<PAGE>1
As filed with the U.S. Securities and Exchange Commission
on December 16, 1996
Securities Act File No. 333-15453
Investment Company Act File No. 811-07909
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.1 [x]
Post-Effective Amendment No.__ [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 [x]
Amendment No. 1 [x]
(Check appropriate box or boxes)
Warburg, Pincus Small Company Growth 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 Small Company Growth 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>
Proposed Maximum Proposed Maximum
Title of Securities Amount Being Offering Price per Aggregate Amount of
Being Registered Registered Unit Offering Price Registration Fee
------------------------ ------------------------ --------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Shares of common
stock, $.001 par value
per share Indefinite* Indefinite* Indefinite* $0
<FN>
- ----------------------------------------------------------------
* 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 SMALL COMPANY GROWTH FUND, INC.
FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Part A
Item No. Prospectus Heading
- -------- ------------------
<S> <C>
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 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 Statement of Additional
Item No. Information Heading
- -------- -----------------------
<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,"
</TABLE>
<PAGE>5
<TABLE>
<CAPTION>
Part B Statement of Additional
Item No. Information Heading
- -------- -----------------------
<S> <C>
"How to Redeem and Exchange Shares," "Net Asset Value"
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.......................................... Statement of Assets and Liabilities;
Report of Coopers & 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>
PROSPECTUS
December 31, 1996
WARBURG PINCUS
SMALL COMPANY GROWTH FUND
[Logo]
<PAGE>
<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.
SUBJECT TO COMPLETION, DATED DECEMBER 9, 1996
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 SMALL COMPANY GROWTH FUND seeks capital growth by investing in
equity securities of small-sized domestic companies.
NO LOAD CLASS OF COMMON SHARES
________________________________________________________________________________
The Fund offers two classes of shares. A class of Common Shares that is 'no
load' is 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 OneSource'tm' Program; Fidelity
Brokerage Services, Inc. FundsNetwork'tm' 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 also be obtained by
calling Warburg Pincus Funds at the same number. 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 GOVERNMENT 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>
<PAGE>
THE FUND'S EXPENSES
________________________________________________________________________________
Warburg Pincus Small Company Growth Fund (the 'Fund') currently offers two
separate classes of shares: Common Shares and Advisor 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 Fund -- Distributor.'
<TABLE>
<S> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage of offering
price)................................................................... 0
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees............................................................ .44%
12b-1 Fees................................................................. .25%
Other Expenses............................................................. .71%
---
Total Fund Operating Expenses (after fee waivers)`D'....................... 1.40%
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..................................................................... $14
3 years.................................................................... $44
</TABLE>
- --------------------------------------------------------------------------------
`D' Absent waiver of fees by the Fund's investment adviser and co-administrator,
Management Fees for the Fund would equal 1.00%, Other Expenses would equal
.81%, and Total Fund Operating Expenses would equal 2.06%. Other Expenses
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 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>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
________________________________________________________________________________
The Fund seeks capital growth. 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 investment fund that pursues its investment
objective by investing in a portfolio of equity securities of small-sized
domestic companies (i.e., companies having stock market capitalizations of $1
billion or less at the time of initial purchase, 'small companies'). The Fund
intends to invest at least 80% of its total assets in common stocks or warrants
of small companies that present attractive opportunities for capital growth and,
under normal market conditions, will invest at least 65% of its total assets in
such securities. The Fund is not required to dispose of issuers whose market
capitalizations grow to exceed $1 billion after acquisition by the Fund. The
Fund will invest primarily in companies whose securities are traded on domestic
stock exchanges or in the over-the-counter market, but may invest up to 20% of
its assets in foreign securities. Small companies in which the Fund may invest
may still be in the developmental stage, may be older companies that appear to
be entering a new stage of growth progress owing to factors such as management
changes or development of new technology, products or markets or may be
companies providing products or services with a high unit volume growth rate.
The Fund's investments will be made on the basis of their equity characteristics
and securities ratings generally will not be a factor in the selection process.
The Fund may also invest in securities of emerging growth companies, which
can be either small- or medium-sized companies that have passed their start-up
phase and that show positive earnings and prospects of achieving significant
profit and gain in a relatively short period of time. Emerging growth companies
generally stand to benefit from new products or services, technological
developments or changes in management and other factors and include smaller
companies experiencing unusual developments affecting their market value.
PORTFOLIO INVESTMENTS
________________________________________________________________________________
DEBT SECURITIES. The Fund may invest up to 20% of its total assets in debt
securities (other than money market obligations) that are not convertible into
common stock 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, Pincus Counsellors, Inc. ('Warburg'), the
Fund's investment adviser. 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
3
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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's holdings of debt securities will be considered investment grade at
the time of purchase, except that up to 5% of the Fund's assets may be below
investment grade. A security will be deemed to be investment grade if it is
rated within the four highest grades by Moody's Investors Service, Inc.
('Moody's') or Standard & Poor's Ratings Services ('S&P') or, if unrated, is
determined to be of comparable quality by Warburg. Bonds rated in the fourth
highest grade may have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade
bonds. The Fund's holdings of debt securities rated below investment grade
(commonly referred to as 'junk bonds') may be rated as low as C by Moody's or D
by S&P at the time of purchase or may be unrated securities considered to be of
equivalent quality. Securities that are rated C by Moody's are the lowest rated
class and can be regarded as having extremely poor prospects of ever attaining
any real investment standing. Debt rated D by S&P is in default or is expected
to default upon maturity or payment date. Subsequent to its purchase by a Fund,
an issue of securities may cease to be rated or its rating may be reduced.
Neither event will require sale of such securities, although Warburg will
consider such event in its determination of whether the Fund should continue to
hold the securities.
When Warburg believes that a defensive posture is warranted, the Fund may
invest temporarily without limit in investment grade debt obligations and in
domestic and foreign money market instruments, including repurchase agreements.
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) 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,
its agencies or instrumentalities; bank obligations (including certificates of
deposit, time deposits and bankers' acceptances of domestic or foreign banks,
domestic savings and loans and similar institutions) that are high quality
investments or, if unrated, deemed by Warburg to be high quality investments;
commercial paper rated no lower than A-2 by S&P or Prime-2 by Moody's or the
equivalent from another major rating service or, if unrated, of an issuer having
an outstanding, unsecured debt issue then rated within the three highest rating
categories; and repurchase agreements with respect to the foregoing.
4
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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 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-
5
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convertible securities of similar quality. The value of convertible securities
fluctuates in relation to changes in interest rates like bonds and, in addition,
fluctuates in relation to the underlying common stock. Subsequent to purchase by
the Fund, convertible securities may cease to be rated or a rating may be
reduced. Neither event will require sale of such securities, although Warburg
will consider such event in its determination of whether the Fund should
continue to hold the securities. The Fund does not currently intend during the
coming year to hold more than 5% of its net assets in convertible securities
rated below investment grade.
WARRANTS. The Fund may invest up to 15% of its total assets in warrants.
Warrants are securities that give the holder the right, but not the obligation,
to purchase newly created equity issues of the company issuing the warrants, or
a related company, at a fixed price either on a date certain or during a set
period.
RISK FACTORS AND SPECIAL CONSIDERATIONS
________________________________________________________________________________
Investing in common stocks and securities convertible into common stocks is
subject to the inherent risk of fluctuations in the prices of such securities.
For certain additional risks relating to the Fund's investments, see 'Portfolio
Investments' beginning at page 3 and 'Certain Investment Strategies' beginning
at page 8.
SMALL CAPITALIZATION AND EMERGING GROWTH COMPANIES. Investing in securities
of small-sized and emerging growth companies may involve greater risks than
investing in larger, more established issuers since these securities may have
limited marketability and, thus, may be more volatile than securities of larger,
more established companies or the market averages in general. Because
small-sized companies normally have fewer shares outstanding than larger
companies, it may be more difficult to buy or sell significant amounts of such
shares without an unfavorable impact on prevailing prices. Small-sized companies
may have limited product lines, markets or financial resources and may lack
management depth. In addition, small-sized companies are typically subject to a
greater degree of changes in earnings and business prospects than are larger,
more established companies. There is typically less publicly available
information concerning small-sized companies than for larger, more established
ones. Securities of issuers in 'special situations' also may be more volatile,
since the market value of these securities may decline in value if the
anticipated benefits do not materialize. Companies in 'special situations'
include, but are not limited to, companies involved in an acquisition or
consolidation; reorganization; recapitalization; merger, liquidation or
distribution of cash, securities or other assets; a tender or exchange offer; a
breakup or workout of a holding company; litigation which, if resolved
favorably, would improve the value of the companies' securities; or a change in
corporate control. Although investing in securities of emerging growth companies
or 'special situations' offers potential for above-average returns if the
companies are successful, the risk exists that the
6
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companies will not succeed and the prices of the companies' shares could
significantly decline in value. Therefore, an investment in the Fund may involve
a greater degree of risk than an investment in other mutual funds that seek
capital growth by investing in better-known, larger companies.
NON-PUBLICLY TRADED SECURITIES; RULE 144A SECURITIES. The Fund may purchase
securities that are not registered under the Securities Act of 1933, as amended
(the 'Securities Act'), but that can be sold to 'qualified institutional buyers'
in accordance with Rule 144A under the Securities 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 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.
WARRANTS. At the time of issue, the cost of a warrant is substantially less
than the cost of the underlying security itself, and price movements in the
underlying security are generally magnified in the price movements of the
warrant. This leveraging effect enables the investor to gain exposure to the
underlying security with a relatively low capital investment. This leveraging
increases an investor's risk, however, in the event of a decline in the value of
the underlying security and can result in a complete loss of the amount invested
in the warrant. In addition, the price of a warrant tends to be more volatile
than, and may not correlate exactly to, the price of the underlying
7
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security. If the market price of the underlying security is below the exercise
price of the warrant on its expiration date, the warrant will generally expire
without value.
PORTFOLIO TRANSACTIONS AND TURNOVER RATE
________________________________________________________________________________
The Fund will attempt to purchase securities with the intent of holding them
for investment but may purchase and sell portfolio securities whenever Warburg
believes it to be in the best interests of the Fund. The Fund will not consider
portfolio turnover rate a limiting factor in making investment decisions
consistent with its investment objective and policies. It is not possible to
predict the Fund's portfolio turnover rate. However, it is anticipated that the
Fund's annual turnover rate should not exceed 100%. High portfolio turnover
rates (100% or more) may result in dealer mark ups or underwriting commissions
as well as other transaction costs, including correspondingly higher brokerage
commissions. In addition, short-term gains realized from portfolio turnover may
be taxable to shareholders as ordinary income. See 'Dividends, Distributions and
Taxes -- Taxes' below and 'Investment Policies -- Portfolio Transactions' in the
Statement of Additional Information.
All orders for transactions in securities or options on behalf of the Fund
are placed by Warburg with broker-dealers that it selects, including Counsellors
Securities Inc., the Fund's distributor ('Counsellors Securities'). The Fund may
utilize Counsellors Securities in connection with a purchase or sale of
securities when Warburg believes that the charge for the transaction does not
exceed usual and customary levels 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 related risks is contained below and in the Statement
of Additional Information.
FOREIGN SECURITIES. The Fund may invest up to 20% of its total assets in the
securities of foreign issuers located in any foreign country. 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
8
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applied in the United States. Moreover, securities of many foreign companies may
be less liquid and their prices more volatile than those of securities of
comparable U.S. companies. Certain foreign countries are known to experience
long delays between the trade and settlement dates of securities purchased or
sold. In addition, with respect to certain foreign countries, there is the
possibility of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of funds or other assets of the Fund,
including the withholding of dividends. Foreign securities may be subject to
foreign government taxes that would reduce the net yield on such securities.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments positions. Investment in foreign securities will also result in higher
operating expenses due to the cost of converting foreign currency into U.S.
dollars, the payment of fixed brokerage commissions on foreign exchanges, which
generally are higher than commissions on U.S. exchanges, higher valuation and
communications costs and the expense of maintaining securities with foreign
custodians.
OPTIONS, FUTURES AND CURRENCY TRANSACTIONS. At the discretion of Warburg, the
Fund may, but is not required to, engage in a number of strategies involving
options, futures and forward currency contracts. These strategies, commonly
referred to as 'derivatives,' may be used (i) for the purpose of hedging against
a decline in value of the Fund's current or anticipated portfolio holdings, (ii)
as a substitute for purchasing or selling portfolio securities or (iii) to seek
to generate income to offset expenses or increase return. TRANSACTIONS THAT ARE
NOT CONSIDERED HEDGING SHOULD BE CONSIDERED SPECULATIVE AND MAY SERVE TO
INCREASE THE FUND'S INVESTMENT RISK. Transaction costs and any premiums
associated with these strategies, and any losses incurred, will affect the
Fund's net asset value and performance. Therefore, an investment in the Fund may
involve a greater risk than an investment in other mutual funds that do not
utilize these strategies. The Fund's use of these strategies may be limited by
position and exercise limits established by 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 also utilize up to 10% of its
assets to purchase options on stocks and debt securities that are traded on U.S.
and foreign exchanges, as well as over-the-counter ('OTC') options. The
purchaser of a put option on a security has the right to compel the purchase by
the writer of the underlying security, while the purchaser of a call option on a
security 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
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OTC put and call options on stock indexes, and may also write such options. A
stock index measures the movement of a certain group of stocks by assigning
relative values to the common stocks included in the index.
The potential loss associated with purchasing an option is limited to the
premium paid, and the premium would partially offset any gains achieved from its
use. However, for an option writer the exposure to adverse price movements in
the underlying security or index is potentially unlimited during the exercise
period. Writing securities options may result in substantial losses to the Fund,
force the sale or purchase of portfolio securities at inopportune times or at
less advantageous prices, limit the amount of appreciation the Fund could
realize on its investments or require the Fund to hold securities it would
otherwise sell.
Futures Contracts and Related Options. The Fund may enter into foreign
currency, interest rate and stock index futures contracts and purchase and write
(sell) related options that are traded on an exchange designated by the
Commodity Futures Trading Commission (the 'CFTC') or, if consistent with CFTC
regulations, on foreign exchanges. These futures contracts are standardized
contracts for the future delivery of foreign currency or an interest rate
sensitive security or, in the case of stock index and certain other futures
contracts, are settled in cash with reference to a specified multiplier times
the change in the specified index, exchange rate or interest rate. An option on
a futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract.
Aggregate initial margin and premiums required to establish positions other
than those considered by the CFTC to be 'bona fide hedging' will not exceed 5%
of the Fund's net asset value, after taking into account unrealized profits and
unrealized losses on any such contracts. Although the Fund is limited in the
amount of assets that may be invested in futures transactions, there is no
overall limit on the percentage of Fund assets that may be at risk with respect
to futures activities.
Currency Exchange Transactions. The Fund will conduct its currency exchange
transactions either (i) on a spot (i.e., cash) basis at the rate prevailing in
the currency exchange market, (ii) through entering into futures contracts or
options on futures contracts (as described above), (iii) through entering into
forward contracts to purchase or sell currency or (iv) by purchasing
exchange-traded currency options. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date at a price
set at the time of the contract. An option on a foreign currency operates
similarly to an option on a security. Risks associated with currency forward
contracts and purchasing currency options are similar to those described in this
Prospectus for futures contracts and securities and stock index options. In
addition, the use of currency transactions could result in losses from the
imposition of foreign exchange controls, suspension of settlement or other
governmental actions or unexpected events.
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Hedging Considerations. The Fund may engage in options, futures and currency
transactions for, among other reasons, hedging purposes. A hedge is designed to
offset a loss on a portfolio position with a gain in the hedge position; at the
same time, however, a properly correlated hedge will result in a gain in the
portfolio position being offset by a loss in the hedge position. As a result,
the use of options, futures contracts and currency exchange transactions for
hedging purposes could limit any potential gain from an increase in value of the
position hedged. In addition, the movement in the portfolio position hedged may
not be of the same magnitude as movement in the hedge. The Fund will engage in
hedging transactions only when deemed advisable by Warburg, and successful use
of hedging transactions will depend on Warburg's ability to correctly predict
movements in the hedge and the hedged position and the correlation between them,
which could prove to be inaccurate. Even a well-conceived hedge may be
unsuccessful to some degree because of unexpected market behavior or trends.
Additional Considerations. To the extent that the Fund engages in the
strategies described above, the Fund may experience losses greater than if these
strategies had not been utilized. In addition to the risks described above,
these instruments may be illiquid and/or subject to trading limits, and the Fund
may be unable to close out an option or futures position without incurring
substantial losses, if at all. The Fund is also subject to the risk of a default
by a counterparty to an off-exchange transaction.
Asset Coverage. The Fund will comply with applicable regulatory requirements
designed to eliminate any potential for leverage with respect to options written
by the Fund on securities 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 or other assets that are acceptable as collateral
to the appropriate regulatory authority in a segregated account with its
custodian or a designated sub-custodian to the extent the Fund's obligations
with respect to these strategies are not otherwise 'covered' through ownership
of the underlying security, financial instrument or currency or by other
portfolio positions or by other means consistent with applicable regulatory
policies. Segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. As a result, there is a possibility that segregation of a large percentage
of the Fund's assets could impede portfolio management or the Fund's ability to
meet redemption requests or other current obligations.
SHORT 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
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value of the securities sold short (excluding short sales 'against the box')
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 certain liquid 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
certain liquid securities equal to the difference, if any, between (i) the
market value of the securities sold at the time they were sold short and (ii)
any cash or certain liquid securities deposited as collateral with the broker in
connection with the short sale (not including the proceeds of the short sale).
Until it replaces the borrowed securities, the 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 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. This kind of short sale, which is referred to as one 'against the
box,' will be entered into by the Fund for the purpose of receiving a portion of
the interest earned by the executing broker from the proceeds of the sale. The
proceeds of the sale will generally be held by the broker until the settlement
date when the Fund delivers securities to close out its short position. Although
prior to delivery the Fund will have to pay an amount equal to any dividends
paid on the securities sold short, the Fund will receive the dividends from the
securities sold short or the dividends from the preferred stock or interest from
the debt securities convertible or exchangeable into the securities sold short,
plus a portion of the interest earned from the proceeds of the short sale. The
Fund will deposit, in a segregated account with its custodian or a qualified
subcustodian, the securities sold short or convertible or exchangeable preferred
stocks or debt securities in connection 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
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10% of the Fund's net assets (taken at current value) may be held as collateral
for short sales against the box at any one time.
The extent to which the Fund may make short sales may be limited by Code
requirements for qualification as a regulated investment company. See
'Dividends, Distributions and Taxes' for other tax considerations applicable to
short sales.
INVESTMENT GUIDELINES
________________________________________________________________________________
The Fund may invest up to 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. 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
the Fund's total assets. The Fund may pledge its assets to the extent necessary
to secure permitted borrowings. Whenever borrowings (including reverse
repurchase agreements) exceed 5% of the value of the Fund's net assets, the Fund
will not make any investments (including roll-overs). Except for the limitations
on borrowing, the investment guidelines set forth in this paragraph may be
changed at any time without shareholder consent by vote of the Board, subject to
the limitations contained in the 1940 Act. A complete list of investment
restrictions that the Fund has adopted identifying additional restrictions that
cannot be changed without the approval of the majority of the Fund's outstanding
shares is contained in the Statement of Additional Information.
MANAGEMENT OF THE FUND
________________________________________________________________________________
INVESTMENT ADVISER. The Fund employs Warburg as investment adviser to the
Fund. Warburg, subject to the control of the Fund's officers and the Board,
manages the investment and reinvestment of the assets of the Fund in accordance
with the Fund's investment objective and stated investment policies. Warburg
makes investment decisions for the Fund and places orders to purchase or sell
securities on behalf of the Fund. Warburg also employs a support staff of
management personnel to provide services to the Fund and furnishes the Fund with
office space, furnishings and equipment.
For the services provided by Warburg, the Fund pays Warburg a fee calculated
at an annual rate of 1.00% of the Fund's average daily net assets. 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 October 31,
1996, Warburg managed approximately $18.4 billion of assets, including
approximately $9.8 billion of investment company assets.
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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 MANAGER. Stephen J. Lurito is the portfolio manager of the Fund.
Mr. Lurito has been a portfolio manager of the Fund since its inception and is
also a co-portfolio manager of Warburg Pincus Emerging Growth Fund and the Small
Company Growth Portfolios of Warburg Pincus Institutional Fund, Inc. and Warburg
Pincus Trust. He is a managing director of EMW and has been with Warburg since
1987, before which time he was a research analyst at Sanford C. Bernstein &
Company, Inc.
CO-ADMINISTRATORS. The Fund employs Counsellors Funds Service, Inc.
('Counsellors Service'), a wholly owned subsidiary of Warburg, as a co-
administrator. As co-administrator, Counsellors Service provides shareholder
liaison services to the Fund including responding to shareholder inquiries and
providing information on shareholder investments. Counsellors Service also
performs a variety of other services, including furnishing certain executive and
administrative services, acting as liaison between the Fund and its various
service providers, furnishing corporate secretarial services, which include
preparing materials for meetings of the Board, preparing proxy statements and
annual, semiannual and quarterly reports, assisting in the preparation of tax
returns 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%
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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 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 chooses the Fund's 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
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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 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. In the interest of
economy and convenience, physical certificates representing shares in the Fund
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, 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
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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 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 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
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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 or redemptions. The Fund is also available through certain
broker-dealers, financial institutions and other industry professionals
(including the programs described above, collectively, 'Service Organizations').
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 or other direct fees
may be imposed. Therefore, a client or customer should contact the Service
Organization acting on his behalf concerning the fees (if any) charged in
connection with a purchase or redemption of Fund shares and should read this
Prospectus in light of the terms governing his accounts with the 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 the fund and 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 Fund's pricing on the following
business day. If payment is not received by such time, the Service Organization
could be held liable for resulting fees or losses.
For administration, subaccounting, transfer agency and/or other services,
Warburg, Counsellors Securities or their affiliates may pay Service
Organizations and certain recordkeeping organizations a fee of up to .35% (the
'Service Fee') of the average annual value of accounts with the Fund maintained
by such Service Organizations or recordkeepers. 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 the 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
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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.
GENERAL. The Fund reserves the right to reject any specific purchase order.
The Fund may discontinue sales of its shares if management believes that a
substantial further increase in assets may adversely affect the Fund's ability
to achieve its investment objective. In such event, however, it is anticipated
that existing shareholders would be permitted to continue to authorize
investment in the Fund and to reinvest any dividends or capital gains
distributions.
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).
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
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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 or through the Automatic
Investment Program before the funds or check clear, payments of the redemption
proceeds will be delayed for five days (for funds received through the Automatic
Investment Program) or 10 days (for check purchases). 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,
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,
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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 its agent prior to 4:00 p.m. (Eastern time), the
exchange will be made at each fund's net asset value determined at the end of
that business day. Exchanges may be effected without a sales charge but must
satisfy the minimum dollar amount 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
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
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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 STRATEGIC VALUE FUND -- an equity fund seeking long-term capital
appreciation by investing in undervalued companies and market sectors;
WARBURG PINCUS EMERGING GROWTH FUND -- an equity fund seeking maximum capital
appreciation by investing in emerging growth 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 HEALTH SCIENCES FUND -- an equity fund seeking capital
appreciation by investing primarily in equity and debt securities of health
sciences companies;
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 apprecation 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
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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 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.
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 how long 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
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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. A portion of the Fund's dividends may 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
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. Debt obligations that mature in 60 days or
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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 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 long-term appreciation and
that such return may not be representative of the Fund's return over a longer
market cycle. The Fund may also advertise aggregate total return figures of 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
and may compare its performance with (i) that of other mutual funds as
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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 Russell 2000 Small Stock Index, the
T. Rowe Price New Horizons Fund 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
Barron's, Business Week, Financial Times, Forbes, Fortune, Inc., Institutional
Investor, Investor's Business Daily, Money, Morningstar, Inc., Mutual Fund
Magazine, Smart Money and The Wall Street Journal.
In reports or other communications to investors or in advertising, the Fund
may also describe the general biography or work experience of the portfolio
managers of the Fund and may include quotations attributable to the portfolio
managers describing approaches taken in managing the Fund's investments,
research methodology underlying stock selection or the Fund's investment
objective. In addition, the Fund and its portfolio managers may render periodic
updates of Fund activity, which may include a discussion of significant
portfolio holdings and analysis of holdings by industry, country, credit quality
and other characteristics. The Fund may also discuss measures of risk, the
continuum of risk and return relating to different investments and the potential
impact of foreign stocks on a portfolio otherwise composed of domestic
securities. Morningstar, Inc. rates funds in broad categories based on
risk/reward analyses over various time periods. In addition, the Fund may from
time to time compare the expense ratio of 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 Small Company Growth Fund,
Inc.' The Fund's charter authorizes the Board to issue three billion full and
fractional shares of capital stock, $.001 par value per share, of which one
billion shares are designated Common Shares and one billion shares are
designated Advisor Shares. Under the Fund's charter documents, the Board has the
power to classify or reclassify any unissued shares of the Fund into one or more
additional classes by setting or changing in any one or more respects their
relative rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption. The Board may similarly
classify or reclassify any class of its shares into one or more series and,
without shareholder approval, may increase the number of authorized shares of
the Fund.
MULTI-CLASS STRUCTURE. The Fund offers a separate class of shares, the
Advisor Shares, pursuant to a separate prospectus. Individual investors may
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only purchase Advisor Shares through institutional shareholders of record,
broker-dealers, financial institutions, depository institutions, retirement
plans and other financial intermediaries. Shares of each class 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. Investors may obtain
information concerning the Advisor Shares from their investment professional or
by calling Counsellors Securities at (800) 369-2728.
VOTING RIGHTS. Investors in the Fund are entitled to one vote for each full
share held and fractional votes for fractional shares held. Shareholders of the
Fund will vote in the aggregate except where otherwise required by law and
except that each class will vote separately on certain matters pertaining to its
distribution and shareholder servicing arrangements. There will normally be no
meetings of investors for the purpose of electing members of the Board unless
and until such time as less than a majority of the members holding office have
been elected by investors. Any Director of the Fund may be removed from office
upon the vote of shareholders holding at least a majority of the Fund's
outstanding shares, at a meeting called for that purpose. A meeting will be
called for the purpose of voting on the removal of a Board member at the written
request of holders of 10% of the outstanding shares of the Fund.
SHAREHOLDER COMMUNICATIONS. Each investor will receive a quarterly statement
of 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 FUND IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH
OFFER MAY NOT LAWFULLY BE MADE.
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[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Fund's Expenses..................................................... 2
Investment Objective and Policies....................................... 3
Portfolio Investments................................................... 3
Risk Factors and Special Considerations................................. 6
Portfolio Transactions and Turnover Rate................................ 8
Certain Investment Strategies........................................... 8
Investment Guidelines................................................... 13
Management of the Fund.................................................. 13
How to Open an Account.................................................. 15
How to Purchase Shares.................................................. 16
How to Redeem and Exchange Shares....................................... 19
Dividends, Distributions and Taxes...................................... 23
Net Asset Value......................................................... 24
Performance............................................................. 25
General Information..................................................... 26
</TABLE>
- --------------------------------------------------------------------------------
P.O. BOX 9030, BOSTON, MA 02205-9030
800-WARBURG (800-927-2874)
WPSCG-1-1296
[Logo]
<PAGE>
WARBURG PINCUS ADVISOR FUNDS
P.O. BOX 9030
BOSTON, MASSACHUSETTS 02205-9030
TELEPHONE NUMBER: (800) 369-2728
December 31, 1996
PROSPECTUS
Warburg Pincus Advisor Funds are a family of open-end mutual funds that are
offered to investors who wish to buy shares through an investment professional,
to financial institutions investing on behalf of their customers and to
retirement plans that elect to make one or more Advisor Funds an investment
option for participants in the plans. One Advisor Fund is described in this
Prospectus:
WARBURG PINCUS SMALL COMPANY GROWTH FUND seeks capital growth by investing in
equity securities of small-sized domestic companies.
The Fund currently offers two classes of shares, one of which, the Advisor
Shares, is offered pursuant to this Prospectus. The Advisor Shares of the Fund,
as well as Advisor Shares of certain other Warburg Pincus-advised funds, are
sold under the name 'Warburg Pincus Advisor Funds.' Individual investors may
purchase Advisor Shares through institutional shareholders of record,
broker-dealers, financial institutions, depository institutions, retirement
plans and other financial intermediaries ('Institutions'). The Advisor Shares
impose a 12b-1 fee of .50% per annum, which is the economic equivalent of a
sales charge. The Fund's Common Shares are available for purchase by individuals
directly and are offered by a separate prospectus.
NO MINIMUM INVESTMENT
There is no minimum amount of initial or subsequent purchases of shares imposed
on Institutions. See 'How to Purchase Shares.'
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Fund, contained in a Statement of Additional Information, has been filed with
the Securities and Exchange Commission (the 'SEC') and is available for
reference, along with other related materials, on the SEC Internet Web site
(http://sec.gov). The Statement of Additional Information is also available to
investors without charge by calling Warburg Pincus Advisor Funds at (800)
369-2728. Information regarding the status of shareholder accounts may also be
obtained by calling Warburg Pincus Advisor Funds at the same number. The
Statement of Additional Information, as amended or supplemented from time to
time, bears the same date as this Prospectus and is incorporated by reference in
its entirety into this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED OR ENDORSED
BY ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
INVESTMENTS IN SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
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.
SUBJECT TO COMPLETION, DATED DECEMBER 9, 1996
<PAGE>
<PAGE>
THE FUND'S EXPENSES
Warburg Pincus Small Company Growth Fund (the 'Fund') currently offers two
separate classes of shares: Common Shares and Advisor Shares. See 'General
Information.' Because of the higher fees paid by Advisor Shares, the total
return on such shares can be expected to be lower than the total return on
Common Shares.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
<S> <C>
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...................................................................................... .44%
12b-1 Fees........................................................................................... .50%
Other Expenses....................................................................................... .71%
--------
Total Fund Operating Expenses (after fee waivers)*................................................... 1.65%
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............................................................................................... $17
3 years.............................................................................................. $52
</TABLE>
- ------------
* Absent waiver of fees by the Fund's investment adviser and co-administrator,
Management Fees for the Fund would equal 1.00%, Other Expenses would equal
.81%, and Total Fund Operating Expenses would equal 2.31%. Other Expenses are
based on annualized estimates of expenses for the fiscal period 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 an Advisor Shareholder of the Fund. Institutions also
may charge their clients fees in connection with investments in the Advisor
Shares, which fees are not reflected in the table. The Example should not be
considered a representation of past or future expenses; actual Fund expenses may
be greater or less than those shown. Moreover, while the Example assumes a 5%
annual return, the Fund's actual performance will vary and may result in a
return greater or less than 5%. Long-term shareholders of Advisor Shares 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
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INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks capital growth. The Fund's 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 investment fund that pursues its investment
objective by investing in a portfolio of equity securities of small-sized
domestic companies (i.e., companies having stock market capitalizations of $1
billion or less at the time of initial purchase, 'small companies'). The Fund
intends to invest at least 80% of its total assets in common stocks or warrants
of small companies that present attractive opportunities for capital growth and,
under normal market conditions, will invest at least 65% of its total assets in
such securities. The Fund is not required to dispose of issuers whose market
capitalizations grow to exceed $1 billion after acquisition by the Fund. The
Fund will invest primarily in companies whose securities are traded on domestic
stock exchanges or in the over-the-counter market, but may invest up to 20% of
its assets in foreign securities. Small companies in which the Fund may invest
may still be in the developmental stage, may be older companies that appear to
be entering a new stage of growth progress owing to factors such as management
changes or development of new technology, products or markets or may be
companies providing products or services with a high unit volume growth rate.
The Fund's investments will be made on the basis of their equity characteristics
and securities ratings generally will not be a factor in the selection process.
The Fund may also invest in securities of emerging growth companies, which
can be either small- or medium-sized companies that have passed their start-up
phase and that show positive earnings and prospects of achieving significant
profit and gain in a relatively short period of time. Emerging growth companies
generally stand to benefit from new products or services, technological
developments or changes in management and other factors and include smaller
companies experiencing unusual developments affecting their market value.
