<PAGE>1
As filed with the U.S. Securities and Exchange Commission
on November 1, 1996
Securities Act File No. 33-______
Investment Company Act File No. 811-____
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No.__ [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 [x]
Amendment No. [ ]
(Check appropriate box or boxes)
Warburg, Pincus Health Sciences Fund, Inc.
.......................................
(Exact Name of Registrant as Specified in Charter)
466 Lexington Avenue
New York, New York 10017-3147
........................................................
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 878-0600
Mr. Eugene P. Grace
Warburg, Pincus Health Sciences Fund, Inc.
466 Lexington Avenue
New York, New York 10017-3147
......................................
(Name and Address of Agent for Service)
Copy to:
Rose F. DiMartino, Esq.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022-4677
<PAGE>2
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
Title of Securities Amount Being Proposed Maximum Proposed Maximum
Being Registered Registered Offering Price per Aggregate Amount of
Unit Offering Price Registration Fee
------------------- ------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Shares of common
stock, $.001 par value
per share Indefinite* Indefinite* Indefinite* $500
- ----------------------------------------------------------------
* An indefinite number of shares of common stock of the Registrant is
being registered by this Registration Statement pursuant to Rule 24f-2
under the Investment Company Act of 1940, as amended (the "1940 Act").
</TABLE>
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended (the "1933 Act"), or
until the Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
<PAGE>3
WARBURG, PINCUS HEALTH SCIENCES FUND, INC.
FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Part A
Item No. Prospectus Heading
- -------- ------------------
<S> <S>
1. Cover Page.................................................... Cover Page
2. Synopsis...................................................... The Fund's Expenses
3. Condensed Financial Information............................... Not applicable
4. General Description of
Registrant.................................................... Cover Page; Investment Objective
and Policies; Risk Factors and Special
Considerations and Certain Investment
Strategies; Investment Guidelines;
General Information
5. Management of the Fund........................................ Management of the Fund
6. Capital Stock and Other
Securities.................................................... General Information
7. Purchase of Securities Being
Offered....................................................... How to Open an Account; How to
Purchase Shares; Management of the
Fund; Net Asset Value
8. Redemption or Repurchase...................................... How to Redeem and Exchange Shares
9. Pending Legal Proceedings..................................... Not applicable
</TABLE>
<PAGE>4
<TABLE>
<CAPTION>
Part B Heading in Statement of
Item No. Additional Information
- -------- -----------------------
<S> <C>
10. Cover Page.................................................... Cover Page
11. Table of Contents............................................. Contents
12. General Information and History............................... Management of the Fund
13. Investment Objectives
and Policies.................................................. Investment Objective; Investment
Policies
14. Management of the Registrant.................................. Management of the Fund
15. Control Persons and Principal
Holders of Securities......................................... Management of the Fund; See
Prospectus-- "Management of the Fund"
16. Investment Advisory and
Other Services................................................ Management of the Fund; See
Prospectus-- "Management of the Fund"
17. Brokerage Allocation
and Other Practices........................................... Investment Policies --
Portfolio Transactions; See
Prospectus-- "Portfolio Transactions
and Turnover Rate"
18. Capital Stock and Other
Securities.................................................... Management of the
Fund--Organization of the Fund; See
Prospectus-"General Information"
19. Purchase, Redemption and Pricing
of Securities Being Offered................................... Additional Purchase and Redemption
Information; See Prospectus-"How to
Open an Account," "How to Purchase
Shares," "How to Redeem and Exchange
Shares," "Net Asset Value"
</TABLE>
<PAGE>5
<TABLE>
<CAPTION>
Part B Heading in Statement of
Item No. Additional Information
- -------- -----------------------
<S> <C>
20. Tax Status.................................................... Additional Information Concerning
Taxes; See Prospectus--"Dividends,
Distributions and Taxes"
21. Underwriters.................................................. Investment Policies-- Portfolio
Transactions; See Prospectus--
"Management of the Fund"
22. Calculation of Performance Data............................... Determination of Performance
23. Financial Statements.......................................... Statements of Assets and Liabilities;
Report of Coopers and Lybrand, L.L.P.,
Independent Accountants
</TABLE>
Part C
Information required to be included in Part C is set forth after the appropriate
item, so numbered, in Part C to this Registration Statement.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT
BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE
ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR
SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
December 31, 1996
WARBURG PINCUS
HEALTH SCIENCES FUND
[Logo]
<PAGE>
Prospectus December 31, 1996
Warburg Pincus Funds are a family of open-end mutual funds that offer
investors a variety of investment opportunities. One fund is described in this
Prospectus:
Warburg Pincus Health Sciences Fund seeks capital appreciation by investing in
equity securities of companies that are principally engaged in the research,
development, production or distribution of products or services related to
health care, medicine or the life sciences (collectively termed 'health
sciences').
NO LOAD CLASS OF COMMON SHARES
_______________________________________________________________________________
Common Shares that are 'no load' are offered by this Prospectus (i) directly
from the Fund's distributor, Counsellors Securities Inc., and (ii) through
various brokerage firms including Charles Schwab & Company, Inc. Mutual Fund
OneSourceTM Program; Fidelity Brokerage Services, Inc. FundsNetworkTM Program;
Jack White & Company, Inc.; and Waterhouse Securities, Inc.
LOW MINIMUM INVESTMENT
_______________________________________________________________________________
The minimum initial investment in the Fund is $2,500 ($500 for an IRA or
Uniform Gifts to Minors Act account) and the minimum subsequent investment is
$100. Through the Automatic Monthly Investment Plan, subsequent investment
minimums may be as low as $50. 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 for
reference, along with other related materials, on the SEC Internet Web site
(http://www.sec.gov). The Statement of Additional Information is also
available to investors without charge by calling Warburg Pincus Funds at (800)
927-2874. Information regarding the status of shareholder accounts may be
obtained by calling Warburg Pincus Funds at (800) 927-2874. 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 INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL
AGENCY. INVESTMENTS IN SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
- ---------------------------------------------------------------------
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>
THE FUND'S EXPENSES
_______________________________________________________________________________
Warburg Pincus Health Sciences Fund (the 'Fund') is authorized to offer two
separate classes of shares: Common Shares and Advisor Shares. The Fund
currently offers only Common Shares. For a description of Advisor Shares see
'General Information.' Common Shares pay the Fund's distributor a 12b-1 fee.
See 'Management of the Funds -- Distributor.'
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............................................... %
12b-1 Fees.................................................... .25%
Other Expenses................................................ %
--
Total Fund Operating Expenses (after fee waivers)`D'.......... %
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....................................................... $
3 years...................................................... $
- ---------------------------------------------------------------------
`D' Absent the anticipated waiver of fees by the Fund's investment adviser and
co-administrator, Management Fees would equal %, Other Expenses would
equal % and Total Fund Operating Expenses would equal %. Other
Expenses for the Fund are based on annualized estimates of expenses for
the fiscal year ending October 31, 1997, net of any fee waivers or expense
reimbursements.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 a Common Shareholder of the Fund. Certain broker-
dealers and financial institutions also may charge their clients fees in
connection with investments in the Fund's Common 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').
2
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
_______________________________________________________________________________
Warburg, Pincus Counsellors, Inc. ('Warburg'), the Fund's investment
adviser, believes that the aging of the population in the United States and
other industrialized nations will have a fundamental impact on financial
markets. The Fund is designed to enable investors to participate in the
opportunities that changing demographic forces can be expected to create as
health sciences companies respond to the challenges ahead.
The Fund's investment objective is capital appreciation. 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 diversified management investment company. The Fund intends to
invest at least 80% of its total assets in equity securities of health
sciences companies, and under normal market conditions will invest at least
65% of its assets in equity and debt securities of health science companies.
Equity securities are common stocks, preferred stocks, warrants and securities
convertible into or exchangeable for common stocks. Health science companies
are companies that are principally engaged in the research, development,
production or distribution of products or services related to health care,
medicine or the life sciences (collectively termed 'health sciences'). A
company is considered to be 'principally engaged' in health sciences when at
least 50% of its assets are committed to, or at least 50% of its revenues or
operating profits are derived from, the activities described in the previous
sentence. A company will also be considered 'principally engaged' in health
sciences if that company has the potential for capital appreciation primarily
as a result of particular products, technology, patents or other market
advantages in these industries. The Fund does not anticipate that companies in
this latter category will represent more than 35% of the Fund's investments in
health sciences.
Warburg believes that health sciences can be divided into four major
categories: (1) Buyers, notably HMOs; (2) Providers, including doctors and
group practices, and also services, including hospitals and nursing homes; (3)
Suppliers, including pharmaceuticals, equipment and devices; and (4)
Innovators, including biotechnology, gene therapy, and drug delivery systems.
Warburg believes that active management of the Fund's portfolio among these
categories provides more diversification than a focus on any one category. The
Fund may invest in a variety of businesses in these categories, which may
include:
Alternative Site Health Care Delivery
Biotechnology
Dental Products
Environmental Products and Services
3
<PAGE>
Health Care, Life Sciences Pharmaceutical and Dental Products
Distribution
Health Care Information Systems
Health Care REITs
Hospital Management
Hospital Supply and Medical Device Technology
Diagnostic and Therapeutic Laboratory Supplies and Equipment
Long-Term Care, Sub-Acute Care, Rehabilitation Services and Home
Health Care
Managed Care: HMOs
Managed Care: Specialty Cost Containment
Medical, Diagnostic and Biochemical Research and Development
Nutrition and Food
Personal Care and Cosmetics
Pharmaceuticals (including Generics)
Physician Practice Management
Retail Drug and Other Health Stores
Vendors to Health Sciences Companies
The Fund intends to concentrate its investments in health sciences companies
in three industries: services, pharmaceuticals and medical devices. The Fund
will, under normal market conditions, invest at least 25% of its assets in the
aggregate in these three industries. This policy may expose the Fund to
greater risk than a health sciences fund that diversified more broadly among
industries.
The Fund may invest in companies of any size, and may invest up to 35% of
its assets in foreign securities.
PORTFOLIO INVESTMENTS
_______________________________________________________________________________
Debt Securities. The Fund may invest up to 20% of its total assets in 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 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. The Fund may invest in debt
securities rated below investment grade and as low as C by Moody's Investors
Service, Inc. ('Moody's') or D by Standard & Poor's Ratings Services ('S&P')
and may invest in unrated issues that are believed by Warburg to have
financial characteristics that are comparable and that are otherwise similar
in quality to the rated issues it purchases.
Money Market Obligations. The Fund is authorized to invest, under normal
market conditions, up to 20% of its total assets in domestic and foreign
short-term (one year or less remaining to maturity) and medium-term (five
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;
4
<PAGE>
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 on portfolio securities 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 in which the Fund seeks 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
5
<PAGE>
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.
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 each Fund's investments, see
'Portfolio Investments' beginning at page 4 and 'Certain Investment
Strategies' beginning at page 9.
Health Sciences Companies. Since the Fund focuses its investments on
companies involved in the health sciences, an investment in the Fund may
involve a greater degree of risk than an investment in other mutual funds that
seek capital appreciation by investing in a broader mix of issuers. Companies
engaged in biotechnology, drugs and medical devices are affected by, among
other things, limited patent duration, intense competition, obsolescence
brought about by rapid technological change, and regulatory requirements. In
addition, many health sciences companies are smaller and less seasoned, suffer
from inexperienced management, offer limited product lines, or may not yet
offer products, and may have persistent losses or erratic revenue patterns.
Securities of these smaller companies may have more limited marketability and,
thus, may be more volatile. Because small 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. There is also typically less publicly available
information concerning smaller companies than for larger, more established
ones.
Other health sciences companies, including pharmaceutical companies,
companies undertaking research and development, and operators of health care
facilities and their suppliers are subject to government regulation, product
or service approval and, with respect to medical devices, the receipt of
necessary reimbursement codes, which could have a significant effect on the
price and availability of such products and services, and may adversely affect
the revenues of these companies. These companies are also susceptible to
product liability claims and competition from manufacturers and distributors
of generic products. Companies engaged in the ownership or management of
health care facilities receive a substantial portion of their
6
<PAGE>
revenues from federal and state governments through Medicare and Medicaid
payments. These sources of revenue are subject to extensive regulation and
government appropriations are under intense scrutiny. Numerous federal and
state legislative initiatives are being considered that seek to control health
care costs and, consequently, could affect the profitability and stock prices
of companies engaged in the health sciences.
Lower-Rated Securities. There are certain factors associated with lower-
rated securities. The Fund may invest in securities rated as low as C by
Moody's or D by S&P. The Fund may invest in unrated securities considered to
be of equivalent quality. Securities that are rate C by Moody's are the lowest
rated class and can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Debt rated D by S&P is in default or
is expected to default upon maturity or payment date.
Lower-rated and comparable unrated securities (commonly referred to as 'junk
bonds') (i) will likely have some quality and protective characteristics that,
in the judgment of the rating organization, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (ii) are
predominately speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation.
The market values of certain of these securities also tend to be more
sensitive to individual corporate developments and changes in economic
conditions than higher-quality securities. In addition, medium- and
lower-rated securities and comparable unrated securities generally present a
higher degree of credit risk. 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 value of securities in lower rated categories is more volatile
than that of higher quality securities. In addition, the Fund may have
difficulty disposing of certain of these securities because there may be a
thin trading market. The lack of a liquid secondary market for certain
securities may have an adverse impact on the Fund's ability to dispose of
particular issues and may make it more difficult for the Fund to obtain
accurate market quotations for purposes of valuing the Fund and calculating
their respective net asset values.
For a complete description of the rating systems of Moody's and S&P, see the
Appendix to the Statement of Additional Information.
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 Board determines on an ongoing basis that an
adequate trading market exists for the security. In addition to an adequate
trading
7
<PAGE>
market, the Board will also consider factors such as trading activity,
availability of 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 Fund 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.
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 Funds' 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
8
<PAGE>
exceed usual and customary levels 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. Detailed information
concerning the Fund's strategies and their related risks is contained below
and in the Statement of Additional Information.
Foreign Securities. The Fund may invest up to 35% of its total assets in the
securities of foreign issuers. 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
9
<PAGE>
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 securities and commodities exchanges and the NASD and by the
Internal Revenue Code of 1986, as amended (the 'Code').
Securities and Stock Index Options. The Fund may write covered call and put
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 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.
10
<PAGE>
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. The Fund will only engage in
currency exchange transactions for hedging purposes.
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.
11
<PAGE>
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 and indexes; 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 securities 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 Selling. The Fund may from time to time sell securities short. A short
sale is a transaction in which the Fund sells borrowed securities in
anticipation of a decline in the market price of the securities. Possible
losses from short sales differ from losses that could be incurred from a
purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested. The
current market value of the securities sold short will not exceed 10% of the
Fund's assets.
