the Fund. When purchases or sales of the same security are made at
substantially the same time on behalf of such other clients, transactions are
averaged as to price and available investments allocated as to amount, in a
manner which Warburg believes to be equitable to each client, including the
Fund. In some instances, this investment procedure may adversely affect the
price paid or received by the Fund or the size of the position obtained or
sold for the Fund. To the extent permitted by law, Warburg may aggregate the
securities to be sold or purchased for the Fund with those to be sold or
purchased for such other investment clients in order to obtain best execution.
Any portfolio transaction for the Fund may be executed through
Counsellors Securities if, in Warburg's judgment, the use of Counsellors
Securities is likely to result in price and execution at least as favorable as
those of other qualified brokers, and if, in the transaction, Counsellors
Securities charges the Fund a commission rate consistent with those charged by
Counsellors Securities to comparable unaffiliated customers in similar
transactions. All transactions with affiliated brokers will comply with Rule
17e-1 under the 1940 Act.
In no instance will portfolio securities be purchased from or sold
to Warburg or Counsellors Securities or any affiliated person of such
companies. In addition, the Fund will not give preference to any institutions
with whom the Fund enters into distribution or shareholder servicing
agreements concerning the provision of distribution services or support
services. See the Prospectuses, "Shareholder Servicing."
Transactions for the Fund may be effected on foreign securities
exchanges. In transactions for securities not actively traded on a foreign
securities exchange, the Fund will deal directly with the dealers who make a
market in the securities involved, except in those circumstances where better
prices and execution are available elsewhere. Such dealers usually are acting
as principal for their own account. On occasion, securities may be purchased
directly from the issuer. Such portfolio securities are generally traded on a
net basis and do not normally involve brokerage commissions. Securities firms
may receive brokerage commissions on certain portfolio transactions, including
options, futures and options on futures transactions and the purchase and sale
of underlying securities upon exercise of options.
The Fund may participate, if and when practicable, in bidding for
the purchase of securities for the Fund's portfolio directly from an issuer in
order to take advantage of the lower purchase price available to members of
such a group. The Fund will engage in this
<PAGE>53
practice, however, only when Warburg, in its sole discretion, believe such
practice to be otherwise in the Fund's interest.
Portfolio Turnover
The Fund does not intend to seek profits through short-term trading,
but the rate of turnover will not be a limiting factor when the Fund deems it
desirable to sell or purchase securities. The Fund's portfolio turnover rate
is calculated by dividing the lesser of purchases or sales of its portfolio
securities for the year by the monthly average value of the portfolio
securities. Securities with remaining maturities of one year or less at the
date of acquisition are excluded from the calculation.
Certain practices that may be employed by the Fund could result in
high portfolio turnover. For example, options on securities may be sold in
anticipation of a decline in the price of the underlying security (market
decline) or purchased in anticipation of a rise in the price of the underlying
security (market rise) and later sold.
JAPAN AND ITS SECURITIES MARKETS
The Fund will be subject to general economic and political
conditions in Japan. In addition to the considerations discussed above, these
include future political and economic developments, the possible imposition
of, or changes in, exchange controls or other Japanese governmental laws or
restrictions applicable to such investments, diplomatic developments,
political or social unrest and natural disasters.
The information set forth in this section has been extracted from
various governmental publications and other sources. The Fund makes no
representation as to the accuracy of the information, nor has the Fund
attempted to verify it. Furthermore, no representation is made that any
correlation exists between Japan or its economy in general and the performance
of the Fund.
Domestic Politics
Japan has a parliamentary form of government. The legislative power
is vested in the Japanese Diet, which consists of a House of Representatives
and a House of Councillors. Members of the House of Representatives are
elected for terms of four years unless the House of Representatives is
dissolved prior to the expiration of their full elected terms. Members of the
House of Councillors are elected for terms of six years with one-half of the
membership being elected every three years. Various political parties are
represented in the Diet, including the conservative Liberal Democratic Party
("LDP"), which until August 1993 had been in power nationally since its
formation in 1955. The LDP ceased to have a majority of the House of
Representatives in June 1993, when certain members of the House of
Representatives left the LDP and formed two new political parties. After an
<PAGE>54
election for the House of Representatives was held on July 18, 1993 and the
LDP failed to secure a majority, seven parties formed a coalition to control
the House of Representatives and chose Morihiro Hosokawa, the Representative
of the Japan New Party, to head their coalition. In April 1994, amid
accusations of financial improprieties, Prime Minister Hosokawa announced that
he would resign. Tsutomu Hata succeeded Mr. Hosokawa as prime minister and
formed a new cabinet as a minority coalition government. In June 1994 Mr.
Hata yielded to political pressure from opposition parties and resigned. He
was succeeded by Social Democratic Party leader Tomiichi Murayama, Japan's
first Socialist prime minister since 1948, who was chosen by a new and
unstable alliance between left-wing and conservative parties, including the
LDP. On September 18, 1994, 187 opposition politicians founded a new party,
the Reform Party led by Ichiro Ozawa, to oppose the government of Prime
Minister Murayama in the next elections. Political realignment has
continued in 1995 as the Social Democrats incurred significant losses in the
July elections. On August 28, 1995, the LDP elected Ryutaro Hashimoto, the
minister for international trade and industry, as its new leader. Mr.
Hashimoto, who favors a stronger Japanese role in world affairs, is considered
the leading candidate for prime minister in the next elections. A change in
government in 1996 could result in increased trade friction with the United
States. This political instability may hamper Japan's ability to establish
and maintain effective economic and fiscal policies, and recent and future
political developments may lead to changes in policy that might adversely
affect the Fund's investments.
Economic Background
Over the past 30 years Japan has experienced significant economic
development. During the era of high economic growth in the 1960's and early
1970's the expansion was based on the development of heavy industries such as
steel and shipbuilding. In the 1970's Japan moved into assembly industries
which employ high levels of technology and consume relatively low quantities
of resources, and since then has become a major producer of electrical and
electronic products and automobiles. Moreover, since the mid-1980's Japan has
become a major creditor nation. With the exception of the periods associated
with the oil crises of the 1970's, Japan has generally experienced very low
levels of inflation. In the mid-1990's, Japan has been plagued by rising
unemployment, excess capacity and significant bad debts in the banking sector.
Japan is largely dependent upon foreign economies for raw materials.
For instance, almost all of its oil is imported, the majority from the Middle
East. Oil prices therefore have a major impact on the domestic economy, as is
evidenced by the current account deficits triggered by the two oil crises of
the 1970's. Oil prices have declined mainly due to a worldwide easing of
demand for crude oil. The stabilized price of oil contributed to Japan's
sizeable current account surplus and stability of wholesale and consumer
prices since 1981. While Japan is working to reduce its dependence on foreign
materials, its lack of natural resources poses a significant obstacle to this
effort.
<PAGE>55
International trade is important to Japan's economy, as exports
provide the means to pay for many of the raw materials it must import.