PORTFOLIO INVESTMENTS
DEBT SECURITIES. The Fund may invest up to 20% of its total assets in debt
securities (other than money market obligations) that are not convertible into
common stock 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, Pincus Counsellors, Inc. ('Warburg'), the
Fund's investment adviser. 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's holdings of debt securities will be considered investment grade
at the time of purchase, except that up to 5% of the Fund's assets may be below
investment grade. A security will be deemed to be investment grade if it is
rated within the four highest grades by Moody's Investors Service, Inc.
('Moody's') or Standard & Poor's Ratings Services ('S&P') or, if unrated, is
determined to be of comparable quality by Warburg. Bonds rated in the fourth
highest grade may have speculative characteristics and changes
3
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<PAGE>
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is the case with
higher grade bonds. The Fund's holdings of debt securities rated below
investment grade (commonly referred to as 'junk bonds') may be rated as low as C
by Moody's or D by S&P at the time of purchase, or may be unrated securities
considered to be of equivalent quality. Securities that are rated C by Moody's
comprise 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. Subsequent
to its purchase by the Fund, an issue of securities may cease to be rated or its
rating may be reduced. Neither event will require sale of such securities.
Warburg will consider such event in its determination of whether the Fund should
continue to hold the securities.
When Warburg believes that a defensive posture is warranted, the Fund may
invest temporarily without limit in investment grade debt obligations and in
domestic and foreign money market obligations, including repurchase agreements.
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) 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, its agencies or
instrumentalities; bank obligations (including certificates of deposit, time
deposits and bankers' acceptances of domestic or foreign banks, domestic savings
and loans and similar institutions) that are high quality investments or, if
unrated, deemed by Warburg to be high quality investments; commercial paper
rated no lower than A-2 by S&P or Prime-2 by Moody's or the equivalent from
another major rating service or, if unrated, of an issuer having an outstanding,
unsecured debt issue then rated within the three highest rating categories; and
repurchase agreements with respect to the foregoing.
Repurchase Agreements. The Fund may enter into 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
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the Fund and appropriate considering the factors of return and liquidity, the
Fund may invest up to 5% of its assets in securities of money market mutual
funds that are unaffiliated with the Fund, Warburg or the Fund's
co-administrator, PFPC Inc. ('PFPC'). As a shareholder in any mutual fund, the
Fund will bear its ratable share of the mutual fund's expenses, including
management fees, and will remain subject to payment of the Fund's administration
fees and other expenses with respect to assets so invested.
U.S. GOVERNMENT SECURITIES. U.S. government securities in which the Fund may
invest include: direct obligations of the U.S. Treasury and obligations issued
by U.S. government agencies and instrumentalities, including instruments that
are supported by the full faith and credit of the United States, instruments
that are supported by the right of the issuer to borrow from the U.S. Treasury
and instruments that are supported by the credit of the instrumentality.
CONVERTIBLE SECURITIES. Convertible securities in which the Fund may invest,
including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an investor
to benefit from increases in the market price of the underlying common stock.
Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. The value of convertible securities fluctuates in relation to
changes in interest rates like bonds and, in addition, fluctuates in relation to
the underlying common stock. Subsequent to purchase by the Fund, convertible
securities may cease to be rated or a rating may be reduced. Neither event will
require sale of such securities, although Warburg will consider such event in
its determination of whether the Fund should continue to hold the securities.
The Fund does not currently intend during the coming year to hold more than 5%
of its net assets in convertible securities rated below investment grade.
WARRANTS. The Fund may invest up to 15% of its total assets in warrants.
Warrants are securities that give the holder the right, but not the obligation,
to purchase newly created equity issues of the company issuing the warrants, or
a related company, at a fixed price either on a date certain or during a set
period.
RISK FACTORS AND SPECIAL
CONSIDERATIONS
Investing in common stocks and securities convertible into common stocks is
subject to the inherent risk of fluctuations in the prices of such securities.
For certain additional risks relating to the Fund's investments, see 'Portfolio
Investments' beginning at page 3 and 'Certain Investment Strategies' beginning
at page 8.
SMALL CAPITALIZATION AND EMERGING GROWTH COMPANIES. Investing in securities of
small-sized and emerging growth companies may involve greater risks than
investing in larger, more established issuers since these securities may have
limited marketability and, thus, may be more volatile than securities of larger,
more established companies or the market averages in general. Because
small-sized companies normally have fewer shares outstanding than larger
companies, it may be more difficult to buy or sell significant amounts of such
shares without an unfavorable impact on prevailing prices. Small-sized companies
may have limited product lines, markets or financial resources and may lack
management depth. In addition, small-sized companies are typically subject to a
greater degree of changes in earnings and business prospects than are larger,
more established companies. There is typically less publicly available
information concerning small-sized companies than for larger, more established
ones. Securities of issuers in 'special situations' also may be more volatile,
since the market value of these securities may decline in value if the
anticipated benefits do not materialize. Companies in 'special situations'
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include, but are not limited to, companies involved in an acquisition or
consolidation; reorganization; recapitalization; merger, liquidation or
distribution of cash, securities or other assets; a tender or exchange offer; a
breakup or workout of a holding company; litigation which, if resolved
favorably, would improve the value of the companies' securities; or a change in
corporate control. Although investing in securities of emerging growth companies
or 'special situations' offers potential for above-average returns if the
companies are successful, the risk exists that the companies will not succeed
and the prices of the companies' shares could significantly decline in value.
Therefore, an investment in the Fund may involve a greater degree of risk than
an investment in other mutual funds that seek capital growth by investing in
better-known, larger companies.
NON-PUBLICLY TRADED SECURITIES; RULE 144A SECURITIES. The Fund may purchase
securities that are not registered under the Securities Act of 1933, as amended
(the 'Securities Act'), but that can be sold to 'qualified institutional buyers'
in accordance with Rule 144A under the Securities Act ('Rule 144A Securities').
An investment in Rule 144A Securities will be considered illiquid and therefore
subject to the Fund's limitation on the purchase of illiquid securities, unless
the Fund's Board determines on an ongoing basis that an adequate trading market
exists for the security. In addition to an adequate trading market, the Board
will also consider factors such as trading activity, availability of 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.
WARRANTS. At the time of issue, the cost of a warrant is substantially less than
the cost of the underlying security itself, and price movements in the
underlying security are generally magnified in the price movements of the
warrant. This leveraging effect enables the investor to gain exposure to the
underlying security with a relatively low capital investment. This leveraging
increases an investor's risk, however, in the event of a decline in the value of
the underlying security and can result in a complete loss of the amount invested
in the warrant. In addition, the price of a warrant tends to be more volatile
than, and may not correlate exactly to, the price of the underlying security. If
the market price of the underlying security is below the exercise price of the
warrant on its expiration date, the warrant will generally expire without value.
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PORTFOLIO TRANSACTIONS AND
TURNOVER RATE
The Fund will attempt to purchase securities with the intent of holding
them for investment but may purchase and sell portfolio securities whenever
Warburg believes it to be in the best interests of the Fund. The Fund will not
consider portfolio turnover rate a limiting factor in making investment
decisions consistent with its investment objective and policies. It is not
possible to predict the Fund's portfolio turnover rate. However, it is
anticipated that the Fund's annual turnover rate should not exceed 100%. High
portfolio turnover rates (100% or more) may result in dealer mark ups or
underwriting commissions as well as other transaction costs, including
correspondingly higher brokerage commissions. In addition, short-term gains
realized from portfolio turnover may be taxable to shareholders as ordinary
income. See 'Dividends, Distributions and Taxes -- Taxes' below and 'Investment
Policies -- Portfolio Transactions' in the Statement of Additional Information.
All orders for transactions in securities or options on behalf of the Fund
are placed by Warburg with broker-dealers that it selects, including Counsellors
Securities Inc., the Fund's distributor ('Counsellors Securities'). The Fund may
utilize Counsellors Securities in connection with a purchase or sale of
securities when Warburg believes that the charge for the transaction does not
exceed usual and customary levels 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 related risks is contained below and in the Statement
of Additional Information.
FOREIGN SECURITIES. The Fund may invest up to 20% of its total assets in the
securities of issuers located in any foreign country. 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
commis-
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sions on foreign exchanges, which generally are higher than commissions on U.S.
exchanges, higher valuation and communications costs and the expense of
maintaining securities with foreign custodians.
OPTIONS, FUTURES AND CURRENCY TRANSACTIONS. At the discretion of Warburg, the
Fund may, but is not required to, engage in a number of strategies involving
options, futures and forward currency contracts. These strategies, commonly
referred to as 'derivatives,' may be used (i) for the purpose of hedging against
a decline in value of the Fund's current or anticipated portfolio holdings, (ii)
as a substitute for purchasing or selling portfolio securities or (iii) to seek
to generate income to offset expenses or increase return. TRANSACTIONS THAT ARE
NOT CONSIDERED HEDGING SHOULD BE CONSIDERED SPECULATIVE AND MAY SERVE TO
INCREASE THE FUND'S INVESTMENT RISK. Transaction costs and any premiums
associated with these strategies, and any losses incurred, will affect the
Fund's net asset value and performance. Therefore, an investment in the Fund may
involve a greater risk than an investment in other mutual funds that do not
utilize these strategies. The Fund's use of these strategies may be limited by
position and exercise limits established by 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 also utilize up to 10% of its
assets to purchase options on stocks and debt securities that are traded on U.S.
and foreign exchanges, as well as over-the-counter ('OTC') options. The
purchaser of a put option on a security has the right to compel the purchase by
the writer of the underlying security, while the purchaser of a call option on a
security has the right to purchase the underlying security from the writer. In
addition to purchasing and writing options on securities, the Fund may also
utilize up to 10% of its total assets to purchase exchange-listed and OTC put
and call options on stock indexes, and may also write such options. A stock
index measures the movement of a certain group of stocks by assigning relative
values to the common stocks included in the index.
The potential loss associated with purchasing an option is limited to the
premium paid, and the premium would partially offset any gains achieved from its
use. However, for an option writer the exposure to adverse price movements in
the underlying security or index is potentially unlimited during the exercise
period. Writing securities options may result in substantial losses to the Fund,
force the sale or purchase of portfolio securities at inopportune times or at
less advantageous prices, limit the amount of appreciation the Fund could
realize on its investments or require the Fund to hold securities it would
otherwise sell.
Futures Contracts and Related Options. The Fund may enter into foreign
currency, interest rate and stock index futures contracts and purchase and write
(sell) related options that are traded on an exchange designated by the
Commodity Futures Trading Commission (the 'CFTC') or, if consistent with CFTC
regulations, on foreign exchanges. These futures contracts are standardized
contracts for the future delivery of foreign currency or an interest rate
sensitive security or, in the case of stock index and certain other futures
contracts, are settled in cash with reference to a specified multiplier times
the change in the specified index, exchange rate or interest rate. An option on
a futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract.
Aggregate initial margin and premiums required to establish positions other
than those considered by the CFTC to be 'bona fide hedging' will not exceed 5%
of the Fund's net
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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.
Hedging Considerations. The Fund may engage in options, futures and
currency transactions for, among other reasons, hedging purposes. A hedge is
designed to offset a loss on a portfolio position with a gain in the hedge
position; at the same time, however, a properly correlated hedge will result in
a gain in the portfolio position being offset by a loss in the hedge position.
As a result, the use of options, futures contracts and currency exchange
transactions for hedging purposes could limit any potential gain from an
increase in value of the position hedged. In addition, the movement in the
portfolio position hedged may not be of the same magnitude as movement in the
hedge. The Fund will engage in hedging transactions only when deemed advisable
by Warburg, and successful use of hedging transactions will depend on Warburg's
ability to correctly predict movements in the hedge and the hedged position and
the correlation between them, which could prove to be inaccurate. Even a
well-conceived hedge may be unsuccessful to some degree because of unexpected
market behavior or trends.
Additional Considerations. To the extent that the Fund engages in the
strategies described above, the Fund may experience losses greater than if these
strategies had not been utilized. In addition to the risks described above,
these instruments may be illiquid and/or subject to trading limits, and the Fund
may be unable to close out an option or futures position without incurring
substantial losses, if at all. The Fund is also subject to the risk of a default
by a counterparty to an off-exchange transaction.
Asset Coverage. The Fund will comply with applicable regulatory
requirements designed to eliminate any potential for leverage with respect to
options written by the Fund on securities 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 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.
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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 (excluding short sales 'against the box') 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 certain liquid 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
certain liquid securities equal to the difference, if any, between (i) the
market value of the securities sold at the time they were sold short and (ii)
any cash or certain liquid securities deposited as collateral with the broker in
connection with the short sale (not including the proceeds of the sort 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 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. This kind of short sale, which is referred to as one 'against the
box,' will be entered into by the Fund for the purpose of receiving a portion of
the interest earned by the executing broker from the proceeds of the sale. The
proceeds of the sale will generally be held by the broker until the settlement
date when the Fund delivers securities to close out its short position. Although
prior to delivery the Fund will have to pay an amount equal to any dividends
paid on the securities sold short, the Fund will receive the dividends from the
securities sold short or the dividends from the preferred stock or interest from
the debt securities convertible or exchangeable into the securities sold short,
plus a portion of the interest earned from the proceeds of the short sale. The
Fund will deposit, in a segregated account with its custodian or a qualified
subcustodian, the securities sold short or convertible or exchangeable preferred
stocks or debt securities in connection with short sales against the box. The
Fund will endeavor to offset transaction costs associated with short sales
against the box with the income from the investment of the cash proceeds. Not
more than 10% of the Fund's net assets (taken at current value) may be held as
collateral for short sales against the box at any one time.
The extent to which the Fund may make short sales may be limited by Code
requirements for qualification as a regulated investment company. See
'Dividends, Distributions and Taxes' for other tax considerations applicable to
short sales.
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INVESTMENT GUIDELINES
The Fund may invest up to 15% of its net assets in securities with
contractual or other restrictions on resale and other investments that are not
readily marketable, including (i) securities issued as part of a privately
negotiated transaction between an issuer and one or more purchasers; (ii)
repurchase agreements with maturities greater than seven days; (iii) time
deposits maturing in more than seven calendar days; and (iv) certain Rule 144A
Securities. The Fund may borrow from banks for temporary or emergency purposes,
such as meeting anticipated redemption requests, provided that borrowings by the
Fund may not exceed 30% of the Fund's total assets. The Fund may pledge its
assets to the extent necessary to secure permitted borrowings. Whenever
borrowings (including reverse repurchase agreements) exceed 5% of the value of
the Fund's net assets, the Fund will not make any investments (including
roll-overs). Except for the limitations on borrowing, the investment guidelines
set forth in this paragraph may be changed at any time without shareholder
consent by vote of the Board, subject to the limitations contained in the 1940
Act. A complete list of investment restrictions that the Fund has adopted
identifying additional restrictions that cannot be changed without the approval
of the majority of the Fund's outstanding shares is contained in the Statement
of Additional Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. The Fund employs Warburg as investment adviser to the Fund.
Warburg, subject to the control of the Fund's officers and the Board, manages
the investment and reinvestment of the assets of the Funds in accordance with
the Fund's investment objective and stated investment policies. Warburg makes
investment decisions for the Fund and places orders to purchase or sell
securities on behalf of the Fund. Warburg also employs a support staff of
management personnel to provide services to the Fund and furnishes the Fund with
office space, furnishings and equipment.
For the services provided by Warburg, the Fund pays Warburg a fee
calculated at an annual rate of 1.00% of the Fund's average daily net assets.
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 borne 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 October 31,
1996, Warburg managed approximately $18.4 billion of assets, including
approximately $9.8 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 MANAGER. Stephen J. Lurito is the portfolio manager of the Fund. Mr.
Lurito has been a portfolio manager of the Fund since its inception and is also
a co-portfolio manager of Warburg, Pincus Emerging Growth Fund and the Small
Company Growth Portfolios of Warburg Pincus Institutional Fund, Inc. and Warburg
Pincus Trust. He is a managing director of EMW and has been with Warburg since
1987, before which time he was a research analyst at Sanford C. Bernstein &
Company, Inc.
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
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the Fund including responding to shareholder inquiries and providing information
on shareholder investments. Counsellors Service also performs a variety of other
services, including furnishing certain executive and administrative services,
acting as liaison between the Fund and its various service providers, furnishing
corporate secretarial services, which include preparing materials for meetings
of the Board, preparing proxy statements and annual, semiannual and quarterly
reports, assisting in the preparation of tax returns and monitoring and
developing compliance procedures for the Fund. As compensation, the Fund pays
Counsellors Service a fee calculated at an annual rate of .10% of its average
daily net assets.
The Fund employs PFPC, an indirect, wholly owned subsidiary of PNC Bank
Corp., as a co-administrator. As a co-administrator, PFPC calculates the Fund's
net asset value, provides all accounting services for the Fund and assists in
related aspects of the Fund's operations. As compensation, the Fund pays 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. No compensation
is payable by the Advisor Shares to Counsellors Securities for distribution
services.
Warburg or its affiliates may, at their own expense, provide promotional
incentives to parties who support the sale of shares of the Fund, consisting of
securities dealers who have sold Fund shares or others, including banks and
other financial institutions, under special arrangements. In some instances,
these incentives may be offered only to certain institutions whose
representatives provide services in connection with the sale or expected sale of
significant amounts of Fund shares.
DIRECTORS AND OFFICERS. The officers of the Fund manage its day-to-day
operations and are directly responsible to the Board. The Board sets broad
policies for the Fund and chooses its officers. A list of the Directors and
officers of the Fund and a brief statement of their present positions and
principal occupations during the past five years is set forth in the Statement
of Additional Information.
HOW TO PURCHASE SHARES
Individual investors may only purchase Warburg Pincus Advisor Fund shares
through Institutions. The Fund reserves the right to make Advisor Shares
available to other investors in the future. References in this Prospectus to
shareholders or investors are generally to Institutions as the record holders of
the Advisor Shares.
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Each Institution separately determines the rules applicable to its
customers investing in the Fund, including minimum initial and subsequent
investment requirements and the procedures to be followed to effect purchases,
redemptions and exchanges of Advisor Shares. There is no minimum amount of
initial or subsequent purchases of Advisor Shares imposed on Institutions,
although the Fund reserves the right to impose minimums in the future.
Orders for the purchase of Advisor Shares are placed with an Institution by
its customers. The Institution is responsible for the prompt transmission of the
order to the Fund or its agent.
Institutions may purchase Advisor Shares by telephoning the Fund and
sending payment by wire. After telephoning (800) 369-2728 for instructions, an
Institution should then wire federal funds to Counsellors Securities using the
following wire address:
State Street Bank and Trust Co.
225 Franklin St.
Boston, MA 02101
ABA# 0110 000 28
Attn: Mutual Funds/Custody Dept.
Warburg Pincus Advisor Small Company Growth Fund
DDA# 9904-649-2
[Shareowner name]
[Shareowner account number]
Orders by wire will not be accepted until a completed account application
has been received in proper form, and an account number has been established. If
a telephone order is received by the close of regular trading on the New York
Stock Exchange ('NYSE') (currently 4:00 p.m., Eastern time) and payment by wire
is received on the same day in proper form in accordance with instructions set
forth above, the shares will be priced according to the net asset value of the
Fund on that day and are entitled to dividends and distributions beginning on
that day. If payment by wire is received in proper form by the close of the NYSE
without a prior telephone order, the purchase will be priced according to the
net asset value of the Fund on that day and is entitled to dividends and
distributions beginning on that day. However, if a wire in proper form that is
not preceded by a telephone order is received after the close of regular trading
on the NYSE, the payment will be held uninvested until the order is effected at
the close of business on the next business day. Payment for orders that are not
accepted will be returned after prompt inquiry. Certain organizations or
Institutions that have entered into agreements with the Fund or its agent may
enter confirmed purchase orders on behalf of customers, with payment to follow
no later than three business days following the day the order is effected. If
payment is not received by such time, the organization could be held liable for
resulting fees or losses.
After an investor has made his initial investment, additional shares may be
purchased at any time by mail or by wire in the manner outlined above. Wire
payments for initial and subsequent investments should be preceded by an order
placed with the Fund or its agent and should clearly indicate the investor's
account number. In the interest of economy and convenience, physical
certificates representing shares in the Fund are not normally issued.
The Fund understands that some broker-dealers (other than Counsellors
Securities), financial institutions, securities dealers and other industry
professionals may impose certain conditions on their clients or customers that
invest in the Fund, which are in addition to or different than those described
in this Prospectus, and may charge their clients or customers direct fees.
Certain features of the Fund, such as the initial and subsequent investment
minimums, redemption fees and certain trading restrictions, may be modified or
waived in these programs, and administrative charges may be imposed for the
services rendered. Therefore, a client or customer should contact the
organization acting on his behalf concerning the fees (if any) charged in
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connection with a purchase or redemption of Fund shares and should read this
Prospectus in light of the terms governing his account with the organization.
GENERAL. The Fund reserves the right to reject any specific purchase order. The
Fund may discontinue sales of its shares if management believes that a
substantial further increase in assets may adversely affect the Fund's ability
to achieve its investment objective. In such event, however, it is anticipated
that existing shareholders would be permitted to continue to authorize
investment in the Fund and to reinvest any dividends or capital gains
distributions.
HOW TO REDEEM AND EXCHANGE
SHARES
REDEMPTION OF SHARES. An investor of the Fund may redeem (sell) shares on any
day that the Fund's net asset value is calculated (see 'Net Asset Value' below).
Requests for the redemption (or exchange) of Advisor Shares are placed with an
Institution by its customers, which is then responsible for the prompt
transmission of the request to the Fund or its agent.
Institutions may redeem Advisor Shares by calling Warburg Pincus Advisor
Funds at (800) 369-2728 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, the redemption proceeds will be
wired to the investor's bank as indicated in the account application previously
filled out by the investor. The Fund does not currently impose a service charge
for effecting wire transfers but reserves the right to do so in the future.
During periods of significant economic or market change, telephone redemptions
may be difficult to implement. If an investor is unable to contact Warburg
Pincus Advisor Funds by telephone, an investor may deliver the redemption
request to Warburg Pincus Advisor Funds by mail at Warburg Pincus Advisor Funds,
P.O. Box 9030, Boston, Massachusetts 02205-9030.
If a redemption order is received 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 wired to an investor on the next
business day following the date a redemption order is effected. If, however, in
the judgment of Warburg, immediate payment would adversely affect the Fund, the
Fund reserves the right to pay the redemption proceeds within seven days after
the redemption order is effected. Furthermore, the Fund may suspend the right of
redemption or postpone the date of payment upon redemption (as well as suspend
or postpone the recordation of an exchange of shares) for such periods as are
permitted under the 1940 Act.
The proceeds paid upon redemption may be more or less than the amount
invested depending upon a share's net asset value at the time of redemption. If
an investor redeems all the shares in his account, all dividends and
distributions declared up to and including the date of redemption are paid along
with the proceeds of the redemption.
EXCHANGE OF SHARES. An Institution may exchange Advisor Shares of the Fund for
Advisor Shares of the other Warburg Pincus Advisor Funds at their respective net
asset values. Exchanges may be effected in the manner described under
'Redemption of Shares' above. If an exchange request is received by Warburg
Pincus Advisor Funds or its agent prior to the
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close of regular trading on the NYSE, the exchange will be made at each fund's
net asset value determined at the end of that business day. Exchanges may be
effected without a sales charge. The exchange privilege may be modified or
terminated at any time upon 60 days' notice to shareholders.
The exchange privilege is available to shareholders residing in any state
in which Advisor Shares being acquired may legally be sold. When an investor
effects an exchange of shares, the exchange is treated for federal income tax
purposes as a redemption. Therefore, the investor may realize a taxable gain or
loss in connection with the exchange. Investors wishing to exchange Advisor
Shares of the Fund for shares in another Warburg Pincus Advisor Fund should
review the prospectus of the other fund prior to making an exchange. For further
information regarding the exchange privilege or to obtain a current prospectus
for another Warburg Pincus Advisor Fund, an investor should contact Warburg
Pincus Advisor Funds at (800) 369-2728.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. The Fund calculates its dividends from net
investment income. Net investment income includes interest accrued and dividends
earned on the Fund's portfolio securities for the applicable period less
applicable expenses. The Fund declares dividends from its net investment income
and net realized short-term and long-term capital gains annually and pays them
in the calendar year in which they are declared, generally in November or
December. Net investment income earned on weekends and when the NYSE is not open
will be computed as of the next business day. Unless an investor instructs the
Fund to pay dividends or distributions in cash, dividends and distributions will
automatically be reinvested in additional Advisor Shares of the Fund at net
asset value. The election to receive dividends in cash may be made on the
account application or, subsequently, by writing to Warburg Pincus Advisor Funds
at the address set forth under 'How to Redeem and Exchange Shares' or by calling
Warburg Pincus Advisor Funds at (800) 369-2728.
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 how long
investors have held Advisor Shares or whether received in cash or reinvested in
additional Advisor Shares. As a general rule, an investor's gain or loss on a
sale or redemption of its Fund shares will be a long-term capital gain or loss
if it has held its shares for more than one year and will be a short-term
capital gain or loss if it has held its shares for one year or less. However,
any loss realized upon the sale or redemption of shares within six months from
the date of their purchase will be treated as a long-term capital loss to the
extent of any amounts treated as distributions of long-term capital gain during
such six-month period with
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respect to such shares. Investors may be proportionately liable for taxes on
income and gains of the Fund, but investors not subject to tax on their income
will not be required to pay tax on amounts distributed to them. The Fund's
investment activities will not result in unrelated business taxable income to a
tax-exempt investor. A portion of the Fund's dividends may 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
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. Individuals investing in the
Fund through Institutions should consult those Institutions or their own tax
advisers regarding the tax consequences of investing in the Fund.
NET ASSET VALUE
The Fund's net asset value per share is calculated as of the close of
regular trading on the NYSE (currently 4:00 p.m., Eastern time) on each business
day, Monday through Friday, except on days when the NYSE is closed. The NYSE is
currently scheduled to be closed on New Year's Day, Washington's Birthday, Good
Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day
and Christmas Day, and on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday, respectively. The net asset value
per share of the Fund generally changes each day.
The net asset value per Advisor Share of the Fund is computed by adding the
Advisor Shares' pro rata share of the value of the Fund's assets, deducting the
Advisor Shares' pro rata share of the Fund's liabilities and the liabilities
specifically allocated to Advisor Shares and then dividing the result by the
total number of outstanding Advisor Shares.
Securities listed on a U.S. securities exchange (including securities
traded through the Nasdaq National Market System) or foreign securities exchange
or traded in an over-the-counter market will be valued at the most recent sale
price when the valuation is made. Options and futures 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 Advisor Shares separately from Common
Shares. The net asset value of the Advisor Shares is listed in The Wall Street
Journal each business day under
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the heading 'Warburg Pincus Advisor Funds.' From time to time, the Fund may
advertise the average annual total return of Advisor Shares over various periods
of time. These total return figures show the average percentage change in value
of an investment in the Advisor Shares from the beginning of the measuring
period to the end of the measuring period. The figures reflect changes in the
price of the Advisor Shares assuming that any income dividends and/or capital
gain distributions made by the Fund during the period were reinvested in Advisor
Shares. Total return will be shown for recent one-, five- and ten-year periods,
and may be shown for other periods as well (such as on a year-by-year, quarterly
or current year-to-date basis).
When considering average total return figures for periods longer than one
year, it is important to note that the annual total return for one year in the
period might have been greater or less than the average for the entire period.
When considering total return figures for periods shorter than one year,
investors should bear in mind that the Fund seeks long-term appreciation and
that such return may not be representative of the Fund's return over a longer
market cycle. The Fund may also advertise aggregate total return figures of
Advisor Shares for various periods, representing the cumulative change in value
of an investment in the Advisor Shares for the specific period (again reflecting
changes in share prices and assuming reinvestment of dividends and
distributions). Aggregate and average total returns may be shown by means of
schedules, charts or graphs and may indicate various components of total return
(i.e., change in value of initial investment, income dividends and capital gain
distributions).
Investors should note that total return figures are based on historical
earnings and are not intended to indicate future performance. The Statement of
Additional Information describes the method used to determine the total return.
Current total return figures may be obtained by calling Warburg Pincus Advisor
Funds at (800) 369-2728.
In reports or other communications to investors or in advertising material,
the Fund may describe general economic and market conditions affecting the Fund
and 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 Russell 2000 Small Stock Index, the T. Rowe
Price New Horizons Fund Index and the S&P 500 Index, which are unmanaged
indexes; or (iii) other appropriate indexes of investment securities or with
data developed by Warburg derived from such indexes. The Fund may also include
evaluations of the Fund published by nationally recognized ranking services and
by financial publications that are nationally recognized, such as Barron's,
Business Week, Financial Times, Forbes, Fortune, Inc., Institutional Investor,
Investor's Business Daily, Money, Morningstar, Inc., Mutual Fund Magazine, Smart
Money and The Wall Street Journal.
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 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
17
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periods. In addition, the Fund may from time to time compare the expense ratio
of Advisor Shares to that of investment companies with similar objectives and
policies, based on data generated by Lipper Analytical Services, Inc. or similar
investment services that monitor mutual funds.
GENERAL INFORMATION
ORGANIZATION. The Fund was incorporated on October 31, 1996 under the laws of
the State of Maryland under the name 'Warburg, Pincus Small Company Growth Fund,
Inc.' The Fund's charter authorizes the Board to issue three billion full and
fractional shares of capital stock, $.001 par value per share, of which one
billion shares are designated Common Shares and one billion shares are
designated Advisor Shares. Under the Fund's charter documents, the Board has the
power to classify or reclassify any unissued shares of the Fund into one or more
additional classes by setting or changing in any one or more respects their
relative rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption. The Board may similarly
classify or reclassify any class of its shares into one or more series and,
without shareholder approval, may increase the number of authorized shares of
the Fund.
MULTI-CLASS STRUCTURE. The Fund offers a separate class of shares, the Common
Shares, directly to individuals pursuant to a separate prospectus. Shares of
each class represent equal pro rata interests in the Fund and accrue dividends
and calculate net asset value and performance quotations in the same manner,
except that Advisor Shares bear fees payable by the Fund to Institutions for
services they provide to the beneficial owners of such shares and enjoy certain
exclusive voting rights on matters relating to these fees. Because of the higher
fees paid by the Advisor Shares, the total return on such shares can be expected
to be lower than the total return on Common Shares. Investors may obtain
information concerning the Common Shares from their investment professional or
by calling Counsellors Securities at (800) 369-2874.
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 meeting will be
called for the purpose of voting on the removal of a Board member at the written
request of holders of 10% of the outstanding shares of the Fund.
SHAREHOLDER COMMUNICATIONS. Each investor will receive a quarterly statement of
its account, as well as a statement of its account after any transaction that
affects his share balance or share registration (other than the reinvestment of
dividends or distributions). The Fund will also send to its investors a
semiannual report and an audited annual report, each of which includes a list of
the investment securities held by the Fund and a statement of the performance of
the Fund. Periodic listings of the investment securities held by the Fund, as
well as certain statistical characteristics of the Fund, may be obtained by
calling Warburg Pincus Advisor Funds at (800) 369-2728. Each Institution that is
the record owner of Advisor Shares on behalf of its customers will send a
statement to those customers periodically showing their indirect interest in
Advisor Shares, as well as providing other information about the Fund. See
'Shareholder Servicing.'