When the Fund makes a short sale, the proceeds it receives from the sale are
retained by a broker until the Fund replaces the borrowed securities. To
deliver the securities to the buyer, the Fund must arrange through a broker to
borrow the securities and, in so doing, the Fund becomes obligated to replace
the securities borrowed at their market price at the time of replacement,
whatever that price may be. The Fund may have to pay a premium to borrow the
securities and must pay any dividends or interest payable on the securities
until they are replaced.
The Fund's obligation to replace the securities borrowed in connection with
a short sale will be secured by cash or U.S. government securities deposited
as collateral with the broker. In addition, the Fund will place in a
segregated account with its custodian or a qualified subcustodian an amount of
cash or U.S. government securities equal to the difference, if any, between
(i) the market value of the securities sold at the time they were sold short
and (ii) any cash or U.S. government securities deposited as collateral with
the broker in connection with the short sale (not including the proceeds of
the short sale). Until it replaces the borrowed securities, the Fund will
maintain the segregated account daily at a level so that (a) the amount
deposited in the account plus the amount deposited with the broker (not
including the proceeds from the short sale) will equal the current market
value of the securities sold short and (b) the amount deposited in the account
plus the amount deposited with the broker (not including the proceeds from the
short
12
<PAGE>
sale) will not be less than the market value of the securities at the time
they were sold short.
Short Sales Against the Box. The Fund may, in addition to engaging in short
sales as described above, 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. The 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 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 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 15% of its net assets in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable ('illiquid securities'), 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. In addition, up to 15% of the Fund's 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 reverse repurchase agreements and any other borrowing
by the Fund may not exceed 30% of its total assets, and may pledge its assets
in connection with borrowings. Whenever borrowings (including reverse
repurchase agreements) exceed 5% of the value of the Fund's total assets, the
Fund will not make any investments (including roll-overs). Except for the
limitations on borrowing, the investment guidelines set
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<PAGE>
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 FUNDS
_______________________________________________________________________________
Investment Advisers. 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, 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 % 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 ,
1996, Warburg managed approximately $ billion of assets, including
approximately $ billion of investment company assets. 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 & 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 Managers. Susan L. Black and Patricia F. Widner are portfolio
managers of the Fund. Ms. Black is a senior managing director of EMW and has
been with Warburg since 1985. Ms. Widner is a vice president of EMW and has
been with Warburg since 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
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<PAGE>
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 the Fund's 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 PFPC a fee calculated at an annual rate of .10% of the Fund's first $500
million in average daily net assets, .075% of the next $1 billion in assets
and .05% of assets exceeding $1.5 billion, 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. Counsellors
Securities receives a fee at an annual rate equal to .25% of the average daily
net assets of the Fund's Common Shares for distribution services, pursuant to
a shareholder servicing and distribution plan (the '12b-1 Plan') adopted by
the Fund pursuant to Rule 12b-1 under the 1940 Act. Amounts paid to
Counsellors Securities under the 12b-1 Plan may be used by Counsellors
Securities to cover expenses that are primarily intended to result in, or that
are primarily attributable to, (i) the sale of the Common Shares, (ii) ongoing
servicing and/or maintenance of the accounts of Common Shareholders of the
Fund and (iii) sub-transfer agency services, subaccounting services or
administrative services related to the sale of the Common Shares, all as set
forth in the 12b-1 Plan. Payments under the 12b-1
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<PAGE>
Plan are not tied exclusively to the distribution expenses actually incurred
by Counsellors Securities and the payments may exceed distribution expenses
actually incurred. The Board evaluates the appropriateness of the 12b-1 Plan
on a continuing basis and in doing so considers all relevant factors,
including expenses borne by Counsellors Securities and amounts received under
the 12b-1 Plan.
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 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 choose 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 OPEN AN ACCOUNT
_______________________________________________________________________________
In order to invest in the Fund, an investor must first complete and sign an
account application. To obtain an application, an investor may telephone
Warburg Pincus Funds at (800) 927-2874 An investor may also obtain an account
application by writing to:
Warburg Pincus Funds
P.O. Box 9030
Boston, Massachusetts 02205-9030
Completed and signed account applications should be mailed to Warburg Pincus
Funds at the above address.
Retirement Plans and UGMA Accounts. For information (i) about investing in
the Fund through a tax-deferred retirement plan, such as an Individual
Retirement Account ('IRA') or a Simplified Employee Pension IRA ('SEP-IRA'),
or (ii) about opening a Uniform Gifts to Minors Act or Uniform Transfers to
Minors Act ('UGMA') account, an investor should telephone Warburg Pincus Funds
at (800) 927-2874 or write to Warburg Pincus Funds at the address set forth
above. Investors should consult their own tax advisers about the establishment
of retirement plans and UGMA accounts.
Changes to Account. For information on how to make changes to an account, an
investor should telephone Warburg Pincus Funds at (800) 927-2874.
HOW TO PURCHASE SHARES
_______________________________________________________________________________
Common Shares of the Fund may be purchased either by mail or, with special
advance instructions, by wire. The minimum initial investment in the Fund is
$2,500 and the minimum subsequent investment is $100, except that
16
<PAGE>
subsequent minimum investments can be as low as $50 under the Automatic
Monthly Investment Plan described below. For retirement plans and UGMA
accounts, the minimum initial investment is $500. The Fund reserves the right
to change the initial and subsequent investment minimum requirements at any
time. In addition, the Fund may, in its sole discretion, waive the initial and
subsequent investment minimum requirements with respect to investors who are
employees of EMW or its affiliates or persons with whom Warburg has entered
into an investment advisory agreement. Existing investors will be given 15
days' notice by mail of any increase in investment minimum requirements.
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 below. Wire
payments for initial and subsequent investments should be preceded by an order
placed with the Fund and should clearly indicate the investor's account number
and the name of the Fund in which shares are being purchased. The Fund
reserves the right to suspend the offering of shares for a period of time or
to reject any specific purchase order. In the interest of economy and
convenience, physical certificates representing shares in the Funds are not
normally issued.
By Mail. If the investor desires to purchase Common Shares by mail, a check
or money order made payable to the Fund or Warburg Pincus Funds (in U.S.
currency) should be sent along with the completed account application to
Warburg Pincus Funds through its distributor, Counsellors Securities Inc., at
the address set forth above. Checks payable to the investor and endorsed to
the order of the Fund or Warburg Pincus Funds will not be accepted as payment
and will be returned to the sender. If payment is received in proper form by
the close of regular trading on the New York Stock Exchange (the 'NYSE')
(currently 4:00 p.m., Eastern time) on a day that the Fund calculates its net
asset value (a 'business day'), the purchase will be made at the Fund's net
asset value calculated at the end of that day. If payment is received after
the close of regular trading on the NYSE, the purchase will be effected at the
Fund's net asset value determined for the next business day after payment has
been received. Checks or money orders that are not in proper form or that are
not accompanied or preceded by a complete account application will be returned
to the sender. Shares purchased by check or money order are entitled to
receive dividends and distributions beginning on the day after payment has
been received. Checks or money orders in payment for shares of more than one
Warburg Pincus Fund should be made payable to Warburg Pincus Funds and should
be accompanied by a breakdown of amounts to be invested in each fund. If a
check used for purchase does not clear, the Fund will cancel the purchase and
the investor may be liable for losses or fees incurred. For a description of
the manner of calculating the Fund's net asset value, see 'Net Asset Value'
below.
By Wire. Investors may also purchase Common Shares in the Fund by wiring
funds from their banks. Telephone orders by wire will not be accepted
17
<PAGE>
until a completed account application in proper form has been received and an
account number has been established. Investors should place an order with the
Fund prior to wiring funds by telephoning (800) 927-2874. Federal funds may be
wired 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.
[Insert Warburg Pincus Fund name(s) here]
DDA# 9904-649-2
[Shareowner name]
[Shareowner account number]
If a telephone order is received by the close of regular trading on the NYSE
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 to the
prospective investor after prompt inquiry. If a telephone order is placed and
payment by wire is not received on the same day, the Fund will cancel the
purchase and the investor may be liable for losses or fees incurred.
Purchases Through Intermediaries. Common Shares of the Fund are available
through the Charles Schwab & Company, Inc. Mutual Fund OneSourceTM Program;
Fidelity Brokerage Services, Inc. Funds-NetworkTM Program; Jack White &
Company, Inc.; and Waterhouse Securities, Inc. Generally, these programs do
not require customers to pay a transaction fee in connection with purchases.
The Fund is also available through certain broker-dealers, financial
institutions and other industry professionals (including the programs
described above, collectively, 'Service Organizations'), which 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 the initial and subsequent investment minimums, redemption fees
and certain trading restrictions, may be modified or waived by Service
Organizations, and administrative charges may be imposed for the services
rendered. Therefore, a client or customer should contact the Service
Organization acting on his behalf concerning the
18
<PAGE>
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 Service Organization. Service Organizations will be
responsible for promptly transmitting client or customer purchase and
redemption orders to the Fund in accordance with their agreements with clients
or customers. Service Organizations that have entered into agreements with the
Fund or its agent may enter confirmed purchase orders on behalf of clients and
customers, with payment to follow no later than the Funds' pricing on the
following business day. If payment is not received by such time, the Service
Organization could be held liable for resulting fees or losses.
For administration, subaccounting, transfer agency and/or other services,
Warburg, Counsellors Securities or their affiliates may pay Service
Organizations and certain recordkeeping organizations with whom they enter
into agreements a fee generally up to .35% (the 'Service Fee') of the annual
average value of accounts maintained by such Service Organizations or
recordkeepers with the Fund. A portion of the Service Fee may be borne by the
Fund as a transfer agency fee. In addition, a Service Organization or
recordkeeper may directly or indirectly pay a portion of its Service Fee to
the Fund's custodian or transfer agent for costs related to accounts of its
clients or customers. The Service Fee payable to any one Service Organization
or recordkeeper is determined based upon a number of factors, including the
nature and quality of services provided, the operations processing
requirements of the relationship and the standardized fee schedule of the
Service Organization or recordkeeper.
Automatic Monthly Investing. Automatic monthly investing allows shareholders
to authorize a Fund to debit their bank account monthly ($50 minimum) for the
purchase of Fund shares on or about either the tenth or twentieth calendar day
of each month. To establish the automatic monthly investing option, obtain a
separate application or complete the 'Automatic Investment Program' section of
the account applications and include a voided, unsigned check from the bank
account to be debited. Only an account maintained at a domestic financial
institution which is an automated clearing house member may be used.
Shareholders using this service must satisfy the initial investment minimum
for the Fund prior to or concurrent with the start of any Automatic Investment
Program. Please refer to an account application for further information, or
contact Warburg Pincus Funds at (800) 927-2874 for information or to modify or
terminate the program. Investors should allow a period of up to 30 days in
order to implement an automatic investment program. The failure to provide
complete information could result in further delays.
HOW TO REDEEM AND EXCHANGE SHARES
_______________________________________________________________________________
Redemption of Shares. An investor in the Fund may redeem (sell) his shares
on any day that the Fund's net asset value is calculated (see 'Net Asset
Value' below).
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<PAGE>
Common Shares of the Fund may either be redeemed by mail or by telephone.
Investors should realize that in using the telephone redemption and exchange
option, you may be giving up a measure of security that you may have if you
were to redeem or exchange your shares in writing. If an investor desires to
redeem his shares by mail, a written request for redemption should be sent to
Warburg Pincus Funds at the address indicated above under 'How to Open an
Account.' An investor should be sure that the redemption request identifies
the Fund, the number of shares to be redeemed and the investor's account
number. In order to change the bank account or address designated to receive
the redemption proceeds, the investor must send a written request (with
signature guarantee of all investors listed on the account when such a change
is made in conjunction with a redemption request) to Warburg Pincus Funds.
Each mail redemption request must be signed by the registered owner(s) (or his
legal representative(s)) exactly as the shares are registered. If an investor
has applied for the telephone redemption feature on his account application,
he may redeem his shares by calling Warburg Pincus Funds at (800) 927-2874
between 9:00 a.m. and 4:00 p.m. (Eastern time) on any business day. 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 by mail or by telephone, the
redemption proceeds will, at the option of the investor, be paid by check and
mailed to the investor of record or be wired to the investor's bank as
indicated in the account application previously filled out by the investor.
The Fund currently does not impose a service charge for effecting wire
transfers but the Fund 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
Funds by telephone, an investor may deliver the redemption request to Warburg
Pincus Funds by mail at the address shown above under 'How to Open an
Account.' Although the Fund will redeem shares purchased by check before the
check clears, payments of the redemption proceeds will be delayed until such
check has cleared, which may take up to 15 days from the purchase date.
Investors should consider purchasing shares using a certified or bank check or
money order if they anticipate an immediate need for redemption proceeds.
If a redemption order is received by the Fund or its agent, 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 mailed or wired to an
investor on the next business day following the date a redemption order is
effected. If,
20
<PAGE>
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 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.
If, due to redemptions, the value of an investor's account drops to less
than $2,000 ($250 in the case of a retirement plan or UGMA account), the Fund
reserves the right to redeem the shares in that account at net asset value.
Prior to any redemption, the Fund will notify an investor in writing that this
account has a value of less than the minimum. The investor will then have 60
days to make an additional investment before a redemption will be processed by
the Fund.
Telephone Transactions. In order to request redemptions by telephone,
investors must have completed and returned to Warburg Pincus Funds an account
application containing a telephone election. Unless contrary instructions are
elected, an investor will be entitled to make exchanges by telephone. Neither
the Fund nor its agents will be liable for following instructions communicated
by telephone that it reasonably believes to be genuine. Reasonable procedures
will be employed on behalf of the Fund to confirm that instructions
communicated by telephone are genuine. Such procedures include providing
written confirmation of telephone transactions, tape recording telephone
instructions and requiring specific personal information prior to acting upon
telephone instructions.
Automatic Cash Withdrawal Plan. The Fund offers investors an automatic cash
withdrawal plan under which investors may elect to receive periodic cash
payments of at least $250 monthly or quarterly. To establish this service,
complete the 'Automatic Withdrawal Plan' section of the account application
and attach a voided check from the bank account to be credited. For further
information regarding the automatic cash withdrawal plan or to modify or
terminate the plan, investors should contact Warburg Pincus Funds at (800)
927-2874.
Exchange of Shares. An investor may exchange Common Shares of the Fund for
Common Shares of another Warburg Pincus Fund at their respective net asset
values. Exchanges may be effected by mail or by telephone in the manner
described under 'Redemption of Shares' above. If an exchange request is
received by Warburg Pincus Funds or their agent prior to the close of regular
trading on the NYSE, the exchange will be made at the Fund's net asset value
determined at the end of that business day. Exchanges may be effected without
a sales charge but must satisfy the minimum dollar amount
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necessary for new purchases. Due to the costs involved in effecting exchanges,
the Fund reserves the right to refuse to honor 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.