Japan's trade surplus has increased dramatically in recent years, exceeding
$100 billion per year since 1991 and reaching a record high of $145 billion in
1994. Because of the concentration of Japanese exports in highly visible
products such as automobiles, machine tools and semiconductors, and the large
trade surpluses resulting therefrom, Japan has entered a difficult phase in
its relations with its trading partners, particularly with respect to the
United States, with whom the trade imbalance is the greatest. In 1995,
however, the trade surplus has decreased due to a drop in exports. The
reduced exports are due primarily to the strength of the yen and the impact of
the threatened U.S. trade sanctions. The United States and Japan have engaged
in "economic framework" negotiations to help increase the United States' share
in Japanese markets and reduce Japan's current account surplus, but progress
in the negotiations has been hampered by the recent political upheaval in
Japan. On June 28, 1995, the United States agreed not to impose trade
sanctions in return for a modest commitment by Japan to buy more American cars
and auto parts. Any trade sanctions imposed upon Japan by the United States
as a result of the current friction or otherwise could adversely affect Japan
and the performance of the Fund.
The following table sets forth the composition of Japan's trade
balance, as well as other components of its current account, for the years
shown.
<TABLE>
<CAPTION>
CURRENT ACCOUNT
Trade
Change from Change from Current
Year Exports Preceding Year Imports Preceding Year Trade Balance Services Transfers Balance
(U.S. dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1984 168,290 15.7 124,003 8.8 44,257 (7,747) (1,507) 35,003
1985 174,015 3.4 118,029 (4.8) 55,986 (5,165) (1,652) 49,169
1986 205,591 18.1 112,764 (4.5) 92,827 (4,932) (2,050) 85,845
1987 224,605 9.2 128,219 13.7 96,386 (5,702) (3,669) 87,015
1988 259,765 15.7 164,753 28.5 95,012 (11,263) (4,118) 79,631
1989 269,570 3.8 192,653 16.9 76,917 (15,526) (4,234) 57,157
1990 280,374 4.0 216,846 12.6 63,528 (22,292) (5,475) 35,761
1991 306,557 9.3 203,513 (6.1) 103,044 (17,660) (12,483) 72,901
1992 330,850 7.9 198,502 (2.5) 132,348 (10,112) (4,685) 117,551
1993 351,292 6.2 209,778 5.7 141,514 (3,949) (6,117) 131,448
1994 384,176 9.4 238,232 13.6 145,944 (9,296) (7,508) 129,140
</TABLE>
Source: Institute of Fiscal and Monetary Policy, Ministry of Finance of
Japan
<PAGE>56
Economic Trends. The following table sets forth Japan's gross
domestic product for the years shown.
GROSS DOMESTIC PRODUCT (GDP)
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988 1987
(yen in billions)
Consumption
Expenditures
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Private 277,676.8 270,919.4 264,824.1 255,084.2 243,628.1 228,483.2 215,122.0 204,585.3
Government 46,108.0 44,666.4 43,257.9 41,232.0 38,806.6 36,274.8 34,184.3 32,974.5
Capital Formation
(incl.
inventories)
Private 93,111.4 99,180.1 108,727.6 116,638.0 110,871.9 100,130.8 89,043.7 76,176.5
Government 42,227.3 40,295.8 35,110.1 30,062.3 28,182.6 25,724.5 24,660.9 23,673.8
Exports of Goods
and Services 44,449.2 44,243.8 47,409.4 46,809.7 45,919.9 42,351.8 37,483.2 36,209.6
Imports of Goods
and Services 34,424.0 33,333.1 36,183.8 38,529.3 42,871.8 36,768.1 29,065.1 25,194.9
GDP
(Expenditures) 469,148.7 465,972.4 463,145.3 451,296.9 24,537.2 396,197.0 371,429.0 348,425.0
Change in GDP
from Preceding
Year
Nominal terms 0.7% 0.6% 2.6% 6.3% 7.2% 6.7% 6.6% 4.1%
Real Terms 0.5% -0.2% 1.1% 4.3% 4.8% 4.7% 6.2% 4.1%
</TABLE>
Source: Institute of Fiscal and Monetary Policy, Ministry of Finance of
Japan
<PAGE>57
The following tables set forth certain economic indicators in Japan
for the years shown.
<TABLE>
<CAPTION>
UNEMPLOYMENT
Labor Productivity
Index
Year Number Unemployed Percent Unemployed (Manufacturing)
(in millions) (Base Year: 1990)
<S> <C> <C> <C>
1984 1.61 2.7 72.4
1985 1.56 2.6 75.6
1986 1.67 2.8 77.0
1987 1.73 2.8 81.4
1988 1.55 2.5 90.8
1989 1.42 2.3 96.2
1990 1.34 2.1 100.0
1991 1.36 2.1 102.5
1992 1.42 2.2 97.0
1993 1.66 2.5 95.4
1994 1.92 2.9 98.3
</TABLE>
Source: Institute of Fiscal and Monetary Policy, Ministry of Finance of
Japan
WHOLESALE PRICE INDEX
(Base Year: 1990)
<TABLE>
<CAPTION>
Change from
All Preceding
Year Commodities Year
<S> <C> <C>
1985 110.4 (1.1)%
1986 100.3 (9.1)
1987 96.5 (3.8)
1988 95.6 (0.9)
1989 98.0 2.5
1990 100.0 2.0
1991 99.4 (0.6)
1992 97.8 (1.6)
1993 95.0 (2.9)
1994 93.0 (2.1)
</TABLE>
Source: Financial Statistics of Japan (1993 ed. and June 1994
supp.), Institute of Fiscal and Monetary Policy,
Ministry of Finance of Japan; International Monetary
Fund
<PAGE>58
CONSUMER PRICE INDEX
<TABLE>
<CAPTION>
Change from
Year General Preceding Year
<S> <C> <C>
(Base Year: 1990)
1985 93.5 2.0%
1986 94.1 0.6
1987 94.2 0.1
1988 94.9 0.7
1989 97.0 2.3
1990 100.0 3.1
1991 103.3 3.3
1992 105.0 1.6
1993 106.4 1.3
1994 107.1 0.7
</TABLE>
Source:
Financial Statistics of Japan (1993 ed. and June 1994 supp.),
Institute of Fiscal and Monetary Policy, Ministry of Finance of
Japan; International Monetary Fund
Currency Fluctuation. The Fund's investments in Japanese securities
will be denominated in yen and most income received by the Fund from such
investments will be in yen. However, the Fund's net asset value will be
reported, and distributions will be made, in U.S. dollars. Therefore, a
decline in the value of the yen relative to the U.S. dollar could have an
adverse effect on the value of the Fund's Japanese investments. The following
table presents the average exchange rates of Japanese yen for U.S. dollars for
the years shown:
CURRENCY EXCHANGE RATES
Year Yen Per U.S. Dollar
1985 238.47
1986 168.35
1987 144.60
1988 128.17
1989 138.07
1990 145.00
1991 134.59
1992 126.79
1993 111.08
1994 102.18
Source:
Board of Governors of the Federal Reserve System, Federal Reserve
Bulletin
On December 28, 1995, the rate of exchange was 102.73 Japanese yen
per U.S. dollar.
<PAGE>59
Geological Factors. The islands of Japan lie in the western Pacific
Ocean, off the eastern coast of the continent of Asia. Japan has in the past
experienced earthquakes and tidal waves of varying degrees of severity. On
January 17, 1995, the Great Hanshin Earthquake killed over 5,000 people and
severely damaged the port of Kobe, Japan's largest container port. The
government has announced a $5.9 billion plan to repair the port and estimates
damage to the region at approximately $120 billion. However, the long-term
economic effects of the earthquake on the Japanese economy as a whole and on
the Fund's investments cannot be predicted.
Securities Markets
There are eight stock exchanges in Japan. Of these, the Tokyo Stock
Exchange is by far the largest, followed by the Osaka Stock Exchange and the
Nagoya Stock Exchange. These exchanges divide the market for domestic stocks
into two sections, with newly listed companies and smaller companies assigned
to the Second Section and larger companies assigned to the First Section.