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SHAREHOLDER SERVICING
The Fund is authorized to offer Advisor Shares exclusively through
Institutions whose clients or customers (or participants in the case of
retirement plans) ('Customers') are owners of Advisor Shares. Either those
Institutions or companies providing certain services to Customers (together,
'Service Organizations') will enter into agreements ('Agreements') with the Fund
and/or Counsellors Securities pursuant to a Distribution Plan as described
below. Such entities may provide certain distribution, shareholder servicing,
administrative and/or accounting services for their Customers. Distribution
services would be marketing or other services in connection with the promotion
and sale of Advisor Shares. Shareholder services that may be provided include
responding to Customer inquiries, providing information on Customer investments
and providing other shareholder liaison services. Administrative and accounting
services related to the sale of Advisor Shares may include (i) aggregating and
processing purchase and redemption requests from Customers and placing net
purchase and redemption orders with the Fund's transfer agent, (ii) processing
dividend payments from the Fund on behalf of Customers and (iii) providing
sub-accounting related to the sale of Advisor Shares beneficially owned by
Customers or the information to the Fund necessary for sub-accounting. The Board
has approved a Distribution Plan (the 'Plan') pursuant to Rule 12b-1 under the
1940 Act under which each participating Service Organization will be paid, out
of the assets of the Fund (either directly or by Counsellors Securities on
behalf of the Fund), a negotiated fee on an annual basis not to exceed .75% (up
to .25% annual service fee and a .50% annual distribution fee) of the value of
the average daily net assets of its Customers invested in Advisor Shares. The
current 12b-1 fee is .50% per annum. The Board evaluates the appropriateness of
the Plan on a continuing basis and in doing so considers all relevant factors.
To offset start-up costs and expenses associated with certain qualified
retirement plans making Advisor Shares avaliable to plan participants,
Counsellors Securities pays CIGNA Financial Advisors, Inc., a registered
broker-dealer which is the broker of record for Connecticut General Life
Insurance Company, a one-time fee of .25% of the average aggregate account
balances of plan participants during the first year of implementation.
Warburg, Counsellors Securities or their affiliates may, from time to time,
at their own expense, provide compensation to Service Organizations. To the
extent they do so, such compensation does not represent an additional expense to
the Fund or its shareholders. In addition, Warburg, Counsellors Securities or
their affiliates may, from time to time, at their own expense, pay certain Fund
transfer agent fees and expenses related to accounts of Customers. A Service
Organization may directly or indirectly use a portion of the fees paid pursuant
to the Plan to compensate the Fund's custodian or transfer agent for costs
related to accounts of its Customers.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE FUND'S
STATEMENT OF ADDITIONAL INFORMATION OR THE FUND'S OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF SHARES OF THE FUND, AND IF GIVEN OR MADE, SUCH
OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF THE
ADVISOR SHARES IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER MAY
NOT LAWFULLY BE MADE.
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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 December 16, 1996
STATEMENT OF ADDITIONAL INFORMATION
------------------------------------------------------------------------
December 31, 1996
WARBURG PINCUS SMALL COMPANY GROWTH 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.....................................................23
Additional Purchase and Redemption Information.............................30
Exchange Privilege.........................................................31
Additional Information Concerning Taxes....................................31
Determination of Performance...............................................34
Independent Accountants and Counsel........................................35
Financial Statement........................................................35
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 Small
Company Growth Fund (the "Fund") and with the Prospectus for the Advisor Shares
of the Fund, each dated December 31, 1996, as amended or supplemented from time
to time, and is incorporated by reference in its entirety into those
Prospectuses. Because this Statement of Additional Information is not itself a
prospectus, no investment in shares of the Fund should be made solely upon the
information contained herein. Copies of the Fund's Prospectuses and information
regarding the Fund's current performance may be obtained by calling the Fund at
(800) 927-2874. Information regarding the status of shareholder accounts may
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 growth.
INVESTMENT POLICIES
The following policies supplement the descriptions of the
Fund's investment objective and policies in the Prospectuses.
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.
<PAGE>9
Currency Hedging. The Fund's currency hedging will be limited
to hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward currency with respect to
specific receivables or payables of the Fund generally accruing in connection
with the purchase or sale of its portfolio securities. Position hedging is the
sale of forward currency with respect to portfolio security positions. The Fund
may not position hedge to an extent greater than the aggregate market value (at
the time of entering into the hedge) of the hedged securities.
A decline in the U.S. dollar value of a foreign currency in
which the Fund's securities are denominated will reduce the U.S. dollar value of
the securities, even if their value in the foreign currency remains constant.
The use of currency hedges does not eliminate fluctuations in the underlying
prices of the securities, but it does establish a rate of exchange that can be
achieved in the future. For example, in order to protect against 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
<PAGE>10
gain in the portfolio position being offset by a loss in the hedged position.
As a result, the use of options, futures, contracts and currency exchange
transactions for hedging purposes could limit any potential gain from an
increase in the value of the position hedged. In addition, the movement in the
portfolio position hedged may not be of the same magnitude as movement in the
hedge. With respect to futures contracts, since the value of portfolio
securities will far exceed the value of the futures contracts sold by the Fund,
an increase in the value of the futures contracts could only mitigate, but not
totally offset, the decline in the value of the Fund's assets.
In hedging transactions based on an index, whether the Fund
will realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indexes, in an industry or market segment,
rather than movements in the price of a particular stock. The risk of imperfect
correlation increases as the composition of the Fund's portfolio varies from the
composition of the index. In an effort to compensate for imperfect correlation
of relative movements in the hedged position and the hedge, the Fund's hedge
positions may be in a greater or lesser dollar amount than the dollar amount of
the hedged position. Such "over hedging" or "under hedging" may adversely affect
the Fund's net investment results if market movements are not as anticipated
when the hedge is established. Stock index futures transactions may be subject
to additional correlation risks. First, all participants in the futures market
are subject to margin deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors may close futures contracts
through offsetting transactions which would distort the normal relationship
between the stock index and futures markets. Secondly, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market also may cause temporary
price distortions. Because of the possibility of price distortions in the
futures market and the imperfect correlation between movements in the stock
index and movements in the price of stock index futures, a correct forecast of
general market trends by Warburg still may not result in a successful hedging
transaction.
The Fund will engage in hedging transactions only when deemed
advisable by Warburg, and successful use by the Fund of hedging transactions
will be subject to Warburg's ability to predict trends in currency, interest
rate or securities markets, as the case may be, and to correctly predict
movements in the directions of the hedge and the hedged position and the
correlation between them, which predictions could prove to be inaccurate. This
requires different skills and techniques than predicting changes in the price of
individual securities, and there can be no assurance that the use of these
strategies will be successful. Even a well-conceived hedge may be unsuccessful
to some degree because of unexpected market behavior or trends. Losses incurred
in hedging transactions and the costs of these transactions will affect the
Fund's performance.
Asset Coverage for Forward Contracts, Options, Futures and
Options on Futures. As described in the Prospectuses, the Fund will comply with
guidelines established by the Securities and Exchange Commission (the "SEC")
with respect to coverage of forward
<PAGE>11
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 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
<PAGE>12
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 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,
<PAGE>13
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.
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
<PAGE>14
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.
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 purchase warrants issued by domestic
and foreign companies to purchase newly created equity securities consisting of
common and preferred stock. The equity security underlying a warrant is
outstanding at the time the warrant is issued or is issued together with the
warrant.
<PAGE>15
Investing in warrants can provide a greater potential for
profit or loss than an equivalent investment in the underlying security, and,
thus, can be a speculative investment. The value of a warrant may decline
because of a decline in the value of the underlying security, the passage of
time, changes in interest rates or in the dividend or other policies of the
company whose equity underlies the warrant or a change in the perception as to
the future price of the underlying security, or any combination thereof.
Warrants generally pay no dividends and confer no voting or other rights other
than to purchase the underlying security.
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 approved 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
<PAGE>16
resale but have a readily available market are not considered illiquid for
purposes of this limitation. Repurchase agreements subject to demand are deemed
to have a maturity equal to the notice period.
Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which have
not been registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market. Mutual funds do not typically hold a significant
amount of these restricted or other illiquid securities because of the potential
for delays on resale and uncertainty in valuation. Limitations on resale may
have an adverse effect on the marketability of portfolio securities and a mutual
fund might be unable to dispose of restricted or other illiquid securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemptions within seven days. A mutual fund might also have to
register such restricted securities in order to dispose of them resulting in
additional expense and delay. Adverse market conditions could impede such a
public offering of securities.
In recent years, however, a large institutional market has
developed for certain securities that are not registered under the Securities
Act including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for repayment.
The fact that there are contractual or legal restrictions on resale to the
general public or to certain institutions may not be indicative of the liquidity
of such investments.
Rule 144A Securities. Rule 144A under the Securities Act
adopted by the SEC allows for a broader institutional trading market for
securities otherwise subject to restriction on resale to the general public.
Rule 144A establishes a "safe harbor" from the registration requirements of the
Securities Act for resales of certain securities to qualified institutional
buyers. Warburg anticipates that the market for certain restricted securities
such as 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
<PAGE>17
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 5%
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 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
<PAGE>18
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, 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.
Special Situation 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.
The Fund may invest in the securities of "special situation
companies" involved in an actual or prospective acquisition or consolidation;
reorganization; recapitalization; merger, liquidation or distribution of cash,
securities or other assets; a tender or exchange offer; a breakup or workout of
a holding company; or litigation which, if resolved favorably, would improve the
value of the company's stock. If the actual or prospective situation does not
materialize as anticipated, the market price of the securities of a "special
situation company" may decline significantly. The Fund believes, however, that
if Warburg analyzes "special situation companies" carefully and invests in the
securities of these companies at the appropriate time, the Fund may achieve
capital growth. There can be no assurance, however, that a special situation
that exists at the time the Fund makes its investment will be consummated under
the terms and within the time period contemplated.
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
<PAGE>19
reverse repurchase agreements, dollar roll transactions that are accounted for
as financings and any other transactions constituting borrowing by the Fund may
not exceed 30% of the value of the Fund's total assets at the time of such
borrowing. For purposes of this restriction, short sales, the entry into
currency transactions, options, futures contracts, options on futures
contracts, forward commitment transactions and dollar roll transactions that
are not accounted for as financings (and the segregation of assets in
connection with any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or more of
the value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of U.S.
Government Securities.
3. 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, 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.
<PAGE>20
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 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.
Portfolio Valuation
The Prospectuses discuss the time at which the net asset value
of the Fund is determined for purposes of sales and redemptions. The following
is a description of the procedures used by the Fund in valuing its assets.
Securities listed on a U.S. securities exchange (including
securities traded through the Nasdaq National Market System) or foreign
securities exchange or traded in an over-the-counter market will be valued at
the most recent sale as of the time the valuation is made or, in the absence of
sales, at the mean between the bid and asked quotations. If there are no such
quotations, the value of the securities will be taken to be the highest bid
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
<PAGE>21
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 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 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
<PAGE>22
Securities may be purchased directly from the U.S. Treasury or from the issuing
agency or instrumentality.
Warburg will select specific portfolio investments and effect
transactions for the Fund and in doing so seeks to obtain the overall best
execution of portfolio transactions. In evaluating prices and executions,
Warburg will consider the factors it deems relevant, which may include the
breadth of the market in the security, the price of the security, the financial
condition and execution capability of a broker or dealer and the reasonableness
of the commission, if any, for the specific transaction and on a continuing
basis. Warburg may, in its discretion, effect transactions in portfolio
securities with dealers who provide brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to
the Fund and/or other accounts over which Warburg exercises investment
discretion. Warburg may place portfolio transactions with a broker or dealer
with whom it has negotiated a commission that is in excess of the commission
another broker or dealer would have charged for effecting the transaction if
Warburg determines in good faith that such amount of commission was reasonable
in relation to the value of such brokerage and research services provided by
such broker or dealer viewed in terms of either that particular transaction or
of the overall responsibilities of Warburg. Research and other services received
may be useful to Warburg in serving both the Fund and its other clients and,
conversely, research or other services obtained by the placement of business of
other clients may be useful to Warburg in carrying out its obligations to the
Fund. Research may include furnishing advice, either directly or through
publications or writings, as to the value of securities, the advisability of
purchasing or selling specific securities and the availability of securities or
purchasers or sellers of securities; furnishing seminars, information, analyses
and reports concerning issuers, industries, securities, trading markets and
methods, legislative developments, changes in accounting practices, economic
factors and trends and portfolio strategy; access to research analysts,
corporate management personnel, industry experts, economists and government
officials; comparative performance evaluation and technical measurement services
and quotation services; and products and other services (such as third party
publications, reports and analyses, and computer and electronic access,
equipment, software, information and accessories that deliver, process or
otherwise utilize information, including the research described above) that
assist Warburg in carrying out its 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
<PAGE>23
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 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
<PAGE>24
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. The Fund's investment in special situation companies could
result in high portfolio turnover. 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.
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>
<CAPTION>
<S> <C>
Richard N. Cooper (62) ................................ Director
Harvard University National Intelligence Counsel; Professor at Harvard
1737 Cambridge Street University; Director or Trustee of CircuitCity
Cambridge, Massachusetts 02138 Stores, Inc. (retail electronics and appliances) and
Phoenix Home Mutual Insurance Company.
Donald J. Donahue (72) ................................ Director
27 Signal Rd. Chairman of Magma Copper from December 1987 until
Stamford, Connecticut 06902 December 1995; 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 December 1995.
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
Wilson, Wyoming 83014 (developers and operators of radio stations);
Director of Advo, Inc. (direct mail advertising).
</TABLE>
<PAGE>25
<TABLE>
<CAPTION>
<S> <C>
John L. Furth* (66) ................................... Director 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.
Thomas A. Melfe (64) .................................. Director
30 Rockefeller Plaza Partner in the law firm of Donovan Leisure Newton &
New York, New York 10112 Irvine; Chairman of the Board, Municipal Fund for
New York Investors, Inc.
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.
Alexander B. Trowbridge (67) .......................... Director
1317 F Street, N.W., 5th Floor President of Trowbridge Partners, Inc. (business
Washington, DC 20004 consulting) from January 1990- November 1996;
President of the National Association of
Manufacturers from 1980-1990; Director or Trustee
of New England Mutual Life Insurance Co., ICOS
Corporation (biopharmaceuticals), WMX Technologies
Inc. (solid and hazardous waste collection and
disposal), The Rouse Company (real estate
development), Harris Corp. (electronics and
communications equipment), The Gillette Co.
(personal care products) and Sun Company Inc.
(petroleum refining and marketing).
- -------------------
* Indicates a Director who is an "interested person" of the Fund as defined in the 1940 Act.
</TABLE>
<PAGE>26
<TABLE>
<CAPTION>
<S> <C>
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
1987-1991; Senior Vice President of Counsellors
Securities and officer of other investment
companies advised by Warburg.
Stephen Distler (43) .................................. Vice President and Chief Financial Officer Managing
466 Lexington Avenue Director, Controller and Assistant Secretary of EMW;
New York, New York 10017-3147 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 1994;
New York, New York 10017-3147 Attorney-at-law from September 1989-April 1994;
life insurance agent, New York Life Insurance
Company from 1993-1994; General Counsel and
Secretary, Home Unity Savings Bank from 1991-1992;
Vice President and Chief Compliance Officer and
Assistant Secretary 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
New York, New York 10017-3147 Martin Geller, C.P.A. from 1990-1992; Vice
President, Finance with Gabelli/Rosenthal &
Partners, L.P. until 1990; Vice President,
Treasurer and Chief Accounting Officer of other
investment companies advised by Warburg
</TABLE>
<PAGE>27
<TABLE>
<CAPTION>
<S> <C>
Daniel S. Madden, CPA (31) Treasurer and Chief Accounting Officer
466 Lexington Avenue Associated with EMW since 1995; Associated with
New York, New York 10017-3147 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; Associated with the
New York, New York 10017-3147 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
who is not a director, trustee, officer or employee of Warburg, PFPC or any of
their affiliates receives an annual fee of $500, and $250 for each meeting of
the Board attended by him for his services as Director and is reimbursed for
expenses incurred in connection with his attendance at Board meetings.
<PAGE>28
Director's Compensation
<TABLE>
<CAPTION>
Total Total Compensation from
Name of Director Compensation from all Investment Companies
the Fund+ Managed by 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 22 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>
Mr. Stephen J. Lurito, portfolio manager of the Fund, is also
co-portfolio manager of Warburg, Pincus Emerging Growth Fund and the Small
Company Growth Portfolio of Warburg Pincus Trust. Mr. Lurito, who is also the
research coordinator and a portfolio manager for micro-cap equity and
post-venture products, has been with Warburg since 1987. Prior to that he was
a research analyst at Sanford C. Bernstein & Company, Inc. Mr. Lurito earned
a B.A. degree from the University of Virginia and an M.B.A. from the University
of Pennsylvania.
Investment Adviser and Co-Administrators
Warburg serves as investment adviser to the Fund, Counsellors
Funds Service, Inc. ("Counsellors Service") serves as a co-administrator to the
Fund and PFPC serves as a 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
<PAGE>29
Counsellors Service Co-Administration Agreement and PFPC under the PFPC
Co-Administration Agreement are described in the Prospectuses. Each class of
shares of the Fund bears its proportionate share of fees payable to Warburg,
Counsellors Service and PFPC in the proportion that its assets bear to the
aggregate assets of the Fund at the time of calculation. These fees are
calculated at an annual rate based on a percentage of the Fund's average daily
net assets. See the Prospectuses, "Management of the Funds."
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 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
<PAGE>30
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 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.
<PAGE>31
Pursuant to the 12b-1 Plan, Counsellors Securities provides
the Board with periodic reports of amounts expended under the 12b-1 Plan and the
purpose for which the expenditures were made.
Advisor Shares. The Fund may, in the future, enter into
agreements ("Agreements") with institutional shareholders of record,
broker-dealers, financial institutions, depository institutions, retirement
plans and financial intermediaries ("Institutions") to provide certain
distribution, shareholder servicing, administrative and/or accounting services
for their clients or customers (or participants in the case of retirement plans)
("Customers") who are beneficial owners of Advisor Shares. See the Advisor
Prospectus, "Shareholder Servicing." Agreements will be governed by a
distribution plan (the "Distribution Plan") pursuant to Rule 12b-1 under the
1940 Act, 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.
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
<PAGE>32
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 Prospectuses under "Net Asset Value."
Under the 1940 Act, the Fund may suspend the right of
redemption or postpone the date of payment upon redemption for any period during
which the NYSE is closed, other than customary weekend and holiday closings, or
during which trading on the NYSE is restricted, or during which (as determined
by the SEC) an emergency exists as a result of which disposal or fair valuation
of portfolio securities is not reasonably practicable, or for such other periods
as the SEC may permit. (The Fund may also suspend or postpone the recordation of
an exchange of its shares upon the occurrence of any of the foregoing
conditions.)
If the Board determines that conditions exist which make
payment of redemption proceeds wholly in cash unwise or undesirable, the Fund
may make payment wholly or partly in securities or other investment instruments
which may not constitute securities as such term is defined in the applicable
securities laws. If a redemption is paid wholly or partly in securities or other
property, a shareholder would incur transaction costs in disposing of the
redemption proceeds. The Fund 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 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.
<PAGE>33
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 the sum of 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) plus at least 90% of its net tax
exempt interest income; (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 foreign currencies, 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 such
securities or currencies; (iii) derive less than 30% of its annual gross income
from the sale or other disposition of securities, options, futures, forward
contracts or certain other assets 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
<PAGE>34
controls and that are determined to be in the same or similar trades or
businesses or related trades or businesses. In meeting these requirements, the
Fund may be restricted in the selling of securities held by the Fund for less
than three months and in the utilization of certain of the investment
techniques described above and in the Fund's Prospectuses. As a regulated
investment company, the Fund will be subject to a 4% non-deductible excise tax
measured with respect to certain undistributed amounts of ordinary income and
capital gain required to be but not distributed under a prescribed formula. The
formula requires payment to shareholders during a calendar year of
distributions representing at least 98% of the Fund's taxable ordinary income
for the calendar year and at least 98% of the excess of its capital gains over
capital losses realized during the one-year period ending October 31 during
such year, together with any undistributed, untaxed amounts of ordinary income
and capital gains from the previous calendar year. The Fund expects to pay the
dividends and make the distributions necessary to avoid the application of this
excise tax.
The Fund's transactions, if any, in foreign currencies,
forward contracts, options and futures contracts (including options, futures
contracts 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 described in the
Prospectuses, will be long-term or short-term depending upon the shareholder's
holding period for the shares. Any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of are replaced, including
replacement through the reinvestment of dividends and capital gains
distributions in the Fund, within a period of 61 days beginning 30 days before
and ending 30 days after the disposition of the shares. In such a case, the
basis of the shares acquired will be increased to reflect the disallowed loss.
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
<PAGE>35
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.
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.
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
- -----------------
* The expression (1 + T) is being raised to the nth power.
<PAGE>36
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.
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 December 12, 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 is regarded, on balance,
as predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB represents a lower
degree of speculation than B, and CCC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB - Debt rated BB has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which could
lead to inadequate capacity to meet timely interest and principal payments. The
BB rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B - Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable
vulnerability to default and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic conditions,
it is not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B- rating.
CC - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC- debt rating. The C
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on
which no interest is being paid. Such debt is rated between debt rated C and
debt rated D.
To provide more detailed indications of credit quality, the
ratings may be modified by the addition of a plus or minus sign to show relative
standing within this major rating category.
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.
<PAGE>A-3
While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers (1, 2 and 3) with respect
to the bonds rated "Aa" through "B." The modifier 1 indicates that the bond
being rated ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates that the bond
ranks in the lower end of its generic rating category.
Caa - Bonds that are rated Caa are of poor standing. These
issues may be in default or present elements of danger may exist with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C comprise the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
<PAGE>1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Warburg, Pincus Small Company Growth Fund, Inc.
We have audited the accompanying Statement of Assets and Liabilities of
Warburg, Pincus Small Company Growth Fund, Inc. (the "Fund") as of December
12, 1996. This financial statement is the responsibility of the Fund's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of Warburg, Pincus Small Company
Growth Fund, Inc. as of December 12, 1996 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
December 16, 1996
<PAGE>1
WARBURG, PINCUS SMALL COMPANY GROWTH FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
as of December 12, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
Assets:
Cash $100,000
Deferred Organizational Costs 19,072
Deferred Offering Costs 117,105
-------
Total Assets 236,177
Liabilities:
Accrued Organizational Costs 19,072
Accrued Offering Costs 117,105
-------
Total Liabilities 136,177
-------
Net Assets 100,000
=======
Net Asset Value, Redemption and Offering Price Per
Share (three billion shares authorized, consisting of 1
billion Common Shares and 1 billion Advisor Shares -
$.001 per share designated) applicable to $10.00
10,000 Common Shares. ======
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE>1
WARBURG, PINCUS SMALL COMPANY GROWTH FUND, INC.
Notes to Financial Statement
December 12, 1996
1. Organization:
Warburg, Pincus Small Company Growth Fund, Inc. (the "Fund") was
incorporated on October 31, 1996 under the laws of the State of
Maryland. The Fund is registered under the Investment Company Act of
1940, as amended, as an open-end management investment company. The
Fund's charter authorizes its Board of Directors to issue three
billion full and fractional shares of capital stock, $.001 par value per
share, of which one billion shares are designated Common Shares and one
billion shares are designated Advisor Shares. Common Shares bear fees of .25%
of average daily net asset value pursuant to a 12b-1 distribution plan.
Advisor Shares bear fees not to exceed .75% of average daily net asset
value pursuant to a 12b-1 distribution plan. The assets of each class
are segregated, and a shareholder's interest is limited to the class in
which shares are held. The Fund has not commenced operations except
those related to organizational matters and the sale of 10,000 Common
Shares (the "Initial Shares") to Warburg, Pincus Counsellors,
Inc., the Fund's investment adviser (the "Adviser"), on December 12, 1996.
2. Organizational Costs, Offering Costs and Transactions with Affiliates:
Organizational costs have been capitalized by the Fund and are being amortized
over sixty months commencing with operations. In the event any of the Initial
Shares of the Fund are redeemed by any holder thereof during the period that
the Fund is amortizing its organizational costs, the redemption proceeds
payable to the holder thereof by the Fund will be reduced by unamortized
organizational costs in the same ratio as the number of Initial Shares
outstanding at the time of redemption. Offering costs, including initial
registration costs, have been deferred and will be charged to expense during
the fund's first year of operation.
Certain officers and a director of the Fund are also officers and a director
of the Adviser. These officers and director are paid no fees by the Fund for
serving as an officer or director of the Fund.
<PAGE>C-1
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements --
(1) Financial Statements included in Part B.
(a) Report of Coopers & Lybrand L.L.P., Independent
Accountants
(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.
5 Investment Advisory Agreement.
6 Distribution Agreement.
7 Not applicable.
8(a) Custodian Agreement with PNC Bank, National
Association
(b) Custodian Agreement with Fiduciary Trust
International.
9(a) Form of Transfer Agency and Service Agreement.
(b) Co-Administration Agreement with Counsellors Funds
Service, Inc.
(c) Form of Co-Administration Agreement with PFPC Inc.
10(a) Opinion and Consent of Willkie Farr & Gallagher,
counsel to the Fund.
(b) Opinion and Consent of Venable, Baetjer and
Howard, LLP, Maryland counsel to the Fund.
- --------
* Incorporated by reference to the corresponding exhibit in the Fund's
Registration Statement on Form N-1A filed on November 1, 1996
(Securities Act No. 333-15453).
<PAGE>C-2
11 Consent of Coopers & Lybrand L.L.P., Independent
Accountants.
12 Not applicable.
13 Purchase Agreement.
14 Not applicable.
15(a) Form of Shareholder Servicing and Distribution
Plan.
(b) Form of Distribution Plan.
16 Not applicable.
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.
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.
<PAGE>C-3
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 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.
<PAGE>C-4
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 Health Sciences 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 Strategic
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.
Item 30. Location of Accounts and Records
(1) Warburg, Pincus Small Company Growth 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)
<PAGE>C-5
(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) State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
(records relating to its functions as shareholer
servicing agent, transfer agent and dividend
disbursing agent)
(6) Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, Massachusetts 02171
(records relating to its functions as transfer agent
and dividend disbursing agent)
(7) PNC Bank, National Association
Broad and Chestnut Streets
Philadelphia, Pennsylvania 19101
(records relating to its functions as custodian)
(8) Fiduciary Trust Company International
Two World Trade Center
New York, New York 10048
(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)
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.
<PAGE>C-6
(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 Fund, 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 Amendment to the 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 16th day of December, 1996.
WARBURG, PINCUS SMALL COMPANY
GROWTH FUND, INC.
By:/s/ Arnold M.Reichman
Arnold M. Reichman
President
Pursuant to the requirements of the Securities Act of 1933,
as amended, this Amendment has been signed below by the following persons in
the capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C>
/s/John L. Furth Chief Executive Officer and December 16, 1996
John L. Furth Director
/s/Arnold M. Reichman President and December 16, 1996
Arnold M. Reichman Director
/s/Howard Conroy Vice President and Chief December 16, 1996
Howard Conroy Financial Officer
/s/Daniel S. Madden Treasurer and Chief Accounting December 16, 1996
Daniel S. Madden Officer
/s/Richard N. Cooper Director December 16, 1996
Richard N. Cooper
/s/Donald J. Donahue Director December 16, 1996
Donald J. Donahue
/s/Jack W. Fritz Director December 16, 1996
Jack W. Fritz
/s/Thomas A. Melfe Director December 16, 1996
Thomas A. Melfe
/s/Alexander B. Trowbridge Director December 16, 1996
Alexander B. Trowbridge
</TABLE>
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
----------- ----------------------
4 Registrant's Forms of Stock Certificates
5 Investment Advisory Agreement
6 Distribution Agreement
8(a) Custodian Agreement with PNC Bank, National
Association
(b) Custodian Agreement with Fiduciary Trust
International
9(a) Transfer Agency and Service Agreement
(b) Co-Administration Agreement with Counsellors Funds
Service, Inc.
(c) Co-Administration Agreement with PFPC, Inc.
10(a) Opinion and Consent of Willkie Farr & Gallagher,
Counsel to the Fund
(b) Opinion and Consent of Venable, Baetjer and Howard,
L.L.P., Maryland Counsel to the Fund
11 Consent of Cooper & Lybrand, L.L.P., Independent
Accountants
13 Purchase Agreement
15(a) Shareholder Servicing and Distribution Plan ` (b)
Distribution Plan
<PAGE>1
NUMBER SHARES
_________ ---------
Incorporated under the laws of the State of Maryland
WARBURG, PINCUS SMALL COMPANY GROWTH FUND, INC.
Common Stock
The Corporation is Authorized to Issue One Billion Shares Par Value $.001,
Designated Advisor Shares
THIS CERTIFIES that is the owner of
fully paid and non-assessable Shares of the above Corporation transferable
only on the books of the Corporation by the holder hereof in person or by duly
authorized Attorney upon surrender of this Certificate properly endorsed.
In Witness Whereof, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and to be sealed with the Seal of the
Corporation.
Dated_____________________
- ----------------------------- ------------------------------
Assistant Secretary President
<PAGE>2
The Corporation is authorized to issue two or more classes of stock. The
Corporation will furnish to any stockholder on request and without charge a
full statement of the designations and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the stock of each
class which the Corporation is authorized to issue and, if the Corporation is
authorized to issue any preferred or special class in series, of the
differences in the relative rights and preferences between the shares of each
series to the extent they have been set and the authority of the Board of
Directors to set the relative rights and preferences of subsequent series.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations. Additional abbreviations may
also be used though not in the list.
<TABLE>
<CAPTION>
<S> <C>
TEN COM as tenants in common UNIF GIFT MIN ACT Custodian
TEN ENT as tenants by the entireties (Minor)
JT TEN as joint tenants with right of survivorship and not under Uniform Gifts to Minors Act (State)
as tenants in common
</TABLE>
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
For value received, the undersigned hereby sells, assigns
and transfers unto ____________________________________________________
__________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
_____________________________________________________________________ Shares
represented by the within Certificate, and hereby irrevocably constitutes and
appoints ________________________________________________________________
_____________________________________________ Attorney to transfer the said
shares on the books of the within-named Corporation with full power of
substitution in the premises.
Dated, _____________________
In presence of
NOTICE: The signature to the assignment must correspond with the
name as written on the face of the certificate in every particular
without alteration or enlargement, or any change whatsoever.
<PAGE>1
NUMBER SHARES
_________ -----------
Incorporated under the laws of the State of Maryland
WARBURG, PINCUS SMALL COMPANY GROWTH FUND, INC.
Common Stock
The Corporation is Authorized to Issue One Billion Shares Par Value $.001,
Designated Common Shares
THIS CERTIFIES that is the owner of
fully paid and non-assessable Shares of the above Corporation transferable
only on the books of the Corporation by the holder hereof in person or by duly
authorized Attorney upon surrender of this Certificate properly endorsed.
In Witness Whereof, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and to be sealed with the Seal of the
Corporation.
Dated_____________________
- ----------------------------- ------------------------------
Assistant Secretary President
<PAGE>2
The Corporation is authorized to issue two or more classes of stock. The
Corporation will furnish to any stockholder on request and without charge a
full statement of the designations and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the stock of each
class which the Corporation is authorized to issue and, if the Corporation is
authorized to issue any preferred or special class in series, of the
differences in the relative rights and preferences between the shares of each
series to the extent they have been set and the authority of the Board of
Directors to set the relative rights and preferences of subsequent series.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations. Additional abbreviations may
also be used though not in the list.
<TABLE>
<CAPTION>
<S> <C>
TEN COM as tenants in common UNIF GIFT MIN ACT Custodian
TEN ENT as tenants by the entireties (Minor)
JT TEN as joint tenants with right of survivorship and not under Uniform Gifts to Minors Act (State)
as tenants in common
</TABLE>
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
For value received, the undersigned hereby sells, assigns
and transfers unto ____________________________________________________
__________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
_____________________________________________________________________ Shares
represented by the within Certificate, and hereby irrevocably constitutes and
appoints ________________________________________________________________
_____________________________________________ Attorney to transfer the said
shares on the books of the within-named Corporation with full power of
substitution in the premises.
Dated, _____________________
In presence of
NOTICE: The signature to the assignment must correspond with the
name as written on the face of the certificate in every particular
without alteration or enlargement, or any change whatsoever.
<PAGE>1
INVESTMENT ADVISORY AGREEMENT
December 31, 1996
Warburg, Pincus Counsellors, Inc.