Currently, exchanges may be made with the following other funds:
Warburg Pincus Cash Reserve Fund -- a money market fund investing in
short-term, high quality money market instruments;
Warburg Pincus New York Tax Exempt Fund -- a money market fund investing in
short-term, high quality municipal obligations designed for New York
investors seeking income exempt from federal, New York State and New York
City income tax;
Warburg Pincus New York Intermediate Municipal Fund -- an intermediate-term
municipal bond fund designed for New York investors seeking income exempt
from federal, New York State and New York City income tax;
Warburg Pincus Tax Free Fund -- a bond fund seeking maximum current income
exempt from federal income taxes, consistent with preservation of capital;
Warburg Pincus Intermediate Maturity Government Fund -- an intermediate-term
bond fund investing in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities;
Warburg Pincus Fixed Income Fund -- a bond fund seeking current income and,
secondarily, capital appreciation by investing in a diversified portfolio of
fixed-income securities;
Warburg Pincus Global Fixed Income Fund -- a bond fund investing in a
portfolio consisting of investment grade fixed-income securities of
governmental and corporate issuers denominated in various currencies,
including U.S. dollars;
Warburg Pincus Balanced Fund -- a fund seeking maximum total return through a
combination of long-term growth of capital and current income consistent with
preservation of capital through diversified investments in equity and debt
securities;
Warburg Pincus Growth & Income Fund -- an equity fund seeking long-term
growth of capital and income and a reasonable current return;
Warburg Pincus Capital Appreciation Fund -- an equity fund seeking long-term
capital appreciation by investing principally in equity securities of
medium-sized domestic companies;
Warburg Pincus Small Company Value Fund -- an equity fund seeking long-term
capital appreciation by investing primarily in equity securities of small
companies;
Warburg Pincus Emerging Growth Fund -- an equity fund seeking maximum capital
appreciation by investing in emerging growth companies;
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Warburg Pincus Post-Venture Capital Fund -- an equity fund seeking long-term
growth of capital by investing principally in equity securities of issuers in
their post-venture capital stage of development;
Warburg Pincus Global Post-Venture Capital Fund -- an equity fund seeking
long-term growth of capital by investing principally in equity securities of
U.S. and foreign issuers in their post-venture capital stage of development;
Warburg Pincus International Equity Fund -- an equity fund seeking long-term
capital appreciation by investing primarily in equity securities of non-
United States issuers;
Warburg Pincus Emerging Markets Fund -- an equity fund seeking growth of
capital by investing primarily in securities of non-United States issuers
consisting of companies in emerging securities markets;
Warburg Pincus Japan Growth Fund -- an equity fund seeking long-term growth
of capital by investing primarily in equity securities of Japanese issuers;
and
Warburg Pincus Japan OTC Fund -- an equity fund seeking long-term capital
appreciation by investing in a portfolio of securities traded in the Japanese
over-the-counter market.
The exchange privilege is available to shareholders residing in any state in
which the Common 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 Common
Shares of the Fund for Common Shares in another Warburg Pincus Fund should
review the prospectus of the other fund prior to making an exchange. For
further information regarding the exchange privilege or to obtain a current
prospectus for another Warburg Pincus Fund, an investor should contact Warburg
Pincus Funds at (800) 927-2874.
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
Common Shares of the relevant 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 Funds at the address set forth under 'How to Open an
Account' or by calling Warburg Pincus Funds at (800) 927-2874.
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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 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 are taxable to
investors as long-term capital gains, in each case regardless of the length of
time the shareholder has held Fund shares and whether received in cash or
reinvested in additional Fund shares. As a general rule, an investor's gain or
loss on a sale or redemption of his Fund shares will be a long-term capital
gain or loss if he has held his shares for more than one year and will be a
short-term capital gain or loss if he has held his 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, including short sales of securities, 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.
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.
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
24
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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 tax advisers with specific reference to their own tax situations,
including their state and local tax liabilities.
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 Common Share of the Fund is computed by adding the
Common Shares' pro rata share of the value of the Fund's assets, deducting the
Common Shares' pro rata share of the Fund's liabilities and the liabilities
specifically allocated to Common Shares and then dividing the result by the
total number of outstanding Common 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. Options and futures contracts will be valued
similarly. 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 Common Shares separately from Advisor
Shares. The net asset value of Common Shares is listed in The Wall Street
Journal each business day under the heading 'Warburg Pincus Funds.' From time
to time, the Fund may advertise the average annual total return of its Common
Shares over various periods of time. These total return figures show the
average percentage change in value of an investment in the Common Shares from
the beginning of the measuring period to the end of the measuring period. The
figures reflect changes in the price of the Common Shares assuming that any
income dividends and/or capital gain distributions made by the Fund during the
period were reinvested in Common Shares of the Fund. Total return will be
shown for recent one-, five- and ten-year periods, and may be shown for other
periods as well (such as from
25
<PAGE>
commencement of the Fund's operations or on a year-by-year, quarterly or
current year-to-date basis).
When considering average total return figures for periods longer than one
year, it is important to note that the annual total return for one year in the
period might have been greater or less than the average for the entire period.
When considering total return figures for periods shorter than one year,
investors should bear in mind that the Fund seeks capital appreciation and
that such return may not be representative of any Fund's return over a longer
market cycle. The Fund may also advertise aggregate total return figures of
its Common Shares for various periods, representing the cumulative change in
value of an investment in the Common Shares 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).
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
Funds at (800) 927-2874.
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 S&P Drug Index, the S&P
Healthcare Index and the S&P 500 Index, 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 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 Business 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 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 refer to or describe demographic
trends in the U.S. and other countries, political and
26
<PAGE>
government actions to address health care issues such as costs, specific
health sciences companies and trends in and relative performance of health
sciences industries. 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 its Common 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 31, 1996 under the laws
of the State of Maryland under the name 'Warburg, Pincus Health Sciences 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 may classify or reclassify any unissued shares of the
Fund into one or more additional classes by setting or changing in any one or
more respects their relative rights, voting powers, restrictions, limitations
as to dividends, qualifications and terms and conditions of redemption. The
Board may similarly classify or reclassify any class of its shares into one or
more series and, without shareholder approval, may increase the number of
authorized shares of the Fund.
Multi-Class Structure. Although it currently does not do so, the Fund is
authorized to offer a separate class of shares, the Advisor Shares, pursuant
to a separate prospectus. Individual investors could only purchase Advisor
Shares through institutional shareholders of record, broker-dealers, financial
institutions, depository institutions, retirement plans and financial
intermediaries. Shares of each class would represent equal pro rata interests
in the Fund and accrue dividends and calculate net asset value and performance
quotations in the same manner. 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.
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 member of the Board 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
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<PAGE>
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 his account, as well as a statement of his account after any transaction
that affects his share balance or share registration (other than the
reinvestment of dividends or distributions or investment made through the
Automatic Investment Program). 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, as well as certain statistical characteristics of the Fund, may
be obtained by calling Warburg Pincus Funds at (800) 927-2874.
-------------------
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
COMMON SHARES OF THE FUNDS IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM,
SUCH OFFER MAY NOT LAWFULLY BE MADE.
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TABLE OF CONTENTS
The Fund's Expenses....................................... 2
Investment Objective and Policies......................... 3
Portfolio Investments..................................... 4
Risk Factors and Special Considerations................... 6
Portfolio Transactions and Turnover Rate.................. 8
Certain Investment Strategies............................. 9
Investment Guidelines..................................... 13
Management of the Fund.................................... 14
How to Open an Account.................................... 16
How to Purchase Shares.................................... 16
How to Redeem and Exchange Shares......................... 19
Dividends, Distributions and Taxes........................ 23
Net Asset Value........................................... 25
Performance............................................... 25
General Information....................................... 27
[Logo]
P.O. Box 9030, Boston, MA 02205-9030
800-WARBURG (800-927-2874)
WPDSF-1-0596
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A
PROSPECTUS.
<PAGE>1
Subject to completion, dated November 1, 1996
STATEMENT OF ADDITIONAL INFORMATION
December 31, 1996
WARBURG PINCUS HEALTH SCIENCES FUND
P.O. Box 9030, Boston, Massachusetts 02205-9030
For information, call (800) WARBURG
Contents
Page
----
Investment Objective........................................................2
Investment Policies.........................................................2
Management of the Fund.....................................................25
Additional Purchase and Redemption Information.............................32
Exchange Privilege.........................................................33
Additional Information Concerning Taxes....................................33
Determination of Performance...............................................36
Independent Accountants and Counsel........................................37
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 Prospectus for the Common Shares of Warburg Pincus
Health Sciences Fund (the "Fund"), dated December 31, 1996, as amended or
supplemented from time to time, and is incorporated by reference in its entirety
into that Prospectus. 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 Prospectus 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 also be obtained by calling the Fund at the same number or by
writing to the Fund, P.O. Box 9030, Boston, Massachusetts 02205-9030.
<PAGE>2
INVESTMENT OBJECTIVE
The investment objective of the Fund is capital appreciation.
The Fund will pursue its objective by investing in equity securities of
companies that are principally engaged in the research, development, production
or distribution of products or services related to health care, medicine or the
life sciences (collectively termed "health sciences").
INVESTMENT POLICIES
The following policies supplement the descriptions of the
Fund's investment objective and policies in the Prospectus.
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.
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.
<PAGE>3
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 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 Options Clearing Corporation (the "Clearing Corporation") and of
the securities exchange on which the option is written.
Prior to their expirations, put and call options may be sold
in closing sale or purchase transactions (sales or purchases by the 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
<PAGE>4
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
anticipated trading activity or order flow or other unforeseen events have at
times rendered certain of the facilities of the Clearing Corporation and various
securities exchanges inadequate 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
<PAGE>5
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.
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 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
<PAGE>6
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 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 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
<PAGE>7
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 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
<PAGE>8
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 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
<PAGE>9
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 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
<PAGE>10
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 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.
<PAGE>11
Asset Coverage for Forward Contracts, Options, Futures and
Options on Futures. As described in the Prospectus, the Fund will comply with
guidelines established by the Securities and Exchange Commission (the "SEC")
with respect to coverage of forward currency contracts; options written by the
Fund on 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 certain liquid
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 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. Since the
Fund may invest in securities denominated in currencies other than the U.S.
dollar, 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's 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
<PAGE>12
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. The Fund may use hedging techniques with
the objective of protecting against loss through the fluctuation of the value
of foreign currencies against the U.S. dollar, particularly the forward market
in foreign exchange, currency options and currency futures. See "Currency
Transactions" and "Futures Activities" above.
Many of the foreign securities held by the Fund will not be
registered with, nor the issuers thereof be subject to reporting requirements
of, the SEC. Accordingly, there may be less publicly available information about
the securities and about the foreign company or government issuing them than is
available about a domestic company or government entity. Foreign companies are
generally not subject to uniform financial reporting standards, practices and
requirements comparable to those applicable to U.S. companies. In addition, 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 countries. 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. 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.
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.
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
<PAGE>13
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 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.
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 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.
<PAGE>14
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 commitment. 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.
Securities of Smaller Companies. The Fund's investments
involve considerations that are not applicable to investing in securities of
established, larger-capitalization issuers, including reduced and less reliable
information about issuers and markets, less stringent accounting standards,
illiquidity of securities and markets, higher brokerage commissions and fees and
greater market risk in general. In addition, securities of smaller companies may
involve greater risks since these securities may have limited marketability and,
thus, may be more volatile.
Securities of Health Sciences Companies. Because the Fund will
focus its investments in securities of companies that are principally engaged in
the health sciences, the value of its shares will be especially affected by
factors relating to the health sciences, resulting in greater volatility in
share price than may be the case with funds that invest in a wider range of
industries.
Health sciences companies are generally subject to greater
governmental regulation than other industries at both the state and federal
levels. Changes in governmental policies may have a material effect on the
demand for or costs of certain products and services. A health sciences company
must receive government approval before introducing new drugs and medical
devices or procedures. This process may delay the introduction of
<PAGE>15
these products and services to the marketplace, resulting in increased
development costs, delayed cost-recovery and loss of competitive advantage to
the extent that rival companies have developed competing products or
procedures, adversely affecting the company's revenues and profitability.
Expansion of facilities by health care providers is subject to "determinations
of need" by the appropriate government authorities. This process not only
increases the time and cost involved in these expansions, but also makes
expansion plans uncertain, limiting the revenue and profitability growth
potential of health care facilities operators, and negatively affecting the
price of their securities.
Certain health science companies depend on the exclusive
rights or patents for the products they develop and distribute. Patents have a
limited duration and, upon expiration, other companies may market substantially
similar "generic" products which have cost less to develop and may cause the
original developer of the product to lose market share and/or reduce the price
charged for the product, resulting in lower profits for the original developer.
Because the products and services of health sciences companies
affect the health and well-being of many individuals, these companies are
especially susceptible to product liability lawsuits. The share price of a
health sciences company can drop dramatically not only as a reaction to an
adverse judicial ruling, but also from the adverse publicity accompanying
threatened litigation.
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 15% of net assets in
warrants (valued at the lower of cost or market), which amount excludes warrants
acquired by the Fund as part of a unit or 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.
<PAGE>16
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 certain liquid
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 the 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.
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 approval custodian cash or other liquid 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 and dollar rolls that are accounted for as financings are considered
to be borrowings under the 1940 Act.
Non-Publicly Traded and Illiquid Securities. The Fund may not
invest more than 15% of its net assets in illiquid securities, including
securities that are illiquid by virtue of the absence of a readily available
market, time deposits maturing in more than seven days, certain Rule 144A
Securities (as defined below) and repurchase agreements which have a maturity of
longer 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
<PAGE>17
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 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 15% 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 and 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).
Below Investment Grade Securities. The Fund may hold up to 20%
of its net assets in fixed income securities rated below investment grade and as
low as C by Moody's Investors Service, Inc. ("Moody's) or D by Standard and
Poor's Ratings Services ("S&P"), and in comparable unrated securities. 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
<PAGE>18
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.
Certain of these securities may be difficult to dispose of
because there may be a thin trading market. Because there is no established
retail secondary market for many of these securities, it is anticipated 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 ability to dispose of particular
issues when necessary to meet 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 to obtain accurate market quotations for purposes of valuation
and calculation of 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. Normally, medium- and lower-rated and comparable
unrated securities are not intended for short-term investment. Additional
expenses may be incurred, to the extent 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.
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. Additional
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,
<PAGE>19
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.