The following table sets forth the number of Japanese companies
listed on each of the eight Japanese stock exchanges as of the end of 1994.
<TABLE>
<CAPTION>
NUMBER OF DOMESTIC COMPANIES LISTED ON ALL STOCK EXCHANGES
Tokyo Osaka Nagoya
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st 2nd 1st 2nd 1st 2nd
Sec. Sec. Sec. Sec. Sec. Sec. Kyoto Hiroshima Fukuoka Nigata Sapporo
1,235 454 855 344 431 129 240 203 260 200 193
</TABLE>
Source: Tokyo Stock Exchange, Fact Book 1995
<PAGE>60
The following table sets forth the trading volume and value of
Japanese stocks on each of the eight Japanese stock exchanges for the years
shown.
STOCK TRADING VOLUME & VALUE ON ALL STOCK EXCHANGES
(shares in millions; yen in billions)
<TABLE>
<CAPTION>
All Exchanges Tokyo Osaka Nagoya
Year Volume Value Volume Value Volume Value Volume Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1989 . . . . . 256,296 386,395 222,599 332,617 25,096 41,679 7,263 10,395
1990 . . . . . 145,837 231,837 123,099 186,667 17,187 35,813 4,323 7,301
1991 . . . . . 107,844 134,160 93,606 110,897 10,998 18,723 2,479 3,586
1992 . . . . . 82,563 80,456 66,408 60,110 12,069 15,575 3,300 3,876
1993 . . . . . 101,172 106,123 86,934 86,889 10,439 14,635 2,779 3,459
1994 . . . . . 105,936 114,622 84,514 87,356 14,903 19,349 4,719 5,780
</TABLE>
<TABLE>
<CAPTION>
Kyoto Hiroshima Fukuoka Niigata Sapporo
Volume Value Volume Value Volume Value Volume Value Volume Value
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 . . . 331 443 190 235 268 330 398 475 151 221
1990 . . . 416 770 169 261 203 405 245 334 195 286
1991 . . . 220 300 125 149 122 174 181 208 113 123
1992 . . . 225 322 110 136 139 129 163 178 149 129
1993 . . . 222 340 185 178 229 225 206 226 173 170
1994 . . . 447 562 255 312 578 669 249 299 267 296
</TABLE>
Source: Tokyo Stock Exchange, Fact Book 1995; Tokyo Stock Exchange
New York
The following table sets forth the stock trading value of Japanese
stocks on the Tokyo Stock Exchange for the years shown.
TOKYO STOCK EXCHANGE
STOCK TRADING VALUE
<TABLE>
<CAPTION>
Year Total Daily Average High Low Turnover Ratio
(yen in millions)
<S> <C> <C> <C> <C> <C>
1984 . . . . . . . . . . . . . 7,974,003 36,843 75,652 3,682 47.1%
1985 . . . . . . . . . . . . . 78,711,048 276,179 727,316 110,512 44.7
1986 . . . . . . . . . . . . . 159,836,218 572,890 1,682,060 115,244 67.2
1987 . . . . . . . . . . . . . 250,736,971 915,098 2,382,114 221,230 80.6
1988 . . . . . . . . . . . . . 285,521,260 1,045,865 2,768,810 192,704 70.2
1989 . . . . . . . . . . . . . 332,616,597 1,335,810 2,796,946 392,347 61.1
1990 . . . . . . . . . . . . . 186,666,820 758,808 1,464,920 218,205 37.7
1991 . . . . . . . . . . . . . 110,897,491 450,803 1,531,064 151,565 29.3
1992 . . . . . . . . . . . . . 60,110,391 243,362 686,737 97,616 18.0
1993 . . . . . . . . . . . . . 86,889,072 353,208 1,422,760 61,747 28.3
1994 . . . . . . . . . . . . . 87,355,567 353,666 1,114,216 123,904 25.6
</TABLE>
<PAGE>61
Source: Tokyo Stock Exchange, Fact Book 1995; Tokyo Stock Exchange New York
OTC Market. Trading of securities on the Japanese OTC market ("OTC
Market" or "JASDAQ") is regulated primarily by the Japan Securities Dealers
Association (the "JSDA"). The JSDA reports the daily high and low selling
prices, the last selling price on each day, trading volumes, market
capitalization and the number of corporate issues registered with the JSDA as
traded over-the-counter by the member firms of the JSDA.
<PAGE>62
The following table sets forth the number of issues traded in, the
market capitalization of, and the trading value of stocks in, the Japanese OTC
market for the years shown.
JAPANESE OTC MARKET
NUMBER OF ISSUES, MARKET CAPITALIZATION
AND TRADING VALUE
<TABLE>
<CAPTION>
Stock Trading Value
(yen in thousands)
No. of
Year Issues Market Capitalization Total Daily Average
(yen in millions)
<S> <C> <C> <C> <C>
1985 150 1,572,308 195,711,396 686,706
1986 161 2,138,063 450,081,898 1,642,634
1987 172 2,489,409 400,065,211 1,460,092
1988 216 4,270,830 721,639,214 2,643,367
1989 279 12,508,712 2,085,482,912 8,375,433
1990 357 11,972,160 6,111,700,820 24,844,312
1991 446 13,001,864 5,043,126,216 20,500,513
1992 451 8,008,572 1,091,101,849 4,417,416
1993 491 11,318,446 2,880,539,952 11,709,512
1994 581 14,628,729 5,384,108,058 21,798,008
</TABLE>
Source: JSDA, 1993 Annual Statistics for the OTC Market; Japan Securities
Research Institute
Securities Indexes. The Tokyo Stock Price Index ("TOPIX") is a
composite index of all common stocks listed on the First Section of the Tokyo
Stock Exchange. TOPIX reflects the change in the aggregate market value of
the common stocks as compared to the aggregate market value of those stocks as
of the close on January 4, 1968.
<PAGE>63
The following table sets forth the high, low and year-end TOPIX for
the years shown.
TOPIX (Tokyo Stock Price Index)
(Jan. 4, 1968=100)
<TABLE>
<CAPTION>
Year Year-end High Low
<S> <C> <C> <C>
1985 1,049.40 1,058.35 916.93
1986 1,556.37 1,583.35 1,025.85
1987 1,725.83 2,258.56 1,557.46
1988 2,357.03 2,357.03 1,690.44
1989 2,881.37 2,884.80 2,364.33
1990 1,733.83 2,867.70 1,523.43
1991 1,714.68 2,028.85 1,638.06
1992 1,307.66 1,763.43 1,102.50
1993 1,439.31 1,698.67 1,250.06
1994 1,559.09 1,712.73 1,445.97
</TABLE>
Source: Tokyo Stock Exchange, Fact Book 1995; Tokyo Stock
Exchange New York
The Nikkei OTC Average is a price weighted index of the quotations
of the OTC registered stock traded by members of the JSDA. The following
table sets forth the year-end Nikkei OTC Average for the years shown.
NIKKEI OTC AVERAGE
Nikkei OTC
Year Average
1985 814.2
1986 1,056.4
1987 1,107.0
1988 1,313.1
1989 2,597.5
1990 2,175.5
1991 1,946.1
1992 1,227.9
1993 1,447.6
1994 1,776.1
Sources: The Nikkei Shimbun; Bloomberg Financial
Markets
As these indexes reflect, share prices of companies traded on
Japanese stock exchanges and on the Japanese OTC market reached historical
peaks (which were later referred to as the "bubble") in 1989 and 1990.