466 Lexington Avenue
New York, New York 10017-3147
Dear Sirs:
Warburg, Pincus Small Company Growth Fund, Inc. (the "Fund"), a
corporation organized and existing under the laws of the State of Maryland,
herewith confirms its agreement with Warburg, Pincus Counsellors, Inc. (the
"Adviser") as follows:
1. Investment Description; Appointment
-----------------------------------
The Fund desires to employ the capital of the Fund by investing and
reinvesting in investments of the kind and in accordance with the limitations
specified in its Articles of Incorporation, as may be amended from time to time,
and in its Prospectus and Statement of Additional Information as from time to
time in effect, and in such manner and to such extent as may from time to time
be approved by the Board of Directors of the Fund. Copies of the Fund's
Prospectus and Statement of Additional Information, as each may be amended from
time to time, have been or will be submitted to the Adviser. The Fund desires to
employ and hereby appoints the Adviser to act as investment adviser to the Fund.
The Adviser accepts the appointment and agrees to furnish the services for the
compensation set forth below.
2. Services as Investment Adviser
------------------------------
Subject to the supervision and direction of the Board of Directors of
the Fund, the Adviser will (a) act in strict conformity with the Fund's Articles
of Incorporation, the Investment Company Act of 1940 and the Investment Advisers
Act of 1940, as the same may from time to time be amended, (b) manage the Fund
in accordance with the Fund's investment objective and policies as stated in the
Fund's Prospectus and Statement of Additional Information relating to the Fund
as from time to time in effect, (c) make investment decisions for the Fund and
(d) place purchase and sale orders for securities on behalf of the Fund. In
providing those services, the Adviser will provide investment research and
supervision of the Fund's investments and conduct a continual program of
investment, evaluation and, if appropriate, sale and reinvestment of the Fund's
assets. In addition, the Adviser will furnish the Fund with whatever
<PAGE>2
statistical information the Fund may reasonably request with respect to the
securities that the Fund may hold or contemplate purchasing.
3. Brokerage
---------
In executing transactions for the Fund and selecting brokers or
dealers, the Adviser will use its best efforts to seek the best overall terms
available. In assessing the best overall terms available for any portfolio
transaction, the Adviser will consider all factors it deems relevant including,
but not limited to, breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker or
dealer and the reasonableness of any commission for the specific transaction and
for transactions executed through the broker or dealer in the aggregate. In
selecting brokers or dealers to execute a particular transaction and in
evaluating the best overall terms available, the Adviser may consider the
brokerage and research services (as those terms are defined in Section 28(e) of
the Securities Exchange Act of 1934, as the same may from time to time be
amended) provided to the Fund and/or other accounts over which the Adviser or an
affiliate exercises investment discretion.
4. Information Provided to the Fund
--------------------------------
The Adviser will keep the Fund informed of developments materially
affecting the Fund, and will, on its own initiative, furnish the Fund from time
to time with whatever information the Adviser believes is appropriate for this
purpose.
5. Standard of Care
----------------
The Adviser shall exercise its best judgment in rendering the services
listed in paragraphs 2, 3 and 4 above. The Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the matters to which this Agreement relates, provided that
nothing herein shall be deemed to protect or purport to protect the Adviser
against any liability to the Fund or to shareholders of the Fund to which the
Adviser would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or by reason of
the Adviser's reckless disregard of its obligations and duties under this
Agreement.
6. Compensation
------------
In consideration of the services rendered pursuant to this Agreement,
the Fund will pay the Adviser an annual fee calculated at an annual rate of
1.00% of the Fund's average daily
<PAGE>
net assets. The fee for the period from the date the Fund's initial registration
statement is declared effective by the Securities and Exchange Commission to the
end of the year during which the initial registration statement is declared
effective shall be prorated according to the proportion that such period bears
to the full yearly period. Upon any termination of this Agreement before the end
of a year, the fee for such part of that year shall be prorated according to the
proportion that such period bears to the full yearly period and shall be payable
upon the date of termination of this Agreement. For the purpose of determining
fees payable to the Adviser, the value of the Fund's net assets shall be
computed at the times and in the manner specified in the Fund's Prospectus or
Statement of Additional Information as from time to time in effect.
7. Expenses
--------
The Adviser will bear all expenses in connection with the performance
of its services under this Agreement. The Fund will bear its proportionate share
of certain other expenses to be incurred in its operation, including: investment
advisory and administration fees; taxes, interest, brokerage fees and
commissions, if any; fees of Directors of the Fund who are not officers,
directors, or employees of the Adviser or any of its affiliates; fees of any
pricing service employed to value shares of the Fund; Securities and Exchange
Commission fees and state blue sky qualification fees; charges of custodians and
transfer and dividend disbursing agents; the Fund's proportionate share of
insurance premiums; outside auditing and legal expenses; costs of maintenance of
the Fund's existence; costs attributable to investor services, including,
without limitation, telephone and personnel expenses; costs of preparing and
printing prospectuses and statements of additional information for regulatory
purposes and for distribution to existing shareholders; costs of shareholders'
reports and meetings of the shareholders of the Fund and of the officers or
Board of Directors of the Fund; and any extraordinary expenses.
The Fund will be responsible for nonrecurring expenses which may
arise, including costs of litigation to which the Fund is a party and of
indemnifying officers and Directors of the Fund with respect to such litigation
and other expenses as determined by the Directors.
8. Services to Other Companies or Accounts
----------------------------------------
The Fund understands that the Adviser now acts, will continue to act
and may act in the future as investment adviser to fiduciary and other managed
accounts and to one or more other investment companies or series of investment
companies, and the Fund has no objection to the Adviser so acting, provided that
<PAGE>
whenever the Fund and one or more other accounts or investment companies or
portfolios advised by the Adviser have available funds for investment,
investments suitable and appropriate for each will be allocated in accordance
with a formula believed to be equitable to each entity. The Fund recognizes that
in some cases this procedure may adversely affect the size of the position
obtainable for the Fund. In addition, the Fund understands that the persons
employed by the Adviser to assist in the performance of the Adviser's duties
hereunder will not devote their full time to such service and nothing contained
herein shall be deemed to limit or restrict the right of the Adviser or any
affiliate of the Adviser to engage in and devote time and attention to other
businesses or to render services of whatever kind or nature.
9. Term of Agreement
-----------------
This Agreement shall continue until April 17, 1998 and thereafter
shall continue automatically for successive annual periods, provided such
continuance is specifically approved at least annually by (a) the Board of
Directors of the Fund or (b) a vote of a "majority" (as defined in the
Investment Company Act of 1940, as amended) of the Fund's outstanding voting
securities, provided that in either event the continuance is also approved by a
majority of the Board of Directors who are not "interested persons" (as defined
in said Act) of any party to this Agreement, by vote cast in person at a meeting
called for the purpose of voting on such approval. This Agreement is terminable,
without penalty, on 60 days' written notice, by the Board of Directors of the
Fund or by vote of holders of a majority of the Fund's shares, or upon 90 days'
written notice, by the Adviser. This Agreement will also terminate automatically
in the event of its assignment (as defined in said Act).
10. Representation by the Fund
--------------------------
The Fund represents that a copy of its Articles of Incorporation,
dated October 30, 1996, together with all amendments thereto, is on file in the
Department of Assessments and Taxation of the State of Maryland.
11. Miscellaneous
-------------
The Fund recognizes that directors, officers and employees of the
Adviser may from time to time serve as directors, trustees, officers and
employees of corporations and business trusts (including other investment
companies) and that such other corporations and trusts may include the name
"Warburg, Pincus" as part of their names, and that the Adviser or its affiliates
may enter into advisory or other agreements with such other corporations and
trusts. If the Adviser ceases to act as
<PAGE>
the investment adviser of the Fund's shares, the Fund agrees that, at the
Adviser's request, the Fund's license to use the words "Warburg, Pincus" will
terminate and that the Fund will take all necessary action to change the name of
the Fund to names not including the words "Warburg, Pincus".
Please confirm that the foregoing is in accordance with your
understanding by indicating your acceptance hereof at the place below indicated,
whereupon it shall become a binding agreement between us.
Very truly yours,
WARBURG, PINCUS SMALL COMPANY
GROWTH FUND, INC.
By: /s/ Eugene P. Grace
Name: Eugene P. Grace
Title:Vice President and
Secretary
Accepted:
WARBURG, PINCUS COUNSELLORS, INC.
By: /s/ Eugene P. Grace
Name: Eugene P. Grace
Title: Vice President
<PAGE>1
DISTRIBUTION AGREEMENT
December 31, 1996
Counsellors Securities Inc.
466 Lexington Avenue
New York, New York 10017-3147
Ladies and Gentlemen:
This is to confirm that, in consideration of the agreements
hereinafter contained, the undersigned, Warburg, Pincus Small Company Growth
Fund, Inc. (the "Fund"), an open-end, diversified, management investment
company organized as a corporation under the laws of the State of Maryland, has
agreed that Counsellors Securities Inc. ("Counsellors Securities") shall be, for
the period of this Agreement, the distributor of shares of common stock of the
Fund, par value $.001 per share. The common stock not designated Advisor Shares
shall be referred to as the "Common Shares".
1. Services as Distributor
-----------------------
1.1 Counsellors Securities will act as agent for the distribution of
the Common Shares and Advisor Shares covered by the Fund's registration
statement on Form N-1A, under the Securities Act of 1933, as amended (the "1933
Act"), and the Investment Company Act of 1940, as amended (the "1940 Act") (the
registration statement, together with the prospectuses (the "prospectus") and
statement of additional information (the "statement of additional information")
included as part of the registration statement, any amendments to the
registration statement, and any supplements to, or material incorporated by
reference into the prospectus or statement of additional information, being
referred to collectively in this Agreement as the "registration statement").
1.2 Counsellors Securities agrees to use appropriate efforts to
solicit orders for the sale of the Common Shares and Advisor Shares at such
prices and on the terms and conditions set forth in the registration statement
and will undertake such advertising and promotion as it believes is reasonable
in connection with such solicitation.
1.3 All activities by Counsellors Securities as distributor of the
Common Shares and Advisor Shares shall comply with all applicable laws, rules
and regulations, including,
<PAGE>2
without limitation, all rules and regulations made or adopted by the Securities
and Exchange Commission (the "SEC") or by any securities association registered
under the Securities Exchange Act of 1934, as amended.
1.4 Counsellors Securities agrees to (a) provide one or more persons
during normal business hours to respond to telephone questions concerning the
Fund and its performance, (b) provide prospectuses of other funds advised by
Warburg, Pincus Counsellors, Inc. to shareholders considering exercising the
exchange privilege and (c) perform such other services as are described in the
registration statement and in the Shareholder Servicing and Distribution Plan
(with respect to Common Shares, the "12b-1 Plan") and in the Distribution Plan
(with respect to Advisor Shares, the "Distribution Plan"), each adopted by the
Fund pursuant to Rule 12b-1 under the 1940 Act ("Rule 12b-1") to be performed by
Counsellors Securities, without limitation, distributing and receiving
subscription order forms and receiving written redemption requests.
1.5 Pursuant to the 12b-1 Plan, the Fund will pay Counsellors
Securities on the first business day of each quarter a fee for the previous
quarter calculated at an annual rate of .25% of the average daily net assets of
the Common Shares of the Fund as compensation for the services provided by
Counsellors Securities to the Common Shares pursuant to this Agreement.
Counsellors Securities serves without compensation as distributor for the
Advisor Shares pursuant to this Agreement. 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, (a) the sale of the Common Shares, as set forth in the 12b-1
Plan ("Selling Services"), (b) ongoing servicing and/or maintenance of the
accounts of holders of Common Shares, as set forth in the 12b-1 Plan
("Shareholder Services"), and/or (c) sub-transfer agency services, subaccounting
services or administrative services with respect to 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,
(i) payments reflecting an allocation of overhead and other office expenses of
Counsellors Securities related to providing Services; (ii) payments made to, and
reimbursement of expenses of, persons who provide support services in connection
with the distribution of the Common Shares including, but not limited to, office
space and equipment, telephone facilities, answering routine inquiries regarding
the Fund, and providing any other Shareholder Services; (iii) payments made to
compensate selected dealers or other authorized persons for providing any
Services; (iv) 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; (v) costs of
printing and distributing prospectuses, statements of additional information and
reports of
<PAGE>3
the Fund to prospective holders of Common Shares; and (vi) costs involved in
obtaining whatever information, analyses and reports with respect to marketing
and promotional activities for the Common Shares that the Fund may, from time to
time, deem advisable.
1.6 Counsellors Securities acknowledges that, whenever in the judgment
of the Fund's officers such action is warranted for any reason, including,
without limitation, market, economic or political conditions, those officers may
decline to accept any orders for, or make any sales of, the Common Shares or
Advisor Shares until such time as those officers deem it advisable to accept
such orders and to make such sales.
1.7 Counsellors Securities will act only on its own behalf as
principal should it choose to enter into selling agreements with selected
dealers or others.
1.8 Counsellors Securities will transmit any orders received by it for
purchase or redemption of the Common Shares and Advisor Shares to State Street
Bank and Trust Company ("State Street"), the Fund's transfer and dividend
disbursing agent, or its successor of which Counsellors Securities is notified
in writing. The Fund will promptly advise Counsellors Securities of the
determination to cease accepting orders or selling Common Shares or Advisor
Shares or to recommence accepting orders or selling Common Shares or Advisor
Shares. The Fund (or its agent) will confirm orders for Common Shares and
Advisor Shares placed through Counsellors Securities upon their receipt, or in
accordance with any exemptive order of the SEC, and will make appropriate book
entries pursuant to the instructions of Counsellors Securities. Counsellors
Securities agrees to cause payment for Common Shares and Advisor Shares and
instructions as to book entries to be delivered promptly to the Fund (or its
agent).
1.9 The outstanding Common Shares and Advisor Shares are subject to
redemption as set forth in the prospectus. The price to be paid to redeem the
Common Shares and Advisor Shares will be determined as set forth in the
prospectus.
1.10 Counsellors Securities will prepare and deliver reports to the
Treasurer of the Fund on a regular, at least quarterly, basis, showing the
distribution expenses incurred pursuant to this Agreement, the 12b-1 Plan and
the Distribution Plan adopted by the Fund pursuant to Rule 12b-1 and the
purposes therefor, as well as any supplemental reports as the Directors from
time to time may reasonably request.
<PAGE>4
2. Duties of the Fund
------------------
2.1 The Fund agrees at its own expense to execute any and all
documents, to furnish any and all information and to take any other actions that
may be reasonably necessary in connection with the sale of Common Shares and
Advisor Shares in those states that Counsellors Securities may designate.
2.2 The Fund shall furnish from time to time, for use in connection
with the sale of the Common Shares and Advisor Shares, such informational
reports with respect to the Fund and the Common Shares and Advisor Shares as
Counsellors Securities may reasonably request, all of which shall be signed by
one or more of the Fund's duly authorized officers; and the Fund warrants that
the statements contained in any such reports, when so signed by one or more of
the Fund's officers, shall be true and correct. The Fund shall also furnish
Counsellors Securities upon request with: (a) annual audits of the Fund's books
and accounts made by independent public accountants regularly retained by the
Fund, (b) semiannual unaudited financial statements pertaining to the Fund, (c)
quarterly earnings statements prepared by the Fund, (d) a monthly itemized list
of the securities held by the Fund, (e) monthly balance sheets as soon as
practicable after the end of each month and (f) from time to time such
additional information regarding the Fund's financial condition as Counsellors
Securities may reasonably request.
3. Representations and Warranties
------------------------------
The Fund represents to Counsellors Securities that all registration
statements, prospectuses and statements of additional information filed by the
Fund with the SEC under the 1933 Act and the 1940 Act with respect to the Common
Shares and/or Advisor Shares have been carefully prepared in conformity with the
requirements of the 1933 Act, the 1940 Act and the rules and regulations of the
SEC thereunder. As used in this Agreement the terms "registration statement",
"prospectus" and "statement of additional information" shall mean any
registration statement, prospectus and statement of additional information filed
by the Fund with respect to the Common Shares and/or Advisor Shares with the SEC
and any amendments and supplements thereto which at any time shall have been
filed with the SEC. The Fund represents and warrants to Counsellors Securities
that any registration statement with respect to the Common Shares and/or Advisor
Shares, or prospectus and statement of additional information contained therein,
when such registration statement becomes effective, will include all statements
required to be contained therein in conformity with the 1933 Act, the 1940 Act
and the rules and regulations of the SEC; that all statements of fact contained
in any registration statement with respect to the Common Shares and/or Advisor
Shares, prospectus or statement of additional information will be true and
correct when such registration statement becomes effective; and that neither any
<PAGE>5
registration statement nor any prospectus or statement of additional information
with respect to the Common Shares and/or Advisor Shares when such registration
statement becomes effective will include an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading to a purchaser of the Common Shares
and/or Advisor Shares. Counsellors Securities may, but shall not be obligated
to, propose from time to time such amendment or amendments to any registration
statement and such supplement or supplements to any prospectus or statement of
additional information as, in the light of future developments, may, in the
opinion of Counsellors Securities' counsel, be necessary or advisable. If the
Fund shall not propose such amendment or amendments and/or supplement or
supplements within fifteen (15) days after receipt by the Fund of a written
request from Counsellors Securities to do so, Counsellors Securities may, at its
option, terminate this Agreement. The Fund shall not file any amendment to any
registration statement or supplement to any prospectus or statement of
additional information without giving Counsellors Securities reasonable notice
thereof in advance; provided, however, that nothing contained in this Agreement
shall in any way limit the Fund's right to file at any time such amendments to
any registration statement and/or supplements to any prospectus or statement of
additional information with respect to the Common Shares and/or Advisor Shares,
of whatever character, as the Fund may deem advisable, such right being in all
respects absolute and unconditional.
4. Indemnification
---------------
4.1 The Fund agrees to indemnify, defend and hold Counsellors
Securities, its several officers and directors, and any person who controls
Counsellors Securities within the meaning of Section 15 of the 1933 Act, free
and harmless from and against any and all claims, demands, liabilities and
expenses (including the cost of investigating or defending such claims, demands
or liabilities and any counsel fees incurred in connection therewith) which
Counsellors Securities, its officers and directors, or any such controlling
person, may incur under the 1933 Act, the 1940 Act or common law or otherwise,
arising out of or based upon any untrue statement or alleged untrue statement of
a material fact contained in any registration statement, any prospectus or any
statement of additional information with respect to the Common Shares and/or
Advisor Shares, or arising out of or based upon any omission or alleged omission
to state a material fact required to be stated in any registration statement,
any prospectus or any statement of additional information with respect to the
Common Shares and/or Advisor Shares, or necessary to make the statements in any
of them not misleading; provided, however, that the Fund's agreement to
indemnify Counsellors Securities, its officers or directors, and any such
controlling person shall not be deemed to cover any claims, demands, liabilities
or expenses arising out of or based upon any statements or representations made
by Counsellors
<PAGE>6
Securities or its representatives or agents other than such statements and
representations as are contained in any registration statement, prospectus or
statement of additional information with respect to the Common Shares and/or
Advisor Shares and in such financial and other statements as are furnished to
Counsellors Securities pursuant to paragraph 2.2 hereof; and further provided
that the Fund's agreement to indemnify Counsellors Securities and the Fund's
representations and warranties hereinbefore set forth in paragraph 3 shall not
be deemed to cover any liability to the Fund or its shareholders to which
Counsellors Securities would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties, or
by reason of Counsellors Securities' reckless disregard of its obligations and
duties under this Agreement. The Fund's agreement to indemnify Counsellors
Securities, its officers and directors, and any such controlling person, as
aforesaid, is expressly conditioned upon the Fund's being notified of any action
brought against Counsellors Securities, its officers or directors, or any such
controlling person, such notification to be given by letter or by telegram
addressed to the Fund at its principal office in New York, New York and sent to
the Fund by the person against whom such action is brought, within ten (10) days
after the summons or other first legal process shall have been served. The
failure to so notify the Fund of any such action shall not relieve the Fund from
any liability that the Fund may have to the person against whom such action is
brought by reason of any such untrue or alleged untrue statement or omission or
alleged omission otherwise than on account of the Fund's indemnity agreement
contained in this paragraph 4.1. The Fund's indemnification agreement contained
in this paragraph 4.1 and the Fund's representations and warranties in this
Agreement shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of Counsellors Securities, its officers and
directors, or any controlling person, and shall survive the delivery of any of
the Fund's shares. This agreement of indemnity will inure exclusively to
Counsellors Securities' benefit, to the benefit of its several officers and
directors, and their respective estates, and to the benefit of the controlling
persons and their successors. The Fund agrees to notify Counsellors Securities
promptly of the commencement of any litigation or proceedings against the Fund
or any of its officers or directors in connection with the issuance and sale of
any of the Common Shares and/or Advisor Shares.
4.2 Counsellors Securities agrees to indemnify, defend and hold the
Fund, its several officers and directors, and any person who controls the Fund
within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
costs of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) that the Fund, its officers or
directors or any such controlling person may incur under the 1933 Act, the 1940
Act or common law or
<PAGE>7
otherwise, but only to the extent that such liability or expense incurred by the
Fund, its officers or directors or such controlling person resulting from such
claims or demands shall arise out of or be based upon (a) any unauthorized sales
literature, advertisements, information, statements or representations or (b)
any untrue or alleged untrue statement of a material fact contained in
information furnished in writing by Counsellors Securities to the Fund
specifically for use in the registration statement and used in the answers to
any of the items of the registration statement or in the corresponding
statements made in the prospectus or statement of additional information, or
shall arise out of or be based upon any omission or alleged omission to state a
material fact in connection with such information furnished in writing by
Counsellors Securities to the Fund and required to be stated in such answers or
necessary to make such information not misleading. Counsellors Securities'
agreement to indemnify the Fund, its officers and directors, and any such
controlling person, as aforesaid, is expressly conditioned upon Counsellors
Securities' being notified of any action brought against the Fund, its officers
or directors, or any such controlling person, such notification to be given by
letter or telegram addressed to Counsellors Securities at its principal office
in New York, New York and sent to Counsellors Securities by the person against
whom such action is brought, within ten (10) days after the summons or other
first legal process shall have been served. The failure to so notify Counsellors
Securities of any such action shall not relieve Counsellors Securities from any
liability that Counsellors Securities may have to the Fund, its officers or
directors, or to such controlling person by reason of any such untrue or alleged
untrue statement or omission or alleged omission otherwise than on account of
Counsellors Securities' indemnity agreement contained in this paragraph 4.2.
Counsellors Securities agrees to notify the Fund promptly of the commencement of
any litigation or proceedings against Counsellors Securities or any of its
officers or directors in connection with the issuance and sale of any of the
Common Shares and/or Advisor Shares.
4.3 In case any action shall be brought against any indemnified party
under paragraph 4.1 or 4.2, and it shall timely notify the indemnifying party of
the commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall wish to do so, to assume the
defense thereof with counsel satisfactory to such indemnified party. If the
indemnifying party opts to assume the defense of such action, the indemnifying
party will not be liable to the indemnified party for any legal or other
expenses subsequently incurred by the indemnified party in connection with the
defense thereof other than (a) reasonable costs of investigation or the
furnishing of documents or witnesses and (b) all reasonable fees and expenses of
separate counsel to such indemnified party if (i) the indemnifying party and the
indemnified party shall have agreed to the retention of such counsel or (ii) the
indemnified party shall have concluded reasonably that representation of the
<PAGE>8
indemnifying party and the indemnified party by the same counsel would be
inappropriate due to actual or potential differing interests between them in the
conduct of the defense of such action.
5. Effectiveness of Registration
-----------------------------
None of the Common Shares or Advisor Shares shall be offered by either
Counsellors Securities or the Fund under any of the provisions of this Agreement
and no orders for the purchase or sale of the Common Shares or Advisor Shares
shall be accepted by the Fund if and so long as the effectiveness of the
registration statement shall be suspended under any of the provisions of the
1933 Act or if and so long as the prospectus is not on file with the SEC;
provided, however, that nothing contained in this paragraph 5 shall in any way
restrict or have an application to or bearing upon the Fund's obligation to
repurchase its shares from any shareholder in accordance with the provisions of
the prospectus or statement of additional information.
6. Notice to Counsellors Securities
---------------------------------
The Fund agrees to advise Counsellors Securities immediately in
writing:
(a) of any request by the SEC for amendments to the
registration statement, prospectus or statement of additional
information then in effect with respect to the Common Shares and/or
Advisor Shares or for additional information;
(b) in the event of the issuance by the SEC of any
stop order suspending the effectiveness of the registration statement,
prospectus or statement of additional information then in effect with
respect to the Common Shares and/or Advisor Shares or the initiation of
any proceeding for that purpose;
(c) of the happening of any event that makes untrue
any statement of a material fact made in the registration statement,
prospectus or statement of additional information then in effect with
respect to the Common Shares and/or Advisor Shares or that requires the
making of a change in such registration statement, prospectus or
statement of additional information in order to make the statements
therein not misleading; and
(d) of all actions of the SEC with respect to any
amendment to any registration statement, prospectus or statement of
additional information with respect to the Common Shares or Advisor
Shares which may from time to time be filed with the SEC.
<PAGE>9
7. Term of Agreement
------------------
This Agreement shall continue until April 17, 1998 with respect to
each of the Common Shares and Advisor Shares, and thereafter shall continue
automatically for successive annual periods ending on April 17th of each year,
provided such continuance is specifically approved at least annually by (a) a
vote of a majority of the Fund's Board of Directors or (b) a vote of a majority
(as defined in the 1940 Act) of each of the outstanding Common Shares and
Advisor Shares, respectively, provided that the continuance is also approved by
a vote of a majority of the Fund's Directors who are not interested persons (as
defined in the 1940 Act) of the Fund and who have no direct or indirect
financial interest in the operation of the 12b-1 Plan or the Distribution Plan,
in this Agreement or in any agreement related to the 12b-1 Plan or Distribution
Plan ("Qualified Directors"), by vote cast in person at a meeting called for the
purpose of voting on such approval. This Agreement is terminable with respect to
the Common Shares or the Advisor Shares without penalty (a) on sixty (60) days'
written notice, by a vote of a majority of the Fund's Qualified Directors or by
vote of a majority (as defined in the 1940 Act) of the outstanding Common Shares
or Advisor Shares, as applicable, or (b) on ninety (90) days' written notice by
Counsellors Securities. This Agreement will also terminate automatically in the
event of its assignment (as defined in the 1940 Act).
8. Amendments
----------
This Agreement may not be amended to increase materially the amount of
the fee with respect to the Common Shares described in Section 1.5 above without
approval of at least a majority (as defined in the 1940 Act) of the outstanding
Common Shares. In addition, all material amendments to this Agreement must be
approved by vote of the Fund's Board of Directors, and by a vote of a majority
of the Qualified Directors, cast in person at a meeting called for the purpose
of voting on the approval.
<PAGE>10
Please confirm that the foregoing is in accordance with your
understanding by indicating your acceptance hereof at the place below indicated,
whereupon it shall become a binding agreement between us.
Very truly yours,
WARBURG, PINCUS SMALL COMPANY
GROWTH FUND, INC.
By: /s/ Eugene P. Grace
Name: Eugene P. Grace
Title: Vice President and
Secretary
Accepted:
COUNSELLORS SECURITIES INC.
By:/s/ Eugene P. Grace
Name: Eugene P. Grace
Title:Vice President
<PAGE>
CUSTODIAN SERVICES AGREEMENT TERMS AND CONDITIONS
-------------------------------------------------
This Agreement is made as of December 31, 1996 by and between PNC
BANK, NATIONAL ASSOCIATION, a national banking association, and WARBURG, PINCUS
SMALL COMPANY GROWTH FUND, INC., a Maryland corporation (the "Fund").
The Fund is registered as an open-end investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund wishes to
retain PNC Bank to provide custodian services, and PNC Bank wishes to furnish
custodian services, either directly or through an affiliate or affiliates, as
more fully described herein.
In consideration of the premises and mutual covenants herein
contained, the parties agree as follows:
1. Definitions.
(a) "Authorized Person". The term "Authorized Person" shall mean
any officer of the Fund and any other person, who is duly authorized by the
Fund's Governing Board, to give Oral and Written Instructions on behalf of the
Fund. Such persons are listed in the Certificate attached hereto as the
Authorized Persons Appendix as such appendix may be amended in writing by the
Fund's Governing Board from time to time.
(b) "Book-Entry System". The term "Book-Entry System" means
Federal Reserve Treasury book-entry system for United States and federal agency
securities, its successor or successors, and its nominee or nominees and any
book-entry system maintained by an
<PAGE>2
exchange registered with the SEC under the 1934 Act.
(c) "CFTC". The term "CFTC" shall mean the Commodities Futures
Trading Commission.
(d) "Governing Board". The term "Governing Board" shall mean the
Fund's Board of Directors if the Fund is a corporation or the Fund's Board of
Trustees if the Fund is a trust, or, where duly authorized, a competent
committee thereof.
(e) "Oral Instructions". The term "Oral Instructions" shall mean
oral instructions received by PNC Bank from an Authorized Person or from a
person reasonably believed by PNC Bank to be an Authorized Person.
(f) "PNC Bank". The term "PNC Bank" shall mean PNC Bank, National
Association or a subsidiary or affiliate of PNC Bank, National Association.
(g) "SEC". The term "SEC" shall mean the Securities and Exchange
Commission.
(h) "Securities and Commodities Laws". The term shall mean the
"1933 Act", the Securities Act of 1933, as amended, the "1934 Act", the
Securities Exchange Act of 1934, as amended, the "1940 Act", and the "CEA", the
Commodities Exchange Act, as amended.
(i) "Shares". The term "Shares" shall mean the shares of stock of
any series or class of the Fund, or, where appropriate, units of beneficial
interest in a trust where the Fund is organized as a Trust.
<PAGE>3
(j) "Property". The term "Property" shall mean:
(i) any and all securities and other investment
items which the Fund may from time to time
deposit, or cause to be deposited, with PNC
Bank or which PNC Bank may from time to time
hold for the Fund;
(ii) All income in respect of any of such
securities or other investment items;
(iii) all proceeds of the sale of any of such
securities or investment items; and
(iv) all proceeds of the sale of securities
issued by the Fund, which are received by
PNC Bank from time to time, from or on
behalf of the Fund.
(k) "Written Instructions". The term "Written Instructions" shall mean
written instructions signed by two Authorized Persons and received by PNC Bank.
The instructions may be delivered by hand, mail, tested telegram, cable, telex
or facsimile sending device.
2. Appointment. The Fund hereby appoints PNC Bank to provide custodian
services, and PNC Bank accepts such appointment and agrees to furnish such
services. 3. Delivery of Documents. The Fund has provided or, where applicable,
will provide PNC Bank with the following: (a) certified or authenticated copies
of the resolutions of the Fund's Governing Board, approving the appointment of
PNC Bank or its affiliates to provide services;
(b) a copy of the Fund's most recent effective
registration statement;
(c) a copy of the Fund's advisory agreement or
agreements;
(d) a copy of the Fund's distribution agreement or
<PAGE>4
agreements;
(e) a copy of the Fund's administration agreements if
PFPC is not providing the Fund with such services;
(f) copies of any shareholder servicing agreements
made in respect of the Fund; and
(g) certified or authenticated copies of any and all
amendments or supplements to the foregoing.
4. Compliance with Government Rules and Regulations.
------------------------------------------------
PNC Bank undertakes to comply with all applicable requirements of the
Securities and Commodities Laws, and any laws, rules and regulations of
governmental authorities having jurisdiction with respect to all duties to be
performed by PNC Bank hereunder. Except as specifically set forth herein, PNC
Bank assumes no responsibility for such compliance by the Fund.
5. Instructions. Unless otherwise provided in this Agreement, PNC Bank
shall act only upon Oral and Written Instructions. PNC Bank shall be entitled to
rely upon any Oral and Written Instructions it receives from an Authorized
Person (or from a person reasonably believed by PNC Bank to be an Authorized
Person) pursuant to this Agreement. PNC Bank may assume that any Oral or Written
Instructions received hereunder are not in any way inconsistent with the
provisions of organizational documents of the Fund or of any vote, resolution or
proceeding of the Fund's Governing Board or of the Fund's shareholders.