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 13 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,
short sales, the entry into currency transactions, options, futures contracts,
options on futures contracts, forward commitment transactions and dollar roll
transactions that are not accounted for as financings (and the segregation of
assets in connection with any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of
the value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities in the
same industry except for businesses in the health sciences; provided that
there shall be no limit on the purchase of U.S. Government Securities.
3. Purchase the securities of any issuer if as a result more
than 5% of the value of the Fund's total assets would be invested in the
securities of such issuer, except that this 5% limitation does not apply to U.S.
Government Securities and except that up to 25% of the value of the Fund's total
assets may be invested without regard to this 5% limitation.
4. 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.
5. 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.
6. 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,
<PAGE>20
mortgages or interests therein and (b) securities of companies that invest in
or sponsor oil, gas or mineral exploration or development programs.
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 indexes, and options on futures contracts, securities, currencies or
indexes, purchase and sell currencies on a forward commitment or
delayed-delivery basis and enter into stand-by commitments.
9. Issue any senior security except as permitted in the
Fund's 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 in connection with the purchase of securities on a
forward commitment or delayed-delivery basis and collateral and initial or
variation margin arrangements with respect to currency transactions, options,
futures contracts, and options on futures contracts.
12. Invest more than 15% of the Fund's net assets in
securities which may be illiquid because of legal or contractual restrictions on
resale or securities for which there are no readily available market quotations.
For purposes of this limitation, repurchase agreements with maturities greater
than seven days shall be considered illiquid securities.
13. Make additional investments (including roll-overs) if
the Fund's borrowings exceed 5% of its net assets.
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.
<PAGE>21
Portfolio Valuation
The Prospectus 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
quotation on the exchange or market. Options and 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 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 certain foreign countries is
completed at various times prior to the close of business on each business day
in New York (i.e., a day on which the New York Stock Exchange (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 may not take place
contemporaneously with the determination of the prices of certain portfolio
securities used in such calculation. 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
<PAGE>22
values at the prevailing 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 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
<PAGE>23
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 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, securities to be sold or purchased for the Fund
may be aggregated 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 Inc., the Fund's distributor ("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.
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
<PAGE>24
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 practice, however, only when Warburg,
in its sole discretion, believes 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. To the extent that its
portfolio is traded for the short-term, the Fund will be engaged essentially in
trading activities based on short-term considerations affecting the value of an
issuer's stock instead of long-term investments based on fundamental valuation
of securities. Because of this policy, portfolio securities may be sold without
regard to the length of time for which they have been held. Consequently, the
annual portfolio turnover rate of the Fund may be higher than mutual funds
having a similar objective that do not invest in special situation companies.
<PAGE>25
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.
<TABLE>
<C> <S>
Richard N. Cooper (62) Director
Harvard University National Intelligence Counsel; Professor at Harvard
1737 Cambridge Street University; Director or Trustee of CircuitCity Stores,
Cambridge, Massachusetts 02138 Inc. (retail electronics and appliances) and Phoenix
Home Life Insurance Co.
Donald J. Donahue (72) Director
27 Signal Rd. Chairman of Magma Copper from January 1987 until
Stamford, Connecticut 06902 January 1996; Chairman and Director
of NAC Holdings from September 1990-June 1993; Director
of Chase Brass Industries, Inc. Since December 1994;
Director of Pioneer Companies, Inc. (chlor-alkali
chemicals) and predecessor companies since 1990 and
Vice Chairman since March 1996.
Jack W. Fritz (69) Director
2425 North Fish Creek Road Private investor; Consultant and Director of Fritz
P.O. Box 483 Broadcasting, Inc. and Fritz Communications (developers
Wilson, Wyoming 83014 and operators of radio stations); Director of Advo,
Inc. (direct mail advertising).
John L. Furth* (66) Chairman of the Board and Chief Executive Officer
466 Lexington Avenue Vice Chairman and Director of E.M. Warburg, Pincus &
New York, New York 10017-3147 Co., Inc. ("EMW"); Associated with EMW since 1970;
Chairman of the Board and officer of other investment
companies advised by Warburg.
* Indicates a Director who is an "interested person" of the Fund as defined in the 1940 Act.
<PAGE>26
</TABLE>
<TABLE>
<S> <C>
Thomas A. Melfe (64) Director
30 Rockefeller Plaza Partner in the law firm of Donovan Leisure Newton &
New York, New York 10112 Irvine; Director of Municipal Fund for New York
Investors, Inc.
Alexander B. Trowbridge (67) Director
1155 Connecticut Avenue, N.W. President of Trowbridge Partners, Inc. (business
Suite 700 consulting) from January 1990-January 1994; President
Washington, DC 20036 of the National Association of Manufacturers from 1980
to 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* (48) Director and President
466 Lexington Avenue Managing Director and Assistant Secretary of EMW;
New York, New York 10017-3147 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 (39) Senior Vice President
466 Lexington Avenue Managing Director of EMW; Associated with EMW since
New York, New York 10017-3147 1991; Vice President of Citibank, N.A. from 1987 to
1991; Senior Vice President of Counsellors Securities
and officer of other investment companies advised by
Warburg.
</TABLE>
<PAGE>27
<TABLE>
<C> <S>
Stephen Distler (43) Vice President and Chief Financial Officer
466 Lexington Avenue Managing Director, Controller and Assistant Secretary
New York, New York 10017-3147 of EMW; Associated with EMW since
1984; Treasurer of Counsellors Securities; Vice
President, Treasurer and Chief Accounting Officer or
Vice President and Chief Financial Officer of other
investment companies advised by Warburg.
Eugene P. Grace (45) Vice President and Secretary
466 Lexington Avenue Associated with EMW since April
New York, New York 10017-3147 1994; 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 (42) Vice President
466 Lexington Avenue Associated with EMW since 1992; Associated with Martin
New York, New York 10017-3147 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.
Daniel S. Madden, CPA (31) Treasurer and Chief Accounting
466 Lexington Avenue Officer
New York, New York 10017-3147 Associated with EMW since 1995;
Associated with BlackRock Financial
Management, Inc. from September
1994 to October 1996; Associated
with BEA Associates from April 1993
to September 1994; Associated with
Ernst & Young LLP from 1990 to 1993.
Treasurer and Chief Accounting
Officer of other investment
companies advised by Warburg.
Janna Manes, Esq. (29) Assistant Secretary
466 Lexington Avenue Associated with EMW since 1996;
New York, New York 10017-3147 Associated with the law firm of
Willkie Farr & Gallagher from 1993-1996; Assistant
Secretary of other investment companies advised by
Warburg.
</TABLE>
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
<PAGE>28
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.
Directors' Compensation
<TABLE>
<CAPTION>
Total Total Compensation from all
Compensation from Investment Companies Managed by
Name of Director Fund+ Warburg+*
---------------- ----------------- -------------------------------
<S> <C> <C>
John L. Furth None** None**
Arnold M. Reichman None** None**
Richard N. Cooper $1,500 $48,000
Donald J. Donahue $1,500 $48,000
Jack W. Fritz $1,500 $48,000
Thomas A. Melfe $1,500 $48,000
Alexander B. Trowbridge $1,500 $48,000
<FN>
- ----------------------------
+ Amounts shown are estimates of future payments to be made in the fiscal
year ending October 31, 1997 pursuant to existing arrangements.
* Each Director also serves as a Director or Trustee of [21] other
investment companies advised by Warburg.
** Mr. Furth and Mr. Reichman are considered to be interested persons of the
Fund and Warburg, as defined under Section 2(a)(19) of the 1940 Act, and,
accordingly, receive no compensation from the Fund or any other investment
company managed by Warburg.
</TABLE>
Ms. Susan L. Black is co-manager of the U.S. Mid Cap Sector
Portfolio of Warburg Pincus Balanced Fund, as well as co-president and
co-portfolio manager of Warburg Pincus Capital Appreciation Fund and the
director of research and a senior portfolio manager of the institutional
growth equity product at Warburg. From 1961 until 1973 Ms. Black was employed
by Argus Research, first as a securities analyst, then as director of
research. From 1973 until 1977 and from 1978 until 1979 she was a vice
president of research at Drexel Burnham Lambert. From 1977 until 1978 she was
a vice president of Research at Donaldson, Lufkin and Jenrette, and from 1979
until 1985 Ms. Black was a partner at Century Capital Associates. Ms. Black
received a B.A. degree from Mount Holyoke College.
Ms. Patricia F. Widner is a vice president of research at
Warburg, which she joined in 1991 as the healthcare securities analyst for the
firm. From 1985 to 1991, she was a vice president and securities analyst,
investing in the securities of venture capital and small capitalization
healthcare companies, for Citibank Investment Management, which changed its name
in 1988 to Chancellor Capital Management. From 1984 to 1985, Ms. Widner served
as a marketing director at Whittaker Health Services, a start-up HMO which
later was sold to The Travelers Group. In 1984, Ms. Widner was employed by
Merrill Lynch as an investment
<PAGE>29
banker specializing in not-for-profit hospitals. Between 1979 and 1982, she
was a practicing dietitian and a sales representative for Abbott Laboratories.
Ms. Widner received an M.B.A. from The Wharton School, University of
Pennsylvania, a B.S. from Marymount College and completed the Registered
Dietitian program at Peter Bent Brigham Hospital in Boston, Massachusetts.
Investment Adviser and Co-Administrators
Warburg serves as investment adviser to the Fund, Counsellors
Funds Service, Inc. ("Counsellors Service") serves as co-administrator to the
Fund and PFPC serves as co-administrator to the Fund pursuant to separate
written agreements (the "Advisory Agreement," the "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 and PFPC under the PFPC Co-Administration
Agreement are described in the Prospectus. 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. These fees are calculated at an annual rate
based on a percentage of the Fund's average daily net assets. See the
Prospectus, "Management of the Fund."
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.
Custodians 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
<PAGE>30
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
meetings of shareholders, (iii) maintains shareholder accounts and, if
requested, sub-accounts and (iv) makes periodic reports to the Board concerning
the transfer agent's operations with respect to the Fund. State Street has
delegated to Boston Financial Data Services, Inc., 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,
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 Stock"), of which one billion shares are designated "Common Shares"
and one billion shares are designated "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
<PAGE>31
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 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. Agreements will be
governed by a distribution plan (the "Distribution Plan") pursuant to Rule 12b-1
under the 1940 Act, pursuant to which the Fund will pay in consideration for
services, a fee calculated at an annual rate of .50% of the average daily net
assets of the Advisor Shares of the Fund. The Distribution Plan requires the
Board, at least quarterly, to receive and review written reports of amounts
expended under the Distribution Plan and the purposes 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.
<PAGE>32
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 manner described above. The Distribution Plan or the 12b-1 Plan may not be
amended to increase materially the amount to be spent thereunder without
shareholder approval of the Advisor Shares or the Common Shares, as the case may
be. Neither the Distribution Plan nor 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 Advisor Shares
or the Common Shares, as the case may be.
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 Prospectus 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 will comply with Rule 18f-1 promulgated under the
1940 Act with respect to redemptions in kind.
Automatic Cash Withdrawal Plan. An automatic cash withdrawal
plan (the "Plan") is available to shareholders who wish to receive specific
amounts of cash periodically. Withdrawals may be made under the Plan by
redeeming as many shares of the 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
<PAGE>33
distributions on shares in the Plan are automatically reinvested at net asset
value in additional shares of the Fund.
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
<PAGE>34
gross income from the sale or other disposition of securities, 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 Prospectus. 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.
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
<PAGE>35
described in the Prospectus, 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.
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 distributions receives, and should have
a cost basis in the shares received equal to that amount. 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. Proposed legislation would reduce the dividends received deduction
available to corporations (as discussed in the Prospectus) from 70% to 50% of
dividends received.
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 distributions 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>36
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)[* GRAPHIC OMITTED-SEE FOOTNOTE
BELOW] = 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.
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.
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 investments 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.
Reference may be made in advertising a class of Fund shares to
opinions of Wall Street economists and analysts regarding economic cycles and
their effects historically on the performance of small companies, both as a
class and relative to other investments. The Fund may also discuss its beta, or
volatility relative to the market, and make reference to its relative
performance in various market cycles in the United States.
- ---------------------------
* The expression (1 + T) is being raised to the nth power.
<PAGE>37
INDEPENDENT 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
the Fund, as of __________, 1996, 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>A-1
APPENDIX
DESCRIPTION OF RATINGS
Commercial Paper Ratings
Commercial paper rated A-1 by Standard and Poor's Ratings
Services ("S&P") indicates that the degree of safety regarding timely payment
is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign designation. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating
assigned by Moody's Investors Service, Inc. ("Moody's"). Issuers rated Prime-1
(or related supporting institutions) are considered to have a superior capacity
for repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics of issuers rated Prime-1 but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
Corporate Bond Ratings
The following summarizes the ratings used by S&P for corporate
bonds:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA - Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB - This is the lowest investment grade. Debt rated BBB is
regarded as having an adequate capacity to pay interest and repay principal.
Although it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for bonds in this category than for
bonds in higher rated categories.
<PAGE>A-2
BB, B and CCC - Debt rated BB and B are regarded, on balance,
as predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB represents a lower
degree of speculation than B, and CCC the highest degree of speculation. While
such bonds will likely have some quality 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>A-3
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.
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.
<PAGE>A-4
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>
REPORT OF COOPERS & LYBRAND, L.L.P., INDEPENDENT ACCOUNTANTS
<PAGE>C-1
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements --
(1) Financial Statements included in Part B(1)
(a) Report of Coopers & Lybrand L.L.P., Independent
Accountants(1)
(b) Statement of Net Assets and Liabilities
(b) Exhibits:
Exhibit No. Description of Exhibit
- ----------- ----------------------
1 Articles of Incorporation.
2 By-Laws.
3 Not applicable.
4 Registrant's Forms of Stock Certificates.(1)
5 Form of Investment Advisory Agreement.(1)
6 Form of Distribution Agreement.(1)
7 Not applicable.
8(a) Form of Custodian Agreement with PNC Bank, National
Association.(2)
(b) Form of Custodian Agreement with Fiduciary Trust
International.(1)
9(a) Form of Transfer Agency and Service Agreement.(2)
(b) Form of Co-Administration Agreement with Counsellors Funds
Service, Inc.(1)
(c) Form of Co-Administration Agreement with PFPC Inc.(1)
- ---------------------
(1) To be filed by amendment
(2) Incorporated by reference; material provisions of this exhibit
substantially similar to those of the corresponding exhibit in
Pre-Effective Amendment No.1 to the Registration Statement on Form
N-1A of Warburg, Pincus Trust filed on June 14, 1995 (Securities Act
File No. 33-58125).