Afterwards stock prices in both markets decreased significantly, reaching
their lowest levels in the second half of 1992. There can be no assurance
that additional market corrections will not occur.
<PAGE>64
MANAGEMENT OF THE FUND
Officers and Board of Directors
The names (and ages) of the Fund's Directors and officers, their
addresses, present positions and principal occupations during the past five
years and other affiliations are set forth below.
Richard N. Cooper (61) Director
Room 7E47OHB National Intelligence Counsel;
Central Intelligence Agency Professor at Harvard University; Director
930 Dolly Madison Blvd. or Trustee of Circuit City Stores, Inc.
McClain, Virginia 22107 (retail electronics and appliances) and
Phoenix Home Life Insurance Co.
Donald J. Donahue (71) Director
99 Indian Field Road Chairman of Magma Copper Company since
Greenwich, Connecticut 06830 January 1987; Director or Trustee of GEV
Corporation and Signet Star Reinsurance
Company; Chairman and Director of NAC Holdings
from September 1990-June 1993.
Jack W. Fritz (68) . . Director
2425 North Fish Creek Road Private investor; Consultant and Director of
P.O. Box 483 Fritz Broadcasting, Inc. and Fritz
Wilson, Wyoming 83014 Communications (developers and operators of
radio stations); Director of Advo, Inc.
(direct mail advertising).
John L. Furth* (65) . . Chairman of the Board
466 Lexington Avenue Vice Chairman and Director of E.M. Warburg,
New York, New York 10017-3147 Pincus & Co., Inc. ("EMW"); Associated with
EMW since 1970; Director and officer of other
investment companies advised by Warburg.
Thomas A. Melfe (63) . Director
30 Rockefeller Plaza Partner in the law firm of Donovan Leisure
New York, New York 10112 Newton & Irvine; Director of Municipal Fund
for New York Investors, Inc.
[FN]
___________
* Indicates a Director who is an "interested person" of the fund as defined
in the 1940
Act.
<PAGE>65
Alexander B. Trowbridge (66) Director
1155 Connecticut Avenue, N.W. President of Trowbridge Partners, Inc.
Suite 700 (business consulting) from January
Washington, DC 20036 1990-January 1994; President of the National
Association of Manufacturers from 1980-1990;
Director or Trustee of New England Mutual Life
Insurance Co., ICOS Corporation
(biopharmaceuticals), P.H.H. Corporation
(fleet auto management; housing and plant
relocation service), WMX Technologies Inc.
(solid and hazardous waste collection and
disposal), The Rouse Company (real estate
development), SunResorts International Ltd.
(hotel and real estate management), Harris
Corp. (electronics and communications
equipment), The Gillette Co. (personal care
products) and Sun Company Inc. (petroleum
refining and marketing).
Arnold M. Reichman (47) President
466 Lexington Avenue Managing Director and Assistant Secretary of
New York, New York 10017-3147 EMW; Associated with EMW since 1984; Senior
Vice President, Secretary and Chief Operating
Officer of Counsellors Securities; Officer of
other investment companies advised by Warburg.
Eugene L. Podsiadlo (38) Senior Vice President
466 Lexington Avenue Managing Director of EMW; Associated with
New York, New York 10017-3147 EMW since 1991; Vice President of Citibank,
N.A. from 1987-1991; Senior Vice President of
Counsellors Securities and officer of other
investment companies advised by Warburg.
Stephen Distler (42) . Vice President and
466 Lexington Avenue Chief Financial Officer
New York, New York 10017-3147 Managing Director, Controller and Assistant
Secretary of EMW; Associated with EMW since
1984; Treasurer of Counsellors Securities;
Treasurer and Chief Accounting Officer or Vice
President and Chief Financial Officer of other
investment companies advised by Warburg.
<PAGE>66
Eugene P. Grace (44) . Vice President and Secretary
466 Lexington Avenue Associated with EMW since April 1994;
New York, New York 10017-3147 Attorney-at-law from September 1989-April
1994; life insurance agent, New York Life
Insurance Company from 1993-1994; General
Counsel and Secretary, Home Unity Savings Bank
from 1991-1992; Vice President and Chief
Compliance Officer of Counsellors Securities;
Vice President and Secretary of other
investment companies advised by Warburg.
Howard Conroy (41) . . Vice President, Treasurer and Chief
466 Lexington Avenue Accounting Officer Associated with EMW since
New York, New York 10017-3147 1992; Associated with Martin Geller, C.P.A.
from 1990-1992; Vice President, Finance with
Gabelli/Rosenthal & Partners, L.P. until 1990;
Vice President, Treasurer and Chief Accounting
Officer of other investment companies advised
by Warburg.
Karen Amato (32) . . . Assistant Secretary
466 Lexington Avenue Associated with EMW since 1987; Assistant
New York, New York 10017-3147 Secretary of other investment companies
advised by Warburg.
No employee of Warburg or PFPC Inc., the Fund's co-administrator
("PFPC"), or any of their affiliates receives any compensation from the Fund
for acting as an officer or director of the Fund. Each Director who is not a
director, trustee, officer or employee of Warburg, PFPC or any of their
affiliates receives an annual fee of $500, and $250 for each meeting of the
Board attended by him for his services as Director and is reimbursed for
expenses incurred in connection with his attendance at Board meetings.
<PAGE>67
Directors' Compensation
<TABLE>
<CAPTION>
Total Total Compensation from
Compensation from all Investment Companies
Name of Director Fund+ Managed by Warburg+*
<S> <C> <C>
John L. Furth None** None**
Richard N. Cooper $1,500 $42,500
Donald J. Donahue $1,500 $42,500
Jack W. Fritz $1,500 $42,500
Thomas A. Melfe $1,500 $42,500
Alexander B. Trowbridge $1,500 $42,500
</TABLE>
[FN]
__________________
+ Amounts shown are estimates of future payments to be made in the fiscal
year ending October 31, 1996 pursuant to existing arrangements.
* Each Director also serves as a Director or Trustee of 15 other investment
companies advised by Warburg.
** Mr. Furth is considered to be an interested person of the Fund and
Warburg, as defined under Section 2(a)(19) of the 1940 Act, and,
accordingly, receives no compensation from the Fund or any other
investment company managed by Warburg.
Mr. P. Nicholas Edwards, portfolio manager of the Fund, is also an
associate portfolio manager and research analyst of Warburg Pincus Japan OTC
Fund, Warburg Pincus International Equity Fund and the International Equity
Portfolios of Warburg Pincus Institutional Fund, Inc. and Warburg Pincus
Trust. Prior to joining Warburg in August 1995, Mr. Edwards was a director at
Jardine Fleming Investment Advisors, Tokyo. He was a vice president of Robert
Fleming Inc. in New York City from 1988 to 1991. Mr. Edwards earned M.A.
degrees from Oxford University and Hiroshima University in Japan.
Investment Adviser and Co-Administrators
Warburg serves as investment adviser to the Fund, Counsellors Funds
Service, Inc. ("Counsellors Service") and PFPC serve as co-administrators to
the Fund pursuant to separate written agreements (the "Advisory Agreement,"
"Counsellors Service Co-Administration Agreement" and the "PFPC Co-
Administration Agreement," respectively). The services provided by, and the
fees payable by the Fund to, Warburg under the Advisory Agreement, Counsellors
Service under the Counsellors Service Co-Administration Agreement
<PAGE>68
and PFPC under the PFPC Co-Administration Agreement are described in the
Prospectuses. Each class of shares of the Fund bears its proportionate share
of fees payable to Warburg, Counsellors Service and PFPC in the proportion
that its assets bear to the aggregate assets of the Fund at the time of
calculation.