The Fund agrees to forward to PNC Bank Written Instructions confirming Oral
Instructions so that PNC Bank receives the Written Instructions by the close of
business on the same day that such
<PAGE>5
Oral Instructions are received. The fact that such confirming Written
Instructions are not received by PNC Bank shall in no way invalidate the
transactions or enforceability of the transactions authorized by the Oral
Instructions.
The Fund further agrees that PNC Bank shall incur no liability to
the Fund in acting upon Oral or Written Instructions provided such instructions
reasonably appear to have been received from an Authorized Person.
6. Right to Receive Advice.
-----------------------
(a) Advice of the Fund. If PNC Bank is in doubt as to any action it
should or should not take, PNC Bank may request directions or advice, including
Oral or Written Instructions, from the Fund.
(b) Advice of Counsel. If PNC Bank shall be in doubt as to any
questions of law pertaining to any action it should or should not take, PNC Bank
may request advice at its own cost from such counsel of its own choosing (who
may be counsel for the Fund, the Fund's advisor or PNC Bank, at the option of
PNC Bank).
(c) Conflicting Advice. In the event of a conflict between directions,
advice or Oral or Written Instructions PNC Bank receives from the Fund, and the
advice it receives from counsel, PNC Bank shall be entitled to rely upon and
follow the advice of counsel.
(d) Protection of PNC Bank. PNC Bank shall be protected in any action
it takes or does not take in reliance upon
<PAGE>6
directions, advice or Oral or Written Instructions it receives from the Fund or
from counsel and which PNC Bank believes, in good faith, to be consistent with
those directions, advice or Oral or Written Instructions.
Nothing in this paragraph shall be construed so as to impose an
obligation upon PNC Bank (i) to seek such directions, advice or Oral or Written
Instructions, or (ii) to act in accordance with such directions, advice or Oral
or Written Instructions unless, under the terms of other provisions of this
Agreement, the same is a condition of PNC Bank's properly taking or not taking
such action.
7. Records. The books and records pertaining to the Fund, which are in
the possession of PNC Bank, shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the 1940 Act and other
applicable securities laws, rules and regulations. The Fund, or the Fund's
authorized representatives, shall have access to such books and records at all
times during PNC Bank's normal business hours. Upon the reasonable request of
the Fund, copies of any such books and records shall be provided by PNC Bank to
the Fund or to an authorized representative of the Fund, at the Fund's expense.
8. Confidentiality. PNC Bank agrees to keep confidential all records
of the Fund and information relative to the Fund and its Shareholders (past,
present and potential), unless the release of such records or information is
otherwise consented to, in
<PAGE>7
writing, by the Fund. The Fund further agrees that, should PNC Bank be required
to provide such information or records to duly constituted authorities (who may
institute civil or criminal contempt proceedings for failure to comply), PNC
Bank shall not be required to seek the Fund's consent prior to disclosing such
information; provided that PNC Bank gives the Fund prior written notice of the
provision of such information and records.
9. Cooperation with Accountants. PNC Bank shall cooperate with the
Fund's independent public accountants and shall take all reasonable action in
the performance of its obligations under this Agreement to ensure that the
necessary information is made available to such accountants for the expression
of their opinion, as required by the Fund.
10. Disaster Recovery. PNC Bank shall enter into and shall maintain in
effect with appropriate parties one or more agreements making reasonable
provision for emergency use of electronic data processing equipment to the
extent appropriate equipment is available. In the event of equipment failures,
PNC Bank shall, at no additional expense to the Fund, take reasonable steps to
minimize service interruptions but shall have no liability with respect thereto.
11. Compensation. As compensation for custody services rendered by PNC
Bank during the term of this Agreement, the Fund will pay to PNC Bank a fee or
fees as may be agreed to in writing from time to time by the Fund and PNC Bank.
<PAGE>8
12. Indemnification. The Fund agrees to indemnify and hold harmless
PNC Bank and its nominees from all taxes, charges, expenses, assessment, claims
and liabilities (including, without limitation, liabilities arising under the
Securities and Commodities Laws, and any state and foreign securities and blue
sky laws, and amendments thereto, and expenses, including (without limitation)
attorneys' fees and disbursements, arising directly or indirectly from any
action which PNC Bank takes or does not take (i) at the request or on the
direction of or in reliance on the advice of the Fund or (ii) upon Oral or
Written Instructions. Neither PNC Bank, nor any of its nominees, shall be
indemnified against any liability to the Fund or to its shareholders (or any
expenses incident to such liability) arising out of PNC Bank's or its nominees'
own willful misfeasance, bad faith, gross negligence or reckless disregard of
its duties and obligations under this Agreement or PNC Bank's own grossly
negligent failure to perform its duties under this Agreement.
13. Responsibility of PNC Bank. PNC Bank shall be under no duty to
take any action on behalf of the Fund except as specifically set forth herein or
as may be specifically agreed to by PNC Bank, in writing. PNC Bank shall be
obligated to exercise care and diligence in the performance of its duties
hereunder, to act in good faith and to use its best efforts, within reasonable
limits, in performing Services provided for under this Agreement. PNC Bank shall
be responsible for its own or its nominees' own
<PAGE>9
willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties and obligations under this Agreement or PNC Bank's own grossly negligent
failure to perform its duties under this Agreement.
Without limiting the generality of the foregoing or of any other
provision of this Agreement, PNC Bank, in connection with its duties under this
Agreement, shall not be under any duty or obligation to inquire into and shall
not be liable for (a) the validity or invalidity or authority or lack thereof of
any Oral or Written Instruction, notice or other instrument which conforms to
the applicable requirements of this Agreement, and which PNC Bank reasonably
believes to be genuine; or (b) delays or errors or loss of data occurring by
reason of circumstances beyond PNC Bank's control, including acts of civil or
military authority, national emergencies, fire, flood or catastrophe, acts of
God, insurrection, war, riots or failure of the mails, transportation,
communication or power supply.
Notwithstanding anything in this Agreement to the contrary, PNC Bank
shall have no liability to the Fund for any consequential, special or indirect
losses or damages which the Fund may incur or suffer by or as a consequence of
PNC Bank's performance of the services provided hereunder, whether or not the
likelihood of such losses or damages was known by PNC Bank.
14. Description of Services.
(a) Delivery of the Property. Notwithstanding anything
<PAGE>10
in this Agreement to the contrary, PNC Bank shall be the custodian of all
securities, cash and other property of the Fund received by it for the account
of the Fund, including cash received as a result of the distribution of its
Shares, during the period that is set forth in this Agreement. PNC Bank will not
be responsible for such property until actual receipt.
(b) Receipt and Disbursement of Money. PNC Bank, acting upon Written
Instructions, shall open and maintain separate account(s) in the Fund's name
using all cash received from or for the account of the Fund, subject to the
terms of this Agreement. In addition, upon Written Instructions, PNC Bank shall
open separate custodial accounts for each separate series, portfolio or class of
the Fund and shall hold in such account(s) all cash received from or for the
accounts of the Fund specifically designated to each separate series, portfolio
or class.
PNC Bank shall make cash payments from or for the account of the Fund
only for:
(i) purchases of securities in the name of the
Fund or PNC Bank or PNC Bank's nominee as
provided in sub-paragraph j and for which
PNC Bank has received a copy of the broker's
or dealer's confirmation or payee's invoice,
as appropriate;
(ii) purchase or redemption of Shares of the Fund
delivered to PNC Bank;
(iii) payment of, subject to Written Instructions,
interest, taxes, administration, accounting,
distribution, advisory, management fees or
similar expenses which are to be borne by
the Fund;
<PAGE>11
(iv) payment to, subject to receipt of Written
Instructions, the Fund's transfer agent, as
agent for the shareholders, an amount equal
to the amount of dividends and distributions
stated in the Written Instructions to be
distributed in cash by the transfer agent to
shareholders, or, in lieu of paying the
Fund's transfer agent, PNC Bank may arrange
for the direct payment of cash dividends and
distributions to shareholders in accordance
with procedures mutually agreed upon from
time to time by and among the Fund, PNC Bank
and the Fund's transfer agent.
(v) payments, upon receipt Written Instructions,
in connection with the conversion, exchange
or surrender of securities owned or
subscribed to by the Fund and held by or
delivered to PNC Bank;
(vi) payments of the amounts of dividends
received with respect to securities sold
short;
(vii) payments made to a sub-custodian pursuant to
provisions in sub-paragraph c of this
Paragraph 14; and
(viii) payments, upon Written Instructions made for
other proper Fund purposes.
PNC Bank is hereby authorized to endorse and collect all checks,
drafts or other orders for the payment of money received as custodian for the
account of the Fund.
(c) Receipt of Securities.
(i) PNC Bank shall hold all securities received
by it for the account of the Fund in a
separate account that physically segregates
such securities from those of any other
persons, firms or corporations. All such
securities shall be held or disposed of only
upon Written Instructions of the Fund
<PAGE>12
pursuant to the terms of this Agreement. PNC
Bank shall have no power or authority to
assign, hypothecate, pledge or otherwise
dispose of any such securities or
investment, except upon the express terms of
this Agreement and upon Written
Instructions, accompanied by a certified
resolution of the Fund's Governing Board,
authorizing the transaction. In no case may
any member of the Fund's Governing Board, or
any officer, employee or agent of the Fund
withdraw any securities.
At PNC Bank's own expense and for its own
convenience, PNC Bank may enter into
sub-custodian agreements with other United
States banks or trust companies to perform
duties described in this sub-paragraph c.
Such bank or trust company shall have an
aggregate capital, surplus and undivided
profits, according to its last published
report, of at least one million dollars
($1,000,000), if it is a subsidiary or
affiliate of PNC Bank, or at least twenty
million dollars ($20,000,000) if such bank
or trust company is not a subsidiary or
affiliate of PNC Bank. In addition, such
bank or trust company must be qualified to
act as custodian and agree to comply with
the relevant provisions of the 1940 Act and
other applicable rules and regulations. Any
such arrangement will not be entered into
without prior written notice to the Fund.
PNC Bank shall remain responsible for the
performance of all of its duties as
described in this Agreement and shall hold
the Fund and the Money Market Series
harmless from its own acts or omissions,
under the standards of care provided for
herein, or the acts and omissions of any
sub-custodian chosen by PNC Bank under the
terms of this sub-paragraph c.
(d) Transactions Requiring Instructions. Upon receipt of Oral or
Written Instructions and not otherwise, PNC Bank, directly or through the use of
the Book-Entry System, shall:
<PAGE>13
(i) deliver any securities held for the Fund
against the receipt of payment for the
sale of such securities;
(ii) execute and deliver to such persons as may
be designated in such Oral or Written
Instructions, proxies, consents,
authorizations, and any other instruments
whereby the authority of the Fund as owner
of any securities may be exercised;
(iii) deliver any securities to the issuer
thereof, or its agent, when such securities
are called, redeemed, retired or otherwise
become payable; provided that, in any such
case, the cash or other consideration is to
be delivered to PNC Bank;
(iv) deliver any securities held for the Fund
against receipt of other securities or cash
issued or paid in connection with the
liquidation, reorganization, refinancing,
tender offer, merger, consolidation or
recapitalization of any corporation, or the
exercise of any conversion privilege;
(v) deliver any securities held for the Fund to
any protective committee, reorganization
committee or other person in connection with
the reorganization, refinancing, merger,
consolidation, recapitalization or sale of
assets of any corporation, and receive and
hold under the terms of this Agreement such
certificates of deposit, interim receipts or
other instruments or documents as may be
issued to it to evidence such delivery;
(vi) make such transfer or exchanges of the
assets of the Fund and take such other steps
as shall be stated in said Oral or Written
Instructions to be for the purpose of
effectuating a duly authorized plan of
liquidation, reorganization, merger,
consolidation or recapitalization of the
Fund;
(vii) release securities belonging to the Fund
<PAGE>14
to any bank or trust company for the purpose
of a pledge or hypothecation to secure any
loan incurred by the Fund; provided,
however, that securities shall be released
only upon payment to PNC Bank of the monies
borrowed, except that in cases where
additional collateral is required to secure
a borrowing already made subject to proper
prior authorization, further securities may
be released for that purpose; and repay such
loan upon redelivery to it of the securities
pledged or hypothecated therefor and upon
surrender of the note or notes evidencing
the loan;
(viii) release and deliver securities owned by the
Fund in connection with any repurchase
agreement entered into on behalf of the
Fund, but only on receipt of payment
therefor; and pay out moneys of the Fund in
connection with such repurchase agreements,
but only upon the delivery of the
securities;
(ix) release and deliver or exchange securities
owned by the Fund in connection with any
conversion of such securities, pursuant to
their terms, into other securities;
(x) release and deliver securities owned by the
fund for the purpose of redeeming in kind
shares of the Fund upon delivery thereof to
PNC Bank; and
(xi) release and deliver or exchange securities
owned by the Fund for other corporate
purposes.
PNC Bank must also receive a certified
resolution describing the nature of the
corporate purpose and the name and address
of the person(s) to whom delivery shall be
made when such action is pursuant to
sub-paragraph d.
(e) Use of Book-Entry System. The Fund shall deliver to PNC Bank
certified resolutions of the Fund's Governing Board
<PAGE>15
approving, authorizing and instructing PNC Bank on a continuous and on-going
basis, to deposit in the Book-Entry System all securities belonging to the Fund
eligible for deposit therein and to utilize the Book-Entry System to the extent
possible in connection with settlements of purchases and sales of securities by
the Fund, and deliveries and returns of securities loaned, subject to repurchase
agreements or used as collateral in connection with borrowings. PNC Bank shall
continue to perform such duties until it receives Written or Oral Instructions
authorizing contrary actions(s).
To administer the Book-Entry System properly, the following provisions
shall apply:
(i) With respect to securities of the Fund which
are maintained in the Book-Entry system,
established pursuant to this sub-paragraph e
hereof, the records of PNC Bank shall
identify by Book-Entry or otherwise those
securities belonging to the Fund. PNC Bank
shall furnish the Fund a detailed statement
of the Property held for the Fund under this
Agreement at least monthly and from time to
time and upon written request.
(ii) Securities and any cash of the Fund
deposited in the Book-Entry System will at
all times be segregated from any assets and
cash controlled by PNC Bank in other than a
fiduciary or custodian capacity but may be
commingled with other assets held in such
capacities. PNC Bank and its sub-custodian,
if any, will pay out money only upon receipt
of securities and will deliver securities
only upon the receipt of money.
(iii) All books and records maintained by PNC Bank
which relate to the Fund's participation in
the Book-Entry System will at all times
during PNC Bank's
<PAGE>16
regular business hours be open to the
inspection of the Fund's duly authorized
employees or agents, and the Fund will be
furnished with all information in respect of
the services rendered to it as it may
require.
(iv) PNC Bank will provide the Fund with copies
of any report obtained by PNC Bank on the
system of internal accounting control of the
Book-Entry System promptly after receipt of
such a report by PNC Bank.
PNC Bank will also provide the Fund with such reports on its own
system of internal control as the Fund may reasonably request from time to time.
(f) Registration of Securities. All Securities held for the Fund which
are issued or issuable only in bearer form, except such securities held in the
Book-Entry System, shall be held by PNC Bank in bearer form; all other
securities held for the Fund may be registered in the name of the Fund; PNC
Bank; the Book-Entry System; a sub-custodian; or any duly appointed nominee(s)
of the Fund, PNC Bank, Book-Entry system or sub-custodian. The Fund reserves the
right to instruct PNC Bank as to the method of registration and safekeeping of
the securities of the Fund. The Fund agrees to furnish to PNC Bank appropriate
instruments to enable PNC Bank to hold or deliver in proper form for transfer,
or to register its registered nominee or in the name of the Book-Entry System,
any securities which it may hold for the account of the Fund and which may from
time to time be registered in the name of the Fund. PNC Bank shall hold all such
securities which are not
<PAGE>17
held in the Book-Entry System in a separate account for the Fund in the name of
the Fund physically segregated at all times from those of any other person or
persons.
(g) Voting and Other Action. Neither PNC Bank nor its nominee shall
vote any of the securities held pursuant to this Agreement by or for the account
of the Fund, except in accordance with Written Instructions. PNC Bank, directly
or through the use of the Book-Entry System, shall execute in blank and promptly
deliver all notice, proxies, and proxy soliciting materials to the registered
holder of such securities. If the registered holder is not the Fund then Written
or Oral Instructions must designate the person(s) who owns such securities.
(h) Transactions Not Requiring Instructions. In the absence of
contrary Written Instructions, PNC Bank is authorized to take the following
actions:
(i) Collection of Income and Other Payments.
(A) collect and receive
for the account of
the Fund, all
income, dividends,
distributions,
coupons, option
premiums, other
payments and similar
items, included or
to be included in
the Property, and,
in addition,
promptly advise the
Fund of such receipt
and credit such
income, as
collected, to the
Fund's custodian
<PAGE>18
account;
(B) endorse and deposit for collection,
in the name of the Fund, checks,
drafts, or other orders for the
payment of money;
(C) receive and hold for the account of
the Fund all securities received as
a distribution on the Fund's
portfolio securities as a result of
a stock dividend, share split-up or
reorganization, recapitalization,
readjustment or other rearrangement
or distribution of rights or
similar securities issued with
respect to any portfolio securities
belonging to the Fund held by
PNC Bank hereunder;
(D) present for payment and collect the
amount payable upon all securities
which may mature or be called,
redeemed, or retired, or otherwise
become payable on the date such
securities become payable; and
(E) take any action which may be
necessary and proper in connection
with the collection and receipt of
such income and other payments and
the endorsement for collection of
checks, drafts, and other negotiable
instruments.
(ii) Miscellaneous Transactions.
---------------------------
(A) PNC Bank is authorized to deliver or
cause to be delivered Property against
payment or other consideration or
written receipt therefor in the
following cases:
(1) for examination by a broker or dealer
selling for the account of the Fund in
accordance with street delivery custom;
(2) for the exchange of interim receipts
<PAGE>19
or temporary securities for definitive
securities; and
(3) for transfer of securities into the name
of the Fund or PNC Bank or nominee of
either, or for exchange of securities
for a different number of bonds,
certificates, or other evidence,
representing the same aggregate face
amount or number of units bearing the
same interest rate, maturity date and
call provisions, if any; provided that,
in any such case, the new securities are
to be delivered to PNC Bank.
(B) Unless and until PNC Bank receives Oral or Written
Instructions to the contrary, PNC Bank shall:
(1) pay all income items held by it which call
for payment upon presentation and hold the
cash received by it upon such payment for
the account of the Fund;
(2) collect interest and cash dividends
received, with notice to the Fund, to the
account of the Fund;
(3) hold for the account of the Fund all stock
dividends, rights and similar securities
issued with respect to any securities held
by us; and
(4) execute as agent on behalf of the Fund all
necessary ownership certificates required
by the Internal Revenue Code or the Income
Tax Regulations of the United States
Treasury Department or under the laws of
any State now or hereafter in effect,
<PAGE>20
inserting the Fund's name on such
certificate as the owner of the securities
covered thereby, to the extent it may
lawfully do so.
(i) Segregated Accounts.
-------------------
(i) PNC Bank shall upon receipt of Written or
Oral Instructions establish and maintain a
segregated accounts(s) on its records for
and on behalf of the Fund. Such account(s)
may be used to transfer cash and securities,
including securities in the Book-Entry
System:
(A) for the purposes of compliance by
the Fund with the procedures
required by a securities or option
exchange, providing such procedures
comply with the 1940 Act and any
releases of the SEC relating to the
maintenance of segregated accounts
by registered investment companies;
and
(B) Upon receipt of Written
Instructions, for other proper
corporate purposes.
(ii) PNC Bank shall arrange for the establishment of IRA
custodian accounts for such shareholders holding
shares through IRA accounts, in accordance with the
Prospectus, the Internal Revenue Code (including
regulations), and with such other procedures as are
mutually agreed upon from time to time by and among
the Fund, PNC Bank and the Fund's transfer agent.
(j) Purchases of Securities. PNC Bank shall settle purchased
securities upon receipt of Oral or Written Instructions from the fund or its
investment advisor(s) that specify:
(i) the name of the issuer and the title of
the securities, including CUSIP number
if applicable;
(ii) the number of shares or the principal
<PAGE>21
amount purchased and accrued interest,
if any;
(iii) the date of purchase and settlement;
(iv) the purchase price per unit;
(v) the total amount payable upon such
purchase; and
(vi) the name of the person from whom or the
broker through whom the purchase was made.
PNC Bank shall upon receipt of securities
purchased by or for the Fund pay out of the
moneys held for the account of the Fund the
total amount payable to the person from whom
or the broker through whom the purchase was
made, provided that the same conforms to the
total amount payable as set forth in such
Oral or Written Instructions.
(k) Sales of Securities. PNC Bank shall sell securities upon receipt
of Oral Instructions from the Fund that specify:
(i) the name of the issuer and the title of
the security, including CUSIP number if
applicable;
(ii) the number of shares or principal amount
sold, and accrued interest, if any;
(iii) the date of trade, settlement and sale;
(iv) the sale price per unit;
(v) the total amount payable to the Fund
upon such sale;
(vi) the name of the broker through whom or
the person to whom the sale was made;
and
(vii) the location to which the security must
be delivered and delivery deadline, if
any.
PNC Bank shall deliver the securities upon receipt of the
<PAGE>22
total amount payable to the Fund upon such sale, provided that the total amount
payable is the same as was set forth in the Oral or Written Instructions.
Subject to the foregoing, PNC Bank may accept payment in such form as shall be
satisfactory to it, and may deliver securities and arrange for payment in
accordance with the customs prevailing among dealers in securities.
(l) Reports.
(i) PNC Bank shall furnish the Fund the
following reports:
(A) such periodic and special reports as the
Fund may reasonably request;
(B) a monthly statement summarizing all
transactions and entries for the account
of the Fund, listing the portfolio
securities belonging to the fund with
the adjusted average cost of each issue
and the market value at the end of such
month, and stating the cash account of
the Fund including disbursement;
(C) the reports to be furnished to the Fund
pursuant to Rule 17f-4; and
(D) such other information as may be agreed
upon from time to time between the Fund
and PNC Bank.
(ii) PNC Bank shall transmit promptly to the Fund any
proxy statement, proxy material, notice of a call or
conversion or similar communication received by it as
custodian of the Property. PNC Bank shall be under no
other obligation to inform the Fund as to such
actions or events.
(m) Collections. All collections of monies or other property in
respect, or which are to become part, of the Property
<PAGE>23
(but not the safekeeping thereof upon receipt by PNC Bank) shall be at the sole
risk of the Fund. If payment is not received by PNC Bank within a reasonable
time after proper demands have been made, PNC Bank shall notify the Fund in
writing, including copies of all demand letters, any written responses,
memoranda of all oral responses and to telephonic demands thereto, and await
instructions from the Fund. PNC Bank shall not be obliged to take legal action
for collection unless and until reasonably indemnified to its satisfaction. PNC
Bank shall also notify the Fund as soon as reasonably practicable whenever
income due on securities is not collected in due course.
15. Duration and Termination. This Agreement shall continue until
terminated by the Fund or by PNC Bank on sixty (60) days' prior written notice
to the other party. In the event this Agreement is terminated (pending
appointment of a successor to PNC Bank or vote of the shareholders of the Fund
to dissolve or to function without a custodian of its cash, securities or other
property), PNC Bank shall not deliver cash, securities or other property of the
Fund to the Fund. It may deliver them to a bank or trust company of PNC Bank's,
having an aggregate capital, surplus and undivided profits, as shown by its last
published report, of not less than twenty million dollars ($20,000,000), as a
custodian for the Fund to be held under terms similar to those of this
Agreement. PNC Bank shall not be required to make any such delivery or payment
until full payment shall have been made to PNC
<PAGE>24
Bank of all of its fees, compensation, costs and expenses. PNC Bank shall have a
security interest in and shall have a right of setoff against Property in the
Fund's possession as security for the payment of such fees, compensation, costs
and expenses.
16. Notices. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. Notice shall be addressed (a) if to PNC Bank at PNC
Bank's address, Airport Business Center, International Court 2, 200 Stevens
Drive, Philadelphia, Pennsylvania 19113, marked for the attention of the
Custodian Services Department (or its successor) (b) if to the Fund, at the
address of the Fund; or (c) if to neither of the foregoing, at such other
address as shall have been notified to the sender of any such Notice or other
communication. If notice is sent by confirming telegram, cable, telex or
facsimile sending device, it shall be deemed to have been given immediately. If
notice is sent by first-class mail, it shall be deemed to have been given five
days after it has been mailed. If notice is sent by messenger, it shall be
deemed to have been given on the day it is delivered.
17. Amendments. This Agreement, or any term hereof, may be changed or
waived only by a written amendment, signed by the party against whom enforcement
of such change or waiver is sought.
18. Delegation. PNC Bank may assign its rights and delegate its duties
hereunder to any wholly-owned direct or indirect
<PAGE>25
subsidiary of PNC Bank, National Association or PNC Bank Corp., provided that
(i) PNC Bank gives the Fund thirty (30) days prior written notice; (ii) the
delegate agrees with PNC Bank to comply with all relevant provisions of the 1940
Act; and (iii) PNC Bank and such delegate promptly provide such information as
the Fund may request, and respond to such questions as the Fund may ask,
relative to the delegation, including (without limitation) the capabilities of
the delegate.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
20. Further Actions. Each party agrees to perform such further acts
and execute such further documents as are necessary to effectuate the purposes
hereof.
21. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the parties
may embody in one more separate documents their agreement, if any, with respect
to delegated and/or Oral Instructions.
The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
This Agreement shall be deemed to be a contract made in Pennsylvania
and governed by Pennsylvania law. If any provision of
<PAGE>26
this Agreement shall be held or made invalid by a court decision, statute, rule
or otherwise, the remainder of this Agreement shall not be affected thereby.
This Agreement shall be binding and shall inure to the benefit of the parties
hereto and their respective successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers designated below on the day and year first above
written.
PNC BANK, NATIONAL ASSOCIATION
By:/s/ Sam Sparhawk IV
Title: Vice President
WARBURG, PINCUS SMALL COMPANY GROWTH FUND, INC.
By: /s/ Eugene P. Grace
Title: Vice President and Secretary
<PAGE>27
AUTHORIZED PERSONS APPENDIX
NAME (Type) SIGNATURE
______________________ _____________________________
______________________ _____________________________
______________________ _____________________________
______________________ _____________________________
______________________ _____________________________
______________________ _____________________________
______________________ _____________________________
<PAGE>
AGREEMENT dated between FIDUCIARY TRUST COMPANY
INTERNATIONAL ("Bank") and WARBURG, PINCUS SMALL COMPANY GROWTH
FUND, INC. ("Fund")
1. Custody Account. The Bank agrees to establish and maintain (a) a custody
account in the name of the Fund ("Custody Account") for any and all stocks,
shares, bonds, debentures, notes, mortgages or other obligations for the payment
of money and any certificates, receipts, warrants or other instruments
representing rights to receive, purchase or subscribe for the same or evidencing
or representing any other rights or interests therein and other similar property
(hereinafter called "Securities") from time to time received by the Bank or its
subcustodians (as defined in the last sentence of Section 3) for the account of
the Fund, and (b) a deposit account in the name of the Fund ("Deposit Account")
for any and all cash in any currency received by the Bank or its subcustodians
for the account of the Fund, which cash shall not be subject to withdrawal by
draft or check.
2. Maintenance of Securities. Securities in the Custody Account shall be
held in the country or other jurisdiction as shall be specified from time to
time in Instructions (as defined
<PAGE>
in Section 9 hereof), provided that such country or other jurisdiction shall be
one in which the principal trading market for such Securities is located or the
country or other jurisdiction in which such Securities are to be presented for
payment or are acquired for the Custody Account and cash in the Deposit Account
shall be credited to an account in such amounts and in the country or other
jurisdiction as shall be specified from time to time in Instructions, provided
that such country or other jurisdiction shall be one in which such cash is the
legal currency for the payment of public or private debts.
3. Eligible Subcustodians. The Board of the Fund authorizes the Bank to
hold the Securities in the Custody Account and the cash in the Deposit Account
in custody and deposit accounts, respectively, which have been established by
the Bank with (a) a securities system, (b) one of the Bank's branches, a branch
of a qualified U.S. bank, an eligible foreign custodian or an eligible foreign
securities depository and (c) a subcustodian of an eligible foreign custodian
that itself is an eligible foreign custodian or an eligible foreign securities
depository with which that subcustodian has entered into an agreement for the
custody of Fund assets; provided, however, that the Board of the Fund has
approved the use of the securities system and the Bank's or its subcustodian's
contract with such eligible foreign custodian or eligible
2
<PAGE>
foreign securities depository by resolution, and Instructions to such effect
have been provided to the Bank. For purposes of this Agreement, "qualified U.S.
bank", "eligible foreign custodian" and "eligible foreign securities depository"
shall have the meanings provided in Rule 17f-5 (or any successor thereto) under
the Investment Company Act of 1940 as interpreted by the staff of the Securities
and Exchange Commission and a "securities system" shall mean a clearing agency
registered with the Securities and Exchange Commission under Section 17A of the
Securities Exchange Act of 1934, which acts as a securities depository, or a
book-entry system authorized by the U.S. Department of the Treasury and certain
federal agencies.
Hereinafter the term "subcustodian" will refer to (a) any securities system, (b)
any branch of a qualified U.S. bank, any eligible foreign custodian or any
eligible foreign securities depository with which the Bank has entered into an
agreement of the type contemplated hereunder regarding Securities and/or cash
held in or to be acquired for the Custody Account or the Deposit Account, and
(c) any subcustodian of an eligible foreign custodian with which the eligible
foreign custodian has entered into an agreement for the holding of Fund assets
or an eligible foreign securities depository in which the subcustodian
participates.
3
<PAGE>
4. Use of Subcustodian. With respect to Securities and other assets which
are maintained by the Bank in the physical custody of a subcustodian pursuant to
Section 3 (as used in this Section 4, the term "Securities" means such
Securities and other assets):
(a) The Bank will identify on its books as belonging to the Fund any
Securities held by such subcustodian.
(b) In the event that a subcustodian permits any of the Securities placed
in its care to be held in an eligible foreign securities depository, such
subcustodian will be required by its agreement with the Bank to identify on its
books such Securities as being held for the account of the Bank as a custodian
for its customers.
(c) Any Securities in the Custody Account held by a subcustodian of the
Bank will be subject only to the instructions of the Bank or its agents, and any
Securities held in an eligible foreign securities depository for the account of
a subcustodian will be subject only to the instructions of such subcustodian.
4
<PAGE>
(d) Securities will be deposited by the Bank only in an account with a
subcustodian which includes exclusively the assets held by the Bank for its
customers, and the Bank will cause such account to be designated by such
subcustodian as a special custody account for the exclusive benefit of customers
of the Bank.
(e) Except as otherwise provided in subsection 4 (k), any agreement the
Bank shall enter into with a subcustodian with respect to the holding of
Securities shall require that (i) the subcustodian shall exercise reasonable
care in the performance of its duties and indemnify, and hold harmless, the Bank
and the Fund from and against any loss, damage, cost, expense, liability or
claim arising out of or in connection with the institution's negligent or
improper performance or nonperformance of such obligation; (ii) the Securities
are not subject to any right, charge, security interest, lien or claim of any
kind in favor of such subcustodian or its creditors or agents except a claim of
payment for their safe custody or administration; (iii) beneficial ownership of
such Securities is freely transferable without the payment of money or value
other than for safe custody or administration; provided, however, that the
foregoing shall not apply to the extent that any of the above-mentioned rights,
charges, etc. result from any compensation or other expenses arising with
respect to the safekeeping of Securities pursuant to such agreement or from any
arrangements made by the Fund with any such subcustodian;
5
<PAGE>
(iv) in the event that a subcustodian permits any of the Securities placed in
its care to be held in an eligible foreign securities depository, such
subcustodian will be required by its agreement with the Bank to identify on its
books such Securities as being held for the account of the Bank as a custodian
for its customers; (v) officers or auditors employed by or other representatives
of the Bank, including to the extent permitted under applicable law, the
independent public accountants for the Fund, will be given access to the books
and records of the foreign banking institution relating to its actions under its
agreement with the Bank; (vi) any Securities in the Custody Account held by a
subcustodian of the Bank will be subject only to the instructions of the Bank or
its agents, and any Securities held in an eligible foreign securities depository
for the account of a subcustodian will be subject only to the instructions of
such subcustodian; and (vii) such foreign banking institution shall notify the
Bank in the event that it ceases to qualify as either a branch of a "qualified
U.S. bank" or an "eligible foreign custodian", as such terms are defined in Rule
17f-5(c), as amended (or any successor thereto).