<PAGE>C-2
10(a) Opinion and Consent of Willkie Farr & Gallagher, counsel to
the Fund.(1)
(b) Opinion and Consent of Venable, Baetjer and Howard, LLP,
Maryland counsel to the Fund.(1)
11 Consent of Coopers & Lybrand L.L.P., Independent
Accountants.(1)
12 Not applicable.
13 Form of Purchase Agreement.(1)
14 Not applicable
15(a) Form of Shareholder Servicing and Distribution Plan.(2)
(b) Form of Distribution Plan.(1)
16 Schedule for Computation of Total Return Performance
Quotation.(1)
17 Not applicable
Item 25. Persons Controlled by or Under Common Control with Registrant
All of the outstanding shares of common stock of Registrant on
the date Registrant's Registration Statement becomes effective will be owned by
Warburg, Pincus Counsellors, Inc. ("Warburg"), a corporation formed under New
York law.
Item 26. Number of Holders of Securities
It is anticipated that Warburg will hold all Registrant's
shares of common stock, par value $.001 per share, on the date Registrant's
Registration Statement becomes effective.
- ---------------------
(1) To be filed by amendment.
(2) Incorporated by reference; material provisions of this exhibit
substantially similar to those of the corresponding exhibit in
Pre-Effective Amendment No.1 to the Registration Statement on Form
N-1A of Warburg, Pincus Trust filed on June 14, 1995 (Securities Act
File No. 33-58125).
<PAGE>C-3
Item 27. Indemnification
Registrant, officers and directors of Warburg, of
Counsellors Securities Inc. ("Counsellors Securities") and of Registrant are
covered by insurance policies indemnifying them for liability incurred in
connection with the operation of Registrant. These policies provide insurance
for any "Wrongful Act" of an officer, director or trustee. Wrongful Act is
defined as breach of duty, neglect, error, misstatement, misleading statement,
omission or other act done or wrongfully attempted by an officer, director or
trustee in connection with the operation of Registrant. Insurance coverage
does not extend to (a) conflicts of interest or gain in fact any profit or
advantage to which one is not legally entitled, (b) intentional non-compliance
with any statute or regulation or (c) commission of dishonest, fraudulent acts
or omissions. Insofar as it related to Registrant, the coverage is limited in
amount and, in certain circumstances, is subject to a deductible.
Under Article VIII of the Articles of Incorporation (the
"Articles"), the Directors and officers of Registrant shall not have any
liability to Registrant or its stockholders for money damages, to the fullest
extent permitted by Maryland law. This limitation on liability applies to
events occurring at the time a person serves as a Director or officer of
Registrant whether or not such person is a Director or officer at the time of
any proceeding in which liability is asserted. No provision of Article VIII
shall protect or purport to protect any Director or officer of Registrant
against any liability to Registrant or its stockholders to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office. Registrant shall indemnify and advance expenses to its currently
acting and its former Director to the fullest extent that indemnification of
Directors and advancement of expenses to Directors is permitted by the
Maryland General Corporation Law.
Registrant shall indemnify and advance expenses to its
officers to the same extent as its Directors and to such further extent as is
consistent with such law. The Board of Directors may, through a by-law,
resolution or agreement, make further provisions for indemnification of
directors, officers, employees and agents to the fullest extent permitted by
the Maryland General Corporation Law.
Article V of the By-Laws further limits the liability of the
Directors by providing that any person who was or is a party or is threatened
to be made a party in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such person is a current or former
<PAGE>C-4
director or officer of Registrant, or is or was serving while a director or
officer of Registrant at the request of Registrant as a director, officer,
partner, trustee, employee, agent or fiduciary of another corporation,
partnership, joint venture, trust, enterprise or employee benefit plan, shall be
indemnified by Registrant against judgments, penalties, fines, excise taxes,
settlements and reasonable expenses (including attorneys' fees)actually incurred
by such person in connection with such action, suit or proceeding to the full
extent permissible under the Maryland General Corporation Law, the 1993 Act and
the 1940 Act, as such statutes are now or hereafter in force, except that such
indemnity shall not protect any such person against any liability to Registrant
or any stockholder thereof to which such person would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of this office.
Item 28. Business and Other Connections of Investment Adviser
Warburg, a wholly owned subsidiary of Warburg, Pincus,
Counsellors GP, acts as investment adviser to the Registrant. Warburg renders
investment advice to a wide variety of individual and institutional clients.
The list required by this Item 28 of officers and directors of Warburg,
together with information as to their other business, profession, vocation or
employment of a substantial nature during the past two years, is incorporated
by reference to Schedules A and D of Form ADV filed by Warburg (SEC File No.
801-07321).
Item 29. Principal Underwriter
(a) Counsellors Securities will act as distributor for
Registrant, as well as for The RBB Fund, Inc., Warburg Pincus Balanced Fund;
Warburg Pincus Capital Appreciation Fund; Warburg Pincus Cash Reserve Fund;
Warburg Pincus Emerging Growth Fund; Warburg Pincus Emerging Markets Fund;
Warburg Pincus Fixed Income Fund; Warburg Pincus Global Fixed Income Fund;
Warburg, Pincus Global Post-Venture Capital Fund, Inc.; Warburg Pincus Growth
& Income Fund, Inc.; Warburg Pincus Institutional Fund, Inc.; Warburg Pincus
Intermediate Maturity Government Fund; Warburg Pincus International Equity
Fund; Warburg Pincus Japan Growth Fund; Warburg, Pincus Japan OTC Fund;
Warburg Pincus New York Intermediate Municipal Fund; Warburg Pincus New York
Tax Exempt Fund; Warburg Pincus Post-Venture Capital Fund; Warburg Pincus
Small Company Value Fund; Warburg Pincus Tax Free Fund; and Warburg Pincus
Trust.
(b) For information relating to each director, officer or
partner of Counsellors Securities, reference is made to Form BD (SEC File No.
8-32482) filed by Counsellors Securities under the Securities Exchange Act of
1934.
(c) None.
<PAGE>C-5
Item 30. Location of Accounts and Records
(1) Warburg, Pincus Health Sciences Fund, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(Fund's Articles of Incorporation, By-Laws and
minute books)
(2) Warburg, Pincus Counsellors, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as
investment adviser)
(3) PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
(records relating to its functions as
Co-administrator)
(4) Counsellors Funds Service, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as
Co-administrator)
(5) Fiduciary Trust Company International
Two World Trade Center
New York, New York 10048
(records relating to its functions as custodian)
(6) State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
(records relating to its functions as transfer
agent and dividend disbursing agent)
(7) Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, Massachusetts 02171
(records relating to its functions as transfer
agent and dividend disbursing agent)
(8) PNC Bank, National Association
Broad and Chestnut Streets
Philadelphia, Pennsylvania 19101
(records relating to its functions as custodian)
(9) Counsellors Securities Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as distributor)
<PAGE>C-6
Item 31. Management Services
Not applicable.
Item 32. Undertakings.
(a) Registrant hereby undertakes to file a post-effective
amendment, with financial statements which need not be certified, within four to
six months from the effective date of this Registration Statement.
(b) Registrant hereby undertakes to furnish each person to whom
a prospectus is delivered with a copy of the latest annual report to
shareholders for the relevant Portfolio, upon request and without charge.
(c) Registrant hereby undertakes to call a meeting of its
shareholders for the purpose of voting upon the question of removal of a
director or directors of Registrant when requested in writing to do so by the
holders of at least 10% of Registrant's outstanding shares. Registrant
undertakes further, in connection with the meeting, to comply with the
provisions of Section 16(c) of the 1940 Act relating to communications with the
shareholders of certain common-law trusts.
<PAGE>C-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
as amended, and the Investment Company Act of 1940, as amended, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York and the State
of New York, on the day of __________________ , 1996.
WARBURG, PINCUS HEALTH SCIENCES
FUND, INC.
By:/s/ Arnold M. Reichman
Arnold M. Reichman
President
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities and on the date indicated:
Signature Title Date
- --------- ----- ----
/s/Arnold M. Reichman President, November 1, 1996
Arnold M. Reichman Director and Secretary
/s/Stephen Distler Vice President, November 1, 1996
Stephen Distler Treasurer, Chief
Accounting Officer
and Chief Financial
Officer
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
- ----------- ----------------------
1 Articles of Incorporation
2 By-Laws
<PAGE>1
ARTICLES OF INCORPORATION
OF
WARBURG, PINCUS HEALTH SCIENCES FUND, INC.
ARTICLE I
INCORPORATOR
The undersigned, George P. Attisano, whose post office address
is c/o Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New
York, New York 10022, being at least 18 years of age, does hereby act as an
incorporator and forms a corporation under the Maryland General Corporation Law.
ARTICLE II
NAME
The name of the corporation is Warburg, Pincus Health
Sciences Fund, Inc. (the "Corporation").
ARTICLE III
PURPOSES AND POWERS
To conduct and carry on the business of an investment company.
(1) To hold, invest and reinvest its assets in securities and other
investments or to hold part or all of its assets in cash.
(2) To issue and sell shares of its capital stock in such amounts, on
such terms and conditions, for such purposes and for such amount or
kind of consideration as may now or hereafter be permitted by law.
(3) To redeem, purchase or acquire in any other manner, hold, dispose of,
resell, transfer, reissue or cancel (all without the vote or consent
of the stockholders of the Corporation) shares of its capital stock,
in any manner and to the extent now or hereafter permitted by law and
by this Charter.
(4) To do any and all additional acts and to exercise any and all
additional powers or rights as may be necessary, incidental,
appropriate or desirable for the accomplishment of all or any of the
foregoing purposes.
<PAGE>2
(5) The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon,
corporations by the Maryland General Corporation Law now or hereafter
in force, and the enumeration of the foregoing shall not be deemed to
exclude any powers, rights or privileges so granted or conferred.
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the
Corporation in the State of Maryland is c/o The Corporation Trust Company
Incorporated, 32 South Street, Baltimore, Maryland 21202. The name and address
of the resident agent of the Corporation in the State of Maryland is The
Corporation Trust Company Incorporated, a Maryland corporation, 32 South Street,
Baltimore, Maryland 21202.
ARTICLE V
CAPITAL STOCK
(1)
(A) The total number of shares of capital stock that the
Corporation shall have authority to issue is three billion
(3,000,000,000) shares, of the par value of one tenth of one
cent ($.001) per share and of the aggregate par value of three
million dollars ($3,000,000), all of which three billion
(3,000,000,000) shares are designated Common Stock.
(B)
(i) One billion (1,000,000,000) shares of Common Stock
have been divided into and classified initially as
a series of Common Stock, designated "Common
Shares".
(ii) One billion (1,000,000,000) shares of Common Stock
have been divided into and classified initially as
a series of Common Stock, designated "Advisor
Shares".
(C) Each Common Share will have the same preferences, conversion
and other rights, voting powers, restrictions, limitations as
to dividends, qualifications and terms and conditions of
redemption as every other share of Common Stock, except that,
subject to the provisions of any governing order, rule
<PAGE>3
or regulation issued pursuant to the Investment Company Act
of 1940, as amended (the "1940 Act"):
(i) Common Shares will share equally with Common
Stock other than Common Shares ("Non-Common
Shares") in the income, earnings and profits
derived from investment and reinvestment of the
assets belonging to the Corporation and will be
charged equally with Non-Common Shares with the
liabilities and expenses of the Corporation,
except that Common Shares will bear the expense
of payments made pursuant to any agreements
entered into by the Corporation pursuant to any
shareholder services plan and/or distribution
plan adopted by the Corporation with respect to
Common Shares;
(ii) On any matter submitted to a vote of
shareholders of the Corporation that pertains to
the agreements or expenses described in clause
(C)(i) above (or to any plan adopted by the
Corporation relating to said agreements or
expenses), only Common Shares will be entitled
to vote, except that if said matter affects
Non-Common Shares, Non-Common Shares will also
be entitled to vote, and in such case Common
Shares will be voted in the aggregate together
with such Non-Common Shares and not by series
except where otherwise required by law. Common
Shares will not be entitled to vote on any
matter that does not affect Common Shares
(except where otherwise required by law) even
though the matter is submitted to a vote of the
holders of Non-Common Shares; and
(iii) The Board of Directors of the Corporation in its
sole discretion may determine whether a matter
affects a particular class or series of
Corporation shares.
(D) Each Advisor Share will have the same preferences, conversion
and other rights, voting powers, restrictions, limitations as
to dividends, qualifications and terms and conditions of
redemption as every other share of Common Stock, except that,
subject to the provisions of any governing order, rule or
regulation issued pursuant to the 1940 Act:
(i) Advisor Shares will share equally with Common
Stock other than Advisor Shares ("Non-Advisor
Shares") in the income, earnings and profits
derived from investment and reinvestment of the
assets belonging to the Corporation and will be
<PAGE>4
charged equally with Non-Advisor Shares with the
liabilities and expenses of the Corporation,
except that Advisor Shares will bear the expense
of payments made pursuant to any agreements
entered into by the Corporation pursuant to any
shareholder services plan and/or distribution plan
adopted by the Corporation with respect to Advisor
Shares;
(ii) On any matter submitted to a vote of
shareholders of the Corporation that pertains to
the agreements or expenses described in clause
(D)(i) above (or to any plan adopted by the
Corporation relating to said agreements or
expenses), only Advisor Shares will be entitled
to vote, except that if said matter affects
Non-Advisor Shares, Non-Advisor Shares will also
be entitled to vote, and in such case Advisor
Shares will be voted in the aggregate together
with such Non-Advisor Shares and not by series
except where otherwise required by law. Advisor
Shares will not be entitled to vote on any
matter that does not affect Advisor Shares
(except where otherwise required by law) even
though the matter is submitted to a vote of the
holders of Non-Advisor Shares; and
(iii) The Board of Directors of the Corporation in its
sole discretion may determine whether a matter
affects a particular class or series of
Corporation shares.
(2) Any fractional share shall carry proportionately the rights of a whole
share including, without limitation, the right to vote and the right to
receive dividends. A fractional share shall not, however, have the
right to receive a certificate evidencing it.
(3) All persons who shall acquire stock in the Corporation shall acquire
the same subject to the provisions of this Charter and the By-Laws of
the Corporation.
(4) No holder of stock of the Corporation by virtue of being such a holder
shall have any preemptive or other right to purchase or subscribe for
any shares of the Corporation's capital stock or any other security
that the Corporation may issue or sell (whether out of the number of
shares authorized by this Charter or out of any shares of the
Corporation's capital stock that the Corporation may acquire) other
than a right that the Board of Directors in its discretion may
determine to grant.
(5) The Board of Directors shall have authority by resolution to
classify or to reclassify, as the case may be, any
<PAGE>5
authorized but unissued shares of capital stock from time to time by
setting or changing in any one or more respects the preferences,
conversion or other rights, voting powers, restrictions, limitations
as to dividends, qualifications or terms or conditions of redemption
of the capital stock.
(6) Notwithstanding any provision of law requiring any action to be taken
or authorized by the affirmative vote of a greater proportion of the
votes of all classes or of any class of stock of the Corporation, such
action shall be effective and valid if taken or authorized by the
affirmative vote of a majority of the total number of votes entitled to
be cast thereon, except as otherwise provided in this Charter.
(7) The presence in person or by proxy of the holders of one-third of the
shares of stock of the Corporation entitled to vote (without regard to
class) shall constitute a quorum at any meeting of the stockholders,
except with respect to any matter which, under applicable statutes or
regulatory requirements, requires approval by a separate vote of one or
more classes of stock, in which case the presence in person or by proxy
of the holders of one-third of the shares of stock of each class
required to vote as a class on the matter shall constitute a quorum.
ARTICLE VI
REDEMPTION
Each holder of shares of the Corporation's capital stock shall
be entitled to require the Corporation to redeem all or any part of the shares
of capital stock of the Corporation standing in the name of the holder on the
books of the Corporation, and all shares of capital stock issued by the
Corporation shall be subject to redemption by the Corporation, at the redemption
price of the shares as in effect from time to time as may be determined by or
pursuant to the direction of the Board of Directors of the Corporation in
accordance with the provisions of Article VII, subject to the right of the Board
of Directors of the Corporation to suspend the right of redemption or postpone
the date of payment of the redemption price in accordance with provisions of
applicable law. Without limiting the generality of the foregoing, the
Corporation shall, to the extent permitted by applicable law, have the right at
any time to redeem the shares owned by any holder of capital stock of the
Corporation (i) if the redemption is, in the opinion of the Board of Directors
of the Corporation, desirable in order to prevent the Corporation from being
deemed a "personal holding company" within the meaning of the Internal Revenue
Code of 1986 or (ii) if the value of the shares in the account maintained by the
Corporation or its transfer agent for any class of stock for the stockholder is
below an amount determined from time to time by the Board of
<PAGE>6
Directors of the Corporation (the "Minimum Account Balance") and the
stockholder has been given at least 60 (sixty) days' written notice of the
redemption and has failed to make additional purchases of shares in an amount
sufficient to bring the value in his account to at least the Minimum Account
Balance before the redemption is effected by the Corporation. Payment of the
redemption price shall be made in cash by the Corporation at the time and in
the manner as may be determined from time to time by the Board of Directors of
the Corporation unless, in the opinion of the Board of Directors, which shall
be conclusive, conditions exist that make payment wholly in cash unwise or
undesirable; in such event the Corporation may make payment wholly or partly
by securities or other property included in the assets belonging or allocable
to the class of the shares for which redemption is being sought, the value of
which shall be determined as provided herein. The Board of Directors may
establish procedures for redemption of shares.
ARTICLE VII
BOARD OF DIRECTORS
(1) The number of directors constituting the Board of Directors shall be
one or such other number as may be set forth in the By-Laws or
determined by the Board of Directors pursuant to the By-Laws. The
number of Directors shall at no time be less than the minimum number
required under the Maryland General Corporation Law. Arnold M. Reichman
has been appointed director of the Corporation to hold office until the
first annual meeting of stockholders or until his successor is elected
and qualified.
(2) In furtherance, and not in limitation, of the powers conferred by the
Maryland General Corporation Law, the Board of Directors is expressly
authorized:
(i) To make, alter or repeal the By-Laws of the
Corporation, except where such power is reserved
by the By-Laws to the stockholders, and except as
otherwise required by the 1940 Act.
(ii) From time to time to determine whether and to what
extent and at what times and places and under what
conditions and regulations the books and accounts
of the Corporation, or any of them other than the
stock ledger, shall be open to the inspection of
the stockholders. No stockholder shall have any
right to inspect any account or book or document
of the Corporation, except as conferred by law or
authorized by resolution of the Board of Directors
or of the stockholders.
<PAGE>7
(iii) Without the assent or vote of the stockholders, to
authorize the issuance from time to time of shares
of the stock of any class of the Corporation,
whether now or hereafter authorized, and
securities convertible into shares of stock of the
Corporation of any class or classes, whether now
or hereafter authorized, for such consideration as
the Board of Directors may deem advisable.
(iv) Without the assent or vote of the stockholders, to
authorize and issue obligations of the
Corporation, secured and unsecured, as the Board
of Directors may determine, and to authorize and
cause to be executed mortgages and liens upon the
real or personal property of the Corporation.
(v) Notwithstanding anything in this Charter to the
contrary, to establish in its absolute discretion
the basis or method for determining the value of
the assets belonging to any class, the value of
the liabilities belonging to any class and the net
asset value of each share of any class of the
Corporation's stock.
(vi) To determine in accordance with generally
accepted accounting principles and practices
what constitutes net profits, earnings, surplus
or net assets in excess of capital, and to
determine what accounting periods shall be used
by the Corporation for any purpose; to set apart
out of any funds of the Corporation reserves for
such purposes as it shall determine and to
abolish the same; to declare and pay any
dividends and distributions in cash, securities
or other property from surplus or any other
funds legally available therefor, at such
intervals as it shall determine; to declare
dividends or distributions by means of a formula
or other method of determination, at meetings
held less frequently than the frequency of the
effectiveness of such declarations; and to
establish payment dates for dividends or any
other distributions on any basis, including
dates occurring less frequently than the
effectiveness of declarations thereof.
(vii) In addition to the powers and authorities
granted herein and by statute expressly
conferred upon it, the Board of Directors is
authorized to exercise all powers and do all
acts that may be exercised or done by the
Corporation pursuant to the provisions of the
laws of the State of Maryland, this Charter and
the By-Laws of the Corporation.
<PAGE>8
(3) Any determination made in good faith, and in accordance with applicable
law and generally accepted accounting principles and practices, if
applicable, by or pursuant to the direction of the Board of Directors,
with respect to the amount of assets, obligations or liabilities of the
Corporation, as to the amount of net income of the Corporation from
dividends and interest for any period or amounts at any time legally
available for the payment of dividends, as to the amount of any
reserves or charges set up and the propriety thereof, as to the time of
or purpose for creating reserves or as to the use, alteration or
cancellation of any reserves or charges (whether or not any obligation
or liability for which the reserves or charges have been created has
been paid or discharged or is then or thereafter required to be paid or
discharged), as to the value of any security owned by the Corporation,
the determination of the net asset value of shares of any class of the
Corporation's capital stock, or as to any other matters relating to the
issuance, sale or other acquisition or disposition of securities or
shares of capital stock of the Corporation, and any reasonable
determination made in good faith by the Board of Directors regarding
whether any transaction constitutes a purchase of securities on
"margin," a sale of securities "short," or an underwriting of the sale
of, or a participation in any underwriting or selling group in
connection with the public distribution of, any securities, shall be
final and conclusive, and shall be binding upon the Corporation and all
holders of its capital stock, past, present and future, and shares of
the capital stock of the Corporation are issued and sold on the
condition and understanding, evidenced by the purchase of shares of
capital stock or acceptance of share certificates, that any and all
such determinations shall be binding as aforesaid. No provision of this
Charter shall be effective to (i) require a waiver of compliance with
any provision of the Securities Act of 1933, as amended, or the 1940
Act, or of any valid rule, regulation or order of the Securities and
Exchange Commission under those Acts or (ii) protect or purport to
protect any director or officer of the Corporation against any
liability to the Corporation or its security holders to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of his office.
<PAGE>9
ARTICLE VIII
INDEMNIFICATION AND LIMITATION OF LIABILITY
(1) To the fullest extent that limitations on the liability of directors
and officers are permitted by the Maryland General Corporation Law, no
director or officer of the Corporation shall have any liability to the
Corporation or its stockholders for money damages. This limitation on
liability applies to events occurring at the time a person serves as a
director or officer of the Corporation whether or not such person is a
director or officer at the time of any proceeding in which liability is
asserted.
(2) The Corporation shall indemnify and advance expenses to its currently
acting and its former directors to the fullest extent that
indemnification of directors and advancement of expenses to directors
is permitted by the Maryland General Corporation Law. The Corporation
shall indemnify and advance expenses to its officers to the same extent
as its directors and to such further extent as is consistent with such
law. The Board of Directors may, through a by-law, resolution or
agreement, make further provisions for indemnification of directors,
officers, employees and agents to the fullest extent permitted by the
Maryland General Corporation Law.
(3) No provision of this Article VIII shall be effective to protect or
purport to protect any director or officer of the Corporation against
any liability to the Corporation or its stockholders to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of his office.
(4) References to the Maryland General Corporation Law in this Article VIII
are to the law as from time to time amended. No amendment to this
Charter shall affect any right of any person under this Article VIII
based on any event, omission or proceeding prior to such amendment. The
term "Charter" as used herein shall have the meaning set forth in the
Maryland General Corporation Law and includes these Articles of
Incorporation and all amendments thereto.
ARTICLE IX
AMENDMENTS
The Corporation reserves the right from time to time to make
any amendment to its Charter, now or hereafter authorized by law, including
any amendment that alters the contract rights, as expressly set forth in this
Charter, of any outstanding stock, and all rights at any time conferred upon
the stockholders of the Corporation by its Charter are granted subject to the
provisions of this Article and the reservation of the right to amend the
Charter herein contained.
<PAGE>10
IN WITNESS WHEREOF, I have adopted and signed these Articles
of Incorporation and do hereby acknowledge that the adoption and signing are
my act.
/s/ George P. Attisano
George P. Attisano
Incorporator
Dated the 24th day of October, 1996
<PAGE>1
BY-LAWS
OF
WARBURG, PINCUS HEALTH SCIENCES FUND, INC.
A Maryland Corporation
ARTICLE I
STOCKHOLDERS
SECTION 1. Annual Meetings. No annual meeting of the
stockholders of the Warburg, Pincus Health Sciences Fund, Inc. (the
"Corporation") shall be held in any year in which the election of directors is
not required to be acted upon under the Investment Company Act of 1940, as
amended (the "1940 Act"), unless otherwise determined by the Board of Directors.
An annual meeting may be held at any place within the United States as may be
determined by the Board of Directors and as shall be designated in the notice of
the meeting, at the time specified by the Board of Directors. Any business of
the Corporation may be transacted at an annual meeting without being
specifically designated in the notice unless otherwise provided by statute, the
Corporation's Charter or these By-Laws.
SECTION 2. Special Meetings. Special meetings of the
stockholders for any purpose or purposes, unless otherwise prescribed by statute
or by the Corporation's Charter, may be held at any place within the United
States, and may be called at any time by the Board of Directors or by the
President, and shall be called by the President or Secretary at the request in
writing of a majority of the Board of Directors or at the request in writing of
stockholders entitled to cast at least 10% (ten percent) of the votes entitled
to be cast at the meeting upon payment by such stockholders to the Corporation
of the reasonably estimated cost of preparing and mailing a notice of the
meeting (which estimated cost shall be provided to such stockholders by the
Secretary of the Corporation). Notwithstanding the foregoing, unless requested
by stockholders entitled to cast a majority of the votes entitled to be cast at
the meeting, a special meeting of the stockholders need not be called at the
request of stockholders to consider any matter which is substantially the same
as a matter voted on at any special meeting of the stockholders held during the
preceding 12 (twelve) months. A written request shall state the purpose or
purposes of the proposed meeting.
SECTION 3. Notice of Meetings. Written or printed notice of
the purpose or purposes and of the time and place of every meeting of the
stockholders shall be given by the Secretary of the Corporation to each
stockholder of record entitled to vote at the meeting, by placing the notice in
the mail at least 10
<PAGE>2
(ten) days, but not more than 90 (ninety) days, prior to the date designated
for the meeting addressed to each stockholder at his address appearing on the
books of the Corporation or supplied by the stockholder to the Corporation for
the purpose of notice. The notice of any meeting of stockholders may be
accompanied by a form of proxy approved by the Board of Directors in favor of
the actions or the election of persons as the Board of Directors may select.
Notice of any meeting of stockholders shall be deemed waived by any
stockholder who attends the meeting in person or by proxy, or who before or
after the meeting submits a signed waiver of notice that is filed with the
records of the meeting.
SECTION 4. Quorum. Except as otherwise provided by statute or
by the Corporation's Charter, the presence in person or by proxy of stockholders
of the Corporation entitled to cast at least one-third of the votes to be cast
shall constitute a quorum at each meeting of the stockholders and all questions
shall be decided by majority of the votes cast (except with respect to the
election of directors, which shall be by a plurality of votes cast). In the
absence of a quorum, the stockholders present in person or by proxy, by majority
vote and without notice other than by announcement, may adjourn the meeting from
time to time as provided in Section 5 of this Article I until a quorum shall
attend. The stockholders present at any duly organized meeting may continue to
do business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum. The absence from any meeting in person
or by proxy of holders of the number of shares of stock of the Corporation in
excess of a majority that may be required by Maryland law, the 1940 Act, or any
other applicable statute, the Corporation's Charter or these By-Laws, for action
upon any given matter shall not prevent action at the meeting on any other
matter or matters that may properly come before the meeting, so long as there
are present, in person or by proxy, holders of the number of shares of stock of
the Corporation required for action upon such other matter or matters.
SECTION 5. Adjournment. Any meeting of the stockholders may be
adjourned from time to time, without notice other than by announcement at the
meeting at which the adjournment is taken. At any adjourned meeting at which a
quorum shall be present, any action may be taken that could have been taken at
the meeting originally called. A meeting of the stockholders may not be
adjourned without further notice to a date more than 120 (one hundred twenty)
days after the original record date determined pursuant to Section 9 of this
Article I.
SECTION 6. Organization. At every meeting of the
stockholders, the Chairman of the Board, or in his absence or inability to act
(or if there is none), the President, or in his absence or inability to act, a
Vice President, or in the absence or inability to act of the Chairman of the
Board, the President and all the Vice Presidents, a chairman chosen by the
stockholders shall act as chairman of the meeting. The
<PAGE>3
Secretary, or in his absence or inability to act, a person appointed by the
chairman of the meeting, shall act as secretary of the meeting and keep the
minutes of the meeting.
SECTION 7. Order of Business. The order of business at all
meetings of the stockholders shall be as determined by the chairman of the
meeting.
SECTION 8. Voting. Except as otherwise provided by statute or
the Corporation's Charter, each holder of record of shares of stock of the
Corporation having voting power shall be entitled at each meeting of the
stockholders to one vote for every share of stock standing in his name on the
records of the Corporation as of the record date determined pursuant to Section
9 of this Article I.
Each stockholder entitled to vote at any meeting of
stockholders may authorize another person to act as proxy for the stockholder
by, (a) signing a writing authorizing another person to act as proxy, or (b) any
other means permitted by law. Signing may be accomplished by the stockholder or
the stockholder's authorized agent signing the writing or causing the
stockholder's signature to be affixed to the writing by any reasonable means,
including facsimile signature.
If a vote shall be taken on any question other than the
election of directors, which shall be by written ballot, then unless required by
statute or these By-Laws, or determined by the chairman of the meeting to be
advisable, any such vote need not be by ballot. On a vote by ballot, each ballot
shall be signed by the stockholder voting, or by his proxy, and shall state the
number of shares voted.
SECTION 9. Fixing of Record Date. The Board of Directors may
set a record date for the purpose of determining stockholders entitled to vote
at any meeting of the stockholders. The record date for a particular meeting
shall be not more than 90 (ninety) nor fewer than 10 (ten) days before the date
of the meeting. All persons who were holders of record of shares as of the
record date of a meeting, and no others, shall be entitled to vote at such
meeting and any adjournment thereof.
SECTION 10. Inspectors. The Board of Directors may, in advance
of any meeting of stockholders, appoint one or more inspectors to act at the
meeting or at any adjournment of the meeting. If the inspectors shall not be so
appointed or if any of them shall fail to appear or act, the chairman of the
meeting may, and on the request of any stockholder entitled to vote at the
meeting shall, appoint inspectors. Each inspector, before entering upon the
discharge of his duties, shall take and sign an oath to execute faithfully the
duties of inspector at the meeting with strict impartiality and according to the
best of his ability. The inspectors shall determine the number of shares
outstanding and the voting power of each share, the number of
<PAGE>4
shares represented at the meeting, the existence of a quorum and the validity
and effect of proxies, and shall receive votes, ballots or consents, hear and
determine all challenges and questions arising in connection with the right to
vote, count and tabulate all votes, ballots or consents, determine the result,
and do those acts as are proper to conduct the election or vote with fairness
to all stockholders. On request of the chairman of the meeting or any
stockholder entitled to vote at the meeting, the inspectors shall make a
report in writing of any challenge, request or matter determined by them and
shall execute a certificate of any fact found by them. No director or
candidate for the office of director shall act as inspector of an election of
directors. Inspectors need not be stockholders of the Corporation.
SECTION 11. Consent of Stockholders in Lieu of Meeting. Except
as otherwise provided by statute or the Corporation's Charter, any action
required to be taken at any meeting of stockholders, or any action that may be
taken at any meeting of the stockholders, may be taken without a meeting,
without prior notice and without a vote, if the following are filed with the
records of stockholders' meetings: (a) a unanimous written consent that sets
forth the action and is signed by each stockholder entitled to vote on the
matter; and (b) a written waiver of notice and any right to dissent signed by
each stockholder entitled to notice of the meeting but not entitled to vote at
the meeting.
SECTION 12. Notice of Stockholder Business.
(a) At any annual or special meeting of the stockholders, only
such business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual or special meeting business
must be, (i), (A) specified in the notice of meeting (or any supplement thereto)
given by or at the direction of the Board of Directors, (B) otherwise properly
brought before the meeting by or at the direction of the Board of Directors, or
(C) subject to the provisions of Section 13 of this Article I, otherwise
properly brought before the meeting by a stockholder, and (ii) a proper subject
under applicable law for stockholder action.
(b) For business to be properly brought before an annual or
special meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, any such
notice must be delivered to or mailed and received at the principal executive
offices of the Corporation not later than 60 (sixty) days prior to the date of
the meeting; provided, however, that if less than 70 (seventy) days' notice or
prior public disclosure of the date of the meeting is given or made to
stockholders, any such notice by a stockholder to be timely must be so received
not later than the close of business on the tenth day following the day on which
<PAGE>5
notice of the date of the annual or special meeting was given or such public
disclosure was made.
(c) Any such notice by a stockholder shall set forth as to
each matter the stockholder proposes to bring before the annual or special
meeting, (i) a brief description of the business desired to be brought before
the annual or special meeting and the reasons for conducting such business at
the annual or special meeting, (ii) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such business, (iii) the class
and number of shares of the capital stock of the Corporation which are
beneficially owned by the stockholder, and (iv) any material interest of the
stockholder in such business.
(d) Notwithstanding anything in the By-Laws to the contrary,
no business shall be conducted at any annual or special meeting except in
accordance with the procedures set forth in this Section 12. The chairman of the
annual or special meeting shall, if the facts warrant, determine and declare to
the meeting that business was not properly brought before the meeting and in
accordance with the provisions of this Section 12, and if he should so
determine, he shall so declare to the meeting and any such business not properly
brought before the meeting shall not be considered or transacted.
SECTION 13. Stockholder Business not Eligible for
Consideration.
(a) Notwithstanding anything in these By-Laws to the
contrary, any proposal that is otherwise properly brought before an annual or
special meeting by a stockholder will not be eligible for consideration by the
stockholders at such annual or special meeting if such proposal is
substantially the same as a matter properly brought before such annual or
special meeting by or at the direction of the Board of Directors of the
Corporation. The chairman of such annual or special meeting shall, if the
facts warrant, determine and declare that a stockholder proposal is
substantially the same as a matter properly brought before the meeting by or
at the direction of the Board of Directors, and, if he should so determine, he
shall so declare to the meeting and any such stockholder proposal shall not be
considered at the meeting.
(b) This Section 13 shall not be construed or applied to
make ineligible for consideration by the stockholders at any annual or special
meeting any stockholder proposal required to be included in the Corporation's
proxy statement relating to such meeting pursuant to Rule 14a-8 under the
Securities Exchange Act of 1934 (the "Exchange Act"), or any successor rule
thereto.
<PAGE>6
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. General Powers. Except as otherwise provided in the
Corporation's Charter, the business and affairs of the Corporation shall be
managed under the direction of its Board of Directors. All powers of the
Corporation may be exercised by or under authority of the Board of Directors
except as conferred on or reserved to the stockholders by law, by the
Corporation's Charter or by these By-Laws.
SECTION 2. Number of Directors. The number of directors shall
be fixed from time to time by resolution of the Board of Directors adopted by a
majority of the entire Board of Directors; provided, however, that the number of
directors shall in no event be fewer than one nor more than fifteen. Any vacancy
created by an increase in directors may be filled in accordance with Section 7
of this Article II. No reduction in the number of directors shall have the
effect of removing any director from office prior to the expiration of his term
unless the director is specifically removed pursuant to Section 6 of this
Article II at the time of the decrease. A director need not be a stockholder of
the Corporation, a citizen of the United States or a resident of the State of
Maryland.
SECTION 3. Election and Term of Directors. The term of office
of each director shall be from the time of his election and qualification until
his successor shall have been elected and shall have qualified, or until his
death, or until his resignation or removal as provided in these By-Laws, or as
otherwise provided by statute or the Corporation's Charter.
SECTION 4. Director Nominations.
(a) Only persons who are nominated in accordance with the
procedures set forth in this Section 4 shall be eligible for election or
re-election as directors. Nominations of persons for election or re-election to
the Board of Directors of the Corporation may be made at a meeting of
stockholders by or at the direction of the Board of Directors or by any
stockholder of the Corporation who is entitled to vote for the election of such
nominee at the meeting and who complies with the notice procedures set forth in
this Section 4.
(b) Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made pursuant to timely notice
delivered in writing to the Secretary of the Corporation. To be timely, any such
notice by a stockholder must be delivered to or mailed and received at the
principal executive
<PAGE>7
offices of the Corporation not later than 60 (sixty) days prior to the
meeting; provided, however, that if less than 70 (seventy) days' notice or
prior public disclosure of the date of the meeting is given or made to
stockholders, any such notice by a stockholder to be timely must be so
received not later than the close of business on the tenth day following the
day on which notice of the date of the meeting was given or such public
disclosure was made.
(c) Any such notice by a stockholder shall set forth, (i) as
to each person whom the stockholder proposes to nominate for election or
re-election as a director, (A) the name, age, business address and residence
address of such person, (B) the principal occupation or employment of such
person, (C) the class and number of shares of the capital stock of the
Corporation which are beneficially owned by such person, and (D) any other
information relating to such person that is required to be disclosed in
solicitations of proxies for the election of directors pursuant to Regulation
14A under the Exchange Act or any successor regulation thereto (including
without limitation such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected and whether any
person intends to seek reimbursement from the Corporation of the expenses of any
solicitation of proxies should such person be elected a director of the
Corporation); and (ii) as to the stockholder giving the notice, (A) the name and
address, as they appear on the Corporation's books, of such stockholder, and (B)
the class and number of shares of the capital stock of the Corporation which are
beneficially owned by such stockholder. At the request of the Board of
Directors, any person nominated by the Board of Directors for election as a
director shall furnish to the Secretary of the Corporation that information
required to be set forth in a stockholder's notice of nomination which pertains
to the nominee.
(d) If a notice by a stockholder is required to be given
pursuant to this Section 4, no person shall be entitled to receive reimbursement
from the Corporation of the expenses of a solicitation of proxies for the
election as a director of a person named in such notice unless such notice
states that such reimbursement will be sought from the Corporation. No person
shall be eligible for election as a director of the Corporation unless nominated
in accordance with the procedures set forth in this Section 4. The chairman of
the meeting shall, if the facts warrant, determine and declare to the meeting
that a nomination was not made in accordance with the procedures prescribed by
the By-Laws, and if he should so determine, he shall so declare to the meeting
and the defective nomination shall be disregarded for all purposes.
SECTION 5. Resignation. A director of the Corporation may
resign at any time by giving written notice of his resignation to the Board of
Directors or the Chairman of the Board or to the President or the Secretary of
the Corporation.
<PAGE>8
Any resignation shall take effect at the time specified in it or, should the
time when it is to become effective not be specified in it, immediately upon
its receipt. Acceptance of a resignation shall not be necessary to make it
effective unless the resignation states otherwise.
SECTION 6. Removal of Directors. Any director of the
Corporation may be removed by the stockholders with or without cause at any
time by a vote of a majority of the votes entitled to be cast for the election
of directors.
SECTION 7. Vacancies. Subject to the provisions of the 1940
Act, any vacancies in the Board of Directors, whether arising from death,
resignation, removal or any other cause except an increase in the number of
directors, shall be filled by a vote of the majority of the Board of Directors
then in office even though that majority is less than a quorum, provided that no
vacancy or vacancies shall be filled by action of the remaining directors if,
after the filling of the vacancy or vacancies, fewer than two-thirds of the
directors then holding office shall have been elected by the stockholders of the
Corporation. A majority of the entire Board as calculated prior to Board
expansion may fill a vacancy which results from an increase in the number of
directors. In the event that at any time a vacancy exists in any office of a
director that may not be filled by the remaining directors, a special meeting of
the stockholders shall be held as promptly as possible and in any event within
60 (sixty) days, for the purpose of filling the vacancy or vacancies. Any
director elected or appointed to fill a vacancy shall hold office until a
successor has been chosen and qualifies or until his earlier death, resignation
or removal.
SECTION 8. Place of Meetings. Meetings of the Board may be
held at any place that the Board of Directors may from time to time determine or
that is specified in the notice of the meeting.
SECTION 9. Regular Meetings. Regular meetings of the Board
of Directors may be held without notice at the time and place determined by
the Board of Directors.
SECTION 10. Special Meetings. Special meetings of the
Board of Directors may be called by two or more directors of the Corporation
or by the Chairman of the Board or the President.
SECTION 11. Notice of Special Meetings. Notice of each
special meeting of the Board of Directors shall be given by the Secretary as
hereinafter provided. Each notice shall state the time and place of the
meeting and shall be delivered to each director, either personally or by
telephone, facsimile transmission or other standard form of telecommunication,
at least 24 (twenty-four) hours before the time at which the meeting is to be
held, or by first-class mail, postage prepaid, addressed to the director at
his residence or usual place of business, and mailed at least 3 (three) days
before the day on which the meeting is to be held.
<PAGE>9
SECTION 12. Waiver of Notice of Meetings. Notice of any
special meeting need not be given to any director who shall, either before or
after the meeting, sign a written waiver of notice that is filed with the
records of the meeting or who shall attend the meeting.
SECTION 13. Quorum and Voting. One-third (but not fewer than
two unless there be only one director) of the members of the entire Board of
Directors shall be present in person at any meeting of the Board in order to
constitute a quorum for the transaction of business at the meeting, and except
as otherwise expressly required by statute, the Corporation's Charter, these
By-Laws, the 1940 Act, or any other applicable statute, the act of a majority of
the directors present at any meeting at which a quorum is present shall be the
act of the Board. In the absence of a quorum at any meeting of the Board, a
majority of the directors present may adjourn the meeting to another time and
place until a quorum shall be present. Notice of the time and place of any
adjourned meeting shall be given to the directors who were not present at the
time of the adjournment and, unless the time and place were announced at the
meeting at which the adjournment was taken, to the other directors. At any
adjourned meeting at which a quorum is present, any business may be transacted
that might have been transacted at the meeting as originally called.
SECTION 14. Organization. The Board of Directors may, by
resolution adopted by a majority of the entire Board, designate a Chairman of
the Board, who shall preside at each meeting of the Board. In the absence or
inability of the Chairman of the Board to act or if there is none, the
President, or, in his absence or inability to act, another director chosen by a
majority of the directors present, shall act as chairman of the meeting and
preside at the meeting. The Secretary, or, in his absence or inability to act,
any person appointed by the chairman, shall act as secretary of the meeting and
keep the minutes thereof.
SECTION 15. Committees. The Board of Directors may designate
one or more committees of the Board of Directors, each consisting of 2 (two)
or more directors. To the extent provided in the resolution, and permitted by
law, the committee or committees shall have and may exercise the powers of the
Board of Directors in the management of the business and affairs of the
Corporation and may authorize the seal of the Corporation to be affixed to all
papers that may require it. Any committee or committees shall have the name or
names determined from time to time by resolution adopted by the Board of
Directors. Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required. The members of a
committee present at any meeting, whether or not they constitute a quorum, may
appoint a director to act in the place of an absent member.
<PAGE>10
SECTION 16. Written Consent of Directors in Lieu of a Meeting.
Subject to the provisions of the 1940 Act, any action required or permitted to
be taken at any meeting of the Board of Directors or of any committee of the
Board may be taken without a meeting if all members of the Board or committee,
as the case may be, consent thereto in writing, and the writing or writings are
filed with the records of the Board's or such committee's meetings.
SECTION 17. Telephone Conference. Members of the Board of
Directors or any committee of the Board may participate in any Board or
committee meeting by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other at the same time. Participation by such means shall constitute
presence in person at the meeting.
SECTION 18. Compensation. Each director shall be entitled to
receive compensation, if any, as may from time to time be fixed by the Board of
Directors, including a fee for each meeting of the Board or any committee
thereof, regular or special, he attends. Directors may also be reimbursed by the
Corporation for all reasonable expenses incurred in traveling to and from the
place of a Board or committee meeting.
ARTICLE III
OFFICERS, AGENTS AND EMPLOYEES
SECTION 1. Number and Qualifications. The officers of the
Corporation shall be a President, a Secretary and a Treasurer, each of whom
shall be elected by the Board of Directors. The Board of Directors may elect or
appoint one or more Vice Presidents and may also appoint any other officers,
agents and employees it deems necessary or proper. Any two or more offices may
be held by the same person, except the offices of President and Vice President,
but no officer shall execute, acknowledge or verify any instrument in more than
one capacity. Officers shall be elected by the Board of Directors, each to hold
office until his successor shall have been duly elected and shall have
qualified, or until his death, or until his resignation or removal as provided
in these By-Laws. The Board of Directors may from time to time elect, or
designate to the President the power to appoint, such officers (including one or
more Assistant Vice Presidents, one or more Assistant Treasurers and one or more
Assistant Secretaries) and such agents as may be necessary or desirable for the
business of the Corporation. Such other officers and agents shall have such
duties and shall hold their offices for such terms as may be prescribed by the
Board or by the appointing authority.
<PAGE>11
SECTION 2. Resignations. Any officer of the Corporation may
resign at any time by giving written notice of his resignation to the Board of
Directors, the Chairman of the Board, the President or the Secretary. Any
resignation shall take effect at the time specified therein or, if the time when
it shall become effective is not specified therein, immediately upon its
receipt. Acceptance of a resignation shall not be necessary to make it effective
unless the resignation states otherwise.
SECTION 3. Removal of Officer, Agent or Employee. Any officer,
agent or employee of the Corporation may be removed by the Board of Directors
with or without cause at any time, and the Board may delegate the power of
removal as to agents and employees not elected or appointed by the Board of
Directors. Removal shall be without prejudice to the person's contract rights,
if any, but the appointment of any person as an officer, agent or employee of
the Corporation shall not of itself create contract rights.
SECTION 4. Vacancies. A vacancy in any office whether arising
from death, resignation, removal or any other cause, may be filled for the
unexpired portion of the term of the office that shall be vacant, in the manner
prescribed in these By-Laws for the regular election or appointment to the
office.
SECTION 5. Compensation. The compensation of the officers
of the Corporation shall be fixed by the Board of Directors, but this power
may be delegated to any officer with respect to other officers under his
control.
SECTION 6. Bonds or Other Security. If required by the Board,
any officer, agent or employee of the Corporation shall give a bond or other
security for the faithful performance of his duties, in an amount and with any
surety or sureties as the Board may require.
SECTION 7. President. The President shall be the chief
executive officer of the Corporation. In the absence or inability of the
Chairman of the Board to act (or if there is none), the President shall preside
at all meetings of the stockholders and of the Board of Directors. The President
shall have, subject to the control of the Board of Directors, general charge of
the business and affairs of the Corporation, and may employ and discharge
employees and agents of the Corporation, except those elected or appointed by
the Board, and he may delegate these powers.
SECTION 8. Vice President. Each Vice President shall have
the powers and perform the duties that the Board of Directors or the President
may from time to time prescribe.
<PAGE>12
SECTION 9. Treasurer. Subject to the provisions of any
contract that may be entered into with any custodian pursuant to authority
granted by the Board of Directors, the Treasurer shall have charge of all
receipts and disbursements of the Corporation and shall have or provide for the
custody of the Corporation's funds and securities; he shall have full authority
to receive and give receipts for all money due and payable to the Corporation,
and to endorse checks, drafts and warrants, in its name and on its behalf and to
give full discharge for the same; he shall deposit all funds of the Corporation,
except those that may be required for current use, in such banks or other places
of deposit as the Board of Directors may from time to time designate; and, in
general, he shall perform all duties incident to the office of Treasurer and
such other duties as may from time to time be assigned to him by the Board of
Directors or the President.
SECTION 10. Secretary. The Secretary shall:
(a) keep or cause to be kept in one or more books
provided for the purpose, the minutes of all meetings of the Board of
Directors, the committees of the Board and the stockholders;
(b) see that all notices are duly given in accordance
with the provisions of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the
Corporation and affix and attest the seal to all stock certificates of the
Corporation (unless the seal of the Corporation on such certificates shall be
a facsimile, as hereinafter provided) and affix and attest the seal to all
other documents to be executed on behalf of the Corporation under its seal;
(d) see that the books, reports, statements,
certificates and other documents and records required by law to be kept and
filed are properly kept and filed; and
(e) in general, perform all the duties incident to the office
of Secretary and such other duties as from time to time may be assigned to him
by the Board of Directors or the President.
SECTION 11. Delegation of Duties. In case of the absence of
any officer of the Corporation, or for any other reason that the Board of
Directors may deem sufficient, the Board may confer for the time being the
powers or duties, or any of them, of such officer upon any other officer or upon
any director.
<PAGE>13
ARTICLE IV
STOCK
SECTION 1. Stock Certificates. Each holder of stock of the
Corporation shall be entitled upon specific written request to such person as
may be designated by the Corporation to have a certificate or certificates, in a
form approved by the Board, representing the number of shares of stock of the
Corporation owned by him; provided, however, that certificates for fractional
shares will not be delivered in any case. The certificates representing shares
of stock shall be signed by or in the name of the Corporation by the Chairman of
the Board, President or a Vice President and by the Secretary or an Assistant
Secretary or the Treasurer or an Assistant Treasurer and sealed with the seal of
the Corporation. Any or all of the signatures or the seal on the certificate may
be facsimiles. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such certificate
shall be issued, it may be issued by the Corporation with the same effect as if
such officer, transfer agent or registrar were still in office at the date of
issue.
SECTION 2. Books of Account and Record of Stockholders. There
shall be kept at the principal executive office of the Corporation correct and
complete books and records of account of all the business and transactions of
the Corporation. There shall be made available upon request of any stockholder,
in accordance with Maryland law, a record containing the number of shares of
stock issued during a specified period not to exceed 12 (twelve) months and the
consideration received by the Corporation for each such share.
SECTION 3. Transfers of Shares. Transfers of shares of stock
of the Corporation shall be made on the stock records of the Corporation only by
the registered holder thereof, or by his attorney thereunto authorized by power
of attorney duly executed and filed with the Secretary or with a transfer agent
or transfer clerk, and on surrender of the certificate or certificates, if
issued, for the shares properly endorsed or accompanied by a duly executed stock
transfer power and the payment of all taxes thereon. Except as otherwise
provided by law, the Corporation shall be entitled to recognize the exclusive
right of a person in whose name any share or shares stand on the record of
stockholders as the owner of the share or shares for all purposes, including,
without limitation, the rights to receive dividends or other distributions and
to vote as the owner, and the Corporation shall not be bound to recognize any
equitable or legal claim to or interest in any such share or shares on the part
of any other person.
<PAGE>14
SECTION 4. Regulations. The Board of Directors may make any
additional rules and regulations, not inconsistent with these By-Laws, as it may
deem expedient concerning the issue, transfer and registration of certificates
for shares of stock of the Corporation. It may appoint, or authorize any officer
or officers to appoint, one or more transfer agents or one or more transfer
clerks and one or more registrars and may require all certificates for shares of
stock to bear the signature or signatures of any of them.
SECTION 5. Stolen, Lost, Destroyed or Mutilated Certificates.
The holder of any certificate representing shares of stock of the Corporation
shall immediately notify the Corporation of its theft, loss, destruction or
mutilation and the Corporation may issue a new certificate of stock in the place
of any certificate issued by it that has been alleged to have been stolen, lost
or destroyed or that shall have been mutilated. The Board may, in its
discretion, require the owner (or his legal representative) of a stolen, lost,
destroyed or mutilated certificate to give to the Corporation a bond in a sum,
limited or unlimited, and in a form and with any surety or sureties, as the
Board in its absolute discretion shall determine or to indemnify the Corporation
against any claim that may be made against it on account of the alleged theft,
loss, destruction or the mutilation of any such certificate, or issuance of a
new certificate. Anything herein to the contrary notwithstanding, the Board of
Directors, in its absolute discretion, may refuse to issue any such new
certificate, except pursuant to legal proceedings under the Maryland General
Corporation Law.
SECTION 6. Fixing of Record Date for Dividends, Distributions,
etc. The Board may fix, in advance, a date not more than 90 (ninety) days
preceding the date fixed for the payment of any dividend or the making of any
distribution or the allotment of rights to subscribe for securities of the
Corporation, or for the delivery of evidences of rights or evidences of
interests arising out of any change, conversion or exchange of common stock or
other securities, as the record date for the determination of the stockholders
entitled to receive any such dividend, distribution, allotment, rights or
interests, and in such case only the stockholders of record at the time so fixed
shall be entitled to receive such dividend, distribution, allotment, rights or
interests.
SECTION 7. Information to Stockholders and Others. Any
stockholder of the Corporation or his agent may inspect and copy during the
Corporation's usual business hours the Corporation's By-Laws, minutes of the
proceedings of its stockholders, annual statements of its affairs and voting
trust agreements on file at its principal office.
<PAGE>15
ARTICLE V
INDEMNIFICATION AND INSURANCE
SECTION 1. Indemnification of Directors and Officers. Any
person who was or is a party or is threatened to be made a party in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person is a current or former director or officer of the Corporation, or is or
was serving while a director or officer of the Corporation at the request of the
Corporation as a director, officer, partner, trustee, employee, agent or
fiduciary of another corporation, partnership, joint venture, trust, enterprise
or employee benefit plan, shall be indemnified by the Corporation against
judgments, penalties, fines, excise taxes, settlements and reasonable expenses
(including attorneys' fees) actually incurred by such person in connection with
such action, suit or proceeding to the full extent permissible under the
Maryland General Corporation Law, the Securities Act of 1933, as amended (the
"Securities Act"), and the 1940 Act, as such statutes are now or hereafter in
force, except that such indemnity shall not protect any such person against any
liability to the Corporation or any stockholder thereof to which such person
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office ("disabling conduct").
SECTION 2. Advances. Any current or former director or officer
of the Corporation claiming indemnification within the scope of this Article V
shall be entitled to advances from the Corporation for payment of the reasonable
expenses incurred by him in connection with proceedings to which he is a party
in the manner and to the full extent permissible under the Maryland General
Corporation Law, the Securities Act and the 1940 Act, as such statutes are now
or hereafter in force; provided however, that the person seeking indemnification
shall provide to the Corporation a written affirmation of his good faith belief
that the standard of conduct necessary for indemnification by the Corporation
has been met and a written undertaking to repay any such advance unless it is
ultimately determined that he is entitled to indemnification, and provided
further that at least one of the following additional conditions is met: (a) the
person seeking indemnification shall provide a security in form and amount
acceptable to the Corporation for his undertaking; (b) the Corporation is
insured against losses arising by reason of the advance; or (c) a majority of a
quorum of directors of the Corporation who are neither "interested persons" as
defined in Section 2(a)(19) of the 1940 Act, nor parties to the proceeding
("disinterested non-party directors"), or independent legal counsel, in a
written opinion, shall determine, based on a review
<PAGE>16
of facts readily available to the Corporation at the time the advance is
proposed to be made, that there is reason to believe that the person seeking
indemnification will ultimately be found to be entitled to indemnification.
SECTION 3. Procedure. At the request of any current or former
director or officer, or any employee or agent whom the Corporation proposes to
indemnify, the Board of Directors shall determine, or cause to be determined, in
a manner consistent with the Maryland General Corporation Law, the Securities
Act and the 1940 Act, as such statutes are now or hereafter in force, whether
the standards required by this Article V have been met; provided, however, that
indemnification shall be made only following: (a) a final decision on the merits
by a court or other body before whom the proceeding was brought that the person
to be indemnified was not liable by reason of disabling conduct; or (b) in the
absence of such a decision, a reasonable determination, based upon a review of
the facts, that the person to be indemnified was not liable by reason of
disabling conduct by, (i) the vote of a majority of a quorum of disinterested
non-party directors, or (ii) an independent legal counsel in a written opinion.
SECTION 4. Indemnification of Employees and Agents. Employees
and agents who are not officers or directors of the Corporation may be
indemnified, and reasonable expenses may be advanced to such employees or
agents, in accordance with the procedures set forth in this Article V to the
extent permissible under the 1940 Act, the Securities Act and Maryland General
Corporation Law, as such statutes are now or hereafter in force, to the extent,
consistent with the foregoing, as may be provided by action of the Board of
Directors or by contract.
SECTION 5. Other Rights. The indemnification provided by this
Article V shall not be deemed exclusive of any other right, in respect of
indemnification or otherwise, to which those seeking such indemnification may be
entitled under any insurance or other agreement, vote of stockholders or
disinterested directors or otherwise, both as to action by a director or officer
of the Corporation in his official capacity and as to action by such person in
another capacity while holding such office or position, and shall continue as to
a person who has ceased to be a director or officer and shall inure to the
benefit of the heirs, executors and administrators of such a person.
SECTION 6. Insurance. The Corporation shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or who, while a
director, officer, employee or agent of the Corporation, is or was serving at
the request of the Corporation as a director, officer, partner, trustee,
employee, agent or fiduciary of another corporation, partnership, joint venture,
trust, enterprise or employee benefit plan, against any liability asserted
against and incurred by him in any such capacity, or arising out of his status
as such, provided that no
<PAGE>17
insurance may be obtained by the Corporation for liabilities against which it
would not have the power to indemnify him under this Article V or applicable
law.
SECTION 7. Constituent, Resulting or Surviving Corporations.
For the purposes of this Article V, references to the "Corporation" shall
include all constituent corporations absorbed in a consolidation or merger as
well the resulting or surviving corporation so that any person who is or was a
director, officer, employee or agent of a constituent corporation or is or was
serving at the request of a constituent corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise shall stand in the same position under this Article V with
respect to the resulting or surviving corporation as he would if he had served
the resulting or surviving corporation in the same capacity.
ARTICLE VI
SEAL
The seal of the Corporation shall be circular in form and
shall bear the name of the Corporation, the year of its incorporation, the words
"Corporate Seal" and "Maryland" and any emblem or device approved by the Board
of Directors. The seal may be used by causing it or a facsimile to be impressed
or affixed or in any other manner reproduced, or by placing the word "(seal)"
adjacent to the signature of the authorized officer of the Corporation.
ARTICLE VII
FISCAL YEAR
The Corporation's fiscal year shall be fixed by the Board of
Directors.
ARTICLE VIII
AMENDMENTS
These By-Laws may be amended or repealed by the affirmative
vote of a majority of the Board of Directors at any regular or special meeting
of the Board of Directors, subject to the requirements of the 1940 Act.
As adopted, ________, 1996