Warburg agrees that if, in any fiscal year, the expenses borne by
the Fund exceed the applicable expense limitations imposed by the securities
regulations of any state in which shares of the Fund are registered or
qualified for sale to the public, it will reimburse the Fund to the extent
required by such regulations. Unless otherwise required by law, such
reimbursement would be accrued and paid on a monthly basis. At the date of
this Statement of Additional Information, the most restrictive annual expense
limitation applicable to the Fund is 2.5% of the first $30 million of the
average net assets of the Fund, 2% of the next $70 million of the average net
assets of the Fund and 1.5% of the remaining average net assets of the Fund.
The advisory fee payable by the Fund is calculated at an annual rate
based on a percentage of the Fund's average daily net assets. See the
Prospectuses, "Management of the Fund."
Custodian and Transfer Agent
PNC Bank, National Association ("PNC") and Fiduciary Trust Company
International ("Fiduciary") serve as custodians of the Fund's U.S. and foreign
assets, respectively, pursuant to separate custodian agreements (the
"Custodian Agreements"). Under the Custodian Agreements, PNC and Fiduciary
each (i) maintains a separate account or accounts in the name of the Fund,
(ii) holds and transfers portfolio securities on account of the Fund,
(iii) makes receipts and disbursements of money on behalf of the Fund,
(iv) collects and receives all income and other payments and distributions for
the account of the Fund's portfolio securities held by it and (v) makes
periodic reports to the Board concerning the Fund's custodial arrangements.
PNC may delegate its duties under its Custodian Agreement with the Fund to a
wholly owned direct or indirect subsidiary of PNC or PNC Bank Corp. upon
notice to the Fund and upon the satisfaction of certain other conditions.
With the approval of the Board, Fiduciary is authorized to select one or more
foreign banking institutions and foreign securities depositories to serve as
sub-custodian on behalf of the Fund. PNC is an indirect, wholly owned
subsidiary of PNC Bank Corp., and its principal business address is Broad and
Chestnut Streets, Philadelphia, Pennsylvania 19101. The principal business
address of Fiduciary is Two World Trade Center, New York, New York 10048.
State Street Bank and Trust Company ("State Street") acts as the
shareholder servicing, transfer and dividend disbursing agent of the Fund
pursuant to a Transfer Agency and Service Agreement, under which State Street
(i) issues and redeems shares of the Fund, (ii) addresses and mails all
communications by the Fund to record owners of Fund shares, including reports
to shareholders, dividend and distribution notices and proxy material for its
<PAGE>69
meetings of shareholders, (iii) maintains shareholder accounts and, if
requested, sub-accounts and (iv) makes periodic reports to the Board
concerning the transfer agent's operations with respect to the Fund. The
principal business address of State Street is 225 Franklin Street, Boston,
Massachusetts 02110. State Street has delegated to Boston Financial Data
Services, Inc., a 50% owned subsidiary ("BFDS"), responsibility for most
shareholder servicing functions. BFDS's principal business address is 2
Heritage Drive, Boston, Massachusetts 02171.
Organization of the Fund
The Fund's charter authorizes the Board to issue three billion full
and fractional shares of common stock, $.001 par value per share ("Common
Shares"), of which one billion shares are designated Common Stock - Series 1
and one billion shares are designated Common Stock - Series 2 (the "Advisor
Shares"). Only Common Shares and Advisor Shares have been issued by the Fund.
All shareholders of the Fund in each class, upon liquidation, will
participate ratably in the Fund's net assets. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Directors can elect all Directors. Shares are
transferable but have no preemptive, conversion or subscription rights.
Distribution and Shareholder Servicing
Common Shares. The Fund has entered into a Shareholder Servicing
and Distribution Plan (the "12b-1 Plan"), pursuant to Rule 12b-1 under the
1940 Act, pursuant to which the Fund will pay Counsellors Securities, in
consideration for Services (as defined below), a fee calculated at an annual
rate of .25% of the average daily net assets of the Common Shares of the Fund.
Services performed by Counsellors Securities include (i) the sale of the
Common Shares, as set forth in the 12b-1 Plan ("Selling Services"), (ii)
ongoing servicing and/or maintenance of the accounts of Common Shareholders of
the Fund, as set forth in the 12b-1 Plan ("Shareholder Services"), and (iii)
sub-transfer agency services, subaccounting services or administrative
services related to the sale of the Common Shares, as set forth in the 12b-1
Plan ("Administrative Services" and collectively with Selling Services and
Administrative Services, "Services") including, without limitation, (a)
payments reflecting an allocation of overhead and other office expenses of
Counsellors Securities related to providing Services; (b) payments made to,
and reimbursement of expenses of, persons who provide support services in
connection with the distribution of the Common Shares including, but not
limited to, office space and equipment, telephone facilities, answering
routine inquiries regarding the Fund, and providing any other Shareholder
Services; (c) payments made to compensate selected dealers or other authorized
persons for providing any Services; (d) costs relating to the formulation and
implementation of marketing and promotional activities for the Common Shares,
including, but not limited to, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising, and related travel and
entertainment expenses; (e) costs of printing and distributing
<PAGE>70
prospectuses, statements of additional information and reports of the Fund to
prospective shareholders of the Fund; and (f) costs involved in obtaining
whatever information, analyses and reports with respect to marketing and
promotional activities that the Fund may, from time to time, deem advisable.
Pursuant to the 12b-1 Plan, Counsellors Securities provides the
Board with periodic reports of amounts expended under the 12b-1 Plan and the
purpose for which the expenditures were made.
Advisor Shares. The Fund may, in the future, enter into agreements
("Agreements") with institutional shareholders of record, broker-dealers,
financial institutions, depository institutions, retirement plans and
financial intermediaries ("Institutions") to provide certain distribution,
shareholder servicing, administrative and/or accounting services for their
clients or customers (or participants in the case of retirement plans)
("Customers") who are beneficial owners of Advisor Shares. See the Advisor
Prospectus, "Shareholder Servicing." Agreements will be governed by a
distribution plan (the "Distribution Plan") pursuant to Rule 12b-1 under the
1940 Act. The Distribution Plan requires the Board, at least quarterly, to
receive and review written reports of amounts expended under the Distribution
Plan and the purpose for which such expenditures were made.
An Institution with which the Fund has entered into an Agreement
with respect to its Advisor Shares may charge a Customer one or more of the
following types of fees, as agreed upon by the Institution and the Customer,
with respect to the cash management or other services provided by the
Institution: (i) account fees (a fixed amount per month or per year); (ii)
transaction fees (a fixed amount per transaction processed); (iii)
compensation balance requirements (a minimum dollar amount a Customer must
maintain in order to obtain the services offered); or (iv) account maintenance
fees (a periodic charge based upon the percentage of assets in the account or
of the dividend paid on those assets). Services provided by an Institution to
Customers are in addition to, and not duplicative of, the services to be
provided under the Fund's co-administration and distribution and shareholder
servicing arrangements. A Customer of an Institution should read the relevant
Prospectus and this Statement of Additional Information in conjunction with
the Agreement and other literature describing the services and related fees
that would be provided by the Institution to its Customers prior to any
purchase of Fund shares. Prospectuses are available from the Fund's
distributor upon request. No preference will be shown in the selection of
Fund portfolio investments for the instruments of Institutions.