(f) The Bank shall allow independent public accountants of the Fund such
reasonable access to the records of the Bank relating to the Securities held in
the Custody Account as required by such accountants in connection with their
examination of the books and records pertaining to the affairs of the Fund. The
Bank shall, subject to restrictions under applicable
6
<PAGE>
law, also obtain from any subcustodian with which the Bank maintains the
physical possession of any Securities in the Custody Account or cash in the
Deposit Account an undertaking to permit officers and independent public
accountants of the Fund such reasonable access to the records of such
subcustodian as may be required in connection with their examination of the
books and records pertaining to the affairs of the Fund. The Bank shall furnish
to the Fund such reports (or portions thereof) of the Bank's external audits as
relate directly to the Bank's system of internal accounting controls applicable
to the Bank's duties under this Agreement. The Bank shall use its best efforts
to obtain and furnish the Fund with such similar reports as the Fund may
reasonably request with respect to each eligible foreign custodian and eligible
foreign securities depository holding Securities or cash of the Fund.
(g) The Bank will supply to the Fund at least monthly a statement in
respect to any cash in the Deposit Account or Securities in the Custody Account
held by a subcustodian, including an identification of the entity having
possession of the cash or Securities, and the Bank will send to the Fund an
advice or notification of any transfers of cash or Securities to or from the
Custody Account, indicating, as to Securities acquired for the Fund, the
identity of the entity having physical possession of such Securities. In the
absence of written notice to the Bank by the Fund of exceptions or objections to
any such statement within sixty (60) days of the
7
<PAGE>
Fund's receipt of such statement, or within sixty (60) days after the date that
a material defect is reasonably discoverable, the Fund shall be deemed to have
approved such statement, and the Bank shall, to the extent permitted by law, be
released, relieved and discharged with respect to all matters and things set
forth in such statement as though such statement had been settled by the decree
of a court of competent jurisdiction in an action in which the Fund and all
persons having any equity interest in the Fund were parties.
(h) The Bank shall furnish annually to the Fund information concerning each
subcustodian employed by the Bank. Such information shall be similar in kind and
scope to that furnished to the Fund in connection with the initial approval of
this Agreement. In addition, the Bank will provide the Fund with such
information as the Fund shall reasonably request in order to enable the Fund to
comply with Rule 17f-5 (or any successor thereto) under the 1940 Act. In
addition, the Bank will promptly inform the Fund in writing in the event that
the Bank learns of a material adverse change in the condition, financial or
otherwise, of a subcustodian or any loss of the assets of the Fund, or in the
case of any foreign subcustodian not the subject of an exemptive order from the
Securities and Exchange Commission modifying the shareholder equity requirement
under Rule 17f-5, learns that there appears to be a substantial likelihood that
a foreign subcustodian's shareholders' equity will decline below $200 million or
that its shareholders' equity has declined below $200
8
<PAGE>
million (in each case in terms of U.S. dollars or the local currency equivalent
thereof and computed in accordance with generally accepted U.S. accounting
principles). In addition, the Bank will promptly inform the Fund in writing in
the event that the Bank learns of a material adverse change in the customary or
established securities trading or securities processing practices and procedures
in the jurisdiction or market in which the Fund is invested.
(i) Except as the Bank may otherwise inform the Fund in writing from
time-to-time, the Bank hereby warrants to the Fund that in the Bank's opinion,
after due inquiry, the established procedures to be followed by each of its
branches, each branch of a qualified U.S. bank, each eligible foreign custodian
and each eligible foreign securities depository holding cash or Securities of
the Fund pursuant to this Agreement afford protection for such cash or
Securities at least equal to that afforded by the Bank's established procedures
with respect to similar securities held by the Bank (and its securities
depositories) in New York.
(j) The Bank hereby warrants to the Fund that, as of the date of this
Agreement, the Bank is maintaining a Bankers Blanket Bond in a commercially
reasonable amount in light of its duties and liabilities hereunder and to its
other customers, and the Bank hereby agrees to notify the Fund in the event its
Bankers Blanket Bond is cancelled or otherwise lapses.
9
<PAGE>
(k) The Bank shall exercise its best efforts to cause all of its existing
subcustodian agreements to conform to the requirements of subsection 4(e) as
soon as reasonably possible. The requirements of subsection 4(e) shall not apply
to any subcustodian that is an eligible foreign securities depository or a
securities system as defined under Section 3. Notwithstanding anything to the
contrary in subsection 4(e), the Fund may authorize the Bank in writing to
maintain Fund assets with subcustodians whose agreements do not conform fully to
subsection 4(e), upon receipt of (i) the applicable subcustodian agreement
(including all amendments thereto) and (ii) a written explanation by the Bank
covering how and why the agreements do not conform to subsection 4(e). 5.
Deposit Account Payments. Subject to the provisions of Section 7, the Bank shall
make, or cause its subcustodians to make, payments of cash credited to the
Deposit Account only: (a) in connection with the purchase of Securities for the
Fund and the delivery of such securities to, or the crediting of such Securities
to, or the crediting of such Securities to the account of, the Bank or its
subcustodian, each such payment to be made at prices as confirmed by
Instructions;
10
<PAGE>
(b) for the purchase or redemption of shares of the capital stock of the
Fund and the delivery to, or crediting to the account of, the Bank or is
subcustodian of such shares to be so purchased or redeemed;
(c) for the payment for the account of the Fund of dividends, interest,
taxes, management or supervisory fees, capital distributions or operating
expenses;
(d) for the payments to be made in connection with the conversion, exchange
or surrender of Securities held in the Custody Account;
(e) for other proper corporate purposes of the Fund; or
(f) upon the termination of the Custody Agreement as hereinafter set forth.
All payments of cash for a purpose permitted by subsection (a), (b), (c) or (d)
of this Section 5 will be made only upon receipt by the Bank of Instructions
which shall specify the purpose for which the payment is to be made. In the case
of any payment to be made for the purpose permitted by subsection (e) of the
Section 5, the Bank must first receive a certified copy of a
11
<PAGE>
resolution of the Board of the Fund adequately describing such payment,
declaring such purpose to be a proper corporate purpose, and naming the person
or persons to whom such payment is to be made. Any payment pursuant to
subsection (f) of this Section 5 will be made in accordance with Section 22.
In the event that any payment made under this Section 5 exceeds the funds
available in the Deposit Account, the Bank may, in its discretion, advance the
Fund an amount equal to such excess and such advance shall be deemed a loan from
the Bank to the Fund, payable on demand, bearing interest at the rate of
interest customarily charged by the Bank on similar loans.
If the Bank causes the Deposit Account to be credited on the payable date
for interest, dividends or redemptions, the Fund will promptly return to the
Bank any such amount or property so credited upon oral or written notification
that neither the Bank nor its subcustodian can collect such amount or property
in the ordinary course of business. The Bank or its subcustodian, as the case
may be, shall have no duty or obligation to institute legal proceedings, file a
claim or proof of claim in any insolvency proceeding or take any other action
with respect to the collection of such amount or property beyond its ordinary
collection
12
<PAGE>
procedures, which procedures shall be comparable to those of other custodians of
mutual fund assets.
6. Custody Account Transactions. Subject to the provisions of Section 7,
Securities in the Custody Account will be transferred, exchanged or delivered by
the Bank or its subcustodians only:
(a) upon sale of such Securities for the Fund and receipt by the Bank or
its subcustodian only of payment therefor, each such payment to be in the amount
confirmed by Instructions from Authorized Persons;
(b) when such Securities are called, redeemed or retired, or otherwise
become payable;
(c) in exchange for or upon conversion into other Securities alone or other
Securities and cash pursuant to any plan of merger, consolidation,
reorganization, recapitalization or readjustment;
(d) upon conversion of such Securities pursuant to their terms into other
Securities;
13
<PAGE>
(e) upon exercise of subscription, purchase or other similar rights
represented by such Securities;
(f) for the purpose of exchanging interim receipts or temporary Securities
for definitive Securities;
(g) for the purpose of redeeming in kind shares of the capital stock of the
Fund against delivery to the Bank or its subcustodian of such shares to be so
redeemed;
(h) for other proper corporate purposes of the Fund; or
(i) upon the termination of this Custody Agreement as hereinafter set
forth.
All transfers, exchanges or deliveries of Securities in the Custody Account for
a purpose permitted by either subsection (a), (b), (c), (d), (e), or (f) of this
Section 6 will be made, except as provided in Section 8, only upon receipt by
the Bank of Instructions which shall specify the purpose of the transfer,
exchange or delivery to be made. In the case of any transfer or delivery to be
made for the purpose permitted by subsection (g) of this Section 6, the Bank
14
<PAGE>
must first receive Instructions from Authorized Persons specifying the shares
held by the Bank or its subcustodian to be so transferred or delivered and
naming the person or persons to whom transfers or delivery of such shares shall
be made. In the case of any transfer, exchange or delivery to be made for the
purpose permitted by subsection (h) of this Section 6, the Bank must first
receive a certified copy of a resolution of the Board of the Fund adequately
describing such transfer. exchange or delivery, declaring such purpose to be a
proper corporate purpose, and naming the person or persons to whom delivery of
such securities shall be made. Any transfer or delivery pursuant to subsection
(i) of this Section 6 will be made in accordance with Section 22.
7. Custody Account Procedures. With respect to any transaction involving
Securities held in or to be acquired for the Custody Account, the Bank shall
cause the Deposit Account to be credited on the contractual settlement date with
the proceeds of any sale or exchange of Securities from the Custody Account and
to be debited on the contractual settlement date for the cost of Securities
purchased or acquired for the Custody Account. The Bank may reverse any such
credit or debit if the transaction with respect to which such credit or debit
was made fails to settle within a reasonable period, determined by the Bank in
its discretion, after the
15
<PAGE>
contractual settlement date, except, that if any Securities delivered pursuant
to this Section 7 are returned by the recipient thereof, the Bank may cause any
such credits and debits to be reversed at any time.
Notwithstanding the preceding paragraph, settlement and payment for
Securities received for, and delivery of Securities out of, the Custody Account
may be effected in accordance with the customary or established securities
trading or securities processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without limitation,
delivering Securities to the purchaser thereof or to a dealer therefor (or an
agent for such purchaser or dealer) against a receipt with the expectation of
receiving later payment for such Securities from such purchaser or dealer;
provided that such customary or established securities trading or securities
practices and procedures are generally accepted by "institutional investors" in
the jurisdiction or market where the transaction occurs. For purposes of this
Agreement, "Institutional Investors" means U.S. registered investment companies
or major, U.S. -based commercial banks, insurance companies, pension funds or
commercial banks, or substantially similar financial institutions which, as part
of their ordinary business operations, purchase or sell securities and make use
of non-U.S. custodial services. The Bank agrees to provide the Fund a list
showing those jurisdictions where the
16
<PAGE>
customary settlement practice is not delivery versus payment, which shall be
kept current by the Bank.
In any and every case where payment for purchase of Securities for the
Custody Account is made by the Bank in advance of receipt of the Securities
purchased in absence of proper Instructions from the Fund on behalf of such
Custody Account to so pay in advance, the Bank shall be absolutely liable to the
Fund for the non-receipt of such Securities purchased except to the extent that
the Bank acted otherwise in accordance with this section 7, in which case the
Bank will be subject to the standard of care set forth in Section 12 hereof. 8.
Actions of the Bank. Until the Bank receives Instructions from Authorized
Persons to the contrary, the Bank will, or will instruct its subcustodian, to:
(a) present for payment any Securities in the Custody Account which are
called, redeemed or retired or otherwise become payable and all coupons and
other income items which call for payment upon presentation to the extent that
the Bank or subcustodian is aware of such opportunities for payment, and hold
cash received upon presentation of such Securities in accordance with the
provision of Sections 2, 3 and 4 of this Agreement;
17
<PAGE>
(b) in respect of Securities in the Custody Account, execute in the name of
the Fund such ownership, tax reclamation and other certificates as may be
required to obtain payments in respect thereof;
(c) exchange interim receipts or temporary Securities in the Custody
Account for definitive Securities;
(d) in respect of trades reported on the Fund's behalf through Depository
Trust Company ("DTC"), accept instruction from DTC (whether in a DTC report or
otherwise) as though they were given by an Authorized Person;
(e) convert monies received with respect to Securities of foreign issuers
into United States dollars or any other currency necessary to effect any
transaction involving the Securities whenever it is practicable to do so through
customary banking channels, using any method or agency available, including, but
not limited to, the facilities of the Bank, its subsidiaries, affiliates or
subcustodians, which shall be entitled to receive compensation for such
services; and
18
<PAGE>
(f) appoint brokers and dealers for any transaction involving the
Securities in the Custody Account from among (i) affiliates of the Bank (in
accordance with Section 11(a) of the Securities Exchange Act of 1934 and Rule
11a-2-2(T) thereunder) or (ii) brokers and dealers included on Schedule _______
as in effect from time to time, which brokers and dealers shall be entitled to
receive compensation for their services. Any such compensation to an affiliate
of the Bank shall be at rates and on terms at least as favorable to the Fund as
are available from third party providers of such services.
9. Instructions. As used in the Agreement, the term "Instructions" means
instruction of (or on behalf of) the Fund received by the Bank, via telephone,
telex, TWX, facsimile transmission, bank wire or other teleprocess or electronic
instruction system acceptable to the Bank which the Bank believes in good faith
to have been given by two Authorized Persons or which are transmitted with
proper testing or authentication pursuant to terms and conditions which the Bank
may specify.
Any instructions delivered to the Bank by telephone shall promptly
thereafter be confirmed in writing signed by two Authorized Persons (which
confirmation may bear the
<
19
<PAGE>
facsimile signature of such Persons), but the Fund will hold the Bank harmless
for any failure on the part of the Fund or its agents to send such confirmation
in writing or the failure of such confirmation to conform to the telephone
instructions received. Unless otherwise expressly provided, all Instructions
shall continue in full force and effect until cancelled or superseded. If the
Bank requires test arrangements, authentication methods or other security
devices to be used with respect to Instructions, any Instructions thereafter
shall be given and processed in accordance with such terms and conditions for
the use of such arrangements, methods or devices as the Bank may put into effect
and modify from time to time. The Fund shall safeguard and shall cause its
agents, if applicable, to safeguard any testkeys, identification codes or other
security devices which the Bank shall make available to the Fund or its agents.
The Bank may electronically record any instructions given by telephone, and
other telephone discussions, with respect to the Custody Account.
10. Authorized Persons. As used in the Agreement, the term "Authorized
Person" means such officers or such agents of the Fund as have been designated
by a resolution of the Board of the Fund, a certified copy of which has been
provided to the Bank, to act on behalf of the Fund in the performance of any
acts which Authorized Persons may do under this
<
20
<PAGE>
Agreement. Such persons shall continue to be Authorized Persons until such time
as the Bank receives Instructions from Authorized Persons that any such officer
or agent is no longer an Authorized Person.
11. Nominees. Securities in the Custody Account which are ordinarily held
in registered form may be registered in the name of the Bank's nominee or, as to
any Securities in the possession of an entity other than the Bank, in the name
of such entity's nominee. The Fund agrees to hold any such nominee harmless from
any liability as a holder of record of such Securities, but not if such
liability is a result of such nominee's negligence, willful misconduct, bad
faith or reckless disregard of its duties. The Bank may without notice to the
Fund cause any such Securities to cease to be registered in the name of any such
nominee and to be registered in the name of the Bank's nominee or held by one of
its subcustodians and registered in the name of such subcustodian's nominee. If
Securities are called for partial redemption by the issuer of such Security, the
Bank may allot, or cause to be allotted, the called portion to the respective
beneficial holders of such class of security in any manner the Bank deems to be
fair and equitable.
21
<PAGE>
>
12. Standard of Care. The Bank shall be responsible for the performance of
only such duties as are set forth herein or contained in Instructions given to
the Bank by Authorized Persons (or those that in each case are reasonably
incidental to such duties) which are not contrary to the provisions of the
Agreement.
The Bank will use reasonable care and diligence in performing its duties
under this Agreement. The Bank shall be liable to the Fund for any loss which
shall occur as the result of a failure of a subcustodian or an eligible foreign
securities depository engaged by such subcustodian to exercise reasonable care
and diligence. In the event of any loss to the Fund by reason of the failure of
the Bank or its subcustodian or an eligible foreign securities depository
engaged by its subcustodian to utilize reasonable care and diligence, the Bank
shall be liable to the Fund to the extent of the Fund's damages to be determined
based on the market value of the property which is the subject of the loss at
the date of discovery of the loss and without reference to any special
circumstances or conditions.
The Bank shall indemnify the Fund and its officers, directors, trustees,
employees, investment manager or adviser or agents (each an "Indemnified Party")
for all losses, damages,
22
<PAGE>
costs and expenses resulting from the failure of the Bank, its subcustodians or
eligible foreign depositories or agents to exercise reasonable care and
diligence (which indemnification shall include reasonable attorneys' fees and
expenses). In the event of any loss of Fund property, the Bank shall be required
(i) to notify the Fund of the loss on the day of discovery by the Bank and (ii)
to promptly provide to the Fund a reasonably detailed written statement of the
relevant facts and circumstances. Upon discovery by the Bank of a loss to the
Fund of assets in custody with the Bank under this Agreement, the Bank will
immediately replace any Securities or reimburse any cash lost on the day of
discovery of such loss. The Bank shall be entitled to recover such amounts from
the Fund if, upon investigation, it reasonably establishes that the standard of
care applicable to the Bank, its subcustodians or eligible foreign custodian, as
set forth in the Agreement, has been met. The Bank shall be indemnified (to the
extent of assets in the Fund) by, and shall be without liability to, the Fund
for any action authorized by this Agreement taken or omitted by the Bank in good
faith without negligence (which indemnification shall include reasonable
attorneys' fees and expenses).
The Bank shall be entitled to rely, and may act, on the prior, written
advice of counsel experienced in the pertinent area of the law (who may be
counsel for the Fund) on all matters and shall be without liability for any
action reasonably taken or omitted in good faith pursuant
23
<PAGE>
to such advice. The Bank shall maintain insurance in a commercially reasonable
amount to cover its obligations with respect to the Securities in the Custody
Accounts and Cash in the Deposit Account. The Bank shall provide to the Fund, on
an annual basis, a report stating whether any events have occurred which would
render the arrangements hereunder to cease to be in compliance with the rules of
the Securities and Exchange Commission governing such arrangements and
describing any such event.
Upon the occurrence of any event which causes or may cause any losses to
the Fund, the Bank shall, and shall cause any applicable domestic or foreign
subcustodian to, use all commercially reasonable steps under the circumstances
to mitigate the effects of such event and to avoid continuing harm to the Fund.
All collections of funds or other property paid or distributed in respect
of Securities in the Custody Account shall be made at the risk of the Fund. The
Bank shall have no liability for any loss occasioned by delay in the actual
receipt of notice by the Bank or by its subcustodian of any payment, redemption
or other transaction regarding Securities in the Custody Account in respect of
which the Bank has agreed to take action as provided in Section 8 hereof, other
than losses arising from the negligence, willful misconduct, bad faith or
reckless
24
<PAGE>
>
disregard of the duty of the Bank, its subcustodians or agents. The Bank shall
not be liable for any action taken in good faith upon Instruction or upon any
certified copy of any resolution and may rely on the genuineness of any such
documents which it may in good faith believe to be validly executed. The Bank
shall not be liable for any loss resulting from, or caused by, the direction of
the Fund to maintain custody of any Securities or cash in a foreign country
("country risk") including, but not limited to, losses resulting from
nationalization, expropriation, currency restriction, act of war or terrorism,
insurrection, revolution, nuclear fusion, fission or radiation, or acts of God.
13. Compliance with Securities and Exchange Commission Rules and Orders.
The Bank agrees to comply with all laws, rules, regulations, interpretations, or
exemptive orders promulgated by or under the authority of the Securities and
Exchange Commission applicable to its activities hereunder, but shall not be
responsible for the Fund's compliance with its investment objectives, policies
or restrictions or laws, rules, regulations, interpretations or exemptive orders
governing the Fund's investment activities.
14. Corporate Action. The Bank or its subcustodian is to promptly forward
to
25
<PAGE>
Provident National Bank ("Provident") (or any successor thereto appointed by the
Fund) such communications relative to the Securities in the Custody Account as
call for voting or the exercise of rights or other specific action (including
material relative to legal proceedings intended to be transmitted to security
holders). The Bank or its subcustodian will cause its nominee to execute and
deliver to Provident (or its successor) proxies relating to Securities in the
Custody Account registered in the name of such nominee but without indicating
the manner in which such proxies are to be voted. Proxies relating to bearer
Securities will be delivered in accordance with written instructions from
Authorized Persons. All other corporate action notifications where no action is
required shall be made available to the Fund and Provident as the Bank and the
Fund may agree in writing from time to time.
15. Communications Relating to Portfolio Securities. The Bank shall
transmit promptly to the Fund written information (including, without
limitation, pendency of calls and maturities of securities and expirations of
rights in connection therewith) received by the Bank via its subcustodians from
issuers of the securities being held for the account of the Fund. With respect
to tender or exchange offers, the Bank shall transmit promptly to the Fund
written information so received by the Bank from issuers of the securities whose
tender or
26
<PAGE>
exchange is sought or from the party (or his or its agents) making the tender or
exchange offer. With respect to instructions received by the Bank, the Bank
shall use its best efforts in the light of local conditions to take the
requested action.
16. Tax Law. The Bank shall use its best efforts and due care to perform
such steps typical for persons acting as global custodian for Institutional
Investors as are required to collect any tax refund, to ascertain the
appropriate rate of tax withholding and to provide documents as may be required
to enable the Fund to receive appropriate tax treatment under applicable tax
laws and any applicable treaty provisions.
17. Segregated Account. The Bank shall upon receipt of Instructions from
the Fund establish and maintain, or cause the applicable subcustodian to
establish and maintain, a segregated account or accounts for and on behalf of
the Fund, into which account or accounts may be transferred cash and/or
securities (i) in accordance with the provisions of any agreement among the
Fund, the Bank (or such subcustodian) and a broker-dealer registered under the
Securities Exchange Act of 1934 and a member of the NASD (or any futures
commission merchant registered under the Commodity Exchange Act), relating to
compliance
27
<PAGE>
with the rules of The Options Clearing Corporation or of any registered national
securities exchange (or the Commodity Futures Trading Commission and/or any
contract market), or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the Fund, (ii)
for purposes of segregating cash and/or securities in connection with (a)
options purchased, sold or written by the Fund, (b) commodity futures contracts
or options thereon purchased, sold or written by the Fund or (c) other
transactions requiring segregation as described in the Fund's registration
statement as in effect from time to time, (iii) for the purposes of compliance
by the Fund with the procedures required by Investment Company Act Release No.
10666, or any subsequent release or releases of the Securities and Exchange
Commission relating to the maintenance of segregated accounts by registered
investment companies and (iv) for other proper corporate purposes, but only, in
the case of this clause (iv), upon receipt of, in addition to Instructions from
the Fund, a certified resolution setting forth the purpose of purposes of such
segregated account and declaring such purposes to be proper corporate purposes.
18. Collection of Income. The Bank (or its subcustodian) shall use its best
efforts in accordance with market practice generally accepted by Institutional
Investors to collect all
28
<PAGE>
income and other payments in due course with respect to the securities held
hereunder to which the Fund shall be entitled and shall credit such income, as
collected, to the Fund. In the event that extraordinary measures are required to
collect such income, the Fund and the Bank shall consult as to such measures and
as to the compensation and expenses of the Bank attendant thereto and the Bank
shall have no obligation to take such extraordinary measures unless it so agrees
in writing.
19. Disaster Recovery. In the event of equipment failures beyond the Bank's
control, the Bank shall, at no additional expense to the Fund, take reasonable
steps to minimize service interruptions. The Bank shall enter into and shall
maintain in effect with appropriate parties one or more agreements making
reasonable provision for (i) periodic back-up of the computer files and data
with respect to the Fund and (ii) emergency use of electronic data processing
equipment to provide services under this Agreement.
20. Fees and Expenses. The Fund agrees to pay to the Bank from time to time
such compensation for its services pursuant to the Agreement as may be mutually
agreed upon in
29
<PAGE>
writing from time to time. The Fund hereby agrees to hold the Bank harmless from
any liability or loss resulting from any registration fees, taxes or other
governmental charges, and any expenses related thereto, which may be imposed or
assessed with respect to the Custody Account (except such as are directly
attributable to income, franchise or similar taxes which may be imposed or
assessed against the Bank, its affiliates, subsidiaries, agents or nominees) and
also agrees to hold the Bank, its subcustodian, and their respective nominees
harmless from liability arising solely as a record holder of Securities in the
Custody Account unless the liability results from the negligence, willful
misconduct, bad faith or reckless disregard of duty by any of such parties. The
Bank shall have a lien on Securities in the Custody Account and on cash in the
Deposit Account for any amount owing to the Bank from time to time under this
Agreement and shall be authorized to charge any account of the Fund for such
items if not paid within a reasonable time after written notice to the Fund.
21. Effectiveness. This Agreement shall be effective on the date first
noted above. This Agreement supersedes and terminates, as of such date, all
prior contracts between the Fund and the Bank relating to the custody of the
assets of the Fund.
30
<PAGE>
22. Termination. This Agreement may be terminated by the Fund by 60 days'
written notice to the Bank and by the Bank on 180 days' written notice to the
Fund; in either case, sent by registered mail, provided that any termination by
the Fund shall be authorized by a resolution of the Board of the Fund, a
certified copy of which shall accompany such notice of termination, and provided
further, that such resolution shall specify the names of the persons to whom the
Bank shall deliver the Securities in the Custody Account and to whom the cash in
the Deposit Account shall be paid. If notice of termination is given by the
Bank, the Fund shall, within 120 days following the giving of such notice,
deliver to the Bank a certified copy of a resolution of its Board specifying the
names of the persons to whom the Bank shall deliver such Securities and cash to
the persons so specified, after deducting therefrom any amounts which the Bank
determines to be owed to it under Section 20. If within 120 days following the
giving of a notice of termination by the Bank, the Bank does not receive from
the Fund a certified copy of a resolution of Board specifying the names of the
persons to whom the Securities in the Deposit Account and the cash in the Cash
Account shall be paid, the Bank, at its election, may deliver such Securities
and pay such cash to a bank or trust company doing business in the State of New
York having an aggregate capital, surplus and undivided profits of not less than
$200 million to be held and disposed of pursuant to the provisions of the
31
<PAGE>
Agreement, or may continue to hold such Securities and cash until a certified
copy of one or more resolutions as aforesaid is delivered to the Bank. The
obligations of the parties hereto regarding the use of reasonable care,
indemnities and payment of fees and expenses shall survive the termination of
this Agreement.
23. Notices. Other than Instructions pursuant to Section 9 hereof, any notice or
other communication from the Fund or its agents to the Bank is to be sent to the
office of the Bank at Two World Trade Center, New York, New York 10048,
Attention: Global Custody Division, or such other address as may hereafter be
given to the Fund and any notice from the Bank to the Fund is to be sent to the
Fund (Attention: President) at the address appearing below, or as the same may
hereafter be changed on the Bank's records in accordance with notice hereunder
from the Fund. Notice may be given by hand delivery, overnight delivery,
telegram, cable, telex, facsimile sending device or first-class mail, postage
pre-paid. If notice is given by first-class mail, it shall be deemed to have
been given five days after it has been mailed. If notice is sent by hand
delivery, it shall be deemed to have been given on the day it is delivered. If
notice is given by telegram, cable, telex or facsimile sending device, it shall
be deemed to have been given immediately if confirmed in writing by overnight
delivery or hand
32
<PAGE>
delivery.
24. Governing Law and Successors and Assigns. This Agreement shall be
governed by the law of the State of New York without regard to the conflict of
law provisions thereof and shall not be assignable by any party, but shall bind
the respective successors and assigns of the Fund and the Bank.
25. Headings. The headings of the paragraphs hereof are included for
convenience of reference only and do not form a part of this Agreement.
26. Counterpart Execution. This Agreement may be executed in any number of
counterparts with the same effect as if all parties hereto had signed the same
documents. All counterparts shall be construed together and shall constitute one
Agreement.
27. Massachusetts Business Trust. A copy of the Declaration of Trust of the
Fund is on file with the Secretary of the Commonwealth of Massachusetts. The
parties hereto acknowledge that this Agreement is not executed by the Fund on
behalf of the trustees of the
33
<PAGE>
Fund as individuals and that the obligations of this Agreement are not binding
upon any of the trustees, officers, shareholders or partners of the Fund
individually, but are binding upon the assets and property of the Fund
individually. The parties agree that (i) no shareholder, trustee, officer or
partner of the Fund may be held personally liable or responsible for any
obligations of the Fund arising out of this Agreement and (ii) that the Bank
shall have no claim under this Agreement on the assets or property of any
portfolio or series of the Fund other than the assets or property of such Fund,
and that no portfolio or series of the Fund shall have the right of set off
against assets, property or obligations of the Bank owed to or held by any other
portfolio or series of the Fund.
Warburg, Pincus Small Company
Growth Fund, Inc.
By:/s/ Eugene P. Grace
Title: Vice President and Secretary
Address for record: 466 Lexington Avenue
New York, NY 10017-3147
34
<PAGE>
FIDUCIARY TRUST COMPANY
INTERNATIONAL
By:/s/ Joseph A. Cajigal
Title: /s/ Senior Vice President
35
<PAGE>
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
between
WARBURG, PINCUS SMALL COMPANY GROWTH FUND, INC.
and
STATE STREET BANK AND TRUST COMPANY
1A - Domestic/Corporation
<PAGE>
TABLE OF CONTENTS
Page
1. Terms of Appointment; Duties of the Bank....................1
2. Fees and Expenses...........................................3
3. Representations and Warranties of the Bank..................4
4. Representations and Warranties of the Fund..................4
5. Data Access and Proprietary Information.....................5
6. Indemnification.............................................6
7. Standard of Care............................................7
8. Covenants of the Fund and the Bank..........................7
9. Termination of Agreement....................................8
10. Assignment..................................................8
11. Amendment...................................................9
12. Massachusetts Law to Apply..................................9
13. Force Majeure...............................................9
14. Consequential Damages.......................................9
15. Merger of Agreement.........................................9
16. Counterparts...............................................10
17. Reproduction of Documents..................................10
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the ____ day of ________, 1996, by and between Warburg,
Pincus Small Company Growth Fund, Inc., a Maryland corporation, having its
principal office and place of business at 466 Lexington Avenue, New York,
New York 10017-3147 (the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a
Massachusetts trust company having its principal office and place of
business at 225 Franklin Street, Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Fund desires to appoint the Bank as its transfer agent, dividend
disbursing agent, custodian of certain retirement plans and agent in connection
with certain other activities, and the Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:
l. Terms of Appointment; Duties of the Bank
1.1 Subject to the terms and conditions set forth in this Agreement, the
Fund hereby employs and appoints the Bank to act as, and the Bank
agrees to act as its transfer agent for the Fund's authorized and
issued shares of its common stock, $.001 par value, ("Shares"),
dividend disbursing agent, custodian of certain retirement plans and
agent in connection with any accumulation, open-account or similar
plans provided to the shareholders of the Fund ("Shareholders") and
set out in the currently effective prospectus and statement of
additional information ("prospectus") of the Fund, including without
limitation any periodic investment plan or periodic withdrawal
program.