General. The Distribution Plan and the 12b-1 Plan will continue in
effect for so long as their continuance is specifically approved at least
annually by the Board, including a majority of the Directors who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the Distribution Plan or the 12b-1 Plan, as the
case may be ("Independent Directors"). Any material amendment of the
Distribution Plan or the 12b-1 Plan would require the approval of the Board in
the same manner. Neither
<PAGE>71
the Distribution Plan nor the 12b-1 Plan may be amended to increase materially
the amount to be spent thereunder without shareholder approval of the relevant
class of shares. The Distribution Plan or the 12b-1 Plan may be terminated at
any time, without penalty, by vote of a majority of the Independent Directors
or by a vote of a majority of the outstanding voting securities of the
relevant class of shares of the Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of the Fund's shares is equal to the per share
net asset value of the relevant class of shares of the Fund. Information on
how to purchase and redeem Fund shares and how such shares are priced is
included in the Prospectuses under "Net Asset Value."
Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
NYSE is closed, other than customary weekend and holiday closings, or during
which trading on the NYSE is restricted, or during which (as determined by the
SEC) an emergency exists as a result of which disposal or fair valuation of
portfolio securities is not reasonably practicable, or for such other periods
as the SEC may permit. (The Fund may also suspend or postpone the recordation
of an exchange of its shares upon the occurrence of any of the foregoing
conditions.)
If the Board determines that conditions exist which make payment of
redemption proceeds wholly in cash unwise or undesirable, the Fund may make
payment wholly or partly in securities or other investment instruments which
may not constitute securities as such term is defined in the applicable
securities laws. If a redemption is paid wholly or partly in securities or
other property, a shareholder would incur transaction costs in disposing of
the redemption proceeds. The Fund intends to comply with Rule 18f-1
promulgated under the 1940 Act with respect to redemptions in kind.
Automatic Cash Withdrawal Plan. An automatic cash withdrawal plan
(the "Plan") is available to shareholders who wish to receive specific amounts
of cash periodically. Withdrawals may be made under the Plan by redeeming as
many shares of the Fund as may be necessary to cover the stipulated withdrawal
payment. To the extent that withdrawals exceed dividends, distributions and
appreciation of a shareholder's investment in the Fund, there will be a
reduction in the value of the shareholder's investment and continued
withdrawal payments may reduce the shareholder's investment and ultimately
exhaust it. Withdrawal payments should not be considered as income from
investment in the Fund. All dividends and distributions on shares in the Plan
are automatically reinvested at net asset value in additional shares of the
Fund.
<PAGE>72
EXCHANGE PRIVILEGE
An exchange privilege with certain other funds advised by Warburg is
available to investors in the Fund. The funds into which exchanges of Common
Shares currently can be made are listed in the Common Share Prospectus.
Exchanges may also be made between certain Warburg Pincus Advisor Funds.
The exchange privilege enables shareholders to acquire shares in a
fund with a different investment objective when they believe that a shift
between funds is an appropriate investment decision. This privilege is
available to shareholders residing in any state in which the Common Shares or
Advisor Shares being acquired, as relevant, may legally be sold. Prior to any
exchange, the investor should obtain and review a copy of the current
prospectus of the relevant class of each fund into which an exchange is being
considered. Shareholders may obtain a prospectus of the relevant class of the
fund into which they are contemplating an exchange from Counsellors
Securities.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-current net
asset value of the relevant class and the proceeds are invested on the same
day, at a price as described above, in shares of the relevant class of the
fund being acquired. Warburg reserves the right to reject more than three
exchange requests by a shareholder in any 30-day period. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
The discussion set out below of tax considerations generally
affecting the Fund and its shareholders is intended to be only a summary and
is not intended as a substitute for careful tax planning by prospective
shareholders. Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Fund.
The Fund intends to qualify each year as a "regulated investment
company" under Subchapter M of the Code. If it qualifies as a regulated
investment company, the Fund will pay no federal income taxes on its taxable
net investment income (that is, taxable income other than net realized capital
gains) and its net realized capital gains that are distributed to
shareholders. To qualify under Subchapter M, the Fund must, among other
things: (i) distribute to its shareholders at least 90% of its taxable net
investment income (for this purpose consisting of taxable net investment
income and net realized short-term capital gains); (ii) derive at least 90% of
its gross income from dividends, interest, payments with respect to loans of
securities, gains from the sale or other disposition of securities, or other
income (including, but not limited to, gains from options, futures, and
forward contracts) derived with respect to the Fund's business of investing in
securities; (iii) derive less than 30% of its annual gross income from the
sale or other disposition of securities,
<PAGE>73
options, futures or forward contracts held for less than three months; and
(iv) diversify its holdings so that, at the end of each fiscal quarter of the
Fund (a) at least 50% of the market value of the Fund's assets is represented
by cash, U.S. government securities and other securities, with those other
securities limited, with respect to any one issuer, to an amount no greater in
value than 5% of the Fund's total assets and to not more than 10% of the
outstanding voting securities of the issuer, and (b) not more than 25% of the
market value of the Fund's assets is invested in the securities of any one
issuer (other than U.S. government securities or securities of other regulated
investment companies) or of two or more issuers that the Fund controls and
that are determined to be in the same or similar trades or businesses or
related trades or businesses. In meeting these requirements, the Fund may be
restricted in the selling of securities held by the Fund for less than three
months and in the utilization of certain of the investment techniques
described above and in the Fund's Prospectuses. As a regulated investment
company, the Fund will be subject to a 4% non-deductible excise tax measured
with respect to certain undistributed amounts of ordinary income and capital
gain required to be but not distributed under a prescribed formula. The
formula requires payment to shareholders during a calendar year of
distributions representing at least 98% of the Fund's taxable ordinary income
for the calendar year and at least 98% of the excess of its capital gains over
capital losses realized during the one-year period ending October 31 during
such year, together with any undistributed, untaxed amounts of ordinary income
and capital gains from the previous calendar year. The Fund expects to pay
the dividends and make the distributions necessary to avoid the application of
this excise tax.
The Fund's transactions, if any, in foreign currencies, forward
contracts, options and futures contracts (including options and forward
contracts on foreign currencies) will be subject to special provisions of the
Code that, among other things, may affect the character of gains and losses
recognized by the Fund (i.e., may affect whether gains or losses are ordinary
or capital), accelerate recognition of income to the Fund, defer Fund losses
and cause the Fund to be subject to hyperinflationary currency rules. These
rules could therefore affect the character, amount and timing of distributions
to shareholders. These provisions also (i) will require the Fund to mark-to-
market certain types of its positions (i.e., treat them as if they were closed
out) and (ii) may cause the Fund to recognize income without receiving cash
with which to pay dividends or make distributions in amounts necessary to
satisfy the distribution requirements for avoiding income and excise taxes.
The Fund will monitor its transactions, will make the appropriate tax
elections and will make the appropriate entries in its books and records when
it acquires any foreign currency, forward contract, option, futures contract
or hedged investment so that (a) neither the Fund nor its shareholders will be
treated as receiving a materially greater amount of capital gains or
distributions than actually realized or received, (b) the Fund will be able to
use substantially all of its losses for the fiscal years in which the losses
actually occur and (c) the Fund will continue to qualify as a regulated
investment company.
A shareholder of the Fund receiving dividends or distributions in
additional shares should be treated for federal income tax purposes as
receiving a distribution in an amount equal to the amount of money that a
shareholder receiving cash dividends or
<PAGE>74
distributions receives, and should have a cost basis in the shares received
equal to that amount.
The Fund's investments in zero coupon securities may create special
tax consequences. Zero coupon securities do not make interest payments,
although a portion of the difference between a zero coupon security's face
value and its purchase price is imputed as income to the Fund each year even
though the Fund receives no cash distribution until maturity. Under the U.S.
federal tax laws, the Fund will not be subject to tax on this income if it
pays dividends to its shareholders substantially equal to all the income
received from, or imputed with respect to, its investments during the year,
including its zero coupon securities. These dividends ordinarily will
constitute taxable income to the shareholders of the Fund.
Investors considering buying shares just prior to a dividend or
capital gain distribution should be aware that, although the price of shares
purchased at that time may reflect the amount of the forthcoming distribution,
those who purchase just prior to a distribution will receive a distribution
that will nevertheless be taxable to them. Upon the sale or exchange of
shares, a shareholder will realize a taxable gain or loss depending upon the
amount realized and the basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands, and, as described in the Prospectuses, will be long-term
or short-term depending upon the shareholder's holding period for the shares.
Any loss realized on a sale or exchange will be disallowed to the extent the
shares disposed of are replaced, including replacement through the
reinvestment of dividends and capital gains distributions in the Fund, within
a period of 61 days beginning 30 days before and ending 30 days after the
disposition of the shares. In such a case, the basis of the shares acquired
will be increased to reflect the disallowed loss.
Each shareholder will receive an annual statement as to the federal
income tax status of his dividends and distributions from the Fund for the
prior calendar year. Furthermore, shareholders will also receive, if
appropriate, various written notices after the close of the Fund's taxable
year regarding the federal income tax status of certain dividends and
distributions that were paid (or that are treated as having been paid) by the
Fund to its shareholders during the preceding year.
If a shareholder fails to furnish a correct taxpayer identification
number, fails to report fully dividend or interest income, or fails to certify
that he has provided a correct taxpayer identification number and that he is
not subject to "backup withholding," the shareholder may be subject to a 31%
"backup withholding" tax with respect to (i) taxable dividends and dis-
tributions and (ii) the proceeds of any sales or repurchases of shares of the
Fund. An individual's taxpayer identification number is his social security
number. Corporate shareholders and other shareholders specified in the Code
are or may be exempt from backup withholding. The backup withholding tax is
not an additional tax and may be credited against a taxpayer's federal income
tax liability. Dividends and distributions also may be subject to state and
local taxes depending on each shareholder's particular situation.
<PAGE>75
Investment in Passive Foreign Investment Companies
If the Fund purchases shares in certain foreign entities classified
under the Code as "passive foreign investment companies" ("PFICs"), the Fund
may be subject to federal income tax on a portion of an "excess distribution"
or gain from the disposition of the shares, even though the income may have to
be distributed as a taxable dividend by the Fund to its shareholders. In
addition, gain on the disposition of shares in a PFIC generally is treated as
ordinary income even though the shares are capital assets in the hands of the
Fund. Certain interest charges may be imposed on either the Fund or its
shareholders with respect to any taxes arising from excess distributions or
gains on the disposition of shares in a PFIC.
The Fund may be eligible to elect to include in its gross income its
share of earnings of a PFIC on a current basis. Generally, the election would
eliminate the interest charge and the ordinary income treatment on the
disposition of stock, but such an election may have the effect of accelerating
the recognition of income and gains by the Fund compared to a fund that did
not make the election. In addition, information required to make such an
election may not be available to the Fund.
On April 1, 1992 proposed regulations of the Internal Revenue
Service (the "IRS") were published providing a mark-to-market election for
regulated investment companies. The IRS subsequently issued a notice
indicating that final regulations will provide that regulated investment
companies may elect the mark-to-market election for tax years ending after
March 31, 1992 and before April 1, 1993. Whether and to what extent the
notice will apply to taxable years of the Fund is unclear. If the Fund is not
able to make the foregoing election, it may be able to avoid the interest
charge (but not the ordinary income treatment) on disposition of the stock by
electing, under proposed regulations, each year to mark-to market the stock
(that is, treat it as if it were sold for fair market value). Such an
election could result in acceleration of income to the Fund.
DETERMINATION OF PERFORMANCE
From time to time, the Fund may quote the total return of its Common
Shares and/or Advisor Shares in advertisements or in reports and other
communications to shareholders. These figures are calculated by finding the
average annual compounded rates of return for the one-, five- and ten- (or
such shorter period as the relevant class of shares has been offered) year
periods that would equate the initial amount invested to the ending redeemable
value according to the following formula: P (1 + T)n = ERV. For purposes of
this formula, "P" is a hypothetical investment of $1,000; "T" is average
annual total return; "n" is number of years; and "ERV" is the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
one-, five- or ten-year periods (or fractional portion thereof). Total return
or "T" is computed by finding the average annual change in the value of an
initial $1,000 investment over the period and assumes that all dividends and
distributions are reinvested during the period.
<PAGE>76
The Fund may advertise, from time to time, comparisons of the
performance of its Common Shares and/or Advisor Shares with that of one or
more other mutual funds with similar investment objectives. The Fund may
advertise average annual calendar year-to-date and calendar quarter returns,
which are calculated according to the formula set forth in the preceding
paragraph, except that the relevant measuring period would be the number of
months that have elapsed in the current calendar year or most recent three
months, as the case may be. Investors should note that this performance may
not be representative of the Fund's total return in longer market cycles.
The performance of a class of Fund shares will vary from time to
time depending upon market conditions, the composition of the Fund's portfolio
and operating expenses allocable to it. As described above, total return is
based on historical earnings and is not intended to indicate future
performance. Consequently, any given performance quotation should not be
considered as representative of performance for any specified period in the
future. Performance information may be useful as a basis for comparison with
other investment alternatives. However, the Fund's performance will
fluctuate, unlike certain bank deposits or other investments which pay a fixed
yield for a stated period of time. Any fees charged by Institutions or other
institutional investors directly to their customers in connection with invest-
ments in Fund shares are not reflected in the Fund's total return, and such
fees, if charged, will reduce the actual return received by customers on their
investments.
Warburg believes that a diversified portfolio of international
equity securities, when combined with a similarly diversified portfolio of
domestic equity securities, tends to have a lower volatility than a portfolio
composed entirely of domestic securities. Furthermore, international equities
have been shown to reduce volatility in single asset portfolios regardless of
whether the investments are in all domestic equities or all domestic fixed-
income instruments, and research indicates that volatility can be
significantly decreased when international equities are added.
To illustrate this point, the performance of international equity
securities, as measured by the Morgan Stanley Capital International (EAFE)
Europe, Australia and Far East Index (the "MS-EAFE Index"), has equalled or
exceeded that of domestic equity securities, as measured by the Standard &
Poor's 500 Composite Stock Index (the "S & P 500 Index") in 14 of the last 23
years. The following table compares annual total returns of the MS-EAFE Index
and the S & P 500 Index for the calendar years shown.
<PAGE>77
MS-EAFE Index vs. S&P 500 Index
1972-1994
Annual Total Return+
Year MS-EAFE Index S&P 500 Index
1972* 33.28 14.43
1973* -16.82 -18.85
1974* -25.60 -30.96
1975* 31.21 27.81
1976 -.36 18.27
1977* 14.61 -9.64
1978* 28.92 5.01
1979 1.82 9.02
1980 19.01 27.71
1981* -4.85 -10.17
1982 -4.63 14.80
1983* 20.91 13.93
1984* 5.02 -1.22
1985* 52.97 29.45
1986* 66.80 14.97
1987* 23.18 .26
1988* 26.66 8.61
1989 9.22 28.81
1990 -24.71 -8.24
1991 10.19 27.94
1992 -13.89 4.43
1993* 30.49 7.22
1994* 6.24 -1.34
1995 9.42 34.71
[FN]
_________________
+ Without reinvestment of dividends.
* The MS-EAFE Index has outperformed the S&P 500 Index 15 out of the last
24 years.
Source: Morgan Stanley Capital International; Bloomberg Financial Markets
The quoted performance information shown above is not intended to
indicate the future performance of the Fund.
Advertising or supplemental sales literature relating to the Fund
may describe the percentage decline from all-time high levels for certain
foreign stock markets. It may
<PAGE>78
also describe how the Fund differs from the MS-EAFE Index in composition. The
Fund may also discuss in advertising and sales literature the history of
Japanese stock markets, including the Tokyo Stock Exchange and OTC market.
Sales literature and advertising may also discuss trends in the economy and
corporate structure in Japan, including the contrast between the sales growth,
profit growth, price/earnings ratios, and return on equity (ROE) of companies;
it may discuss the cultural changes taking place among consumers in Japan,
including increasing cost-consciousness and accumulation of purchasing power
and wealth among Japanese consumers, and the ability of new companies to take
advantage of these trends. The Fund may also discuss current statistics and
projections of the volume, market capitalization, sector weightings and number
of issues traded on Japanese exchanges and in Japanese over-the-counter
markets, and may include graphs of such statistics in advertising and other
sales literature.
ACCOUNTANTS AND COUNSEL
Coopers & Lybrand L.L.P. ("Coopers & Lybrand"), with principal
offices at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves
as independent accountants for the Fund. The statement of assets and
liabilities of Warburg, Pincus Japan Growth Fund, Inc. as of December 5, 1995
that appears in this Statement of Additional Information has been audited by
Coopers & Lybrand, whose report thereon appears elsewhere herein and has been
included herein in reliance upon the report of such firm of independent
accountants given upon their authority as experts in accounting and auditing.
Willkie Farr & Gallagher serves as counsel for the Fund as well as
counsel to Warburg, Counsellors Service and Counsellors Securities.
FINANCIAL STATEMENT
The Fund's financial statement follows the Report of Independent
Accountants.
<PAGE>79
APPENDIX
DESCRIPTION OF RATINGS
Commercial Paper Ratings
Commercial paper rated A-1 by Standard and Poor's Ratings Group
("S&P") indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign designation. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating assigned
by Moody's Investors Services, Inc. ("Moody's"). Issuers rated Prime-1 (or
related supporting institutions) are considered to have a superior capacity
for repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics of issuers rated Prime-1 but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
Corporate Bond Ratings
The following summarizes the ratings used by S&P for corporate
bonds:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and
repay principal.
AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB - This is the lowest investment grade. Debt rated BBB is
regarded as having an adequate capacity to pay interest and repay principal.
Although it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for bonds in this category than
for bonds in higher rated categories.
BB, B and CCC - Debt rated BB and B are regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in
<PAGE>80
accordance with the terms of the obligation. BB represents a lower degree of
speculation than B, and CCC the highest degree of speculation. While such
bonds will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which could
lead to inadequate capacity to meet timely interest and principal payments.
The BB rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BBB rating.
B - Debt rated B has a greater vulnerability to default but
currently have the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will likely
impair capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The CCC
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on which no
interest is being paid. Such debt is rated between debt rated C and debt
rated D.
To provide more detailed indications of credit quality, the ratings
may be modified by the addition of a plus or minus sign to show relative
standing within this major rating category.
D - Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The D rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
<PAGE>81
The following summarizes the ratings used by Moody's for corporate
bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations.
Factors giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime
in the future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers (1, 2 and 3) with respect to the
bonds rated "Aa" through "B." The modifier 1 indicates that the bond being
rated ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the bond
ranks in the lower end of its generic rating category.
Caa - Bonds that are rated Caa are of poor standing. These issues
may be in default or present elements of danger may exist with respect to
principal or interest.
<PAGE>82
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
<PAGE>83
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Warburg, Pincus Japan Growth Fund, Inc.
We have audited the accompanying Statement of Assets and Liabilities of
Warburg, Pincus Japan Growth Fund, Inc. (the "Fund") as of December 5, 1995.
This financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of Warburg, Pincus Japan Growth
Fund, Inc. as of December 5, 1995 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
December 8, 1995
<PAGE>84
WARBURG PINCUS JAPAN GROWTH FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
as of December 5, 1995
Assets:
Cash $100,000
Deferred Organizational Costs 65,000
Deferred Offering Costs 47,055
-------
Total Assets 212,055
-------
Liabilities:
Accrued Organizational Costs 65,000
Accrued Offering Costs 47,055
-------
Total Liabilities 112,055
-------
Net Assets $100,000
=======
Net Asset Value, Redemption and
Offering Price Per Share (three billion
shares authorized, consisting of 2
billion Common Shares and 1 billion
Advisor Shares - $.001 per share)
applicable to 9,900 Common Shares
and 100 Advisor Shares outstanding. $10.00
=====
The accompanying notes are an integral part of this financial statement.
<PAGE>85
WARBURG PINCUS JAPAN GROWTH FUND, INC.
Notes to Financial Statement
December 5, 1995
1. Organization:
Warburg Pincus Japan Growth Fund, Inc. (the "Fund") was incorporated on
October 10, 1995 under the laws of the State of Maryland. The Fund is
registered under the Investment Company Act of 1940, as amended, as an open-
end management investment company. The Fund's charter authorizes its Board of
Directors to issue three billion full and fractional shares of capital stock,
$.001 par value per share, of which one billion shares are designated Advisor
Shares. Common Shares bear fees of .25% of average daily net asset value
pursuant to a 12b-1 distribution plan. Advisor Shares bear fees not to exceed
.75% of average daily net asset value pursuant to a 12b-1 distribution plan.
The assets of each class are segregated, and a shareholder's interest is
limited to the class in which shares are held. The Fund has not commenced
operations except those related to organizational matters and the sale of
9,900 Common Shares and 100 Advisor Shares (the "Initial Shares") to Warburg
Pincus Counsellors, Inc., the Fund's investment advisor (the "Adviser"), on
December 5, 1995.
2. Organizational Costs, Offering Costs and Transactions with Affiliates:
Organizational costs have been capitalized by the Fund and are being amortized
over sixty months commencing with operations. Offering costs have been
capitalized by the Fund and are being amortized over a period of one year. In
the event any of the Initial Shares of the Fund are redeemed by any holder
thereof during the period that the Fund is amortizing its organizational
costs, the redemption proceeds payable to the holder thereof by the Fund will
be reduced by unamortized organizational costs in the same ratio as the number
of Initial Shares outstanding at the time of redemption.
Certain officers and a director of the Fund are also officers and a director
of the Adviser. These officers and director are paid no fees by the Fund for
serving as an officer or director of the Fund.