1.2 The Bank agrees that it will perform the following services:
(a) In accordance with procedures established from time to time
by agreement between the Fund and the Bank, the Bank shall:
(i) Receive for acceptance, orders for the purchase of
Shares, and promptly deliver payment and appropriate
documentation thereof to the Custodian of the Fund
authorized pursuant to the Articles of Incorporation
of the Fund (the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate
number of Shares and hold such Shares in the
appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and
redemption directions and deliver the appropriate
documentation thereof to the Custodian;
<PAGE>
(iv) In respect to the transactions in items (i), (ii)
and (iii) above, the Bank shall execute transactions
directly with broker-dealers authorized by the Fund
who shall thereby be deemed to be acting on behalf
of the Fund;
(v) At the appropriate time as and when it receives
monies paid to it by the Custodian with respect to
any redemption, pay over or cause to be paid over in
the appropriate manner such monies as instructed by
the redeeming Shareholders;
(vi) Effect transfers of Shares by the registered
owners thereof upon receipt of appropriate
instructions;
(vii) Prepare and transmit payments for dividends and
distributions declared by the Fund;
(viii) Issue replacement certificates for those
certificates alleged to have been lost, stolen or
destroyed upon receipt by the Bank of
indemnification satisfactory to the Bank and
protecting the Bank and the Fund, and the Bank at
its option, may issue replacement certificates in
place of mutilated stock certificates upon
presentation thereof and without such indemnity;
(ix) Maintain records of account for and advise the
Fund and its Shareholders as to the foregoing; and
(x) Record the issuance of shares of the Fund and
maintain pursuant to SEC Rule 17Ad-10(e) a record of
the total number of shares of the Fund which are
authorized, based upon data provided to it by the
Fund, and issued and outstanding. The Bank shall
also provide the Fund on a regular basis with the
total number of shares which are authorized and
issued and outstanding and shall have no obligation,
when recording the issuance of shares, to monitor
the issuance of such shares or to take cognizance of
any laws relating to the issue or sale of such
shares, which functions shall be the sole
responsibility of the Fund.
(b) In addition to and neither in lieu nor in contravention of the
services set forth in the above paragraph (a), the Bank shall:
(i) perform the customary services of a transfer agent,
dividend disbursing agent, custodian of certain retirement
plans and, as relevant, agent in connection with accumulation,
open-account or similar plans (including without limitation any
periodic investment plan or periodic withdrawal program),
including but not limited to: maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing proxies,
mailing Shareholder reports and prospectuses to current
Shareholders, withholding taxes on U.S. resident and
non-resident alien accounts, preparing and filing U.S. Treasury
Department Forms 1099 and other appropriate forms required with
respect to dividends and distributions
2
<PAGE>
by federal authorities for all Shareholders, preparing and
mailing confirmation forms and statements of account to
Shareholders for all purchases and redemptions of Shares and
other confirmable transactions in Shareholder accounts,
preparing and mailing activity statements for Shareholders, and
providing Shareholder account information and (ii) provide a
system which will enable the Fund to monitor the total number
of Shares sold in each State.
(c) In addition, the Fund shall (i) identify to the Bank in writing
those transactions and assets to be treated as exempt from blue
sky reporting for each State and (ii) verify the establishment
of transactions for each State on the system prior to
activation and thereafter monitor the daily activity for each
State. The responsibility of the Bank for the Fund's blue sky
State registration status is solely limited to the initial
establishment of transactions subject to blue sky compliance by
the Fund and the reporting of such transactions to the Fund as
provided above.
(d) Procedures as to who shall provide certain of these services in
Section 1 may be established from time to time by agreement
between the Fund and the Bank per the attached service
responsibility schedule. The Bank may at times perform only a
portion of these services and the Fund or its agent may perform
these services on the Fund's behalf.
(e) The Bank shall provide additional services on behalf of the
Fund (i.e., escheatment services) which may be agreed upon in
writing between the Fund and the Bank.
2. Fees and Expenses
2.1 For the performance by the Bank pursuant to this Agreement, the Fund
agrees to pay the Bank an annual maintenance fee for each Shareholder
account as set out in the initial fee schedule attached hereto. Such
fees and out-of-pocket expenses and advances identified under Section
2.2 below may be changed from time to time subject to mutual written
agreement between the Fund and the Bank.
2.2 In addition to the fee paid under Section 2.1 above, the Fund agrees
to reimburse the Bank for out-of-pocket expenses, including but not
limited to confirmation production, postage, forms, telephone,
microfilm, microfiche, tabulating proxies, records storage, or
advances incurred by the Bank for the items set out in the fee
schedule attached hereto. In addition, any other expenses incurred by
the Bank at the request or with the consent of the Fund, will be
reimbursed by the Fund.
2.3 The Fund agrees to pay all fees and reimbursable expenses within five
days following the receipt of the respective billing notice. Postage
for mailing of dividends, proxies, Fund reports and other mailings to
all shareholder accounts shall be advanced to the Bank by the Fund at
least seven (7) days prior to the mailing date of such materials.
3
<PAGE>
3. Representations and Warranties of the Bank
The Bank represents and warrants to the Fund that:
3.1 It is a trust company duly organized and existing and in good
standing under the laws of The Commonwealth of Massachusetts.
3.2 It is duly qualified to carry on its business in The Commonwealth of
Massachusetts.
3.3 It is empowered under applicable laws and by its Charter and By-Laws
to enter into and perform this Agreement.
3.4 All requisite corporate proceedings have been taken to authorize it
to enter into and perform this Agreement.
3.5 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under
this Agreement.
4. Representations and Warranties of the Fund
The Fund represents and warrants to the Bank that:
4.1 It is a corporation duly organized and existing and in good standing
under the laws of Maryland.
4.2 It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement.
4.3 All corporate proceedings required by said Articles of
Incorporation and By-Laws have been taken to authorize it to enter
into and perform this Agreement.
4.4 It is an open-end and diversified management investment company
registered under the Investment Company Act of 1940, as amended.
4.5 A registration statement under the Securities Act of 1933, as amended
is currently effective and will remain effective, and appropriate
state securities law filings have been made and will continue to be
made, with respect to all Shares of the Fund being offered for sale.
5. Data Access and Proprietary Information
5.1 The Fund acknowledges that the data bases, computer programs, screen
formats, report formats, interactive design techniques, and
documentation manuals furnished to the Fund by the Bank as part of
the Fund's ability to access certain Fund-related data ("Customer
Data")
4
<PAGE>
maintained by the Bank on data bases under the control and ownership
of the Bank or other third party ("Data Access Services") constitute
copyrighted, trade secret, or other proprietary information
(collectively, "Proprietary Information") of substantial value to
the Bank or other third party. In no event shall Proprietary
Information be deemed Customer Data. The Fund agrees to treat all
Proprietary Information as proprietary to the Bank and further
agrees that it shall not divulge any Proprietary Information to any
person or organization except as may be provided hereunder. Without
limiting the foregoing, the Fund agrees for itself and its employees
and agents:
(a) to access Customer Data solely from locations as may be
designated in writing by the Bank and solely in accordance with
the Bank's applicable user documentation;
(b) to refrain from copying or duplicating in any way the
Proprietary Information;
(c) to refrain from obtaining unauthorized access to any portion of
the Proprietary Information, and if such access is
inadvertently obtained, to inform in a timely manner of such
fact and dispose of such information in accordance with the
Bank's instructions;
(d) to refrain from causing or allowing the data acquired hereunder
from being retransmitted to any other computer facility or
other location, except with the prior written consent of the
Bank;
(e) that the Fund shall have access only to those authorized
transactions agreed upon by the parties;
(f) to honor all reasonable written requests made by the Bank to
protect at the Bank's expense the rights of the Bank in
Proprietary Information at common law, under federal copyright
law and under other federal or state law.
Each party shall take reasonable efforts to advise its employees of their
obligations pursuant to this Section 5. The obligations of this Section shall
survive any earlier termination of this Agreement.
5.2 If the Fund notifies the Bank that any of the Data Access Services do
not operate in material compliance with the most recently issued user
documentation for such services, the Bank shall endeavor in a timely
manner to correct such failure. Organizations from which the Bank may
obtain certain data included in the Data Access Services are solely
responsible for the contents of such data and the Fund agrees to make
no claim against the Bank arising out of the contents of such
third-party data, including, but not limited to, the accuracy
thereof. DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND SOFTWARE
SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED ON AN AS IS,
AS AVAILABLE BASIS. THE BANK EXPRESSLY DISCLAIMS ALL WARRANTIES
EXCEPT THOSE EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO,
THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
5
<PAGE>
5.3 If the transactions available to the Fund include the ability to
originate electronic instructions to the Bank in order to (i) effect
the transfer or movement of cash or Shares or (ii) transmit
Shareholder information or other information, then in such event the
Bank shall be entitled to rely on the validity and authenticity of
such instruction without undertaking any further inquiry as long as
such instruction is undertaken in conformity with security procedures
established by the Bank from time to time.
6. Indemnification
6.1 The Bank shall not be responsible for, and the Fund shall indemnify
and hold the Bank harmless from and against, any and all losses,
damages, costs, charges, counsel fees, payments, expenses and
liability arising out of or attributable to:
(a) All actions of the Bank or its agent or subcontractors
required to be taken pursuant to this Agreement, provided
that such actions are taken in good faith and without
negligence or willful misconduct.
(b) The Fund's lack of good faith, negligence or willful
misconduct which arise out of the breach of any
representation or warranty of the Fund hereunder.
(c) The reliance on or use by the Bank or its agents or
subcontractors of information, records, documents or
services which (i) are received by the Bank or its agents or
subcontractors, and (ii) have been prepared, maintained or
performed by the Fund or any other person or firm on behalf
of the Fund including but not limited to any previous
transfer agent or registrar.
(d) The reliance on, or the carrying out by the Bank or
its agents or subcontractors of any instructions or
requests of the Fund.
(e) The offer or sale of Shares in violation of any requirement
under the federal securities laws or regulations or the
securities laws or regulations of any state that such Shares
be registered in such state or in violation of any stop
order or other determination or ruling by any federal agency
or any state with respect to the offer or sale of such
Shares in such state.
6.2 At any time the Bank may apply to any officer of the Fund for
instructions, and may consult with legal counsel with respect to any
matter arising in connection with the services to be performed by the
Bank under this Agreement, and the Bank and its agents or
subcontractors shall not be liable and shall be indemnified by the
Fund for any action taken or omitted by it in reliance upon such
instructions or upon the opinion of such counsel. The Bank, its
agents and subcontractors shall be protected and indemnified in
acting upon any paper or document furnished by or on behalf of the
Fund, reasonably believed to be genuine and to have been signed by
the proper person or persons, or upon any instruction, information,
data, records or documents provided the Bank or its agents or
subcontractors by machine readable input, telex, CRT data entry or
other similar means authorized by the Fund, and shall not be held to
6
<PAGE>
have notice of any change of authority of any person, until receipt
of written notice thereof from the Fund. The Bank, its agents and
subcontractors shall also be protected and indemnified in recognizing
stock certificates which are reasonably believed to bear the proper
manual or facsimile signatures of the officers of the Fund, and the
proper countersignature of any former transfer agent or former
registrar, or of a co-transfer agent or co-registrar.
6.3 In order that the indemnification provisions contained in this
Section 6 shall apply, upon the assertion of a claim for which the
Fund may be required to indemnify the Bank, the Bank shall promptly
notify the Fund of such assertion, and shall keep the Fund advised
with respect to all developments concerning such claim. The Fund
shall have the option to participate with the Bank in the defense of
such claim or to defend against said claim in its own name or in the
name of the Bank. The Bank shall in no case confess any claim or make
any compromise in any case in which the Fund may be required to
indemnify the Bank except with the Fund's prior written consent.
7. Standard of Care
The Bank shall at all times act in good faith and agrees to use its
best efforts within reasonable limits to insure the accuracy of all
services performed under this Agreement, but assumes no
responsibility and shall not be liable for loss or damage due to
errors unless said errors are caused by its negligence, bad faith, or
willful misconduct or that of its employees.
8. Covenants of the Fund and the Bank
8.1 The Fund shall promptly furnish to the Bank the following:
(a) A certified copy of the resolution of the Board of Directors
of the Fund authorizing the appointment of the Bank and the
execution and delivery of this Agreement.
(b) A copy of the Articles of Incorporation and By-Laws of the
Fund and all amendments thereto.
8.2 The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices,
if any; and for the preparation or use, and for keeping account of,
such certificates, forms and devices.
8.3 The Bank shall keep records relating to the services to be performed
hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the Investment Company Act of 1940,
as amended, and the Rules thereunder, the Bank agrees that all such
records prepared or maintained by the Bank relating to the services
to be performed by the Bank hereunder are the property of the Fund
and will be preserved, maintained and made
7
<PAGE>
available in accordance with such Section and Rules, and will be
surrendered promptly to the Fund on and in accordance with its
request.
8.4 The Bank and the Fund agree that all books, records, information and
data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out
of this Agreement shall remain confidential, and shall not be
voluntarily disclosed to any other person, except as may be required
by law.
8.5 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, the Bank will endeavor to notify the
Fund and to secure instructions from an authorized officer of the
Fund as to such inspection. The Bank reserves the right, however, to
exhibit the Shareholder records to any person whenever it is advised
by its counsel that it may be held liable for the failure to exhibit
the Shareholder records to such person.
9. Termination of Agreement
9.1 This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other.
9.2 Should the Fund exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and material will be
borne by the Fund. Additionally, the Bank reserves the right to
charge for any other reasonable expenses associated with such
termination and/or a charge equivalent to the average of three (3)
months' fees.
10. Assignment
10.1 Except as provided in Section 10.3 below, neither this Agreement nor
any rights or obligations hereunder may be assigned by either party
without the written consent of the other party.
10.2 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
10.3 The Bank may, without further consent on the part of the Fund,
subcontract for the performance hereof with (i) Boston Financial Data
Services, Inc., a Massachusetts corporation ("BFDS") which is duly
registered as a transfer agent pursuant to Section 17A(c)(2) of the
Securities Exchange Act of 1934, as amended ("Section 17A(c)(2)"),
(ii) a BFDS subsidiary duly registered as a transfer agent pursuant
to Section 17A(c)(2) or (iii) a BFDS affiliate; provided, however,
that the Bank shall be as fully responsible to the Fund for the acts
and omissions of any subcontractor as it is for its own acts and
omissions.
11. Amendment
This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution
of the Board of Directors of the Fund.
8
<PAGE>
12. Massachusetts Law to Apply
This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the Commonwealth
of Massachusetts.
13. Force Majeure
In the event either party is unable to perform its obligations under
the terms of this Agreement because of acts of God, strikes,
equipment or transmission failure or damage reasonably beyond its
control, or other causes reasonably beyond its control, such party
shall not be liable for damages to the other for any damages
resulting from such failure to perform or otherwise from such causes.
14. Consequential Damages
Neither party to this Agreement shall be liable to the other party
for consequential damages under any provision of this Agreement or
for any consequential damages arising out of any act or failure to
act hereunder.
15. Merger of Agreement
This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject
matter hereof whether oral or written.
16. Counterparts
This Agreement may be executed by the parties hereto on any number of
counterparts, and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
17. Reproduction of Documents
This Agreement and all schedules, exhibits, attachments and
amendments hereto may be reproduced by any photographic, photostatic,
microfilm, micro-card, miniature photographic or other similar
process. The parties hereto all/each agree that any such reproduction
shall be admissible in evidence as the original itself in any
judicial or administrative proceeding, whether or not the original is
in existence and whether or not such reproduction was made by a party
in the regular course of business, and that any enlargement,
facsimile or further reproduction of such reproduction shall likewise
be admissible in evidence.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in their names and on their behalf by and through their duly authorized
officers, as of the day and year first above written.
WARBURG, PINCUS SMALL COMPANY
GROWTH FUND, INC.
BY:__________________________
ATTEST:
______________________
STATE STREET BANK AND TRUST
COMPANY
BY:__________________________
Executive Vice President
ATTEST:
______________________
<PAGE>
STATE STREET BANK & TRUST COMPANY
FUND SERVICE RESPONSIBILITIES*
Service Performed Responsibility
Bank Fund
1. Receives orders for the purchase
of Shares.
2. Issue Shares and hold Shares in
Shareholders accounts.
3. Receive redemption requests.
4. Effect transactions 1-3 above
directly with broker-dealers.
5. Pay over monies to redeeming
Shareholders.
6. Effect transfers of Shares.
7. Prepare and transmit dividends
and distributions.
8. Issue Replacement Certificates.
9. Reporting of abandoned property.
10. Maintain records of account.
11. Maintain and keep a current and
accurate control book for each
issue of securities.
12. Mail proxies.
13. Mail Shareholder reports.
14. Mail prospectuses to current
Shareholders.
15. Withhold taxes on U.S. resident
and non-resident alien accounts.
16. Prepare and file U.S. Treasury
Department forms.
<PAGE>
Service Performed Responsibility
Bank Fund
17. Prepare and mail account and
confirmation statements for
Shareholders.
18. Provide Shareholder account
information.
19. Blue sky reporting.
* Such services are more fully described in Section 1.2 (a), (b)
and (c) of the Agreement.
WARBURG, PINCUS SMALL COMPANY GROWTH FUND, INC.
BY:____________________________
ATTEST:
_______________________________
STATE STREET BANK AND TRUST COMPANY
BY:____________________________
Executive Vice President
ATTEST:
_______________________________
<PAGE>
CO-ADMINISTRATION AGREEMENT
December 31, 1996
Counsellors Funds Service, Inc.
466 Lexington Avenue
New York, New York 10017-3147
Dear Sirs:
Warburg, Pincus Small Company Growth Fund, Inc. (the "Fund"), a
corporation organized and existing under the laws of the State of Maryland,
confirms its agreement with Counsellors Funds Service, Inc. ("Counsellors
Service") as follows:
1. Investment Description; Appointment
-----------------------------------
The Fund desires to employ its capital by investing and reinvesting in
investments of the kind and in accordance with the limitations specified in its
Articles of Incorporation, as amended from time to time (the "Articles"), in its
By-laws, as amended from time to time (the "By-laws"), in the Fund's prospectus
(the "Prospectus") and Statement of Additional Information (the "Statement of
Additional Information") as in effect from time to time, and in such manner and
to the extent as may from time to time be approved by the Board of Directors of
the Fund. Copies of the Prospectus, Statement of Additional Information and the
Articles and By-laws have been submitted to Counsellors Service. The Fund
employs Warburg, Pincus Counsellors, Inc. (the "Adviser") as its investment
adviser and desires to employ and hereby appoints Counsellors Service as its
co-administrator. Counsellors Service accepts this appointment and agrees to
furnish the services for the compensation set forth below.
2. Services as Co-Administrator
----------------------------
Subject to the supervision and direction of the Board of Directors of
the Fund, Counsellors Service will:
(a) assist in supervising all aspects of the Fund's operations, except
those performed by other parties pursuant to written agreements with the Fund;
<PAGE>2
(b) provide various shareholder liaison services including, but not
limited to, responding to inquiries of shareholders regarding the Fund,
providing information on shareholder investments, assisting shareholders of the
Fund in changing dividend options, account designations and addresses, and other
similar services;
(c) provide certain administrative services including, but not limited
to, providing periodic statements showing the account balance of a Fund
shareholder and integrating the statements with those of other transactions and
balances in the shareholder's other accounts serviced by the Fund's custodian or
transfer agent;
(d) supply the Fund with office facilities (which may be Counsellors
Service's own offices), data processing services, clerical, internal executive
and administrative services, and stationery and office supplies;
(e) furnish corporate secretarial services, including assisting in the
preparation of materials for Board of Directors' meetings and distributing those
materials and preparing minutes of meetings of the Fund's Board of Directors and
any committees thereof and of the Fund's shareholders;
(f) coordinate the preparation of reports to the Fund's shareholders
of record and filings with the Securities and Exchange Commission (the "SEC")
including, but not limited to, proxy statements; annual, semi-annual and
quarterly reports to shareholders; and post-effective amendments to the Fund's
Registration Statement on Form N-1A (the "Registration Statement");
(g) assist in the preparation of the Fund's tax returns and assist in
other regulatory filings as necessary;
(h) assist the Adviser, at the Adviser's request, in monitoring and
developing compliance procedures for the Fund which will include, among other
matters, procedures to assist the Adviser in monitoring compliance with the
Fund's investment objective, policies, restrictions, tax matters and applicable
laws and regulations; and
(i) acting as liaison between the Fund and the Fund's independent
public accountants, counsel, custodian or custodians, transfer agent and
co-administrator and taking all reasonable action in the performance of its
obligations under this Agreement
<PAGE>3
to assure that all necessary information is made available to each of them.
In performing all services under this Agreement, Counsellors Service
shall act in conformity with applicable law, the Articles and By-laws, and the
investment objective, investment policies and other practices and policies set
forth in the Registration Statement, as such Registration Statement and
practices and policies may be amended from time to time.
3. Compensation
------------
In consideration of services rendered pursuant to this Agreement, the
Fund will pay Counsellors Service on the first business day of each month a fee
for the previous month at an annual rate of .10% of the Fund's average daily net
assets. The fee for the period from the date the Fund commences its investment
operations to the end of the month during which the Fund commences its
investment operations shall be prorated according to the proportion that such
period bears to the full monthly period. Upon any termination of this Agreement
before the end of any month, the fee for such part of a month shall be prorated
according to the proportion which such period bears to the full monthly period
and shall be payable upon the date of termination of this Agreement. For the
purpose of determining fees payable to Counsellors Service, fees shall be
calculated monthly and the value of the Fund's net assets shall be computed at
the times and in the manner specified in the Prospectus and Statement of
Additional Information as from time to time in effect.
4. Expenses
--------
Counsellors Service will bear all expenses in connection with the
performance of its services under this Agreement; provided, however, that the
Fund will reimburse Counsellors Service for the out-of-pocket expenses incurred
by it on behalf of the Fund. Such reimbursable expenses shall include, but not
be limited to, postage, telephone, telex and FedEx charges. Counsellors Service
will bill the Fund as soon as practicable after the end of each calendar month
for the expenses it is entitled to have reimbursed.
The Fund will bear certain other expenses to be incurred in its
operation, including: taxes, interest, brokerage fees and commissions, if any;
fees of Directors of the Fund who are not officers, directors, or employees of
the Adviser or Counsellors Service; SEC fees and state blue sky qualification
<PAGE>4
fees; charges of custodians and transfer and dividend disbursing agents; certain
insurance premiums; outside auditing and legal expenses; costs of maintenance of
corporate existence; except as otherwise provided herein, costs attributable to
investor services, including without limitation, telephone and personnel
expenses; costs of preparing and printing prospectuses and statements of
additional information for regulatory purposes and for distribution to existing
shareholders; costs of shareholders' reports and meetings, and meetings of the
officers of the Board of Directors of the Fund; costs of any pricing services;
and any extraordinary expenses.
5. Standard of Care
----------------
Counsellors Service shall exercise its best judgment in rendering the
services listed in paragraph 2 above. Counsellors Service shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the Fund
in connection with the matters to which this Agreement relates provided that
nothing in this Agreement shall be deemed to protect or purport to protect
Counsellors Service against liability to the Fund or its shareholders to which
Counsellors Service would otherwise be subject by reason of willful misfeasance,
bad faith or negligence on its part in the performance of its duties or by
reason of Counsellors Service's reckless disregard of its obligations and duties
under this Agreement.
6. Term of Agreement
-----------------
This Agreement shall become effective as of the date the Fund
commences its investment operations and shall continue until April 17, 1998 and
shall continue automatically (unless terminated as provided herein) for
successive annual periods ending on April 17th of each year, provided that such
continuance is specifically approved at least annually by the Board of Directors
of the Fund, including a majority of the Board of Directors who are not
"interested persons" (as defined in the Investment Company Act of 1940, as
amended) of any party to this Agreement, by vote cast in person at a meeting
called for the purpose of voting on such approval. This Agreement is terminable,
without penalty, on sixty (60) days' written notice, by the Board of Directors
of the Fund or by vote of holders of a majority of the Fund's shares, or upon
sixty (60) days' written notice, by Counsellors Service.
<PAGE>5
7. Service to Other Companies or Accounts
--------------------------------------
The Fund understands that Counsellors Service now acts, will continue
to act and may act in the future as administrator, co-administrator or
administrative services agent to one or more other investment companies, and the
Fund has no objection to Counsellors Service's so acting. The Fund understands
that the persons employed by Counsellors Service to assist in the performance of
Counsellors Service's duties hereunder will not devote their full time to such
service and nothing contained in this Agreement shall be deemed to limit or
restrict the right of Counsellors Service or any affiliate of Counsellors
Service to engage in and devote time and attention to other businesses or to
render services of whatever kind or nature.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance hereof by signing and returning to us the enclosed copy
hereof.
Very truly yours,
WARBURG, PINCUS SMALL COMPANY
GROWTH FUND, INC.
By: /s/ Eugene P. Grace
Name: Eugene P. Grace
Title: Vice President and
Secretary
Accepted:
WARBURG, PINCUS COUNSELLORS, INC.
By: /s/ Eugene P. Grace
Name: Eugene P. Grace
Title: Vice President
<PAGE>
CO-ADMINISTRATION AGREEMENT
TERMS AND CONDITIONS
This Agreement is made as of December 31, 1996 by and between Warburg,
Pincus Small Company Growth Fund, Inc. (the "Fund"), a Maryland corporation, and
PFPC Inc. ("PFPC"), a Delaware corporation, which is an indirect, wholly
owned subsidiary of PNC Bank Corp.
The Fund is registered as an open-end investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund wishes to
retain PFPC to provide certain administration and accounting services, and PFPC
wishes to furnish such services.
In consideration of the promises and mutual covenants herein
contained, the parties agree as follows:
1. Definitions.
(a) "Authorized Person." The term "Authorized Person" shall mean any
officer of the Fund and any other person, who is duly authorized by the Fund's
Board of Directors, to give Oral and Written Instructions on behalf of the Fund.
Such persons are listed in the Certificate attached hereto as the Authorized
Persons Appendix to each Services Attachment to this Agreement. If PFPC provides
more than one service hereunder, the Fund's designation of Authorized Persons
may vary by service.
(b) "Board of Directors." The term "Board of Directors" shall mean
the Fund's Board of Directors or, where duly authorized, a competent committee
thereof.
(c) "CFTC." The term "CFTC" shall mean the Commodities Futures
Trading Commission.
(d) "Oral Instructions." The term "Oral Instructions" shall mean
oral instructions received by PFPC from an Authorized Person or from a person
reasonably believed by PFPC to be an Authorized Person.
(e) "PNC." The term "PNC" shall mean PNC Bank or a subsidiary or
affiliate of PNC Bank.
(f) "SEC." The term "SEC" shall mean the Securities and Exchange
Commission.
<PAGE>
(g) "Securities and Commodities Laws." The terms the "1933 Act" shall
mean the Securities Act of 1933, as amended, the "1934 Act" shall mean the
Securities Exchange Act of 1934, as amended, the "1940 Act" shall mean the
Investment Company Act 1940, as amended, and the "CEA" shall mean the
Commodities Exchange Act, as amended.
(h) "Services." The term "Services" shall mean the service provided
to the Fund by PFPC.
(i) "Shares." The term "Shares" shall mean the shares of any class
of common stock, par value $.001 per share, of the Fund.
(j) "Property." The term "Property" shall mean:
(i) any and all securities and other investment items which
the Fund may from time to time deposit, or cause to be
deposited, with PNC or which PNC may from time to time
hold for the Fund;
(ii) all income in respect of any of such securities or other
investment items;
(iii)all proceeds of the sale of any of such securities or
investment items; and
(iv) all proceeds of the sale of securities issued by the Fund,
which are received by PNC from time to time, from or on
behalf of the Fund.
(k) "Written Instructions." The term "Written Instructions" shall
mean written instructions signed by one Authorized Person and received by PFPC.
The instructions may be delivered by hand, mail, tested telegram, cable, telex
or facsimile sending device.
2. Appointment.
The Fund hereby appoints PFPC to provide administration and accounting
services, in accordance with the terms set forth in this Agreement. PFPC accepts
such appointment and agrees to furnish such services.
2
<PAGE>
3. Delivery of Documents.
The Fund has provided or, where applicable, will provide PFPC with the
following:
(a) certified or authenticated copies of the resolutions of the Board
of Directors, approving the appointment of PNC or its affiliates
to provide services to the Fund;
(b) a copy of the Fund's most recent effective registration
statement;
(c) a copy of the Fund's advisory agreement;
(d) a copy of the Fund's distribution agreements;
(e) a copy of the Fund's co-administration agreement if PFPC is not
providing the Fund with such services;
(f) copies of any shareholder servicing agreements made in respect of
the Fund; and
(g) certified or authenticated copies of any and all amendments or
supplements to the foregoing.
4. Compliance with Government Rules and Regulations. PFPC undertakes
to comply with all applicable requirements of the 1933 Act, the 1934 Act, the
1940 Act, and the CEA, and any laws, rules and regulations of governmental
authorities having jurisdiction with respect to all duties to be performed by
PFPC hereunder. Except as specifically set forth herein, PFPC assumes no
responsibility for such compliance by the Fund.
5. Instructions.
Unless otherwise provided in this Agreement, PFPC shall act only upon
Oral and Written Instructions.
PFPC shall be entitled to rely upon any Oral and Written Instructions
it receives from an Authorized Person (or from a person reasonably believed by
PFPC to be an Authorized Person) pursuant to this Agreement. PFPC may assume
that any Oral or Written Instruction received hereunder is not in any way
inconsistent with the provisions of organizational documents or this Agreement
or of any vote, resolution or proceeding of the Board of Directors or of the
Fund's shareholders.
3
<PAGE>
The Fund agrees to forward to PFPC Written Instructions confirming
Oral Instructions so that PFPC receives the Written Instructions by the close of
business on the same day that such Oral Instructions are received. The fact that
such confirming Written Instructions are not received by PFPC shall in no way
invalidate the transactions or enforceability of the transactions authorized by
the Oral Instructions. The Fund further agrees that PFPC shall incur no
liability to the Fund in acting upon Oral or Written Instructions provided such
instructions reasonably appear to have been received from an Authorized Person.
6. Right to Receive Advice.
(a) Advice of the Fund. If PFPC is in doubt as to any action it should
or should not take, PFPC may request directions or advice, including Oral or
Written Instructions, from the Fund.
(b) Advice of Counsel. If PFPC shall be in doubt as to any questions
of law pertaining to any action it should or should not take, PFPC may request
advice at its own cost from such counsel of its own choosing (who may be counsel
for the Fund, the Fund's investment adviser (the "Adviser") or PFPC, at the
option of PFPC).
(c) Conflicting Advice. In the event of a conflict between directions,
advice or Oral or Written Instructions PNC receives from the Fund, and the
advice it receives from counsel, PFPC shall be entitled to rely upon and follow
the advice of counsel.
(d) Protection of PFPC. PFPC shall be protected in any action it takes
or does not take in reliance upon directions, advice or Oral or Written
Instructions it receives from the Fund or from counsel and which PFPC believes,
in good faith, to be consistent with those directions, advice and Oral or
Written Instructions.
Nothing in this paragraph shall be construed so as to impose an
obligation upon PFPC (i) to seek such directions, advice or Oral or Written
Instructions, or (ii) to act in accordance with such directions, advice or Oral
or Written Instructions unless, under the terms of other provisions of this
Agreement, the same is a condition of PFPC's properly taking or not taking such
action.
4
<PAGE>
7. Records.
The books and records pertaining to the Fund, which are in the
possession of PFPC, shall be the property of the Fund. Such books and records
shall be prepared and maintained as required by the 1940 Act and other
applicable securities laws, rules and regulations. The Fund, or the Fund's
Authorized Persons, shall have access to such books and records at all times
during PFPC's normal business hours. Upon the reasonable request of the Fund,
copies of any such books and records shall be provided by PFPC to the Fund or to
an Authorized Person of the Fund, at the Fund's expense.
PFPC shall keep the following records:
(a) all books and records with respect to the Fund's books of
account;
(b) records of the Fund's securities transactions; and
(c) all other books and records as PFPC is required to maintain
pursuant to Rule 31a-1 of the 1940 Act and as specifically set
forth in Appendix A hereto.
8. Confidentiality.
PFPC agrees to keep confidential all records of the Fund and
information relative to the Fund and its shareholders (past, present and
potential), unless the release of such records or information is otherwise
consented to, in writing, by the Fund. The Fund agrees that such consent shall
not be unreasonably withheld. The Fund further agrees that, should PFPC be
required to provide such information or records to duly constituted authorities
(who may institute civil or criminal contempt proceedings for failure to
comply), PFPC shall not be required to seek the Fund's consent prior to
disclosing such information.
9. Liaison with Accountants.
PFPC shall act as liaison with the Fund's independent public
accountants and shall provide account analyses, fiscal year summaries, and other
audit-related schedules. PFPC shall take all reasonable action in the
performance of its obligations under this Agreement to assure that the necessary
information is made available to such accountants for the expression of their
opinion, as such may be required by the Fund from time to time.
5
<PAGE>
10. Disaster Recovery.
PFPC shall enter into and shall maintain in effect with appropriate
parties one or more agreements making reasonable provision of emergency use of
electronic data processing equipment to the extent appropriate equipment is
available. In the event of equipment failures, PFPC shall, at no additional
expense to the Fund, take reasonable steps to minimize service interruptions but
shall have no liability with respect thereto.
11. Compensation.
As compensation for services rendered by PFPC during the term of this
Agreement, the Fund will pay PFPC a fee or fees as may be agreed to in writing
by the Fund and PFPC.
12. Indemnification.
The Fund agrees to indemnify and hold harmless PFPC and its nominees
from all taxes, charges, expenses, assessments, claims and liabilities
(including, without limitation, liabilities arising under the 1933 Act, the 1934
Act, the 1940 Act, the CEA, and any state and foreign securities and blue sky
laws, and amendments thereto, and expenses, including (without limitation)
attorneys' fees and disbursements, arising directly or indirectly from any
action which PFPC takes or does not take (a) at the request or on the direction
of or in reliance on the advice of the Fund or (b) upon Oral or Written
Instructions. Neither PFPC, nor any of its nominees, shall be indemnified
against any liability to the Fund or to its shareholders (or any expenses
incident to such liability) arising out of PFPC's own willful misfeasance, bad
faith, negligence or reckless disregard of its duties and obligations under this
Agreement.
13. Responsibility of PFPC.
PFPC shall be under no duty to take any action on behalf of the Fund
except as specifically set forth herein or as may be specifically agreed to by
PFPC, in writing. PFPC shall be obligated to exercise care and diligence in the
performance of its duties hereunder, to act in good faith and to use its best
efforts, within reasonable limits, in performing services provided for under
this Agreement. PFPC shall be responsible for its own negligent failure to
perform its duties under this Agreement. Notwithstanding the foregoing, PFPC
shall not be responsible for losses beyond its control, provided that PFPC has
acted in accordance with the standard of care set forth above; and provided
further that PFPC shall only be responsible for that
6
<PAGE>
portion of losses or damages suffered by the Fund that are attributable to the
negligence of PFPC.
Without limiting the generality of the foregoing or of any other
provision of this Agreement, PFPC, in connection with its duties under this
Agreement, shall not be liable for (a) the validity or invalidity or authority
or lack thereof of any Oral or Written Instruction, notice or other instrument
which conforms to the applicable requirements of this Agreement, and which PFPC
reasonably believes to be genuine; or (b) delays or errors or loss of data
occurring by reason of circumstances beyond PFPC's control, including acts of
civil or military authority, national emergencies, labor difficulties, fire,
flood or catastrophe, acts of God, insurrection, war, riots or failure of the
mails, transportation, communication or power supply.
Notwithstanding anything in this Agreement to the contrary, PFPC shall
have no liability to the Fund for any consequential, special or indirect losses
or damages which the Fund may incur or suffer by or as a consequence of PFPC's
performance of the services provided hereunder, whether or not the likelihood of
such losses or damages was known by PFPC.
14. Description of Accounting Services.
(a) Services on a Continuing Basis. PFPC will perform the
following accounting functions if required:
(i) Journalize the Fund's investment, capital share
and income and expense activities;
(ii) Verify investment buy/sell trade tickets when
received from the Adviser and transmit
trades to the Fund's custodian
for proper settlement;
(iii) Maintain individual ledgers for investment securities;
(iv) Maintain historical tax lots for each security;
(v) Reconcile cash and investment balances of the Fund
with the custodian, and provide the Adviser with the
beginning cash balance available for investment
purposes;
7
<PAGE>
(vi) Update the cash availability throughout
the day as required by the Adviser;
(vii) Post to and prepare the Fund's Statement of Assets
and Liabilities and the Statement of Operations;
(viii) Calculate various contractual expenses (e.g.,
advisory and custody fees);
(ix) Monitor the expense accruals and notify the
Fund's management of any proposed adjustments;
(x) Control all disbursements from the Fund and
authorize such disbursements upon Written
Instructions;
(xi) Calculate capital gains and losses;
(xii) Determine the Fund's net income;
(xiii) Obtain security market quotes from independent
pricing services approved by the Adviser, or if
such quotes are unavailable, then obtain such
prices from the Adviser, and in either case
calculate the market value of the Fund's
investments;
(xiv) Transmit or mail a copy of the daily
portfolio valuation to the Adviser;
(xv) Compute the net asset value of the Fund;
(xvi) As appropriate, compute the Fund's yield, total
return, expense ratios, portfolio turnover rate,
and, if required, portfolio average dollar-weighted
maturity; and
(xvii) Prepare a monthly financial statement, which will
include the following items:
Schedule of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Cash Statement
8
<PAGE>
Schedule of Capital Gains and Losses.
15. Description of Administration Services.
(a) Services on a Continuing Basis.
(i) Prepare quarterly broker security transactions
summaries;
(ii) Prepare monthly security transaction listings;
(iii) Prepare for execution and file the Fund's federal
and state tax returns;
(iv) Prepare and file the Fund's semiannual reports with
the SEC on Form N-SAR;
(v) Prepare and file with the SEC the Fund's annual
and semiannual shareholder reports;
(vi) Assist with the preparation of registration
statements and other filings relating to the
registration of Shares; and
(vii) Monitor the Fund's status as a regulated investment
company under Sub-Chapter M of the Internal Revenue
Code of 1986, as amended.
16. Duration and Termination.
This Agreement shall continue until terminated by the Fund or by PFPC
on sixty (60) days' prior written notice to the other party.
17. Notices.
All notices and other communications, including Written Instructions,
shall be in writing or by confirming telegram, cable, telex or facsimile sending
device. If notice is sent by confirming telegram, cable, telex or facsimile
sending device, it shall be deemed to have been given immediately. If notice is
sent by first-class mail, it shall be deemed to have been given three days after
it has been mailed. If notice is sent by messenger, it shall be deemed to have
been given on the day it is delivered. Notices shall be addressed (a) if to
PFPC, at PFPC's
9
<PAGE>
address, 400 Bellevue Parkway, Wilmington, Delaware 19809; (b) if to the Fund,
at the address of the Fund; or (c) if to neither of the foregoing, at such other
address as shall have been notified to the sender of any such notice or other
communication.
18. Amendments.
This Agreement, or any term thereof, may be changed or waived only by
written amendment, signed by the party against whom enforcement of such change
or waiver is sought.
19. Delegation.
PFPC may assign its rights and delegate its duties hereunder to any
wholly owned direct or indirect subsidiary of PNC Bank or PNC Bank Corp.,
provided that (a) PFPC gives the Fund thirty (30) days' prior written notice;
(b) the delegate agrees with PFPC to comply with all relevant provisions of the
1940 Act; and (c) PFPC and such delegate promptly provide such information as
the Fund may request, and respond to such questions as the Fund may ask,
relative to the delegation, including (without limitation) the capabilities of
the delegate.
20. Counterparts.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
21. Further Actions.
Each party agrees to perform such further acts and execute such
further documents as are necessary to effectuate the purposes hereof.
22. Miscellaneous.
This Agreement embodies the entire agreement and understanding between
the parties and supersedes all prior agreements and understandings relating to
the subject matter hereof, provided that the parties may embody in one or more
separate documents their agreement, if any, with respect to delegated and/or
Oral Instructions.
The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
10
<PAGE>
This Agreement shall be deemed to be a contract made in Delaware and
governed by Delaware law. If any provision of this agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby. This Agreement shall be binding
and shall inure to the benefit of the parties hereto and their respective
successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers designated below on the day and year first above
written.
PFPC INC.
By:______________________________
Name:
Title:
WARBURG, PINCUS SMALL COMPANY GROWTH
FUND, INC.
By:/s/ Eugene P. Grace
Name: Eugene P. Grace
Title:Vice President and
Secretary
11
<PAGE>
APPENDIX A
None.
<PAGE>
December 31, 1996
Warburg, Pincus Small Company Growth Fund, Inc.
466 Lexington Avenue
New York, New York 10017
RE: CO-ADMINISTRATION SERVICE FEES
Gentlemen:
This letter constitutes our agreement with respect to compensation to
be paid to PFPC Inc. ("PFPC") under the terms of a Co-Administration Agreement
dated December 31, 1996 between you (the "Fund") and PFPC. Pursuant to Paragraph
11 of that Agreement, and in consideration of the services to be provided to
you, you will pay PFPC an annual co-administration fee, to be calculated daily
and paid monthly. You will also reimburse PFPC for its out-of-pocket expenses
incurred on behalf of the Fund, including, but not limited to: postage and
handling, telephone, telex, FedEx and outside pricing service charges.
The annual administration and accounting fee shall be the following
percentages of the Fund's average daily net assets.:-
Percentage Net Assets
O.10 First US$500,000,000
0.075 Next US$1,000,000,000
0.05 Above US$1,500,000,000
The fee for the period from the day of the year this agreement is
entered into until the end of that year shall be pro-rated according to the
proportion which such period bears to the full annual period.
<PAGE>
If the foregoing accurately sets forth our agreement, and you intend
to be legally bound thereby, please execute a copy of this letter and return it
to us.
Very truly yours,
PFPC INC.
By:____________________________
Name:
Title:
Accepted: WARBURG, PINCUS SMALL COMPANY GROWTH FUND, INC.
By:/s/ Eugene P. Grace
Name: Eugene P. Grace
Title:Vice President and
Secretary
2
<PAGE>
<PAGE>
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022-4677
December 16, 1996
Warburg, Pincus Small Company Growth Fund, Inc.
466 Lexington Avenue
New York, New York 10017-3147
Ladies and Gentlemen:
We have acted as counsel to Warburg, Small Company Growth Fund, Inc. (the
"Fund"), a corporation organized under the laws of the State of Maryland, in
connection with the preparation of a registration statement on Form N-1A
covering the offer and sale of an indefinite number of shares of Common Stock of
the Fund (the "Common Stock"), one billion of which are designated "Common
Shares" and one billion of which are designated "Advisor Shares", par value
$.001 per share.
We have examined copies of the Charter and By-Laws of the Fund, the Fund's
prospectuses and statement of additional information (the "Statement of
Additional Information") included in its Registration Statement on Form N-1A,
Securities Act File No. 333-15453 and Investment Company Act File No. 811-07909
(the "Registration Statement"), all resolutions adopted by the Fund's Board of
Directors (the "Board") at its initial meeting held on November 4, 1996,
consents of the Board and other records, documents and papers that we have
deemed necessary for the purpose of this opinion. We have also examined such
other statutes and authorities as we have deemed necessary to form a basis for
the opinion hereinafter expressed.
In our examination of material, we have assumed the genuineness of all
signatures and the conformity to original documents of all copies submitted to
us. As to various questions of fact material to our opinion, we have relied upon
statements and certificates of officers and representatives of the Fund and
others.
Based upon the foregoing, we are of the opinion that:
<PAGE>2
1. The Fund is duly organized and validly existing as a
corporation in good standing under the laws of the State of
Maryland.
2. The 10,000 presently issued and outstanding shares of Common
Stock, all of which are designated Common Shares, of the Fund
have been validly and legally issued and are fully paid and
nonassessable.
3. The Common Shares and Advisor Shares to be offered for sale
pursuant to the Registration Statement are, to the extent of
the number of shares authorized to be issued by the Fund in
its Charter, duly authorized and, when sold, issued and paid
for as contemplated by Registration Statement, will have been
validly and legally issued and will be fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, to the reference to us in the Statement of Additional
Information and to the filing of this opinion as an exhibit to any application
made by or on behalf of the Fund or any distributor or dealer in connection with
the registration or qualification of the Fund, the Common Shares or the Advisor
Shares under the securities laws of any state or other jurisdiction.
We are members of the Bar of the State of New York only and do not opine as to
the laws of any jurisdiction other than the laws of the State of New York and
the laws of the United States, and the opinions set forth above are,
accordingly, limited to the laws of those jurisdictions. As to matters involving
the application of the laws of the State of Maryland, we have relied on the
opinion of Messrs. Venable, Baetjer and Howard, LLP.
Very truly yours,
<PAGE>
Venable, Baetjer, Howard & Civiletti, LLP
1201 New York Avenue, N.W., Suite 1000
Washington, D.C. 20005-8300
(202) 962-4800, Fax (202) 962-8300
December 16 , 1996
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, NY 10022-4677
Re: Warburg, Pincus Small Company Growth Fund, Inc.
Ladies and Gentlemen:
We have acted as special Maryland counsel for Warburg, Pincus
Small Company Growth Fund, Inc. a Maryland corporation (the "Fund"), in
connection with the organization of the Fund and the issuance of shares of its
common stock, par value $.001 per share, including Common Shares (the "Common
Shares") and Advisor Shares (the "Advisor Shares").
As Maryland counsel for the Fund, we are familiar with its
Charter and Bylaws. We have examined its Registration Statement on Form N-1A,
Securities Act File No. 333-15453 and Investment Company Act File No.
811-07909, including the prospectus and statement of additional information
contained therein, substantially in the form in which it is to become effective
(the "Registration Statement"). We have further examined and relied upon a
certificate of the Maryland State Department of Assessments and Taxation to the
effect that the Fund is duly incorporated and existing under the laws of the
State of Maryland and is in good standing and duly authorized to transact
business in the State of Maryland.
We have also examined and relied upon such corporate records
of the Fund and other documents and certificates with respect to factual
matters as we have deemed necessary to render the opinion expressed herein. We
have assumed, without independent verification, the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, and
the conformity with originals of all documents submitted to us as copies.
<PAGE>2
Based on such examination, we are of the opinion that:
1. The Fund is duly organized and validly existing as
a corporation in good standing under the laws of
the State of Maryland.
2. The 10,000 presently issued and outstanding Common
Shares of the Fund have been validly and legally
issued and are fully paid and nonassessable.
3. The Common Shares and Advisor Shares of the Fund to
be offered for sale pursuant to the Registration
Statement are, to the extent of the number of Common
Shares authorized to be issued by the Fund in its
Charter, duly authorized and, when sold, issued and
paid for as contemplated by the Registration
Statement, will have been validly and legally issued
and will be fully paid and nonassessable.
This letter expresses our opinion with respect to the
Maryland General Corporation Law governing matters such as due organization and
the authorization and issuance of stock. It does not extend to the securities
or "blue sky" laws of Maryland, to federal securities laws or to other laws.
You may rely upon our foregoing opinion in rendering your
opinion to the Fund that is to be filed as an exhibit to the Registration
Statement. We consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
Venable, Baetjer and Howard, LLP
<PAGE>1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion of our report dated December 16, 1996 on our audit
of the Statement of Assets and Liabilities of Warburg, Pincus Small Company
Growth Fund, Inc. as of December 12, 1996 with respect to this Pre-Effective
Amendment No. 1 to the Registration Statement (No. 333-15453) under the
Securities Act of 1933 on Form N-1A. We also consent to the reference to our
Firm under the heading "Independent Accountants and Counsel" in the Statement
of Additional Information.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
December 16, 1996
<PAGE>1
PURCHASE AGREEMENT
Warburg, Pincus Small Company Growth Fund, Inc. (the "Fund"), a
corporation organized under the laws of the State of Maryland, and Warburg,
Pincus Counsellors, Inc. ("Warburg") hereby agree as follows:
1. The Fund offers Warburg and Warburg hereby purchases 10,000 shares
of common stock of the Fund, each of which shall be designated "Common Shares"
each having a par value $.001 per share (the "Shares") at a price of $10.00 per
Share (the "Initial Shares"). Warburg hereby acknowledges receipt of
certificates representing the Initial Shares and the Fund hereby acknowledges
receipt from Warburg of $100,000.00 in full payment for the Initial Shares.
2. Warburg represents and warrants to the Fund that the Initial Shares
are being acquired for investment purposes and not for the purpose of
distributing them.
3. Warburg agrees that if any holder of the Initial Shares redeems any
Initial Share in the Fund before five years after the date upon which the Fund
commences its investment activities, the redemption proceeds will be reduced by
the amount of unamortized organizational expenses, in the same proportion as the
number of Initial Shares being redeemed bears to the number of Initial Shares
outstanding at the time of redemption. The parties
<PAGE>2
hereby acknowledge that any Shares acquired by Warburg other than the Initial
Shares have not been acquired to fulfill the requirements of Section 14 of the
Investment Company Act of 1940, as amended, and, if redeemed, their redemption
proceeds will not be subject to reduction based on the unamortized
organizational expenses of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the 31st day of December, 1996.
WARBURG PINCUS SMALL COMPANY
GROWTH FUND, INC.
By:/s/ Eugene P. Grace
Name: Eugene P. Grace
Title: Vice President and Secretary
ATTEST:
/s/ Maryann Maglia
WARBURG, PINCUS COUNSELLORS, INC.
By:/s/ Eugene P. Grace
Name: Eugene P. Grace
Title: Vice President
ATTEST:
/s/ Maryann Maglia
<PAGE>1
SHAREHOLDER SERVICING AND DISTRIBUTION PLAN
-------------------------------------------
This Shareholder Servicing and Distribution Plan ("Plan") is adopted
by Warburg, Pincus Small Company Growth Fund, Inc., a corporation organized
under the laws of State of Maryland (the "Fund"), with respect to the common
stock, par value $.001 per share, of the Fund other than those designated
Advisor Shares (the "Shares") pursuant to Rule 12b-1 (the "Rule") under the
Investment Company Act of 1940, as amended (the "1940 Act"), subject to the
following terms and conditions:
Section 1. Amount of Payments.
The Fund will pay Counsellors Securities Inc. ("Counsellors
Securities"), a corporation organized under the laws of the State of New York,
for shareholder servicing and distribution services provided to the Share, an
annual fee of up to .25% of the value of the average daily net assets of the
Shares. Fees to be paid with respect to the Fund under this Plan will be
calculated monthly and paid quarterly by the Fund.
Section 2. Services Payable under the Plan.
(a) The annual fees described above payable with respect to the Fund
are intended to compensate Counsellors Securities, or enable Counsellors
Securities to compensate other persons ("Service Providers"), including any
other distributor of Shares, for providing (i) ongoing servicing and/or
maintenance of the accounts of holders of Shares ("Shareholder Services"); (ii)
services that are primarily intended to result in, or that are primarily
attributable to, the sale of Shares ("Selling Services"); and/or (iii)
subtransfer agency services, subaccounting services or administrative services
with respect to Shares ("Administrative Services"). Shareholder Services may
include, among other things, responding to inquiries of prospective investors
regarding the Fund and services to shareholders not otherwise required to be
provided by the Fund's custodian or any co-administrator. Selling Services may
include, but are not limited to: the printing and distribution to prospective
investors in Shares of prospectuses and statements of additional information
describing the Fund; the preparation, including printing, and distribution of
sales literature, reports and media advertisements relating to the Shares;
providing telephone services relating to the Fund; distributing Shares; costs
relating to the formulation and implementation of marketing and promotional
activities, including, but not limited to, direct mail promotions and
television, radio, newspaper, magazine and other mass media advertising, and
related travel and entertainment expenses; and costs involved in obtaining
whatever information, analyses and reports with respect to marketing
and
<PAGE>2
promotional activities that the Fund may, from time to time, deem advisable. In
providing compensation for Selling Services in accordance with this Plan,
Counsellors Securities is expressly authorized (i) to make, or cause to be made,
payments reflecting an allocation of overhead and other office expenses related
to providing Services; (ii) to make, or cause to be made, payments, or to
provide for the reimbursement of expenses of, persons who provide support
services in connection with the distribution of Shares including, but not
limited to, office space and equipment, telephone facilities, answering routine
inquiries regarding the Fund, and providing any other Service; and (iii) to
make, or cause to be made, payments to compensate selected dealers or other
authorized persons for providing any Services. Administrative Services may
include, but are not limited to, establishing and maintaining accounts and
records on behalf of Fund shareholders; processing purchase, redemption and
exchange transactions in Shares; and other similar services not otherwise
required to be provided by the Fund's transfer agent or any co-administrator.
(b) Payments under this Plan are not tied exclusively to the expenses
for shareholder servicing, administration and distribution expenses actually
incurred by Counsellors Securities or any Service Provider, and the payments may
exceed expenses actually incurred by Counsellors Securities and/or a Service
Provider. Furthermore, any portion of any fee paid to Counsellors Securities or
to any of its affiliates by the Fund or any of their past profits or other
revenue may be used in their sole discretion to provide services to shareholders
of the Fund or to foster distribution of Shares.
Section 3. Approval of Plan.
-----------------
Neither this Plan nor any related agreements will take effect until
approved by a majority of (a) the outstanding voting Shares, (b) the full Board
of Directors of the Fund and (c) those Directors who are not interested persons
of the Fund and who have no direct or indirect financial interest in the
operation of this Plan or in any agreements related to it (the "Independent
Directors"), cast in person at a meeting called for the purpose of voting on
this Plan and the related agreements.
Section 4. Continuance of Plan.
-------------------
This Plan will continue in effect with respect to the Shares from year
to year so long as its continuance is specifically approved annually by vote of
the Fund's Board of Directors in the manner described in Section 3(b) and 3(c)
above. The Fund's Board of Directors will evaluate the appropriateness of this
Plan and its payment terms on a continuing basis and in doing so will consider
all relevant factors, including the types and extent of Shareholder Services,
Selling Services and Administrative Services provided by Counsellors Securities
and/or
<PAGE>3
Service Providers and amounts Counsellors Securities and/or Service Providers
receive under this Plan.
Section 5. Termination.
------------
This Plan may be terminated at any time with respect to the Shares by
vote of a majority of the Independent Directors or by a vote of a majority of
the outstanding voting Shares.
Section 6. Amendments.
------------
This Plan may not be amended to increase materially the amount of the
fees described in Section 1 above with respect to the Shares without approval of
at least a majority of the outstanding voting Shares. In addition, all material
amendments to this Plan must be approved in the manner described in Section 3(b)
and 3(c) above.
Section 7. Selection of Certain Directors.
------------------------------
While this Plan is in effect with respect to the Fund, the selection
and nomination of the Fund's Directors who are not interested persons of the
Fund will be committed to the discretion of the Directors then in office who are
not interested persons of the Fund.
Section 8. Written Reports.
---------------
In each year during which this Plan remains in effect with respect to
the Fund, any person authorized to direct the disposition of monies paid or
payable by the Fund pursuant to the Plan or any related agreement will prepare
and furnish to the Fund's Board of Directors, and the Board will review, at
least quarterly, written reports, complying with the requirements of the Rule,
which set out the amounts expended under this Plan and the purposes for which
those expenditures were made.
Section 9. Preservation of Materials.
-------------------------
The Fund will preserve copies of this Plan, any agreement relating to
this Plan and any report made pursuant to Section 8 above, for a period of not
less than six years (the first two years in an easily accessible place) from the
date of this Plan, the agreement or the report.
Section 10. Meaning of Certain Terms.
-------------------------
As used in this Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meanings that
those terms have under the 1940 Act and the rules and regulations under the 1940
Act, subject to any exemption that may be granted to the Fund under the 1940 Act
by the Securities and Exchange Commission.
<PAGE>4
Section 11. Date of Effectiveness.
----------------------
This Plan will become effective as of the date the Fund first
commences its investment operations.
IN WITNESS WHEREOF, the Fund has executed this Plan as of the 31st
day of December, 1996.
WARBURG, PINCUS SMALL COMPANY GROWTH
FUND, INC.
By:/s/ Eugene P. Grace
Name: Eugene P. Grace
Title: Vice President and Secretary
<PAGE>1
DISTRIBUTION PLAN
This Distribution Plan (the "Plan") is adopted in accordance with Rule
12b-1 under the Investment Company Act of 1940, as amended (the "1940 Act"), by
Warburg, Pincus Small Company Growth Fund, Inc., a corporation organized under
the laws of the State of Maryland (the "Fund"), subject to the following terms
and conditions:
Section 1. Distribution Agreements; Annual Fee.
Any officer of the Fund or Counsellors Securities Inc., the Fund's
distributor ("Counsellors Securities"), is authorized to execute and deliver
written agreements in any form duly approved by the Board of Directors of the
Fund (the "Agreements") with institutional shareholders of record,
broker-dealers, financial institutions, depository institutions, retirement
plans and other financial intermediaries ("Service Organizations") relating to
shares of the Fund's common stock, par value $.001 per share, designated Advisor
Shares (the "Advisor Shares"). Pursuant to an Agreement, Service Organizations
will be paid an annual fee out of the assets of the Fund by the Fund directly or
by Counsellors Securities on behalf of the Fund for providing (a) services
primarily intended to result in the sale of Advisor Shares ("Distribution
Services"), (b) shareholder servicing to their customers or clients who are the
record and/or the beneficial owners of Advisor Shares ("Customers")
("Shareholder Services") and/or (c) administrative and accounting services to
Customers ("Administrative Services"). A Service Organization will be paid an
annual fee under the Plan calculated daily and paid monthly at an annual rate of
up to .50% of the average daily net assets of the Advisor Shares held by or on
behalf of its Customers ("Customers' Shares") with respect to Distribution
Services and/or Administrative Services and may be paid an annual fee of up to
.25% of the average daily net assets of Customers' Shares with respect to
Shareholder Services.
Section 2. Services.
The annual fee paid to Service Organizations under Section 1 of the
Plan with respect to Distribution Services, if any, will compensate Service
Organizations to cover certain expenses primarily intended to result in the sale
of Advisor Shares, including, but not limited to: (a) costs of payments made to
employees that engage in the distribution of Advisor Shares; (b) payments made
to, and expenses of, persons who provide support services in connection with the
distribution of Advisor Shares, including, but not limited to, office space and
equipment, telephone facilities, processing shareholder transactions and
providing any other shareholder services not otherwise provided by the Fund's
transfer agent; (c) costs
<PAGE>2
relating to the formulation and implementation of marketing and promotional
activities, including, but not limited to, direct mail promotions and
television, radio, newspaper, magazine and other mass media advertising; (d)
costs of printing and distributing prospectuses, statements of additional
information and reports of the Fund to prospective holders of Advisor Shares;
(e) costs involved in preparing, printing and distributing sales literature
pertaining to 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.
The annual fee paid to Service Organizations under Section 1 of the
Plan with respect to Shareholder Services, if any, will compensate Service
Organizations for personal service and/or the maintenance of Customer accounts,
including but not limited to (a) responding to Customer inquiries, (b) providing
information on Customer investments and (c) providing other shareholder liaison
services.
The annual fee paid to Service Organizations under Section 1 of the
Plan with respect to Administrative Services, if any, will compensate Service
Organizations for administrative and accounting services to their Customers,
including, but not limited to: (a) aggregating and processing purchase and
redemption requests from Customers and placing net purchase and redemption
orders with the Fund's distributor or transfer agent; (b) providing Customers
with a service that invests the assets of their accounts in Advisor Shares; (c)
processing dividend payments from the Fund on behalf of Customers; (d) providing
information periodically to Customers showing their positions in Advisor Shares;
(e) arranging for bank wires; (f) providing sub-accounting with respect to
Advisor Shares beneficially owned by Customers or the information to the Fund
necessary for sub-accounting; (g) forwarding shareholder communications from the
Fund (for example, proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to Customers,
if required by law and (h) providing other similar services to the extent
permitted under applicable statutes, rules and regulations.
Payments under this Plan are not tied exclusively to the expenses for
shareholder servicing, administration and distribution expenses actually
incurred by any Service Organization, and the payments may exceed expenses
actually incurred by any Service Organization.
Section 3. Additional Payments.
Counsellors Securities, Warburg, Pincus Counsellors, Inc., the Fund's
investment adviser ("Warburg"), Counsellors Funds Service, Inc., the Fund's
co-administrator ("Counsellors Service"), or any affiliate of any of the
foregoing may, from time to time, make payments to Service Organizations for
<PAGE>3
providing distribution, administrative, accounting and/or other services with
respect to holders of Advisor Shares. Counsellors Securities, Warburg,
Counsellors Service or any affiliate thereof may, from time to time, at their
own expense, pay certain Fund transfer agent fees and expenses related to
accounts of Customers of Service Organizations that have entered into
Agreements. A Service Organization may use a portion of the fees paid pursuant
to the Plan to compensate the Fund's custodian or transfer agent for costs
related to accounts of Customers of the Service Organization that hold Advisor
Shares. Payments by the Fund under this Plan shall not be made to a Service
Organization with respect to services for which the Service Organization is
otherwise compensated by Counsellors Securities, Warburg, Counsellors Service or
any affiliate thereof.
Payments may be made to Service Organizations by Counsellors
Securities, Warburg, Counsellors Service or any affiliate thereof from any such
entity's own resources, which may include a fee it receives from the Fund.
Section 4. Monitoring.
Counsellors Securities shall monitor the arrangements pertaining to
the Fund's Agreements with Service Organizations.
Section 5. Approval by Shareholders.
The Plan is effective, and fees are payable in accordance with Section
1 of the Plan pursuant to the approval of the Plan by a vote of at least a
majority of the outstanding voting Advisor Shares.
Section 6. Approval by Directors.
The Plan is effective, and payments under any related agreement may be
made pursuant to the approval of the Plan and such agreement by a majority vote
of both (a) the full Board of Directors of the Fund and (b) those Directors who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the operation of the Plan or in any agreements related to
it (the "Qualified Directors"), cast in person at a meeting called for the
purpose of voting on the Plan and the related agreements.
Section 7. Continuance of the Plan.
The Plan will continue in effect for so long as its continuance is
specifically approved at least annually by the Fund's Board of Directors in the
manner described in Section 5 above.
Section 8. Termination.
<PAGE>4
The Plan may be terminated at any time by a majority vote of the
Qualified Directors or by a majority of the outstanding voting Advisor Shares.
Section 9. Amendments.
The Plan may not be amended to increase materially the amount of the
fees described in Section 1 above with respect to the Advisor Shares without
approval of at least a majority of the outstanding voting Advisor Shares. In
addition, all material amendments to the Plan must be approved by the Fund's
Board of Directors in the manner described in Section 6 above.
Section 10. Selection of Certain Directors.
While the Plan is in effect, the selection and nomination of the
Fund's Directors who are not interested persons of the Fund will be committed to
the discretion of the Directors then in office who are not interested persons of
the Fund.
Section 11. Written Reports.
In each year during which the Plan remains in effect, Counsellors
Securities will furnish to the Fund's Board of Directors, and the Board will
review, at least quarterly, written reports, which set out the amounts expended
under the Plan and the purposes for which those expenditures were made.
Section 12. Preservation of Materials.
The Fund will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 11 above, for a period of not
less than six years (the first two years in an easily accessible place) from the
date of the Plan, agreement or report.
Section 13. Meanings of Certain Terms.
As used in the Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meanings that
those terms have under the 1940 Act and the rules and regulations thereunder,
subject to any exemption that may be granted to the Fund under the 1940 Act by
the Securities and Exchange Commission.
<PAGE>5
IN WITNESS WHEREOF, the Fund has executed the Plan as of
________ __, 1996.
WARBURG, PINCUS SMALL COMPANY
GROWTH FUND, INC.
By:___________________________
Name:
Title:
Acknowledged this
_____ day of ________, 1996
COUNSELLORS SECURITIES INC.
By:_____________________________
Name:
Title:
