<PAGE> 1
As filed with the U.S. Securities and Exchange Commission
on May 20, 1998
Securities Act File No. 333-49537
Investment Company Act File No. 811-08737
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 International Small Company Fund, Inc.
.......................................
(Exact Name of Registrant as Specified in Charter)
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466 Lexington Avenue
New York, New York 10017-3147
..........................................................
(Address of Principal Executive Offices) (Zip Code)
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Registrant's Telephone Number, including Area Code: (212) 878-0600
Mr. Eugene P. Grace
Warburg, Pincus International Small Company 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.
Title of Securities Being Registered: Common Stock, $.001 par value per share.
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 INTERNATIONAL SMALL COMPANY FUND, INC.
FORM N-1A
CROSS REFERENCE SHEET
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Part A
Item No. Prospectus Heading
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1. Cover Page . . . . . . . . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . . . . . . . . The Fund Expenses
3. Condensed Financial Information . . . . . . . . . . . . Not applicable
4. General Description of
Registrant . . . . . . . . . . . . . . . . . . . . . . Cover Page; Investment Objective and Policies; Risk Factors
and Special Considerations and Certain Investment
Strategies; Investment Guidelines; General Information
5. Management of the Fund . . . . . . . . . . . . . . . . . Management of the Fund
6. Capital Stock and Other
Securities . . . . . . . . . . . . . . . . . . . . . . General Information
7. Purchase of Securities Being
Offered . . . . . . . . . . . . . . . . . . . . . . . How to Open an Account; How to Purchase Shares; Management
of the Fund; Net Asset Value
8. Redemption or Repurchase . . . . . . . . . . . . . . . . How to Redeem and Exchange Shares
9. Pending Legal Proceedings . . . . . . . . . . . . . . . Not applicable
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>k
Part B
Item No.
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10. Cover Page . . . . . . . . . . . . . . . . . . . . . . . Cover Page
11. Table of Contents . . . . . . . . . . . . . . . . . . . Contents
12. General Information and History . . . . . . . . . . . . Management of the Fund
13. Investment Objectives
and Policies . . . . . . . . . . . . . . . . . . . . . Investment Objective; Investment Policies
14. Management of the Registrant . . . . . . . . . . . . . . Management of the Fund
15. Control Persons and Principal
Holders of Securities . . . . . . . . . . . . . . . . Management of the Fund; See Prospectus--"Management of the
Fund"
16. Investment Advisory and
Other Services . . . . . . . . . . . . . . . . . . . . Management of the Fund; See Prospectus--"Management of the
Fund"
17. Brokerage Allocation
and Other Practices . . . . . . . . . . . . . . . . . Investment Policies -- Portfolio Transactions;
See Prospectus--"Portfolio Transactions and Turnover Rate"
18. Capital Stock and Other
Securities . . . . . . . . . . . . . . . . . . . . . . Management of the Fund--Organization of the Fund; See
Prospectus-"General Information"
19. Purchase, Redemption and Pricing
of Securities Being Offered . . . . . . . . . . . . . Additional Purchase and Redemption Information; See
Prospectus-"How to Open an Account," "How to Purchase
Shares," "How to Redeem and
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<PAGE> 5
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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 . . . . . . . . . . . . . . . . . . Statements of Assets and Liabilities; Report of Coopers and
Lybrand, L.L.P., Independent Accountants
</TABLE>
Part C
Information required to be included in Part C is set forth after the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE> 6
SUBJECT TO COMPLETION, DATED MAY 20, 1998
PROSPECTUS
MAY 29, 1998
WARBURG PINCUS
INTERNATIONAL SMALL COMPANY FUND
[WARBURG PINCUS FUNDS LOGO]
<PAGE> 7
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 MAY 20, 1998
PROSPECTUS May 29, 1998
Warburg Pincus Funds is a family of open-end mutual funds that offer investors a
variety of investment opportunities. One fund is described in this Prospectus:
WARBURG PINCUS INTERNATIONAL SMALL COMPANY FUND seeks capital appreciation by
investing in a portfolio of equity securities of non-United States small-sized
companies.
International investing entails special risk considerations, including currency
fluctuations, lower liquidity, economic instability, political uncertainty and
differences in accounting methods. See "Risk Factors and Special
Considerations."
NO LOAD CLASS OF COMMON SHARES
- --------------------------------------------------------------------------------
Common Shares that are "no load" are offered by this Prospectus (i) directly
from the Fund's distributor, Counsellors Securities Inc., and (ii) through
various brokerage firms including Charles Schwab & Company, Inc. Mutual Fund
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 Transfers/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 has been filed with the Securities and Exchange Commission (the "SEC"). The
SEC maintains a Web site (http://www.sec.gov) that contains the Statement of
Additional Information, material incorporated by reference and other information
regarding the Fund. The Statement of Additional Information is available to
investors without charge by calling Warburg Pincus Funds at (800) 927-2874.
Information regarding the status of shareholder accounts may be obtained by
calling Warburg Pincus Funds at the same number. Warburg Pincus Funds maintains
a Web site at www.warburg.com. 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 THE 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.
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<PAGE> 8
THE FUND'S EXPENSES
- --------------------------------------------------------------------------------
Although authorized to offer two separate classes of shares (Common Shares and
Advisor Shares), the Warburg Pincus International Small Company Fund (the
"Fund") currently offers only Common Shares. Common Shares pay the Fund's
distributor a 12b-1 fee. See "Management of the Fund -- Distributor."
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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 (after fee waivers)....................... .49%+
12b-1 Fees................................................ .25%
Other Expenses (after fee waivers and expense
reimbursements)......................................... .81%+
----
Total Fund Operating Expenses (after fee waivers and
expense reimbursements)*................................ 1.55%
EXAMPLE
You would pay the following expense on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
1 year.................................................... $16
3 years................................................... $49
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+ Annual Fund Operating Expenses are based on amounts expected to be charged in
the current fiscal year after the anticipated waiver of fees by the Fund's
investment adviser and co-administrator. The investment adviser and co-
administrator have voluntarily agreed to limit the Fund's expenses as shown
above until October 31, 1999. The investment adviser and co-administrator are
under no obligation to continue such waivers and/or reimbursements thereafter.
* Absent the anticipated waiver of fees by the Fund's investment adviser and
co-administrator, Management Fees for the Fund would equal 1.10%, Other
Expenses would equal .93%, and Total Fund Operating Expenses would equal
2.28%.
---------------------------
The expense table shows the costs and expenses that an investor will bear
directly or indirectly as a Common Shareholder of the Fund. Certain
broker-dealers and financial institutions also may charge their clients fees in
connection with investments in the Fund's Common Shares, which fees are not
reflected in the table. The Example should not be considered a representation of
past or future expenses; actual Fund expenses may be greater or less than those
shown. Moreover, while the Example assumes a 5% annual return, the Fund's actual
performance will vary and may result in a return greater or less than 5%.
Long-term shareholders of the Fund may pay more than the economic equivalent of
the maximum sales charges permitted by the National Association of Securities
Dealers, Inc.
INVESTMENT OBJECTIVE AND POLICIES
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The investment objective of the Fund is to seek capital appreciation. This
objective is a fundamental policy and may not be amended without first obtaining
the approval of a majority of the outstanding shares of the Fund. Any investment
involves risk and, therefore, there can be no assurance that the Fund will
achieve its investment objective. See "Portfolio Investments" and "Certain
Investment Strategies" for descriptions of certain types of investments the Fund
may make.
The Fund is a diversified management investment company that pursues its
investment objective by investing in a portfolio of equity securities of small-
2
<PAGE> 9
sized companies, wherever organized, that in the judgment of Warburg Pincus
Asset Management, Inc., the Fund's investment adviser ("Warburg"), have their
principal business activities and interests outside of the United States. The
Fund intends to invest, under normal market conditions, at least 65% of its
total assets in common stocks, warrants and securities convertible into or
exchangeable for common stocks of foreign small companies that present
attractive opportunities for capital appreciation. Ordinarily the Fund's
investments will be in at least three countries other than the United States.
The Fund considers a "small" company to be one whose market capitalization,
measured at the time the Fund purchases a security of that company, is no larger
than the largest market capitalization of companies represented in the Morgan
Stanley Capital International EAFE(R) Small Cap Index (the "Small Cap Index").
(As of December 31, 1997, the largest market capitalization of companies
represented in the Small Cap Index was $1.39 billion.) Companies whose market
capitalization no longer meets this definition after purchase continue to be
considered small companies for purposes of the Fund's policy of investing at
least 65% of its assets in foreign small companies. As a result of these
policies, the average market capitalization of the Fund at any particular time
may exceed the largest market capitalization of companies represented in the
Small Cap Index, particularly at times when the market values of small company
stocks are rising. Because the Fund will invest in both developed and emerging
markets (as discussed below), some companies in smaller markets in which the
Fund may invest might rank among the largest companies, by market
capitalization, in those markets.
The Fund intends to be widely diversified across securities of many companies
located in a number of countries, and may invest up to 25% of its assets in less
developed countries considered to be "emerging markets." In appropriate
circumstances, such as when a direct investment by the Fund in the securities of
a particular country cannot be made or when the securities of an investment
company are more liquid than the underlying portfolio securities, the Fund may,
consistent with the provisions of the Investment Company Act of 1940, as amended
(the "1940 Act"), invest in the securities of closed-end investment companies.
The Fund will invest primarily in companies whose securities are traded on
national securities exchanges or in an organized over-the-counter market, such
as the Japan Securities Dealers Association Automated Quotation System
("JASDAQ"), the European Association of Securities Dealers Automated Quotation
System ("EASDAQ") and the U.K. Alternative Investment Market ("AIM"). The Fund
may engage in a variety of strategies, including currency hedging and short
selling, to seek to reduce currency and other risks or to enhance return. The
Fund may invest up to 35% of its assets in U.S. securities.
Warburg will analyze countries and industries to identify promising areas of
investment around the world. This "top-down" view attempts to assess a country's
relative attractiveness, looking for improving economic conditions such as
sustainable growth, appropriate monetary policy, a pro-business envi-
3
<PAGE> 10
ronment and non-inflationary government policies. The presence of an apparent
stable or improving political environment is also important in this assessment.
Industries are targeted for their growth characteristics, both cyclical and
secular, their position in the economic cycle and for new developments that
Warburg believes may change the outlook for corporate profits. Investments will
then be analyzed to target those that appear to offer the best valuation
characteristics and opportunity for capital appreciation. In evaluating
investments, Warburg considers a number of factors, including earnings and cash
flow growth, return on capital, balance sheet strength, management capability,
competitive advantages and general operating characteristics. In general,
Warburg seeks to target investments in attractive economies and industries that
it believes offer substantial value in relation to their projected growth rates.
Warburg believes that there are many opportunities to find investments priced
below their long-term intrinsic value in the small company sector chiefly
because currently there may be relatively few analysts researching these
companies, creating potentially large differences between their market prices
and their long-term intrinsic values. Over time, Warburg believes that market
price and intrinsic value should converge creating an opportunity to achieve
capital appreciation. The Fund will invest in a broad mix of small companies
that have varied business characteristics. Both developmental stage companies
that appear to offer high growth rates and more mature companies that can be
purchased below their fundamental long-term value will be considered for
investment.
PORTFOLIO INVESTMENTS
- --------------------------------------------------------------------------------
DEBT SECURITIES. The Fund may invest up to 35% of its total assets in
investment grade debt securities (other than money market obligations) and
preferred stocks 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.
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 forecast accurately changes in interest rates. The market value of debt
obligations may also be expected to vary depending upon, among other factors,
the ability of the issuer to repay principal and interest, any change in
investment rating and general economic conditions.
A security will be deemed to be investment grade if it is rated within the
four highest grades by Moody's Investors Service, Inc. ("Moody's") or Standard &
Poor's Ratings Services ("S&P") or, if unrated, is determined to be of
comparable quality by Warburg. Bonds rated in the fourth highest grade have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
4
<PAGE> 11
and interest payments than is the case with higher grade bonds. Subsequent to
its purchase by the Fund, an issue of securities may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require sale of such securities, although Warburg will
consider such event in its determination of whether the Fund should continue to
hold the securities. The Fund does not currently intend during the coming year
to hold more than 5% of its net assets in securities rated below investment
grade, including convertible and non-convertible debt securities downgraded
below investment grade subsequent to acquisition by the Fund.
When Warburg believes that a defensive posture is warranted, the Fund may
invest temporarily without limit in U.S. and foreign investment grade debt
obligations, other securities of U.S. companies and in domestic and foreign
money market obligations, including repurchase agreements.
MONEY MARKET OBLIGATIONS. The Fund is authorized to invest, under normal
market conditions, up to 20% of its total assets in domestic and foreign
short-term (one year or less remaining to maturity) and medium-term (five years
or less remaining to maturity) money market obligations and for temporary
defensive purposes may invest in these securities without limit. These
instruments consist of obligations issued or guaranteed by the U.S. government
or a foreign government, 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 invest in repurchase agreement
transactions with member banks of the Federal Reserve System and certain non-
bank dealers. Repurchase agreements are contracts under which the buyer of a
security simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under the terms of a typical repurchase agreement,
the Fund would acquire any underlying security for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the underlying
securities will at all times be at least equal to the total amount of the
purchase obligation, including interest. The Fund bears a risk of loss in the
event that the other party to a repurchase agreement defaults on its obligations
or becomes bankrupt and the Fund is delayed or prevented from exercising its
right to dispose of the collateral securities, including the risk of a possible
decline in the value of the underlying securities during the period in which the
Fund
5
<PAGE> 12
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
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 or Warburg. As a shareholder in any
mutual fund, the Fund will bear its ratable share of the mutual fund's expenses,
including management fees, and will remain subject to payment of the Fund's
administration fees and other expenses with respect to assets so invested.
U.S. GOVERNMENT SECURITIES. U.S. government securities in which the Fund may
invest include: direct obligations of the U.S. Treasury, and obligations issued
by U.S. government agencies and instrumentalities, including instruments that
are supported by the full faith and credit of the United States, instruments
that are supported by the right of the issuer to borrow from the U.S. Treasury
and instruments that are supported by the credit of the instrumentality.
CONVERTIBLE SECURITIES. Convertible securities in which the Fund may invest,
including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an investor
to benefit from increases in the market price of the underlying common stock.
Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. The value of convertible securities fluctuates in relation to
changes in interest rates like bonds and, in addition, fluctuates in relation to
the underlying common stock. Subsequent to purchase by the Fund, convertible
securities may cease to be rated or a rating may be reduced below the minimum
required for purchase by the Fund. Neither event will require sale of such
securities, although Warburg will consider such event in its determination of
whether the Fund should continue to hold the securities.
WARRANTS. The Fund may invest up to 10% of its total assets in warrants.
Warrants are securities that give the holder the right, but not the obligation,
to purchase equity issues of the company issuing the warrants, or a related
company, at a fixed price either on a date certain or during a set period.
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" and "Certain Investment Strategies" in this Prospectus.
6
<PAGE> 13
EMERGING MARKETS. Investing in securities of issuers located in emerging
markets involves not only the risks described below, with respect to investing
in foreign securities, but also other risks, including exposure to economic
structures that are generally less diverse and mature than, and to political
systems that can be expected to have less stability than, those of developed
countries. For example, many investments in emerging markets experienced
significant declines in value due to political and currency volatility in
emerging market countries during the latter part of 1997. Other characteristics
of emerging markets that may affect investment there include certain national
policies that may restrict investment by foreigners in issuers or industries
deemed sensitive to relevant national interests and the absence of developed
legal structures governing private and foreign investments and private property.
The typically small size of the markets for securities of issuers located in
emerging markets and the possibility of a low or nonexistent volume of trading
in those securities may also result in a lack of liquidity and in price
volatility of those securities.
EMERGING GROWTH AND SMALLER CAPITALIZATION COMPANIES; UNSEASONED
ISSUERS. Investing in securities of emerging growth, small- and medium-sized
companies and companies with continuous operations of less than three years
("unseasoned issuers") may involve greater risks than investing in larger, more
established companies 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 such companies normally have fewer
shares outstanding than larger companies, it may be more difficult for the Fund
to buy or sell significant amounts of such shares without an unfavorable impact
on prevailing prices. These companies may have limited product lines, markets or
financial resources and may lack management depth. In addition, these 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 these companies than for larger, more
established ones. Although investing in securities of these companies offers
potential for above-average returns if the companies are successful, the risk
exists that the companies will not succeed and the prices of the companies'
shares could significantly decline in value. Therefore, an investment in the
Fund may involve a greater degree of risk than an investment in other mutual
funds that seek capital appreciation by investing in more established, 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
7
<PAGE> 14
trading market, the Fund's 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 but increases an
investor's risk 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.
YEAR 2000 COMPLIANCE. Many services provided to the Fund and its shareholders
by Warburg and certain of its affiliates (the "Warburg Service Providers") and
the Fund's other service providers rely on the functioning of their respective
computer systems. Many computer systems cannot distinguish the year 2000 from
the year 1900, with resulting potential difficulty in performing various
calculations (the "Year 2000 Issue"). The Year 2000 Issue could potentially have
an adverse impact on the handling of security trades, the payment of interest
and dividends, pricing, account services and other Fund operations.
The Warburg Service Providers recognize the importance of the Year 2000 Issue
and are taking appropriate steps necessary in preparation for the year 2000. At
this time, there can be no assurance that these steps will be
8
<PAGE> 15
sufficient to avoid any adverse impact on the Fund nor can there be any
assurance that the Year 2000 Issue will not have an adverse effect on the Fund's
investments or on global markets or economies, generally. In addition, it has
been reported that foreign institutions have made less progress in addressing
the Year 2000 Issue than major U.S. entities, which could adversely affect the
Fund's foreign investments.
The Warburg Service Providers anticipate that their systems and those of the
Fund's other service providers will be adapted in time for the year 2000. To
further this goal, the Warburg Service Providers have coordinated a plan to
repair, adapt or replace systems that are not year 2000 compliant, and are
seeking to obtain similar representations from the Fund's other major service
providers. The Warburg Service Providers will be monitoring the Year 2000 Issue
in an effort to ensure appropriate preparation.
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 relevant 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 higher 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
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Although there is no intention of doing so during the coming year, the Fund is
authorized to: (i) purchase securities on a when-issued basis and purchase or
sell securities for delayed delivery, (ii) lend portfolio securities, and (iii)
enter into reverse repurchase agreements and dollar rolls. The Fund may also
invest in asset-backed securities, mortgaged-backed securities, zero coupon
securities and stand-by commitments, although the Fund currently anticipates
9
<PAGE> 16
that during the coming year such investments will each not exceed 5% of net
assets. Detailed information concerning the Fund's strategies and related risks
is contained below and in the Statement of Additional Information.
FOREIGN SECURITIES. The Fund will ordinarily hold no less than 65% of its
total assets in foreign securities. There are certain risks involved in
investing in securities of companies and governments of foreign nations which
are in addition to the usual risks inherent in domestic investments. These risks
include those resulting from fluctuations in currency exchange rates,
revaluation of currencies, future adverse political and economic developments
and the possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions, reduced availability of public information
concerning issuers, the lack of uniform accounting, auditing and financial
reporting standards and other regulatory practices and requirements that are
often generally less rigorous than those applied in the United States. Moreover,
securities of many foreign companies may be less liquid and their prices more
volatile than those of securities of comparable U.S. companies. Certain foreign
countries are known to experience long delays between the trade and settlement
dates of securities purchased or sold. In addition, with respect to certain
foreign countries, there is the possibility of expropriation, nationalization,
confiscatory taxation and limitations on the use or removal of funds or other
assets of the Fund, including the withholding of dividends. Foreign securities
may be subject to foreign government taxes that would reduce the net yield on
such securities. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments positions. Investment in foreign securities will also result
in higher operating expenses due to the cost of converting foreign currency into
U.S. dollars, the payment of fixed brokerage commissions on foreign exchanges,
which generally are higher than commissions on U.S. exchanges, higher valuation
and communications costs and the expense of maintaining securities with foreign
custodians. The risks associated with investing in securities of non-U.S.
issuers are generally heightened for investments in securities of issuers in
emerging markets.
DEPOSITARY RECEIPTS. Certain of the above risks may be involved with American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
International Depositary Receipts ("IDRs"), instruments that evidence ownership
in underlying securities issued by a foreign corporation. ADRs, EDRs and IDRs
may not necessarily be denominated in the same currency as the securities whose
ownership they represent. ADRs are typically issued by a U.S. bank or trust
company. EDRs (sometimes referred to as Continental Depositary Receipts) are
issued in Europe, and IDRs (sometimes referred to as Global Depositary Receipts)
are issued outside the United States, each typically by non-U.S. banks and trust
companies.
STRATEGIC AND OTHER TRANSACTIONS. At the discretion of Warburg, the Fund may,
but is not required to, engage in a number of strategies involving op-
10
<PAGE> 17
tions, futures, forward currency contracts and swaps. 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 other applicable regulatory authorities.
Securities Options and Stock Index Options. The Fund may write covered call
options 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 15% 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
11
<PAGE> 18
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.
Swaps. The Fund may enter into swaps relating to indexes, currencies and
equity interests of foreign issuers without limit. A swap transaction is an
agreement between the Fund and a counterparty to act in accordance with the
terms of the swap contract. Index swaps involve the exchange by the Fund with
another party of the respective amounts payable with respect to a notional
principal amount related to one or more indexes. Currency swaps involve the
exchange of cash flows on a notional amount of two or more currencies based on
their relative future values. An equity swap is an agreement to exchange streams
of payments computed by reference to a notional amount based on the performance
of a basket of stocks or a single stock. The Fund may enter into these
transactions to preserve a return or spread on a particular investment or
portion of its assets, to protect against currency fluctuations, as a duration
management technique or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. The Fund may also
use these transactions for speculative purposes, such as to obtain the price
performance of a security without actually purchasing the security in
circumstances where, for example, the subject security is illiquid, is
unavailable for direct investment or available only on less attractive terms.
Swaps have risks associated with them, including possible default by the
counterparty to the transaction, illiquidity and, where swaps are used as
hedges, the risk that the use of a swap could result in losses greater than if
the swap had not been employed.
12
<PAGE> 19
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the agreement, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Swaps do not involve the delivery
of securities, other underlying assets or principal. Accordingly, the risk of
loss with respect to swaps is limited to the net amount of payments that the
Fund is contractually obligated to make. If the counterparty to a swap defaults,
the Fund's risk of loss consists of the net amount of payments that the Fund is
contractually entitled to receive. Where swaps are entered into for good faith
hedging purposes, Warburg believes such obligations do not constitute senior
securities under the 1940 Act and, accordingly, will not treat them as being
subject to the Fund's borrowing restrictions. Where swaps are entered into for
other than hedging purposes, the Fund will segregate an amount of cash or liquid
securities having a value equal to the accrued excess of its obligations over
its entitlements with respect to each swap on a daily basis.
Hedging Considerations. The Fund may engage in options, futures, currency
transactions and swaps 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, currency exchange
transactions and swaps 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 predict correctly 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 a 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 and swaps. The use of these strategies may require that the Fund
maintain cash or 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
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<PAGE> 20
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 securities it does not own in
anticipation of a decline in the market price of the securities. The current
market value of the securities sold short (excluding short sales "against the
box") will not exceed 10% of the Fund's assets.
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 will make a profit or incur a loss as a
result of a short sale depending on whether the price of the securities
decreases or increases between the date of the short sale and the date on which
the Fund purchases the security to replace the borrowed securities that have
been sold. The amount of any loss would be increased (and any gain decreased) by
any premium or interest the Fund is required to pay in connection with a short
sale.
The Fund's obligation to replace the securities borrowed in connection with a
short sale will be secured by cash or 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 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 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, a 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 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," may be entered into by the Fund, for
example, to lock in a sale price for a security the Fund does not wish to sell
immediately. The Fund will deposit, in a segregated account with its custodian
or a qualified
14
<PAGE> 21
subcustodian, the securities sold short or convertible or exchangeable preferred
stocks or debt securities in connection with short sales against the box. 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.
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
total assets, and may pledge its assets to the extent necessary to secure
permitted borrowings. Whenever borrowings (including reverse repurchase
agreements) exceed 5% of the Fund's 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 1.10% 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 advisory firm which provides investment
services to investment companies, employee benefit plans, endowment funds,
foundations and other institutions and individuals. As of March 31, 1998,
Warburg managed approximately $21.2 billion of assets, including approximately
$12.4 billion of investment company assets. Incorporated in 1970, Warburg is
indirectly controlled by Warburg, Pincus & Co. ("WP&Co."),
15
<PAGE> 22
which has no business other than being a holding company of Warburg and its
affiliates. Lionel I. Pincus, the managing partner of WP&Co., may be deemed to
control both WP&Co. and Warburg. Warburg's address is 466 Lexington Avenue, New
York, New York 10017-3147.
PORTFOLIO MANAGERS. Harold E. Sharon has been Portfolio Manager of the Fund,
and J.H. Cullum Clark, CFA, has been Associate Portfolio Manager of the Fund,
since the Fund's inception. Mr. Sharon, a Managing Director of Warburg, has been
with Warburg since March 1998. Mr. Sharon was also a Vice President and
Portfolio Manager at Warburg from 1990-1994. From September 1994 through
February 1998, he was an executive director and portfolio manager at CIBC
Oppenheimer. Mr. Clark, a Senior Vice President of Warburg, has been with
Warburg since 1996, before which time he was an analyst and portfolio manager
with Brown Brothers Harriman.
CO-ADMINISTRATORS. The Fund employs Counsellors Funds Service, Inc., a wholly
owned subsidiary of Warburg ("Counsellors Service"), 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 their various service providers,
furnishing corporate secretarial services, which include preparing materials for
meetings of the Board, preparing proxy statements and annual and semiannual
reports, assisting in the preparation of tax returns and 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 Inc. ("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 .12% of the Fund's first $250
million in average daily net assets, .10% of the next $250 million in average
daily net assets, .08% of the next $250 million in average daily net assets, and
.05% of average daily net assets over $750 million, subject in each case to a
minimum annual fee and exclusive of out-of-pocket expenses. PFPC has its
principal offices at 400 Bellevue Parkway, Wilmington, Delaware 19809.
CUSTODIANS. State Street Bank and Trust Company ("State Street") serves as
custodian of the Fund's non-U.S. assets. PNC Bank, National Association ("PNC")
serves as custodian of the Fund's U.S. assets. State Street's principal business
address is 225 Franklin Street, Boston, Massachusetts 02110. Like PFPC, PNC is a
subsidiary of PNC Bank Corp. and its principal business address is 1600 Market
Street, Philadelphia, Pennsylvania 19103.
TRANSFER AGENT. State Street also serves 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"), re-
16
<PAGE> 23
sponsibility for most shareholder servicing functions. 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 a 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 consider 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 for qualified recipients 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. Incentives
may include opportunities to attend business meetings, conferences, sales or
training programs for recipients' employees or clients and other programs or
events and may also include opportunities to participate in advertising or sales
campaigns and/or shareholder services and programs regarding one or more Warburg
Pincus Funds. Warburg or its affiliates may pay for travel, meals and lodging in
connection with these promotional activities. 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 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 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
17
<PAGE> 24
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
OR
Overnight to:
BFDS
Attn: Warburg Pincus Funds
2 Heritage Drive
North Quincy, Massachusetts 02171
Completed and signed account applications should be sent to the above.
RETIREMENT PLANS AND UTMA/UGMA ACCOUNTS. For information (i) about investing
in the Fund through a tax-advantaged retirement plan, such as an Individual
Retirement Account ("IRA"), or (ii) about opening a Uniform Transfers to Minors
Act ("UTMA") account or Uniform Gifts to Minors Act ("UGMA") account, an
investor should telephone Warburg Pincus Funds at (800) 927-2874 or write to
Warburg Pincus Funds at an address set forth above. Investors should consult
their own tax advisers about the establishment of retirement plans and UTMA or
UGMA accounts.
CHANGES TO ACCOUNT. For information on how to make changes to an account,
including changes to account registration, address and/or privileges, an
investor should telephone Warburg Pincus Funds at (800) 927-2874. Shareholders
are responsible for maintaining current account registration and addresses with
the Fund. No interest will be paid on amounts represented by uncashed
distribution or redemption checks.
HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------------
Common Shares of the Fund may be purchased either by mail or, with special
advance instructions, by wire and automated clearing house transactions ("ACH on
Demand").
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 or by ACH on Demand,
as described below. For certain retirement plans (described above) and UTMA/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 Warburg 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
18
<PAGE> 25
payments for initial and subsequent investments should be preceded by an order
placed with the Fund and should clearly indicate the investor's account number
and the name of the Fund in which shares are being purchased. The Fund reserves
the right to suspend the offering of shares for a period of time or to reject
any specific purchase order. In the interest of economy and convenience,
physical certificates representing shares in the 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 an 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 prior to the close of regular
trading on The New York Stock Exchange, Inc. (the "NYSE") (currently 4:00 p.m.,
Eastern time) on a day that the Fund calculates its net asset value (a "business
day"), the purchase will be made at the Fund's net asset value calculated at the
end of that day. If payment is received at or 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 payment is 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 using
the following wire address:
State Street Bank and Trust Company
ABA# 0110 000 28
Attn: Mutual Funds/Custody Department
Warburg Pincus International Small Company Fund
DDA# 9904-649-2
F/F/C: [Account Number and Account Registration]
If a telephone order is received prior to 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 accord-
19
<PAGE> 26
ing to the net asset value of the Fund on that day and are 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 at or 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.
AUTOMATIC MONTHLY INVESTMENT PLAN AND ACH ON DEMAND. The Automatic Monthly
Investment Plan allows shareholders to authorize the Fund or its agent 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. Shareholders may
also purchase shares by calling Warburg Pincus Funds at (800) 927-2874 on any
business day to request direct debit or credit (for redemptions) of their bank
account through an ACH on Demand transaction.
To establish the Automatic Monthly Investment Plan and/or ACH on Demand
option, obtain a separate application or complete the relevant section of the
account application. Only an account maintained at a financial institution which
is an automated clearing house member may be used, and one common name must
appear on both the shareholder's Fund registration and bank account
registration. Shareholders using this service must satisfy the initial
investment minimum for the Fund prior to or concurrent with the start of any
Automatic Monthly Investment Plan or ACH on Demand transaction. Please contact
Warburg Pincus Funds at (800) 927-2874 for additional information. Investors
should allow a period of up to 30 days in order to implement an Automatic
Investment Plan. The failure to provide complete information could result in
further delays.
If an ACH on Demand transaction request is received prior to the close of
regular trading on the NYSE, the shares will be priced according to the net
asset value of Fund shares on that day and are entitled to dividends and
distributions beginning on that day. If a request is received at or after the
close of regular trading on the NYSE, the shares will be priced at the Fund's
net asset value on the following business day.
TELEPHONE TRANSACTIONS. Unless otherwise indicated on the account application
or if the ACH on Demand option is elected, an investor may request transactions
by telephone. Investors should realize that in conducting transactions by
telephone they may be giving up a measure of security that they may have if they
were to conduct such transactions in writing. 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 designed to give reasonable assurance that instructions
communicated by telephone are genuine. Such procedures include providing written
confirmation of telephone transactions, tape recording
20
<PAGE> 27
telephone instructions and requiring specific personal information prior to
acting upon telephone instructions.
PURCHASES THROUGH INTERMEDIARIES. Common Shares of the Fund are available
through the Charles Schwab & Company, Inc. Mutual Fund OneSource(TM) Program;
Fidelity Brokerage Services, Inc. Funds-Network(TM) Program; Jack White &
Company, Inc.; and Waterhouse Securities, Inc. Generally, these programs require
customers to pay either no or low transaction fees in connection with purchases,
exchanges or redemptions. The Fund is also available through certain
broker-dealers, financial institutions and other industry professionals
(including the brokerage firms offering the programs described above,
collectively, "Service Organizations"), which may impose certain conditions on
their clients or customers that invest in the Fund, which are in addition to or
different than those described in this Prospectus, and may charge their clients
or customers direct fees. Certain features of the Fund, such as the initial and
subsequent investment minimums, redemption fees and certain trading
restrictions, may be modified or waived by Service Organizations. Service
Organizations may impose transaction or administrative charges or other direct
fees, which charges and fees would not be imposed if Fund shares are purchased
directly from the Fund. 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, exchange 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 or, if applicable, their designees may enter confirmed
purchase or redemption 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. The Fund may be deemed to have received a
purchase or redemption order when a Service Organization, or, if applicable, its
authorized designee, accepts the order. Such orders received by the Fund in
proper form will be priced at the Fund's net asset value next computed after
they are accepted by the Service Organization or its authorized designee.
For administration, subaccounting, transfer agency and/or other services,
Counsellors Securities or its affiliates may pay Service Organizations and
certain recordkeeping organizations a fee of up to .40% (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
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<PAGE> 28
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.
GENERAL. The Fund reserves the right to reject any specific purchase order,
including certain purchases made by exchange (see "How to Redeem and Exchange
Shares -- Exchange of Shares" below). Purchase orders may be refused if, in
Warburg's judgment, the Fund would be unable to invest the money effectively in
accordance with its investment objective and policies, or would otherwise
potentially be adversely affected. The Fund may discontinue sales of its shares
if management believes that a substantial further increase in assets may
adversely affect that 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 such 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. If
an investor desires to redeem his shares by mail, a written request for
redemption should be sent to Warburg Pincus Funds at an 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. Payment of redemption proceeds may be delayed in
connection with account changes. 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. 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
reserves the right to do so in the future. During periods of significant
economic or market change, telephone redemptions may be difficult to implement.
If an investor is unable to contact Warburg Pincus Funds by telephone, an
investor may deliver the redemption request to Warburg Pincus Funds by mail at
an address shown above under "How to Open an Account." Although
22
<PAGE> 29
the Fund will redeem shares purchased by check, through the Automatic Monthly
Investment Plan or by ACH on Demand before the check or funds clear, payments of
the redemption proceeds will be delayed for up to five days (for funds received
through the Automatic Monthly Investment Plan or by ACH on Demand) or up to ten
days (for check purchases) from the date of purchase. Investors should consider
purchasing shares using a certified or bank check, money order or federal funds
wire if they anticipate an immediate need for redemption proceeds.
If a redemption order is received by a 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 at or 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 UTMA 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.
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 re-
23
<PAGE> 30
quest is received by Warburg Pincus Funds or its agent prior to the close of
regular trading on the NYSE, the exchange will be made at each fund's net asset
value determined at the end of that business day. Exchanges will be effected
without a sales charge but must satisfy the minimum dollar amount necessary for
new purchases. The Fund may refuse exchange purchases at any time without prior
notice. Currently, exchanges may be made with the following other funds:
- - WARBURG PINCUS CASH RESERVE FUND -- a money market fund investing in
short-term, high quality money market instruments;
- - WARBURG PINCUS NEW YORK TAX EXEMPT FUND -- a money market fund investing in
short-term, high quality municipal obligations designed for New York investors
seeking income exempt from federal, New York State and New York City income
tax;
- - WARBURG PINCUS NEW YORK INTERMEDIATE MUNICIPAL FUND -- an intermediate-term
municipal bond fund designed for New York investors seeking income exempt from
federal, New York State and New York City income tax;
- - WARBURG PINCUS INTERMEDIATE MATURITY GOVERNMENT FUND -- an intermediate-term
bond fund investing in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities;
- - WARBURG PINCUS FIXED INCOME FUND -- a bond fund seeking current income and,
secondarily, capital appreciation by investing in a diversified portfolio of
fixed-income securities;
- - WARBURG PINCUS GLOBAL FIXED INCOME FUND -- a bond fund investing in a
portfolio consisting of investment grade fixed-income securities of
governmental and corporate issuers denominated in various currencies,
including U.S. dollars;
- - WARBURG PINCUS BALANCED FUND -- a fund seeking maximum total return through a
combination of long-term growth of capital and current income consistent with
preservation of capital through diversified investments in equity and debt
securities;
- - WARBURG PINCUS GROWTH & INCOME FUND -- an equity fund seeking long-term growth
of capital and income and a reasonable current return;
- - WARBURG PINCUS CAPITAL APPRECIATION FUND -- an equity fund seeking long-term
capital appreciation by investing primarily in a broadly diversified portfolio
of equity securities of 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;
24
<PAGE> 31
- - WARBURG PINCUS SMALL COMPANY GROWTH FUND* -- an equity fund seeking capital
growth by investing in equity securities of small-sized domestic 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 MAJOR FOREIGN MARKETS FUND -- an equity fund seeking long-term
capital appreciation by investing in equity securities of issuers consisting
of companies in major foreign securities markets;
- - WARBURG PINCUS INTERNATIONAL EQUITY FUND -- an equity fund seeking long-term
capital appreciation by investing primarily in equity securities of non-
United States issuers;
- - WARBURG PINCUS EMERGING MARKETS FUND -- an equity fund seeking growth of
capital by investing primarily in securities of non-United States issuers
consisting of companies in emerging securities markets;
- - WARBURG PINCUS JAPAN GROWTH FUND -- an equity fund seeking long-term growth of
capital by investing primarily in equity securities of Japanese issuers; and
- - WARBURG PINCUS JAPAN OTC FUND -- an equity fund seeking long-term capital
appreciation by investing in a portfolio of securities traded in the Japanese
over-the-counter market.
The exchange privilege is available to shareholders residing in any state in
which the Common Shares being acquired may legally be sold. When an investor
effects an exchange of shares, the exchange is treated for federal income tax
purposes as a redemption. Therefore, the investor may realize a taxable gain or
loss in connection with the exchange. Investors wishing to exchange Common
Shares of the Fund for Common Shares in another Warburg Pincus Fund should
review the prospectus of the other fund prior to making an exchange. For further
information regarding the exchange privilege or to obtain a current prospectus
for another Warburg Pincus Fund, an investor should contact Warburg Pincus Funds
at (800) 927-2874.
The Fund reserves the right to refuse exchange purchases by any person or
group if, in Warburg's judgment, the Fund would be unable to invest the money
effectively in accordance with its investment objective and policies, or would
otherwise potentially be adversely affected. Examples of when an ex-
- ---------------
* Warburg Pincus Small Company Growth Fund is currently closed to certain new
investors; the Small Company Growth Fund's prospectus describes the types of
investors that may purchase shares.
25
<PAGE> 32
change purchase could be refused are when the Fund receives or anticipates
receiving large exchange orders at or about the same time and/or when a pattern
of exchanges within a short period of time (often associated with a "market
timing" strategy) is discerned. The Fund reserves the right to terminate or
modify the exchange privilege at any time upon 30 days' notice to shareholders.
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 on the previous 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 an 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 Internal Revenue Code of 1986, as amended
(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 derived from net
realized short-term capital gains are taxable to investors as ordinary income
whether received in cash or reinvested in additional Fund shares. Distributions
derived from net realized long-term capital gains will be taxable to investors
as long-term capital gains, regardless of how long investors have held Fund
shares or whether such distributions are received in cash or reinvested in Fund
shares. As a general rule, an investor's gain or loss on a sale or redemption of
Fund shares will be a long-term capital gain or loss if the investor has held
the shares for more than one year and will be a short-term capital gain or loss
if the investor has held the shares for one year or less. However, any loss
realized upon the sale or redemption of shares within six
26
<PAGE> 33
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.
The Taxpayer Relief Act of 1997 made certain changes to the Code with respect
to taxation of long-term capital gains earned by taxpayers other than a
corporation. In general, for sales made after May 6, 1997, the maximum tax rate
for individual taxpayers on net long-term capital gains is lowered to 20% for
most assets (including long-term capital gains recognized by shareholders on the
sale or redemption of Fund shares that were held as capital assets). This 20%
rate applies to sales on or after July 29, 1997 only if the asset was held for
more than 18 months at the time of disposition. Capital gains on the disposition
of assets on or after July 29, 1997 held for more than one year and up to 18
months at the time of disposition will be taxed as "mid-term gain" at a maximum
rate of 28%. A rate of 18% instead of 20% will apply after December 31, 2000 for
assets held for more than five years. However, the 18% rate applies only to
assets acquired after December 31, 2000 unless the taxpayer elects to treat an
asset held prior to such date as sold for fair market value on January 1, 2001.
In the case of individuals whose ordinary income is taxed at a 15% rate, the 20%
rate is reduced to 10% and the 10% rate for assets held for more than five years
is reduced to 8%. The Fund will provide information relating to that portion of
a "capital gain dividend" that may be treated by investors as eligible for the
reduced capital gains rate for capital assets held for more than 18 months.
Investors may be proportionately liable for taxes on income and gains of the
Fund, but investors not subject to tax on their income will not be required to
pay tax on amounts distributed to them. The Fund's investment activities,
including short sales of securities, will not result in unrelated business
taxable income to a tax-exempt investor. The Fund's dividends may qualify for
the dividends received deduction for corporations to the extent they are derived
from dividends attributable to certain types of stock issued by U.S. domestic
corporations.
Dividends and interest received by the Fund may be subject to withholding and
other taxes imposed by foreign countries. However, tax conventions between
certain countries and the United States may reduce or eliminate such taxes. If
the Fund qualifies as a regulated investment company, if certain asset and
distribution requirements are satisfied and if more than 50% of the Fund's total
assets at the close of its fiscal year consists of stock or securities of
foreign corporations, the Fund may elect for U.S. income tax purposes to treat
foreign income taxes paid by it as paid by its shareholders. The Fund may
qualify for and make this election in some, but not necessarily all, of its
taxable years. If a Fund were to make an election, shareholders of the Fund
would be required to take into account an amount equal to their pro rata
portions of such foreign taxes in computing their taxable income and then treat
an amount equal to those foreign taxes as a U.S. federal income tax deduction or
as a foreign tax credit against their U.S. federal income taxes. Shortly after
any year for which
27
<PAGE> 34
it makes such an election, the Fund will report to its shareholders the amount
per share of such foreign income tax that must be included in each shareholder's
gross income and the amount which will be available for the deduction or credit.
No deduction for foreign taxes may be claimed by a shareholder who does not
itemize deductions. Certain limitations will be imposed on the extent to which
the credit (but not the deduction) for foreign taxes may be claimed.
Certain provisions of the Code may require that a gain recognized by the Fund
upon the closing of a short sale be treated as a short-term capital gain, and
that a loss recognized by the Fund upon the closing of a short sale be treated
as a long-term capital loss, regardless of the amount of time that the Fund held
the securities used to close the short sale. The Fund's use of short sales may
also affect the holding periods of certain securities held by the Fund if such
securities are "substantially identical" to securities used by the Fund to close
the short sale. The Fund's short selling activities will not result in unrelated
business taxable income to a tax-exempt investor.
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, Dr. Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, 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 each Fund generally changes each day.
The net asset value per Common Share of the Fund is computed by adding the
Common Shares' pro rata share of the value of the Fund's assets, deducting the
Common Shares' pro rata share of the Fund's liabilities and the liabilities
specifically allocated to Common Shares and then dividing the result by the
total number of outstanding Common Shares.
Securities listed on a U.S. securities exchange (including securities traded
through the Nasdaq National Market System) or foreign securities exchange or
traded in an over-the-counter market will be valued at the most recent sale
price when the valuation is made. Options and futures contracts will be valued
similarly. Debt obligations that mature in 60 days or less from the valuation
date are valued on the basis of amortized cost, unless the Board
28
<PAGE> 35
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 and intends to have the net asset value of Common Shares 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 capital appreciation over a
period of time 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 Fund's
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.
The Fund may compare its performance with (i) that of other mutual funds as
listed in the rankings prepared by Lipper Analytical Services, Inc. or similar
investment services that monitor the performance of mutual funds or as set forth
in the publications listed below; (ii) the Morgan Stanley Capital Interna-
29
<PAGE> 36
tional EAFE(R) Small Cap Index and/or other indexes prepared by Morgan Stanley
that are appropriate benchmarks for securities represented in the Fund; 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, Mutual Fund Magazine, SmartMoney, The Wall
Street Journal and Worth. Morningstar, Inc. rates funds in broad categories
based on risk/reward analyses over various time periods. In addition, each Fund
may from time to time compare 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.
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; analysis of holdings by industry, country, credit quality
and other characteristics; and comparison and analysis of the Fund with respect
to relevant market and industry benchmarks. 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.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
ORGANIZATION. The Fund was incorporated on April 2, 1998 under the laws of the
State of Maryland under the name "Warburg, Pincus International Small Company
Fund, Inc."
The Fund's charter authorizes its Board to issue three billion full and
fractional shares of capital stock, $.001 par value per share, of which one
billion shares are designated Common Shares and two billion shares are
designated Advisor Shares. Under 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. Although the Fund currently offers only Common Shares,
the Fund is authorized to offer a separate class of shares, the Advisor
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<PAGE> 37
Shares. Individual investors will only be able to purchase Advisor Shares
through institutional shareholders of record, broker-dealers, financial
institutions, depository institutions, retirement plans and financial
intermediaries. Shares of each class will 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 to be paid by the
Advisor Shares, the total return on such shares can be expected to be lower than
the total return on Common Shares. Once offered, investors will be able to
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 relevant 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 a 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 Monthly
Investment Plan). 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 or on the Warburg Pincus Funds Web site
at www.warburg.com.
------------------------------
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.
31
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TABLE OF CONTENTS
<TABLE>
<S> <C>
The Fund's Expenses...................................... 2
Investment Objective and Policies........................ 2
Portfolio Investments.................................... 4
Risk Factors and Special Considerations.................. 6
Portfolio Transactions and Turnover Rate................. 9
Certain Investment Strategies............................ 9
Investment Guidelines.................................... 15
Management of the Fund................................... 15
How to Open an Account................................... 17
How to Purchase Shares................................... 18
How to Redeem and Exchange Shares........................ 22
Dividends, Distributions and Taxes....................... 26
Net Asset Value.......................................... 28
Performance.............................................. 29
General Information...................................... 30
</TABLE>
[WARBURG PINCUS FUNDS LOGO]
P.O. BOX 9030, BOSTON, MA 02205-9030
800-WARBURG (800-927-2874)
www.warburg.com
COUNSELLORS SECURITIES INC., DISTRIBUTOR. WPISM-1-0598
<PAGE> 39
SUBJECT TO COMPLETION, DATED MAY 20, 1998
STATEMENT OF ADDITIONAL INFORMATION
May 29, 1998
------------------------
WARBURG PINCUS INTERNATIONAL SMALL COMPANY FUND
P.O. Box 9030, Boston, Massachusetts 02205-9030
For information, call (800) WARBURG
------------------------
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objective ............................................... 2
Investment Policies ................................................ 2
Management of the Fund ............................................. 28
Additional Purchase and Redemption Information ..................... 34
Exchange Privilege ................................................. 35
Additional Information Concerning Taxes ............................ 35
Determination of Performance ....................................... 40
Independent Accountants and Counsel ................................ 42
Financial Statement ................................................ 42
Appendix - Description of Ratings .................................. A-1
</TABLE>
This Statement of Additional Information is meant to be read in
conjunction with the Prospectus for the Common Shares of Warburg Pincus
International Small Company Fund (the "Fund"), dated May 29, 1998, as amended or
supplemented from time to time, and is incorporated by reference in its entirety
into the Prospectus. Because this Statement of Additional Information is not
itself a prospectus, no investment in shares of the Fund should be made solely
upon the information contained herein. Copies of the Fund's Prospectus and
information regarding the Fund's current performance may be obtained by calling
the Fund at (800) 927-2874. Information regarding the status of shareholder
accounts may also be obtained by calling the Fund at the same number or by
writing to the Fund, P.O. Box 9030, Boston, Massachusetts 02205-9030.
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 any
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> 40
INVESTMENT OBJECTIVE
The investment objective of the Fund is capital appreciation.
INVESTMENT POLICIES
The following policies supplement the descriptions of the Fund's
investment objective and policies in the Prospectus.
Options, Futures and Currency Exchange Transactions
Securities Options. The Fund may write covered put and call
options on stock and debt securities. The Fund may purchase covered put and
call options that are traded on foreign and U.S. exchanges, as well as
over-the-counter ("OTC").
The Fund will realize 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.
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
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<PAGE> 41
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 Asset Management, Inc., each 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 exists a
secondary market for an option of the same series on a recognized securities
exchange or in the OTC 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
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<PAGE> 42
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 OTC market may be more limited
than for exchange-traded options and may also involve the risk that securities
dealers participating in OTC transactions would fail to meet their obligations
to the Fund. The Fund, however, intends to purchase OTC options only from
dealers whose debt securities, as determined by Warburg, are considered to be
investment grade. If, as a covered call option writer, the Fund is unable to
effect a closing purchase transaction in a secondary market, it will not be able
to sell the underlying security until the option expires or it delivers the
underlying security upon exercise. In either case, the Fund would continue to be
at market risk on the security and could face higher transaction costs,
including brokerage commissions.
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class which may be held
or written, or exercised within certain time periods by an investor or group of
investors acting in concert (regardless of whether the options are written on
the same or different securities exchanges or are held, written or exercised in
one or more accounts or through one or more brokers). It is possible that the
Fund and other clients of Warburg and certain of its affiliates may be
considered to be such a group. A securities exchange may order the liquidation
of positions found to be in violation of these limits and it may impose certain
other sanctions. These limits may restrict the number of options the Funds will
be able to purchase on a particular security.
Securities Index Options. The Fund may purchase and write
exchange-listed and OTC put and call options on securities indexes. A securities
index measures the movement of a certain group of securities by assigning
relative values to the securities included in the index, fluctuating with
changes in the market values of the securities included in the
4
<PAGE> 43
index. Some securities index options are based on a broad market index, such as
the NYSE Composite Index, or a narrower market index such as the Standard &
Poor's 100. Indexes may also be based on a particular industry or market
segment.
Options on securities indexes are similar to options on securities
except that (i) the expiration cycles of securities index options are monthly,
while those of securities options are currently quarterly, and (ii) the delivery
requirements are different. Instead of giving the right to take or make delivery
of securities at a specified price, an option on a securities index gives the
holder the right to receive a cash "exercise settlement amount" equal to (a) the
amount, if any, by which the fixed exercise price of the option exceeds (in the
case of a put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (b) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the securities index upon which the option is based being greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
index and the exercise price of the option times a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Securities index options may be offset by entering into
closing transactions as described above for securities options.
OTC Options. 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 securities to the clearing
organization if the option is exercised, and the clearing organization is then
obligated to pay the writer the exercise price of the option. If the Fund were
to purchase a dealer option, however, it would rely on the dealer from whom it
purchased the option to perform if the option were exercised. If the dealer
fails to honor the exercise of the option by the Fund, the Fund would lose the
premium it paid for the option and the expected benefit of the transaction.
Listed options generally have a continuous liquid market while
dealer options have none. Consequently, the Fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when the Fund writes a
dealer option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to which the Fund originally wrote the option. Although the Fund will seek to
enter into dealer options only with dealers who will agree to and that are
expected to be capable of entering into closing transactions with the Fund,
there can be no assurance that the Fund will be able to liquidate a dealer
option at a favorable price at any time prior to expiration. The inability to
enter into a closing transaction may result in material losses to the Fund.
Until the Fund, as a covered OTC call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) used to cover the written option until the option expires or is
exercised. This requirement may impair the Fund's ability to sell portfolio
securities or, with respect to currency options, currencies at a time when such
sale might be advantageous. In the event of insolvency of the other party, the
Fund may be unable to liquidate a dealer option.
5
<PAGE> 44
Futures Activities. The Fund may enter into foreign currency,
interest rate and securities 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 Fund reserves the right to engage in transactions involving futures
contracts and options on futures contracts to the extent allowed by CFTC
regulations in effect from time to time and in accordance with the Fund's
policies. There is no overall limit on the percentage of Fund assets that may be
at risk with respect to futures activities.
Futures Contracts. A foreign currency futures contract provides for
the future sale by one party and the purchase by the other party of a certain
amount of a specified non-U.S. currency at a specified price, date, time and
place. An interest rate futures contract provides for the future sale by one
party and the purchase by the other party of a certain amount of a specific
interest rate sensitive financial instrument (debt security) at a specified
price, date, time and place. Securities indexes are capitalization weighted
indexes which reflect the market value of the securities listed on the indexes.
A securities index futures contract is an agreement to be settled by delivery of
an amount of cash equal to a specified multiplier times the difference between
the value of the index at the close of the last trading day on the contract and
the price at which the agreement is made.
No consideration is paid or received by 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 liquid securities acceptable to
the broker, equal to approximately 1% to 10% of the contract amount (this amount
is subject to change by the exchange on which the contract is traded, and
brokers may charge a higher amount). This amount is known as "initial margin"
and is in the nature of a performance bond or good faith deposit on the contract
which is returned to the Fund upon termination of the futures contract, assuming
all contractual obligations have been satisfied. The broker will have access to
amounts in the margin account if the Fund fails to meet its contractual
obligations. Subsequent payments, known as "variation margin," to and from the
broker, will be made daily as the currency, financial instrument or securities
index underlying the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"marking-to-market." 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
6
<PAGE> 45
(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 securities index futures
contract, as contrasted with the direct investment in such a contract, gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract at a specified exercise price at any time prior to the
expiration date of the option. The writer of the option is required upon
exercise to assume an offsetting futures position (a short position if the
option is a call and a long position if the option is a put). Upon exercise of
an option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account, which represents the 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
7
<PAGE> 46
currency exchange market, (ii) through entering into futures contracts or
options on such contracts (as described above), (iii) through entering into
forward contracts to purchase or sell currency or (iv) by purchasing
exchange-traded currency options.
Forward Currency Contracts. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract as agreed upon by the
parties, at a price set at the time of the contract. These contracts are entered
into in the interbank market conducted directly between currency traders
(usually large commercial banks and brokers) and their customers. Forward
currency contracts are similar to currency futures contracts, except that
futures contracts are traded on commodities exchanges and are standardized as to
contract size and delivery date.
At or before the maturity of a forward contract, the Fund may either
sell a portfolio security and make delivery of the currency, or retain the
security and fully or partially offset its contractual obligation to deliver the
currency by negotiating with its trading partner to purchase a second,
offsetting contract. If the Fund retains the portfolio security and engages in
an offsetting transaction, the Fund, at the time of execution of the offsetting
transaction, will incur a gain or a loss to the extent that movement has
occurred in forward contract prices.
Currency Options. The Fund may purchase exchange-traded put and call
options on foreign currencies. Put options convey the right to sell the
underlying currency at a price which is anticipated to be higher than the spot
price of the currency at the time the option is exercised. Call options convey
the right to buy the underlying currency at a price which is expected to be
lower than the spot price of the currency at the time the option is exercised.
Currency Hedging. The Fund's currency hedging will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward currency with respect to
specific receivables or payables of the Fund generally accruing in connection
with the purchase or sale of its portfolio securities. Position hedging is the
sale of forward currency with respect to portfolio security positions. The Fund
may not position hedge to an extent greater than the aggregate market value (at
the time of entering into the hedge) of the hedged securities.
A decline in the U.S. dollar value of a foreign currency in which
the Fund's securities are denominated will reduce the U.S. dollar value of the
securities, even if their value in the foreign currency remains constant. The
use of currency hedges does not eliminate fluctuations in the underlying prices
of the securities, but it does establish a rate of exchange that can be achieved
in the future. For example, in order to protect against 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
8
<PAGE> 47
partially, the effects of the adverse movements in exchange rates. The benefit
to the Fund derived from purchases of currency options, like the benefit derived
from other types of options, will be reduced by premiums and other transaction
costs. Because transactions in currency exchange are generally conducted on a
principal basis, no fees or commissions are generally involved. Currency hedging
involves some of the same risks and considerations as other transactions with
similar instruments. Although currency hedges limit the risk of loss due to a
decline in the value of a hedged currency, at the same time, they also limit any
potential gain that might result should the value of the currency increase. If a
devaluation is generally anticipated, the Fund may not be able to contract to
sell a currency at a price above the devaluation level it anticipates.
While the values of currency futures and options on futures, forward
currency contracts and currency options may be expected to correlate with
exchange rates, they will not reflect other factors that may affect the value of
the Fund's investments and a currency hedge may not be entirely successful in
mitigating changes in the value of the Fund's investments denominated in that
currency. A currency hedge, for example, should protect a Yen-denominated bond
against a decline in the Yen, but will not protect the Fund against a price
decline if the issuer's creditworthiness deteriorates.
Hedging. In addition to entering into options, futures and currency
exchange transactions for other purposes, including generating current income to
offset expenses or increase return, the Fund may enter into these transactions
as hedges to reduce investment risk, generally by making an investment expected
to move in the opposite direction of a portfolio position. A hedge is designed
to offset a loss in a portfolio position with a gain in the hedged position; at
the same time, however, a properly correlated hedge will result in a gain in the
portfolio position being offset by a loss in the hedged position. As a result,
the use of options, futures, contracts and currency exchange transactions for
hedging purposes could limit any potential gain from an increase in the value of
the position hedged. In addition, the movement in the portfolio position hedged
may not be of the same magnitude as movement in the hedge. With respect to
futures contracts, since the value of portfolio securities will far exceed the
value of the futures contracts sold by the Fund, an increase in the value of the
futures contracts could only mitigate, but not totally offset, the decline in
the value of the Fund's assets.
In hedging transactions based on an index, whether the Fund will
realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of securities prices in the stock market
generally or, in the case of certain indexes, in an industry or market segment,
rather than movements in the price of a particular security. The risk of
imperfect correlation increases as the composition of 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. Securities index
futures transactions may be subject to additional correlation risks. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions which
would distort the normal relationship between the securities index
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<PAGE> 48
and futures markets. Secondly, from the point of view of speculators, the
deposit requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased participation by
speculators in the futures market also may cause temporary price distortions.
Because of the possibility of price distortions in the futures market and the
imperfect correlation between movements in the securities index and movements in
the price of securities index futures, a correct forecast of general market
trends by 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 predict correctly
movements in the directions of the hedge and the hedged position and the
correlation between them, which predictions could prove to be inaccurate. This
requires different skills and techniques than predicting changes in the price of
individual securities, and there can be no assurance that the use of these
strategies will be successful. Even a well-conceived hedge may be unsuccessful
to some degree because of unexpected market behavior or trends. Losses incurred
in hedging transactions and the costs of these transactions will affect the
Fund's performance.
Asset Coverage for Forward Contracts, Options, Futures and Options
on Futures. As described in the Prospectus, the Fund will comply with guidelines
established by the U.S. Securities and Exchange Commission (the "SEC") with
respect to coverage of forward currency contracts; options written by the Fund
on currencies, securities, if applicable, and indexes; and currency, interest
rate and index futures contracts and options on these futures contracts. These
guidelines may, in certain instances, require segregation by the Fund of cash or
liquid securities.
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.
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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.
Foreign Currency Exchange. Since the Fund will 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 assets denominated in that foreign currency.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by the Fund. The rate of exchange between the U.S. dollar and other
currencies is determined by the forces of supply and demand in the foreign
exchange markets. Changes in the exchange rate may result over time from the
interaction of many factors directly or indirectly affecting economic and
political conditions in the United States and a particular foreign country,
including economic and political developments in other countries. Of particular
importance are rates of inflation, interest rate levels, the balance of payments
and the extent of government surpluses or deficits in the United States and the
particular foreign country, all of which are in turn sensitive to the monetary,
fiscal and trade policies pursued by the governments of the United States and
foreign countries important to international trade and finance. Governmental
intervention may also play a significant role. National governments rarely
voluntarily allow their currencies to float freely in response to economic
forces. Sovereign governments use a variety of techniques, such as intervention
by a country's central bank or imposition of regulatory controls or taxes, to
affect the exchange rates of their currencies. The Fund may use hedging
techniques with the objective of protecting against loss through the fluctuation
of the value of the yen against the U.S. dollar, particularly the forward market
in foreign exchange, currency options and currency futures. See "Currency
Transactions" and "Futures Activities" above.
Information. The majority of the securities held by the Fund will
not be registered with, nor will the issuers thereof be subject to reporting
requirements of the SEC. Accordingly, there may be less publicly available
information about the securities and about the foreign company or government
issuing them than is available about a domestic company or government entity.
Foreign companies are generally not subject to uniform financial reporting
standards, practices and requirements comparable to those applicable to U.S.
companies.
Political Instability. With respect to some foreign countries, there
is the possibility of expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Fund, political or social instability,
or domestic developments which could affect U.S.
investments in those and neighboring countries.
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<PAGE> 50
Delays. Securities of some foreign companies are less liquid and
their prices are more volatile than securities of comparable U.S. companies.
Certain foreign countries are known to experience long delays between the trade
and settlement dates of securities purchased or sold. Due to the increased
exposure of the Fund to market and foreign exchange fluctuations brought about
by such delays, and due to the corresponding negative impact on Fund liquidity,
the Fund will avoid investing in countries which are known to experience
settlement delays which may expose the Fund to unreasonable risk of loss.
Increased Expenses. The operating expenses of the Fund can be
expected to be higher than that of an investment company investing exclusively
in U.S. securities, since the expenses of the Fund, such as custodial costs,
valuation costs and communication costs, as well as the rate of the investment
advisory fees, though similar to such expenses of some other international
funds, are higher than those costs incurred by other investment companies not
investing in foreign securities.
Foreign Debt Securities. The returns on foreign debt securities
reflect interest rates and other market conditions prevailing in those countries
and the effect of gains and losses in the denominated currencies against the
U.S. dollar, which have had a substantial impact on investment in foreign
fixed-income securities. The relative performance of various countries'
fixed-income markets historically has reflected wide variations relating to the
unique characteristics of each country's economy. Year-to-year fluctuations in
certain markets have been significant, and negative returns have been
experienced in various markets from time to time.
The foreign government securities in which the Fund may invest
generally consist of obligations issued or backed by national, state or
provincial governments or similar political subdivisions or central banks in
foreign countries. Foreign government securities also include debt obligations
of supranational entities, which include international organizations designated
or backed by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples include the International Bank for Reconstruction and Development (the
"World Bank"), the European Coal and Steel Community, the Asian Development Bank
and the InterAmerican Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). Debt securities
of quasi-governmental agencies are issued by entities owned by either a
national, state or equivalent government or are obligations of a political unit
that is not backed by the national government's full faith and credit and
general taxing powers. An example of a multinational currency unit is the
European Currency Unit ("ECU"). An ECU represents specified amounts of the
currencies of certain member states of the European Economic Community. The
specific amounts of currencies comprising the ECU may be adjusted by the Council
of Ministers of the European Community to reflect changes in relative values of
the underlying currencies.
General. Individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation,
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<PAGE> 51
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.
Japanese Investments. Securities in Japan are denominated and quoted
in "yen." Yen are fully convertible and transferable based on floating exchange
rates into all currencies, without administrative or legal restrictions for both
non-residents and residents of Japan. In determining the net asset value of
shares of the Fund, assets or liabilities initially expressed in terms of
Japanese yen will be translated into U.S. dollars at the current selling rate of
Japanese yen against U.S. dollars. As a result, in the absence of a successful
currency hedge, the value of the Fund's assets as measured in U.S. dollars may
be affected favorably or unfavorably by fluctuations in the value of Japanese
yen relative to the U.S. dollar.
The decline in the Japanese securities markets since 1989 has
contributed to a weakness in the Japanese economy, and the impact of a further
decline cannot be ascertained. The common stocks of many Japanese companies
continue to trade at high price-earnings ratios in comparison with those in the
United States, even after the recent market decline. Differences in accounting
methods make it difficult to compare the earnings of Japanese companies with
those of companies in other countries, especially the United States.
Japan is largely dependent upon foreign economies for raw materials.
International trade is important to Japan's economy, as exports provide the
means to pay for many of the raw materials it must import. Because of the
concentration of Japanese exports in highly visible products such as
automobiles, machine tools and semiconductors, and the large trade surpluses
ensuing therefrom, Japan has entered a difficult phase in its relations with its
trading partners, particularly with respect to the United States, with whom the
trade imbalance is the greatest.
Japan has a parliamentary form of government. In 1993, a coalition
government was formed which, for the first time since 1955, did not include the
Liberal Democratic Party. Since mid-1993, there have been several changes in
leadership in Japan. What, if any, effect the current political situation will
have on prospective regulatory reforms in the Japanese economy cannot be
predicted. Recent and future developments in Japan and neighboring Asian
countries may lead to changes in policy that might adversely affect the Fund
investing there.
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,
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<PAGE> 52
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, the Fund will
invest in obligations issued by such an instrumentality only if Warburg
determines that the credit risk with respect to the instrumentality does not
make its securities unsuitable for investment by the Fund.
Below Investment Grade Securities. The market values of below
investment grade securities and unrated securities of comparable quality tend to
react less to fluctuations in interest rate levels than do those of investment
grade securities and the market values of certain of these securities also tend
to be more sensitive to individual corporate developments and changes in
economic conditions than below investment grade securities. In addition, these
securities generally present a higher degree of credit risk. Issuers of these
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 below investment grade securities generally are
unsecured and frequently are subordinated to prior payment of senior
indebtedness.
The market for below investment grade and unrated securities is
relatively new and has not weathered a major economic recession. Any such
recession could disrupt severely the market for such securities and may
adversely affect the value of such securities and the ability of the issuers of
such securities to repay principal and pay interest thereon.
The Fund may have difficulty disposing of certain of these
securities because there may be a thin trading market. Because there is no
established retail secondary market for many of these securities, the Fund
anticipates that these securities could be sold only to a limited number of
dealers or institutional investors. To the extent a secondary trading market for
these securities does exist, it generally is not as liquid as the secondary
market for investment grade securities. The lack of a liquid secondary market,
as well as adverse publicity and investor perception with respect to these
securities, may have an adverse impact on market price and the Fund's ability to
dispose of particular issues when necessary to meet liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. The lack of a liquid secondary market for
certain securities also may make it more difficult for the Fund to obtain
accurate market quotations for purposes of valuing the Fund and calculating net
asset value.
The market value of securities rated below investment grade is more
volatile than that of investment grade securities. Factors adversely impacting
the market value of these securities will adversely impact the Fund's net asset
value. The Fund will rely on the judgment, analysis and experience of Warburg in
evaluating the creditworthiness of an issuer. In this evaluation, Warburg will
take into consideration, among other things, the issuer's financial resources,
its sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. Normally, below
investment grade securities and comparable unrated securities are not intended
for short-term investment. The
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<PAGE> 53
Fund may incur additional expenses to the extent it is required to seek recovery
upon a default in the payment of principal or interest on its portfolio holdings
of such securities.
Mortgage-Backed Securities. The Fund may invest up to 5% of its net
assets in U.S. and foreign governmental and private mortgage-backed securities.
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property. The
mortgages backing these securities include, among other mortgage instruments,
conventional 30-year fixed-rate mortgages, 15-year fixed-rate mortgages,
graduated payment mortgages and adjustable rate mortgages. The government or the
issuing agency typically guarantees the payment of interest and principal of
these securities. However, the guarantees do not extend to the securities' yield
or value, which are likely to vary inversely with fluctuations in interest
rates, nor do the guarantees extend to the yield or value of the Fund's shares.
These securities generally are "pass-through" instruments, through which the
holders receive a share of all interest and principal payments from the
mortgages underlying the securities, net of certain fees.
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. The occurrence of mortgage prepayments is affected by various
factors, including the level of interest rates, general economic conditions, the
location, scheduled maturity and age of the mortgage and other social and
demographic conditions. Because prepayment rates of individual pools vary
widely, it is not possible to predict accurately the average life of a
particular pool. For pools of fixed-rate 30-year mortgages, a common industry
practice in the U.S. has been to assume that prepayments will result in a
12-year average life. At present, pools, particularly those with loans with
other maturities or different characteristics, are priced on an assumption of
average life determined for each pool. In periods of falling interest rates, the
rate of prepayment tends to increase, thereby shortening the actual average life
of a pool of mortgage-related securities. Conversely, in periods of rising rates
the rate of prepayment tends to decrease, thereby lengthening the actual average
life of the pool. However, these effects may not be present, or may differ in
degree, if the mortgage loans in the pools have adjustable interest rates or
other special payment terms, such as a prepayment charge. Actual prepayment
experience may cause the yield of mortgage-backed securities to differ from the
assumed average life yield. Reinvestment of prepayments may occur at higher or
lower interest rates than the original investment, thus affecting the Fund's
yield. In addition, mortgage-backed securities issued by certain non-government
entities and collateralized mortgage obligations may be less marketable than
other securities.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificate holders and to any guarantor, such as GNMA, and
due to any yield retained by the issuer. Actual yield to the holder may vary
from the coupon rate, even if adjustable, if the mortgage-backed securities are
purchased or traded in the secondary market at a premium or discount. In
addition, there is normally some delay between the time the issuer receives
mortgage payments from the
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<PAGE> 54
servicer and the time the issuer makes the payments on the mortgage-backed
securities, and this delay reduces the effective yield to the holder of such
securities.
Asset-Backed Securities. The Fund may invest up to 5% of its net
assets in U.S. and foreign governmental and private asset-backed securities.
Asset-backed securities represent participations in, or are secured by and
payable from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property and receivables
from revolving credit (credit card) agreements. Such assets are securitized
through the use of trusts and special purpose corporations. Payments or
distributions of principal and interest may be guaranteed up to certain amounts
and for a certain time period by a letter of credit or a pool insurance policy
issued by a financial institution unaffiliated with the trust or corporation.
Asset-backed securities present certain risks that are not presented
by other securities in which the Fund may invest. Automobile receivables
generally are secured by automobiles. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations. If
the servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the holders of
the asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in the underlying automobiles. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities. Credit card receivables are
generally unsecured, and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Because asset-backed securities are relatively new, the market
experience in these securities is limited, and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested.
Zero Coupon Securities. The Fund may invest in "zero coupon" U.S.
Treasury, foreign government and U.S. and foreign corporate debt securities,
which are bills, notes and bonds that have been stripped of their unmatured
interest coupons and custodial receipts or certificates of participation
representing interests in such stripped debt obligations and coupons. A zero
coupon security pays no interest to its holder prior to maturity. Accordingly,
such securities usually trade at a deep discount from their face or par value
and will be subject to greater fluctuations of market value in response to
changing interest rates than debt obligations of comparable maturities that make
current distributions of interest. The Fund anticipates that it will not
normally hold zero coupon securities to maturity. Federal tax law requires that
a holder of a zero coupon security accrue a portion of the discount at which the
security was purchased as income each year, even though the holder receives no
interest payment on the security during the year. Such accrued discount will be
included in determining the amount of dividends the Fund must pay each year and,
in order to generate cash necessary to pay such dividends, the Fund may
liquidate portfolio securities at a time when it would not otherwise have done
so.
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<PAGE> 55
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. Like bonds, the value of convertible securities fluctuates in
relation to changes in interest rates and, in addition, also fluctuates in
relation to the underlying common stock.
Securities of Other Investment Companies. The Fund may invest in
securities of other investment companies to the extent permitted under the
Investment Company Act of 1940, as amended (the "1940 Act"). Presently, under
the 1940 Act, the Fund may hold securities of another investment company in
amounts which (i) do not exceed 3% of the total outstanding voting stock of such
company, (ii) do not exceed 5% of the value of the Fund's total assets and (iii)
when added to all other investment company securities held by the Fund, do not
exceed 10% of the value of the Fund's total assets.
Lending of Portfolio Securities. The Fund may lend portfolio
securities to brokers, dealers and other financial organizations that meet
capital and other credit requirements or other criteria established by the
Fund's Board of Directors (the "Board"). These loans, if and when made, may not
exceed 20% of the Fund's total assets taken at value. The Fund will not lend
portfolio securities to affiliates of Warburg unless it has applied for and
received specific authority to do so from the SEC. Loans of portfolio securities
will be collateralized by cash, letters of credit or U.S. government securities,
which are maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would be for the account of the Fund. From time to time, the Fund may return a
part of the interest earned from the investment of collateral received for
securities loaned to the borrower and/or a third party that is unaffiliated with
the Fund and that is acting as a "finder."
By lending its securities, the Fund can increase its income by
continuing to receive interest and any dividends on the loaned securities as
well as by either investing the collateral received for securities loaned in
short-term instruments or obtaining yield in the form of interest paid by the
borrower when U.S. government securities are used as collateral. Although the
generation of income is not an investment objective of the Fund, income received
could be used to pay the Fund's expenses and would increase an investor's total
return. The Fund will adhere to the following conditions whenever its portfolio
securities are loaned: (i) the Fund must receive at least 100% cash collateral
or equivalent 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
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<PAGE> 56
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). The Fund will enter into a when-issued transaction for the purpose
of acquiring portfolio securities and not for the purpose of leverage, but may
sell the securities before the settlement date if Warburg deems it advantageous
to do so. The payment obligation and the interest rate that will be received on
when-issued securities are fixed at the time the buyer enters into the
commitment. Due to fluctuations in the value of securities purchased or sold on
a when-issued or delayed-delivery basis, the prices obtained on such securities
may be higher or lower than the prices available in the market on the dates when
the investments are actually delivered to the buyers.
When the Fund agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash or liquid securities equal to the
amount of the commitment in a segregated account. Normally, the custodian will
set aside portfolio securities to satisfy a purchase commitment, and in such a
case the Fund may be required subsequently to place additional assets in the
segregated account in order to ensure that the value of the account remains
equal to the amount of the Fund's commitment. It may be expected that the Fund's
net assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash. When
the Fund engages in when-issued or delayed-delivery transactions, it relies on
the other party to consummate the trade. Failure of the seller to do so may
result in the Fund's incurring a loss or missing an opportunity to obtain a
price considered to be advantageous.
Short Sales. In a short sale, the Fund sells a borrowed security and
has a corresponding obligation to the lender to return the identical security.
The seller does not immediately deliver the securities sold and is said to have
a short position in those securities until delivery occurs. If the Fund engages
in a short sale, the collateral for the short position will be maintained by the
Fund's custodian or qualified sub-custodian. While the short sale is open, the
Fund will maintain in a segregated account an amount of securities equal in kind
and amount to the securities sold short or securities convertible into or
exchangeable for such equivalent securities.
These securities constitute the Fund's long position.
While a short sale is made by selling a security the Fund does not
own, a short sale is "against the box" to the extent that the Fund
contemporaneously owns or has the right to obtain, at no added cost, securities
identical to those sold short. The Funds do not intend to engage in short sales
against the box for investment purposes. The Fund may, however, make a short
sale as a hedge when it believes that the price of a security may decline,
causing a decline in the value of a security owned by the Fund (or a security
convertible or exchangeable for such security). In such case, any future losses
in the Fund's long position should be offset by a gain in the short position
and, conversely, any gain in the long position should be reduced by a loss in
the short position. The extent to which such gains or losses are reduced will
depend upon the amount of the security sold short relative to the amount the
Fund owns.
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<PAGE> 57
There will be certain additional transactions costs associated with short sales
against the box, but the Fund will endeavor to offset these costs with the
income from the investment of the cash proceeds of short sales.
If the Fund effects a short sale of securities at a time when it has
an unrealized gain on the securities, it may be required to recognize that gain
as if it had actually sold the securities (as a "constructive sale") on the date
it effects the short sale. However, such constructive sale treatment may not
apply if the Fund closes out the short sale with securities other than the
appreciated securities held at the time of the short sale and if certain other
conditions are satisfied. Uncertainty regarding the tax consequences of
effecting short sales may limit the extent to which the Fund may effect short
sales.
Emerging Growth and Smaller Capitalization Companies; Unseasoned
Issuers. Investments in securities of small- and medium-sized, emerging growth
companies and companies with continuous operations of less than three years
("unseasoned issuers") involve considerations that are not applicable to
investing in securities of established, larger-capitalization issuers, including
reduced and less reliable information about issuers and markets, less stringent
financial disclosure requirements, illiquidity of securities and markets, higher
brokerage commissions and fees and greater market risk in general. In addition,
securities of these companies may involve greater risks since these securities
may have limited marketability and, thus, may be more volatile.
Depositary Receipts. The assets of the Fund may be invested in the
securities of foreign issuers in the form of American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and International Depositary
Receipts ("IDRs"). These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs are
receipts typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. EDRs, which
are sometimes referred to as Continental Depositary Receipts, are receipts
issued in Europe, and IDRs, which are sometimes referred to as Global Depositary
Receipts, are issued outside the United States. EDRs and IDRs are typically
issued by non-U.S. banks and trust companies and evidence ownership of either
foreign or domestic securities. Generally, ADRs in registered form are designed
for use in U.S. securities markets and EDRs and IDRs in bearer form are designed
for use in European and non-U.S. securities markets, respectively.
Warrants. The Fund may invest up to 10% of net assets in warrants 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.
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.
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Non-Publicly Traded and Illiquid Securities. The Fund may not invest
more than 15% of its net assets in non-publicly traded and illiquid securities,
including securities that are illiquid by virtue of the absence of a readily
available market, repurchase agreements which have a maturity of longer than
seven days, certain Rule 144A Securities (as defined below), and time deposits
maturing in more than seven days. Securities that have legal or contractual
restrictions on resale but have a readily available market are not considered
illiquid for purposes of this limitation. Repurchase agreements subject to
demand are deemed to have a maturity equal to the notice period.
Historically, illiquid securities have included securities subject
to contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. 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 without borrowing. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
Rule 144A Securities. Rule 144A under the Securities Act adopted by
the SEC allows for a broader institutional trading market for securities
otherwise subject to restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the Securities
Act for resales of certain securities to qualified institutional buyers. 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 limit on the purchase of illiquid securities
unless the Board or its delegates determines that the Rule 144A Securities are
liquid. In reaching liquidity decisions, the Board or its delegates may
consider, inter alia, the following factors: (i) the unregistered nature of the
security; (ii) the frequency of trades and quotes for the security; (iii) the
number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (iv) dealer undertakings to make a market in the
security and (v) the nature of the
20
<PAGE> 59
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer).
Borrowing. The Fund may borrow up to 30% of its total assets for
temporary or emergency purposes, including to meet portfolio redemption requests
so as to permit the orderly disposition of portfolio securities or to facilitate
settlement transactions on portfolio securities. Investments (including
roll-overs) will not be made when borrowings exceed 5% of the Fund's net assets.
Although the principal of such borrowings will be fixed, the Fund's assets may
change in value during the time the borrowing is outstanding. The Fund expects
that some of its borrowings may be made on a secured basis. In such situations,
either the custodian will segregate the pledged assets for the benefit of the
lender or arrangements will be made with a suitable subcustodian, which may
include the lender.
Reverse Repurchase Agreements and Dollar Rolls. The Fund may enter
into reverse repurchase agreements with the same parties with whom it may enter
into repurchase agreements. Reverse repurchase agreements involve the sale of
securities held by the Fund pursuant to its agreement to repurchase them at a
mutually agreed upon date, price and rate of interest. At the time the Fund
enters into a reverse repurchase agreement, it will establish and maintain a
segregated account with an approved custodian containing cash or liquid
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 liquid securities 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.
Stand-By Commitments. The Fund may acquire "stand-by commitments"
with respect to securities held in its portfolio. Under a stand-by commitment, a
dealer agrees to
21
<PAGE> 60
purchase at the Fund's option specified securities at a specified price. The
Fund's right to exercise stand-by commitments is unconditional and unqualified.
Stand-by commitments acquired by the Fund may also be referred to as "put"
options. A stand-by commitment is not transferable by the Fund, although the
Fund can sell the underlying securities to a third party at any time.
The principal risk of stand-by commitments is that the writer of a
commitment may default on its obligation to repurchase the securities acquired
with it. The Fund intends to enter into stand-by commitments only with brokers,
dealers and banks that, in the opinion of Warburg, present minimal credit risks.
In evaluating the creditworthiness of the issuer of a stand-by commitment,
Warburg will periodically review relevant financial information concerning the
issuer's assets, liabilities and contingent claims. The Fund will acquire
stand-by commitments only in order to facilitate portfolio liquidity and does
not intend to exercise its rights under stand-by commitments for trading
purposes.
The amount payable to the Fund upon its exercise of a stand-by
commitment is normally (i) the Fund's acquisition cost of the securities
(excluding any accrued interest which the Fund paid on their acquisition), less
any amortized market premium or plus any amortized market or original issue
discount during the period the Fund owned the securities, plus (ii) all interest
accrued on the securities since the last interest payment date during that
period.
The Fund expects that stand-by commitments will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding stand-by commitments held in the Fund's portfolio will
not exceed 1/2 of 1% of the value of the Fund's total assets calculated
immediately after each stand-by commitment is acquired.
The Fund would acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The acquisition of a stand-by commitment would not affect the
valuation or assumed maturity of the underlying securities. Stand-by commitments
acquired by the Fund would be valued at zero in determining net asset value.
Where the Fund paid any consideration directly or indirectly for a stand-by
commitment, its cost would be reflected as unrealized depreciation for the
period during which the commitment was held by the Fund. Stand-by commitments
would not affect the average weighted maturity of the Fund's portfolio.
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 14 may be
changed by a vote of the Board at any time.
22
<PAGE> 61
The Fund may not:
1. Borrow money except that the Fund may (a) borrow from banks for
temporary or emergency purposes and (b) enter into reverse repurchase
agreements; provided that reverse repurchase agreements, dollar roll
transactions that are accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 30% of the value of the Fund's
total assets at the time of such borrowing. For purposes of this restriction,
short sales and 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 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
indices, and options on futures contracts, securities, currencies or indices,
and 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.
23
<PAGE> 62
10. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition, reorganization or offer of
exchange, or as otherwise permitted under the 1940 Act.
11. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow and in connection with the writing of covered put
and call options and purchase of securities on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to currency transactions, options, futures contracts,
and options on futures contracts.
12. Invest more than 15% of the Fund's net assets in securities
which may be illiquid because of legal or contractual restrictions on resale or
securities for which there are no readily available market quotations. For
purposes of this limitation, repurchase agreements with maturities greater than
seven days shall be considered illiquid securities.
13. Invest in warrants (other than warrants acquired by the Fund as
part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would exceed 10%
of the value of the Fund's net assets.
14. Make additional investments (including roll-overs) if the Fund's
borrowings exceed 5% of its net assets.
If a percentage restriction (other than the percentage limitation
set forth in No. 1 and No. 12) 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 Prospectus discusses 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 OTC market will be valued at the most recent
sale as of the time the valuation is made or, in the absence of sales, at the
mean between the 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 Fund's Board.
Amortized cost involves valuing a portfolio instrument at its initial cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. The amortized cost method of valuation may also be used
with respect to other debt obligations with 60 days or less remaining to
maturity. Notwithstanding the foregoing, in determining the
24
<PAGE> 63
market value of portfolio investments, the Fund may employ outside organizations
(a "Pricing Service") which may use a matrix, formula or other objective method
that takes into consideration market indexes, matrices, yield curves and other
specific adjustments. The procedures of Pricing Services are reviewed
periodically by the officers of the Fund under the general supervision and
responsibility of the Board, which may replace a Pricing Service at any time.
Securities, options and futures contracts for which market quotations are not
available and certain other assets of the Fund will be valued at their fair
value as determined in good faith pursuant to consistently applied procedures
established by the Board. In addition, the Board or its delegates may value a
security at fair value if it determines that such security's value determined by
the methodology set forth above does not reflect its fair value.
Trading in securities in certain foreign countries is completed at
various times prior to the close of business on each business day in New York
(i.e., a day on which The New York Stock Exchange, Inc. (the "NYSE") is open for
trading). In addition, securities trading in a particular country or countries
may not take place on all business days in New York. Furthermore, trading takes
place in various foreign markets on days which are not business days in New York
and days on which the Fund's net asset value is not calculated. As a result,
calculation of the Fund's net asset value does not take place contemporaneously
with the determination of the prices of the majority of the Fund's securities.
All assets and liabilities initially expressed in foreign currency values will
be converted into U.S. dollar values at the prevailing exchange rate as quoted
by a Pricing Service. If such quotations are not available, the rate of exchange
will be determined in good faith pursuant to consistently applied procedures
established by the Board.
Portfolio Transactions
Warburg is responsible for establishing, reviewing and, where
necessary, modifying the Fund's investment program to achieve its investment
objective. Purchases and sales of newly issued portfolio securities are usually
principal transactions without brokerage commissions effected directly with the
issuer or with an underwriter acting as principal. Other purchases and sales may
be effected on a securities exchange or 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 OTC markets, but the price of
securities traded in OTC markets includes an undisclosed commission or mark-up.
U.S. government securities are generally purchased from underwriters or dealers,
although certain newly issued U.S. government securities may be purchased
directly from the U.S. Treasury or from the issuing agency or instrumentality.
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
25
<PAGE> 64
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, as amended) 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, Warburg may aggregate the securities to be sold or purchased
for the Fund with those to be sold or purchased for such other investment
clients in order to obtain best execution.
Any portfolio transaction for the Fund may be executed through
Counsellors Securities 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
26
<PAGE> 65
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, Counsellors Securities or any affiliated person of such companies.
In addition, the Fund will not give preference to any institutions with whom the
Fund enters into distribution or shareholder servicing agreements concerning the
provision of distribution services or support services. See the Prospectus,
"Shareholder Servicing."
Transactions for the Fund may be effected on foreign securities
exchanges. In transactions for securities not actively traded on a foreign
securities exchange, the Fund will deal directly with the dealers who make a
market in the securities involved, except in those circumstances where better
prices and execution are available elsewhere. Such dealers usually are acting as
principal for their own account. On occasion, securities may be purchased
directly from the issuer. Such portfolio securities are generally traded on a
net basis and do not normally involve brokerage commissions. Securities firms
may receive brokerage commissions on certain portfolio transactions, including
options, futures and options on futures transactions and the purchase and sale
of underlying securities upon exercise of options.
The Fund may participate, if and when practicable, in bidding for
the purchase of securities for the Fund's portfolio directly from an issuer in
order to take advantage of the lower purchase price available to members of such
a group. The Fund will engage in this practice, however, only when Warburg, in
its sole discretion, believes such practice to be otherwise in the Fund's
interest.
Portfolio Turnover
The Fund does not intend to seek profits through short-term trading,
but the rate of turnover will not be a limiting factor when the Fund deems it
desirable to sell or purchase securities. The Fund's portfolio turnover rate is
calculated by dividing the lesser of purchases or sales of its portfolio
securities for the year by the monthly average value of the portfolio
securities. Securities with remaining maturities of one year or less at the date
of acquisition are excluded from the calculation.
Certain practices that may be employed by the Fund could result in
high portfolio turnover. For example, options on securities may be sold in
anticipation of a decline in the price of the underlying security (market
decline) or purchased in anticipation of a rise in the price of the underlying
security (market rise) and later sold. To the extent that its portfolio is
traded for the short-term, the Fund will be engaged essentially in trading
activities based on short-term considerations affecting the value of an issuer's
stock instead of long-term investments based on fundamental valuation of
securities. Because of this policy, portfolio securities may be sold without
regard to the length of time for which they have been held. Consequently, the
annual portfolio turnover rate of the Fund may be higher than mutual funds
having a similar objective that do not utilize these strategies.
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<PAGE> 66
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>
<S> <C>
Richard N. Cooper* (63) Director
Harvard University Professor at Harvard University; National
1737 Cambridge Street Intelligence Council from June 1995 until
Cambridge, Massachusetts 02138 January 1997; Director or Trustee of
Circuit City Stores, Inc. (retail
electronics and appliances) and Phoenix
Home Life Mutual Insurance Company;
Director/Trustee of other investment
companies advised by Warburg.
Jack W. Fritz (71) Director
2425 North Fish Creek Road Private investor; Consultant and Director
P.O. Box 483 of Fritz Broadcasting, Inc. and Fritz
Wilson, Wyoming 83014 Communications (developers and operators
of radio stations); Director of Advo,
Inc. (direct mail advertising);
Director/Trustee of other investment
companies advised by Warburg.
John L. Furth* (67) Chairman of the Board
466 Lexington Avenue Vice Chairman, Managing Director and
New York, New York 10017-3147 Director of Warburg; Associated with
Warburg since 1970; Director of Counsellors
Securities; Chairman of the Board of other
investment companies advised by Warburg.
Jeffrey E. Garten (51) Director
Box 208200 Dean of Yale School of Management and
New Haven, Connecticut 06520-8200 William S. Beinecke Professor in the
Practice of International Trade and Finance;
Undersecretary of Commerce for International
Trade from November 1993 to October 1995;
Professor at Columbia University from
September 1992 to November 1993;
Director/Trustee of other investment
companies advised by Warburg.
</TABLE>
*Indicates a Director who is an "interested person" of the Fund as defined in
the 1940 Act.
28
<PAGE> 67
<TABLE>
<S> <C>
Thomas A. Melfe (66) Director
30 Rockefeller Plaza Partner in the law firm of Piper &
New York, New York 10112 Marbury L.L.P.; Partner in the law firm
of Donovan Leisure Newton & Irvine from
April 1984 to April 1998; Chairman of the
Board, Municipal Fund for New York
Investors, Inc.; Director/Trustee of other
investment companies advised by Warburg.
Arnold M. Reichman* (50) Director
466 Lexington Avenue Managing Director, Chief Operating
New York, New York 10017-3147 Officer and Assistant Secretary of
Warburg; Director of The RBB Fund, Inc.;
Associated with Warburg since 1984; Director
and officer of Counsellors Securities;
Director/Trustee of other investment
companies advised by Warburg.
Alexander B. Trowbridge (68) Director
1317 F Street President of Trowbridge Partners, Inc.
5th Floor (business consulting) from January 1990
Washington, DC 20004 to November 1996; Director or Trustee of
New England Mutual Life Insurance Co.,
ICOS Corporation (biopharmaceuticals),
Waste Management, Inc. (solid and
hazardous waste collection and disposal),
IRI International (energy services), 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); Director/Trustee of other
investment companies advised by Warburg.
Eugene L. Podsiadlo (41) President
466 Lexington Avenue Managing Director of Warburg; Associated
New York, New York 10017-3147 with Warburg since 1991; Officer of
Counsellors Securities and other investment
companies advised by Warburg.
Stephen Distler (44) Vice President
466 Lexington Avenue Managing Director of Warburg; Associated
New York, New York 10017-3147 with Warburg since 1984; Treasurer of
Counsellors Securities; Officer of other
investment companies advised by Warburg.
</TABLE>
* Indicates a Director who is an "interested person" of the Fund as defined
in the 1940 Act.
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<PAGE> 68
<TABLE>
<S> <C>
Eugene P. Grace (46) Vice President and Secretary
466 Lexington Avenue Senior Vice President of Warburg;
New York, New York 10017-3147 Associated with Warburg since April 1994;
Attorney-at-law from September 1989-April
1994; Life insurance agent, New York Life
Insurance Company from 1993 to 1994; Officer
of Counsellors Securities and other
investment companies advised by Warburg.
Howard Conroy, CPA (44) Vice President and Chief Financial Officer
466 Lexington Avenue Vice President of Warburg; Associated
New York, New York 10017-3147 with Warburg since 1992; Officer of other
investment companies advised by Warburg.
Daniel S. Madden, CPA (32) Treasurer and Chief Accounting Officer
466 Lexington Avenue Vice President of Warburg; Associated
New York, New York 10017-3147 with Warburg since 1995; Associated with
BlackRock Financial Management, Inc. from
September 1994 to October 1995; Associated
with BEA Associates from April 1993 to
September 1994; Associated with Ernst &
Young LLP from 1990 to 1993; Officer of
other investment companies advised by
Warburg.
Janna Manes, Esq. (30) Assistant Secretary
466 Lexington Avenue Vice President of Warburg; Associated
New York, New York 10017-3147 with Warburg since 1996; Associated with
the law firm of Willkie Farr & Gallagher
from 1993 to 1996; Officer of other
investment companies advised by Warburg.
</TABLE>
No employee of Warburg, 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.
Directors' Total Compensation:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
All Investment
Name of Director The Fund+ Companies Managed by
Warburg++
- --------------------------------------------------------------------------------
<S> <C> <C>
John L. Furth* None None
- --------------------------------------------------------------------------------
Arnold M. Reichman* None None
- --------------------------------------------------------------------------------
</TABLE>
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<PAGE> 69
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
All Investment
Name of Director The Fund+ Companies Managed by
Warburg++
- --------------------------------------------------------------------------------
<S> <C> <C>
Richard N. Cooper $1,000 $56,000
- --------------------------------------------------------------------------------
Jack W. Fritz $1,000 $56,000
- --------------------------------------------------------------------------------
Jeffrey E. Garten $1,000 $0**
- --------------------------------------------------------------------------------
Thomas A. Melfe $1,000 $56,000
- --------------------------------------------------------------------------------
Alexander B. Trowbridge $1,000 $56,000
- --------------------------------------------------------------------------------
</TABLE>
- ------------------
+ Amounts shown are estimates of payments to be made for the remaining period
of the fiscal year ending October 31, 1998 pursuant to existing
arrangements.
++ Each Director serves as a Director or Trustee of 25 (23 in the case of
Mr. Melfe) investment companies advised by Warburg.
* Mr. Furth and Mr. Reichman receive compensation as affiliates of Warburg
and, accordingly, receive no compensation from the Fund or any other
investment company advised by Warburg.
** Mr. Garten became a Director or Trustee of the other investment companies
managed by Warburg effective February 6, 1998 and, accordingly, received no
compensation from these funds for the fiscal year ended October 31, 1997.
Portfolio Managers
Mr. Harold E. Sharon has been Portfolio Manager of the Fund since
the Fund's inception. Mr. Sharon has been with Warburg since 1998. Prior to
joining Warburg, Mr. Sharon was an executive director and portfolio manager
at CIBC Oppenheimer from 1994-1998. Mr. Sharon was previously a Vice
President and Portfolio Manager at Warburg from 1990-1994. Mr. Sharon earned
a B.S. Degree with honors from the University of Rochester and an M.S. degree
in Management from the Sloan School of Management, M.I.T.
Mr. J.H. Cullum Clark, CFA, has been Associate Portfolio Manager
of the Fund since the Fund's inception. Mr. Clark is a Vice President of
Warburg and is an analyst at Warburg. Prior to joining Warburg, Mr. Clark
was an analyst and portfolio manager at Brown Brothers Harriman from 1993 to
1996 and a research assistant at the U.S. Senate Select Committee on
Intelligence from 1992 to 1993. Mr. Clark received an A.M. degree from
Harvard University and a B.A. degree from Yale University. Mr. Clark also
studied at the Stanford Inter-University Center for Japanese Language Studies
in 1990.
Investment Adviser and Co-Administrators
Warburg serves as investment adviser to the Fund, and Counsellors
Funds Service, Inc. ("Counsellors Service") and PFPC serve as co-administrators
to the Fund, each pursuant to separate written agreements (the "Advisory
Agreement," "Counsellors Service Co-Administration Agreement" and the "PFPC
Co-Administration Agreement," respectively). The services to be provided by, and
the fees payable by the Fund to Warburg under the Advisory Agreement,
Counsellors Service under the Counsellors Service Co-Administration Agreement
and PFPC under the PFPC Co-Administration Agreement are described in the
Prospectus. Each class of shares of the Fund bears its proportionate share of
fees payable to Warburg, Counsellors Service and PFPC in the proportion that its
assets bear to the aggregate assets of the Fund at the time of calculation.
These fees are calculated at an annual rate based
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on a percentage of the Fund's average daily net assets. See the Prospectus,
"Management of the Fund."
Custodians and Transfer Agent
State Street Bank and Trust Company ("State Street") serves as
custodian of the Fund's non-U.S. assets, and PNC Bank, National Association
("PNC") serves as custodian of the Fund's U.S. assets. Pursuant to separate
custodian agreements (the "Custodian Agreements"), State Street and PNC each
will (i) maintain a separate account or accounts in the name of the Fund, (ii)
hold and transfer portfolio securities on account of the Fund, (iii) make
receipts and disbursements of money on behalf of the Fund, (iv) collect and
receive all income and other payments and distributions for the account of the
Fund's portfolio securities and (v) make periodic reports to the Board
concerning the Fund's custodial arrangements. State Street is authorized to
select one or more foreign banking institutions and foreign securities
depositories to serve as sub-custodian on behalf of the Fund, and PNC is
authorized to select one or more domestic banks or trust companies to serve as
sub-custodian on behalf of the Fund. 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. PNC is an indirect, wholly owned
subsidiary of PNC Bank Corp., and its principal business address is 1600 Market
Street, Philadelphia, Pennsylvania 19103. The principal business address of
State Street is 225 Franklin Street, Boston, Massachusetts 02110.
State Street will also serve 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 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. BFDS's principal business address is 2 Heritage Drive, North Quincy,
Massachusetts 02171.
Organization of the Fund
All shareholders of the Fund in the 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
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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.
Pursuant to the 12b-1 Plan, Counsellors Securities will provide the
Fund's Board with periodic reports of amounts expended under the 12b-1 Plan and
the purpose for which the expenditures were made.
Advisor Shares. The Fund may, in the future, enter into agreements
("Agreements") with institutional shareholders of record, broker-dealers,
financial institutions, depository institutions, retirement plans and financial
intermediaries ("Institutions") to provide certain distribution, shareholder
servicing, administrative and/or accounting services for their clients or
customers (or participants in the case of retirement plans) ("Customers") who
are beneficial owners of Advisor Shares. Agreements will be governed by a
distribution plan (the "Distribution Plan") pursuant to Rule 12b-1 under the
1940 Act. The Distribution Plan requires the Board, at least quarterly, to
receive and review written reports of amounts expended under the Distribution
Plan and the purpose for which such expenditures were made.
An Institution with which the Fund has entered into an Agreement
with respect to its Advisor Shares may charge a Customer one or more of the
following types of fees, as agreed upon by the Institution and the Customer,
with respect to the cash management or other services provided by the
Institution: (i) account fees (a fixed amount per month or per year); (ii)
transaction fees (a fixed amount per transaction processed); (iii) compensation
balance requirements (a minimum dollar amount a Customer must maintain in order
to obtain the services offered); or (iv) account maintenance fees (a periodic
charge based upon the percentage of assets in the account or of the dividend
paid on those assets). Services provided by an Institution to Customers are in
addition to, and not duplicative of, the services to be provided under the
Fund's co-administration and distribution and shareholder servicing
arrangements. A Customer of an Institution should read the 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
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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 Plans or the 12b-1 Plans, as the
case may be ("Independent Directors"). Any material amendment of the
Distribution Plan or 12b-1 Plan would require the approval of the Board in the
same manner. Neither the Distribution Plan nor the 12b-1 Plan may be amended to
increase materially the amount to be spent thereunder without shareholder
approval of the relevant class of shares. The Distribution Plan or 12b-1 Plan
may be terminated at any time, without penalty, by vote of a majority of the
Independent Directors or by a vote of a majority of the outstanding voting
securities of the relevant class of shares of the Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of the Fund's shares is equal to the per share
net asset value of the relevant class of shares of the Fund. Information on how
to purchase and redeem Fund shares and how such shares are priced is included in
the Prospectus under "Net Asset Value."
Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
NYSE is closed, other than customary weekend and holiday closings, or during
which trading on the NYSE is restricted, or during which (as determined by the
SEC) an emergency exists as a result of which disposal or fair valuation of
portfolio securities is not reasonably practicable, or for such other periods as
the SEC may permit. (The Fund may also suspend or postpone the recordation of an
exchange of its shares upon the occurrence of any of the foregoing conditions.)
If the Board determines that conditions exist which make payment of
redemption proceeds wholly in cash unwise or undesirable, the Fund may make
payment wholly or partly in securities or other investment instruments which may
not constitute securities as such term is defined in the applicable securities
laws. If a redemption is paid wholly or partly in securities or other property,
a shareholder would incur transaction costs in disposing of the redemption
proceeds. The Fund will comply with Rule 18f-1 promulgated under the 1940 Act
with respect to redemptions in kind.
Automatic Cash Withdrawal Plan. An automatic cash withdrawal plan
(the "Plan") is available to shareholders who wish to receive specific amounts
of cash periodically. Withdrawals may be made under the Plan by redeeming as
many shares of the Fund as may be necessary to cover the stipulated withdrawal
payment. To the extent that withdrawals exceed dividends, distributions and
appreciation of a shareholder's investment in the Fund, there will be a
reduction in the value of the shareholder's investment and continued withdrawal
payments may reduce the shareholder's investment and ultimately exhaust it.
Withdrawal payments should not be considered as income from investment in the
Fund.
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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 Prospectus. Exchanges may also be
made between certain Warburg Pincus Advisor Funds.
The exchange privilege enables shareholders to acquire shares in the
Fund with a different investment objective when they believe that a shift
between funds is an appropriate investment decision. Subject to the restrictions
on exchange purchases contained in the Prospectus and any other applicable
restrictions, 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 the 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.
Subject to the restrictions described above, 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. The exchange privilege
may be modified or terminated at any time upon 30 days' notice to shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is a summary of the material United States federal
income tax considerations regarding the purchase, ownership and disposition of
shares in the Fund. Each prospective shareholder is urged to consult his own tax
adviser with respect to the specific federal, state, local and foreign tax
consequences of investing in the Fund. The summary is based on the laws in
effect on the date of this Statement of Additional Information, which are
subject to change.
The Fund and its Investments
The Fund intends to qualify to be treated as a regulated investment
company each taxable year under the Code. To so qualify, the Fund must, among
other things: (a) derive at least 90% of its gross income in each taxable year
from dividends, interest, payments with respect to securities, loans and gains
from the sale or other disposition of stock or securities or foreign currencies,
or other income (including, but not limited to, gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies; and (b) diversify its holdings so that, at the
end of each quarter of the Fund's taxable year, (i) at least 50% of the market
value of the Fund's assets is represented by cash, securities of other regulated
investment companies, United States government securities and other securities,
with such other securities limited, in respect of any one issuer, to an amount
not greater than 5% of the Fund's assets and not greater than 10% of the
outstanding voting securities of such issuer and (ii) not more than 25% of the
value of its assets is invested in the securities (other than United States
government securities or securities
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of other regulated investment companies) of any one issuer or any two or more
issuers that the Fund controls and are determined to be engaged in the same or
similar trades or businesses or related trades or businesses. The Fund expects
that all of its foreign currency gains will be directly related to its principal
business of investing in stocks and securities.
As a regulated investment company, the Fund will not be subject to
United States federal income tax on its net investment income (i.e., income
other than its net realized long- and short-term capital gains) and its net
realized long- and short-term capital gains, if any, that it distributes to its
shareholders, provided that an amount equal to at least 90% of the sum of its
investment company taxable income (i.e., 90% of its taxable income minus the
excess, if any, of its net realized long-term capital gains over its net
realized short-term capital losses (including any capital loss carryovers), plus
or minus certain other adjustments as specified in the Code) and its net
tax-exempt income for the taxable year is distributed, but will be subject to
tax at regular corporate rates on any taxable income or gains that it does not
distribute. Furthermore, the Fund will be subject to a United States corporate
income tax with respect to such distributed amounts in any year that it fails to
qualify as a regulated investment company or fails to meet this distribution
requirement. Any dividend declared by the Fund in October, November or December
of any calendar year and payable to shareholders of record on a specified date
in such a month shall be deemed to have been received by each shareholder on
December 31 of such calendar year and to have been paid by the Fund not later
than such December 31, provided that such dividend is actually paid by the Fund
during January of the following calendar year.
The Fund intends to distribute annually to its shareholders
substantially all of its investment company taxable income. The Board will
determine annually whether to distribute any net realized long-term capital
gains in excess of net realized short-term capital losses (including any capital
loss carryovers). The Fund currently expects to distribute any excess annually
to its shareholders. However, if the Fund retains for investment an amount equal
to all or a portion of its net long-term capital gains in excess of its net
short-term capital losses and capital loss carryovers, it will be subject to a
corporate tax (currently at a rate of 35%) on the amount retained. In that
event, the Fund will designate such retained amounts as undistributed capital
gains in a notice to its shareholders who (a) will be required to include in
income for United Stares federal income tax purposes, as long-term capital
gains, their proportionate shares of the undistributed amount, (b) will be
entitled to credit their proportionate shares of the 35% tax paid by the Fund on
the undistributed amount against their United States federal income tax
liabilities, if any, and to claim refunds to the extent their credits exceed
their liabilities, if any, and (c) will be entitled to increase their tax basis,
for United States federal income tax purposes, in their shares by an amount
equal to 65% of the amount of undistributed capital gains included in the
shareholder's income. Organizations or persons not subject to federal income tax
on such capital gains will be entitled to a refund of their pro rata share of
such taxes paid by the Fund upon filing appropriate returns or claims for refund
with the Internal Revenue Service (the "IRS"). Even if the Fund makes such an
election, it is possible that the Fund may incur an excise tax as a result of
not having distributed net capital gains.
The Code imposes a 4% nondeductible excise tax on the Fund to the
extent the Fund does not distribute by the end of any calendar year at least 98%
of its net investment
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income for that year and 98% of the net amount of its capital gains (both
long-and short-term) for the one-year period ending, as a general rule, on
October 31 of that year. For this purpose, however, any income or gain retained
by the Fund that is subject to corporate income tax will be considered to have
been distributed by year-end. In addition, the minimum amounts that must be
distributed in any year to avoid the excise tax will be increased or decreased
to reflect any underdistribution or overdistribution, as the case may be, from
the previous year. The Fund anticipates that it will pay such dividends and will
make such distributions as are necessary in order to avoid the application of
this tax.
With regard to the Fund's investments in foreign securities,
exchange control regulations may restrict repatriations of investment income and
capital or the proceeds of securities sales by foreign investors such as the
Fund and may limit the Fund's ability to pay sufficient dividends and to make
sufficient distributions to satisfy the 90% and excise tax distribution
requirements.
If, in any taxable year, the Fund fails to qualify as a regulated
investment company under the Code, it would be taxed in the same manner as an
ordinary corporation and distributions to its shareholders would not be
deductible by the Fund in computing its taxable income. In addition, in the
event of a failure to qualify, the Fund's distributions, to the extent derived
from the Fund's current or accumulated earnings and profits would constitute
dividends (eligible for the corporate dividends-received deduction) which are
taxable to shareholders as ordinary income, even though those distributions
might otherwise (at least in part) have been treated in the shareholders' hands
as long-term capital gains. If the Fund fails to qualify as a regulated
investment company in any year, it must pay out its earnings and profits
accumulated in that year in order to qualify again as a regulated investment
company. In addition, if the Fund failed to qualify as a regulated investment
company for a period greater than one taxable year, the Fund may be required to
recognize any net built-in gains (the excess of the aggregate gains, including
items of income, over aggregate losses that would have been realized if it had
been liquidated) in order to qualify as a regulated investment company in a
subsequent year.
The Fund's short sales against the box, if any, and transactions in
foreign currencies, forward contracts, options and futures contracts (including
options and futures contracts on foreign currencies) will be subject to special
provisions of the Code that, among other things, may affect the character of
gains and losses realized by the Fund (i.e., may affect whether gains or losses
are ordinary or capital), accelerate recognition of income to the Fund and defer
Fund losses. These rules could therefore affect the character, amount and timing
of distributions to shareholders. These provisions also (a) will require the
Fund to mark-to-market certain types of the positions in its portfolio (i.e.,
treat them as if they were closed out) and (b) may cause the Fund to recognize
income without receiving cash with which to pay dividends or make distributions
in amounts necessary to satisfy the distribution requirements for avoiding
income and excise taxes. 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 in order to mitigate the effect of these rules and
prevent disqualification of the Fund as a regulated investment company.
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The Fund's investments in zero coupon securities, if any, may create
special tax consequences. Zero coupon securities do not make interest payments,
although a portion of the difference between zero coupon security's face value
and its purchase price is imputed as income to the Fund each year even though
the Fund receives no cash distribution until maturity. Under the U.S. federal
tax laws, the Fund will not be subject to tax on this income if it pays
dividends to its shareholders substantially equal to all the income received
from, or imputed with respect to, its investments during the year, including its
zero coupon securities. These dividends ordinarily will constitute taxable
income to the shareholders of the Fund.
Passive Foreign Investment Companies. If the Fund purchases shares
in certain foreign investment entities, called "passive foreign investment
companies" (a "PFIC"), it may be subject to United States federal income tax on
a portion of any "excess distribution" or gain from the disposition of such
shares even if such income is distributed as a taxable dividend by the Fund to
its shareholders. Additional charges in the nature of interest may be imposed on
the Fund in respect of deferred taxes arising from such distributions or gains.
[Any tax paid by the Fund as a result of its ownership of shares in a PFIC will
not give rise to any deduction or credit to the Fund or any shareholder.] If the
Fund were to invest in a PFIC and elected to treat the PFIC as a "qualified
electing fund" under the Code, in lieu of the foregoing requirements, the Fund
might be required to include in income each year a portion of the ordinary
earnings and net capital gains of the qualified election fund, even if not
distributed to the Fund, and such amounts would be subject to the 90% and excise
tax distribution requirements described above. In order to make this election,
the Fund would be required to obtain certain annual information from the passive
foreign investment companies in which it invests, which may be difficult or not
possible to obtain. If the Fund were able to make the election described in this
paragraph, the Fund would not be able to treat any portion of the long-term
capital gains included in income pursuant to the election as eligible for the
20% maximum capital gains rate. On October 9, 1997, the Ways and Means Committee
of the U.S. Congress approved technical corrections legislation that would treat
PFICs as pass-through entities for purposes of applying the 20% rate to the
portion of a PFIC's long-term gain attributable to assets held more than 18
months.
Recently, legislation was enacted that provides a mark-to-market
election for regulated investment companies effective for taxable years
beginning after December 31, 1997. This election would result in a Fund being
treated as if it had sold and repurchased all of the PFIC stock at the end of
each year. In this case, the Fund would report gains as ordinary income and
would deduct losses as ordinary losses to the extent of previously recognized
gains. The election, once made, would be effective for all subsequent taxable
years of the Fund, unless revoked with the consent of the IRS. By making the
election, the Fund could potentially ameliorate the adverse tax consequences
with respect to its ownership of shares in a PFIC, but in any particular year
may be required to recognize income in excess of the distributions it receives
from PFICs and its proceeds from dispositions of PFIC company stock. The Fund
may have to distribute this "phantom" income and gain to satisfy its
distribution requirement and to avoid imposition of the 4% excise tax. The Fund
will make the appropriate tax elections, if possible, and take any additional
steps that are necessary to mitigate the effect of these rules.
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Dividends and Distributions. Dividends of net investment income and
distributions of net realized short-term capital gains are taxable to a United
States shareholder as ordinary income, whether paid in cash or in shares.
Distributions of net-long-term capital gains, if any, that the Fund designates
as capital gains dividends are taxable as long-term capital gains, whether paid
in cash or in shares and regardless of how long a shareholder has held shares of
the Fund. Dividends and distributions paid by the Fund (except for the portion
thereof, if any, attributable to dividends on stock of U.S. corporations
received by the Fund) will not qualify for the deduction for dividends received
by corporations. Distributions in excess of the Fund's current and accumulated
earnings and profits will, as to each shareholder, be treated as a tax-free
return of capital, to the extent of a shareholder's basis in his shares of the
Fund, and as a capital gain thereafter (if the shareholder holds his shares of
the Fund as capital assets).
Shareholders receiving dividends or distributions in the form of
additional shares should be treated for United States federal income tax
purposes as receiving a distribution in the amount equal to the amount of money
that the shareholders receiving cash dividends or distributions will receive,
and should have a cost basis in the shares received equal to such amount.
Investors considering buying shares just prior to a dividend or
capital gain distribution should be aware that, although the price of shares
just purchased at that time may reflect the amount of the forthcoming
distribution, such dividend or distribution may nevertheless be taxable to them.
If the Fund is the holder of record of any stock on the record date
for any dividends payable with respect to such stock, such dividends are
included in the Fund's gross income not as of the date received but as of the
later of (a) the date such stock became ex-dividend with respect to such
dividends (i.e., the date on which a buyer of the stock would not be entitled to
receive the declared, but unpaid, dividends) or (b) the date the Fund acquired
such stock. Accordingly, in order to satisfy its income distribution
requirements, the Fund may be required to pay dividends based on anticipated
earnings, and shareholders may receive dividends in an earlier year than would
otherwise be the case.
Sales of Shares. Upon the sale or exchange of his shares, a
shareholder will realize a taxable gain or loss equal to the difference between
the amount realized and his basis in his shares. Such gain or loss will be
treated as capital gain or loss, if the shares are capital assets in the
shareholder's hands, and will be long-term capital gain or loss if the shares
are held for more than one year and short-term capital gain or loss if the
shares are held for one year or less. Any loss realized on a sale or exchange
will be disallowed to the extent the shares disposed of are replaced, including
replacement through the reinvesting of dividends and capital gains distributions
in the Fund, within a 61-day period beginning 30 days before and ending 30 days
after the disposition of the shares. In such a case, the basis of the shares
acquired will be increased to reflect the disallowed loss. Any loss realized by
a shareholder on the sale of the Fund share held by the shareholder for six
months or less will be treated for United States federal income tax purposes as
a long-term capital loss to the extent of any distributions or deemed
distributions of long-term capital gains received by the shareholder with
respect to such share.
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Backup Withholding. The Fund may be required to withhold, for United
States federal income tax purposes, 31% of the dividends and 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 IRS that they are subject to backup withholding. Certain
shareholders are exempt from backup withholding. Backup withholding is not an
additional tax and any amount withheld may be credited against a shareholder's
United States federal income tax liabilities.
Notices. Shareholders will be notified annually by the Fund as to
the United States federal income tax status of the dividends, distributions and
deemed distributions attributable to undistributed capital gains (discussed
above in "The Fund and its Investments") made by the Fund to its shareholders.
Furthermore, shareholders will also receive, if appropriate, various written
notices after the close of the Fund's taxable year regarding the United States
federal income tax status of certain dividends, distributions and deemed
distributions that were paid (or that are treated as having been paid) by the
Fund to its shareholders during the preceding taxable year.
Other Taxation
Distributions also may be subject to additional state, local and
foreign taxes depending on each shareholder's particular situation.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN MATERIAL TAX CONSEQUENCES
AFFECTING THE FUND AND ITS 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.
DETERMINATION OF PERFORMANCE
From time to time, the Fund may quote the total return of its Common
Shares and/or Advisor Shares in advertisements or in reports and other
communications to shareholders. These figures are calculated by finding the
average annual compounded rates of return for the one-, five- and ten- (or such
shorter period as the relevant class of shares has been offered) year periods
that would equate the initial amount invested to the ending redeemable value
according to the following formula: P (1 + T)n = ERV. For purposes of this
formula, "P" is a hypothetical investment of $1,000; "T" is average annual total
return; "n" is number of years; and "ERV" is the ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the one-, five- or ten-year
periods (or fractional portion thereof). Total return or "T" is computed by
finding the average annual change in the value of an initial $1,000 investment
over the period and assumes that all dividends and distributions are reinvested
during the period.
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
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months that have elapsed in the current calendar year or most recent three
months, as the case may be. Investors should note that this performance may not
be representative of the Fund's total return in longer market cycles.
The performance of a class of Fund shares will vary from time to
time depending upon market conditions, the composition of the Fund's portfolio
and operating expenses allocable to it. As described above, total return is
based on historical earnings and is not intended to indicate future performance.
Consequently, any given performance quotation should not be considered as
representative of performance for any specified period in the future.
Performance information may be useful as a basis for comparison with other
investment alternatives. However, the Fund's performance will fluctuate, unlike
certain bank deposits or other investments which pay a fixed yield for a stated
period of time. Any fees charged by Institutions or other institutional
investors directly to their customers in connection with 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.
The Fund intends to diversify its assets among countries, and in
doing so, would expect to be able to reduce the risk arising from economic
problems affecting a single country. Warburg thus believes that, by spreading
risk throughout many diverse markets outside the United States, the Fund may
reduce its exposure to country-specific economic problems. Warburg believes that
a diversified portfolio of international equity securities, when combined with a
similarly diversified portfolio of domestic equity securities, tends to have a
lower volatility than a portfolio composed entirely of domestic securities.
Furthermore, international equities have been shown to reduce volatility in
single asset portfolios regardless of whether the investments are in all
domestic equities or all domestic fixed-income instruments, and research
indicates that volatility can be significantly decreased when international
equities are added.
To illustrate this point, the performance of international equity
securities, as measured by the Morgan Stanley Capital International (EAFE)
Europe, Australia, Far East Index (the "EAFE Index"), has equaled or exceeded
that of domestic equity securities, as measured by the Standard & Poor's 500
Composite Stock Index (the "S&P 500 Index") in 14 of the last 26 years. The
following table compares annual total returns of the EAFE Index and the S&P 500
Index for the calendar years shown.
EAFE INDEX VS. S&P 500 INDEX
1972-1997
ANNUAL TOTAL RETURN+
<TABLE>
<CAPTION>
YEAR EAFE INDEX S&P 500 INDEX
---- ---------- -------------
<S> <C> <C>
1972* 33.28 15.63
1973* -16.82 -17.37
1974* -25.60 -29.72
1975 31.21 31.55
1976 -.36 19.15
1977* 14.61 -11.50
1978* 28.91 1.06
</TABLE>
41
<PAGE> 80
EAFE INDEX VS. S&P 500 INDEX
1972-1997
ANNUAL TOTAL RETURN+
<TABLE>
<CAPTION>
YEAR EAFE INDEX S&P 500 INDEX
---- ---------- -------------
<S> <C> <C>
1979 1.82 12.31
1980 19.01 25.77
1981* -4.85 -9.73
1982 -4.63 14.76
1983* 20.91 17.27
1984* 5.02 1.40
1985* 52.97 26.33
1986* 66.80 14.62
1987* 23.18 2.03
1988* 26.66 12.40
1989 9.22 27.25
1990 -24.71 -6.56
1991 10.19 26.31
1992 -13.89 4.46
1993* 30.49 7.06
1994* 6.24 -1.54
1995 9.42 34.11
1996 4.40 20.26
1997 0.24 31.01
</TABLE>
- --------------------
+ Without reinvestment of dividends.
* The EAFE Index has outperformed the S&P 500 Index 14 out of the last 26 years.
The quoted performance information shown above is not intended to
indicate the future performance of the Fund.
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 each Fund. The statement of assets and liabilities
of the Fund, as of May 15, 1998, 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.
42
<PAGE> 81
APPENDIX
DESCRIPTION OF RATINGS
Commercial Paper Ratings
Commercial paper rated A-1 by Standard and Poor's Ratings Services
("S&P") indicates that the degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted with a plus sign designation. Capacity for timely payment on commercial
paper rated A-2 is satisfactory, but the relative degree of safety is not as
high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating assigned
by Moody's Investors Service, Inc. ("Moody's"). Issuers rated Prime-1 (or
related supporting institutions) are considered to have a superior capacity for
repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics of issuers rated Prime-1 but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
Corporate Bond Ratings
The following summarizes the ratings used by S&P for corporate
bonds:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB - This is the lowest investment grade. Debt rated BBB is
regarded as having an adequate capacity to pay interest and repay principal.
Although it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for bonds in this category than for
bonds in higher rated categories.
BB, B and CCC - Debt rated BB and B are regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB represents a lower
degree of speculation than B, and CCC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
A-1
<PAGE> 82
BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which could
lead to inadequate capacity to meet timely interest and principal payments. The
BB rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B - Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to
default and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
Additionally, the rating CI is reserved for income bonds on which no
interest is being paid. Such debt is rated between debt rated C and debt rated
D.
To provide more detailed indications of credit quality, the ratings
may be modified by the addition of a plus or minus sign to show relative
standing within this major rating category.
D - Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
The following summarizes the ratings used by Moody's for corporate
bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
A-2
<PAGE> 83
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.
A-3
<PAGE> 84
WARBURG, PINCUS INTERNATIONAL SMALL COMPANY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
MAY 15, 1998
<TABLE>
<S> <C>
ASSETS:
Cash $100,000
Deferred Organizational Costs 16,500
Deferred Offering Costs 60,500
--------
Total Assets 177,000
--------
Liabilities:
Accrued Organizational Costs 16,500
Accrued Offering Costs 60,500
--------
Total Liabilities 77,000
--------
Net Assets $100,000
--------
Net Asset Value, Redemption and Offering Price per Share
(three billion shares authorized, consisting of 1 billion
Common Shares and 2 billion Advisor Shares - $.001 per
share designated) applicable to 10,000 Common Shares. $ 10.00
--------
</TABLE>
See Accompanying Notes to Financial Statements
<PAGE> 85
WARBURG, PINCUS INTERNATIONAL SMALL COMPANY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 15, 1998
1. ORGANIZATION:
Warburg, Pincus International Small Company Fund, Inc. (the "Fund") was
incorporated on April 2, 1998 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 two billion are
designated Advisor Shares. Common Shares bear fees of .25% of average
daily net asset value pursuant to a 12b-1 distribution plan. 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 Asset Management, Inc., the Fund's investment adviser (the
"Adviser"), on May 15, 1998.
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> 86
[Coopers & Lybrand Letterhead]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Warburg, Pincus International Small Company Fund, Inc.
We have audited the accompanying Statement of Assets and Liabilities of Warburg,
Pincus International Small Company Fund, Inc. (the "Fund") as of May 15, 1998.
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 International
Small Company Fund, Inc. as of May 15, 1998 in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
May 15, 1998
<PAGE> 87
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:
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ---------- ----------------------
<S> <C>
1 Articles of Incorporation.(1)
2 By-Laws.(1)
3 Not applicable.
4 Registrant's Forms of Stock Certificates.
5 Form of Investment Advisory Agreement.(1)
6 Form of Distribution Agreement.(1)
7 Not applicable.
8(a) Custodian Agreement with PNC Bank, National Association.
(b) Custodian Agreement with State Street Bank and Trust Company.
9(a) Transfer Agency and Service Agreement.
(b) Form of Co-Administration Agreement with Counsellors Funds Service, Inc.(1)
(c) Form of Co-Administration Agreement with PFPC Inc.(1)
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.
</TABLE>
- ------------------------
1 Incorporated by reference to Registrant's Registration Statement on
Form N-1A filed on April 7, 1998 (Securities Act File No. 333-49537).
<PAGE> 88
<TABLE>
<S> <C>
11 Consent of Coopers & Lybrand L.L.P., Independent Accountants.
12 Not applicable.
13 Form of Purchase Agreement.(1)
14 Not applicable
15(a) Form of Shareholder Servicing and
Distribution Plan.(1)
(b) Form of Distribution Plan.(1)
16 Not applicable.
17 Not applicable
18 Form of 18f-3 Plan.(1)
</TABLE>
Item 25. Persons Controlled by or Under Common Control
with Registrant
From time to time, Warburg Pincus Asset Management, Inc.
("Warburg") may be deemed to control the Fund and other registered investment
companies it advises through its beneficial ownership of more than 25% of the
relevant fund's shares on behalf of discretionary advisory clients. Warburg
has five wholly-owned subsidiaries: Counsellors Securities Inc., a New York
corporation; Counsellors Funds Service, Inc., a Delaware corporation;
Counsellors Agency Inc., a New York corporation; Warburg, Pincus Investments
International (Bermuda), Ltd., a Bermuda corporation; and Warburg, Pincus Asset
Management International, Inc., a Delaware corporation.
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. Discussion of this coverage is incorporated by
reference to Item 27 of Part C of the Fund's initial Registration Statement on
Form N-1A filed on April 7, 1998.
<PAGE> 89
Item 28. Business and Other Connections of Investment
Adviser
Warburg, a wholly owned subsidiary of Warburg, Pincus
Asset Management Holdings, Inc., 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 Warburg Pincus Balanced Fund; Warburg Pincus Capital
Appreciation Fund; Warburg Pincus Cash Reserve Fund; Warburg Pincus Emerging
Growth Fund; Warburg Pincus Emerging Markets Fund; Warburg Pincus Fixed Income
Fund; Warburg Pincus Global Fixed Income Fund; Warburg, Pincus Global
Post-Venture Capital Fund, Inc.; Warburg Pincus Growth & Income Fund; Warburg
Pincus Health Sciences Fund; Warburg Pincus Institutional Fund; Warburg Pincus
Intermediate Maturity Government Fund; Warburg Pincus International Equity
Fund; Warburg Pincus Japan Growth Fund; Warburg Pincus Japan OTC Fund; Warburg
Pincus Major Foreign Markets 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 Growth Fund; Warburg
Pincus Small Company Value Fund; Warburg Pincus Strategic Value Fund; Warburg
Pincus Trust; and Warburg Pincus Trust II.
(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 International Small Company
Fund, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(Fund's Articles of Incorporation, By-Laws and
minute books)
(2) Warburg Pincus Asset Management, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as
<PAGE> 90
investment adviser)
(3) PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
(records relating to its functions as
co-administrator)
(4) Counsellors Funds Service, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as
co-administrator)
(5) State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
(records relating to its functions as custodian,
transfer agent and dividend disbursing agent)
(7) Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, Massachusetts 02171
(records relating to its functions as transfer
agent and dividend disbursing agent)
(8) PNC Bank, National Association
Broad and Chestnut Streets
Philadelphia, Pennsylvania 19101
(records relating to its functions as custodian)
(9) Counsellors Securities Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as distributor)
Item 31. Management Services
Not applicable.
Item 32. Undertakings.
(a) 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.
(b) 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
<PAGE> 91
Section 16(c) of the 1940 Act relating to communications with the shareholders
of certain common-law trusts.
<PAGE> 92
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York and the State
of New York, on the 20th day of May, 1998.
WARBURG, PINCUS INTERNATIONAL SMALL
COMPANY FUND, INC.
By:/s/Eugene L. Podsiadlo
----------------------
Eugene L. Podsiadlo
President
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/John L. Furth Chairman of the May 20, 1998
- ---------------- Board of Directors
John L. Furth
/s/Eugene L. Podsiadlo President May 20, 1998
- ----------------------
Eugene L. Podsiadlo
/s/Howard Conroy Vice President and May 20, 1998
- ---------------- Chief Financial
Howard Conroy Officer
/s/Daniel S. Madden Treasurer and Chief May 20, 1998
- ------------------- Accounting Officer
Daniel S. Madden
/s/Richard N. Cooper Director May 20, 1998
- --------------------
Richard N. Cooper
/s/Jack W. Fritz Director May 20, 1998
- ----------------
Jack W. Fritz
/s/Jeffrey E. Garten Director May 20, 1998
- --------------------
Jeffrey E. Garten
/s/Thomas A. Melfe Director May 20, 1998
- ------------------
Thomas A. Melfe
/s/Arnold M. Reichman Director May 20, 1998
- ---------------------
Arnold M. Reichman
/s/Alexander B. Trowbridge Director May 20, 1998
- -----------------------------
Alexander B. Trowbridge
</TABLE>
<PAGE> 93
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Exhibit No. Description of Exhibit
- ----------- ----------------------
4 Registrant's Forms of Stock Certificates
8(a) Custodian Agreement with PNC Bank, National
Association
8(b) Custodian Agreement with State Street Bank
and Trust Company
9(a) Transfer Agency and Service Agreement
10(a) Opinion and Consent of Willkie Farr & Gallagher,
counsel to the Fund
10(b) Opinion and Consent of Venable, Baetjer and
Howard, LLP, Maryland counsel to the Fund.
11 Consent of Coopers & Lybrand L.L.P., Independent
Accountants.
</TABLE>
<PAGE> 1
EXHIBIT 4
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
WARBURG, PINCUS INTERNATIONAL SMALL COMPANY FUND, INC.
THE CORPORATION IS AUTHORIZED TO ISSUE THREE BILLION SHARES, PAR VALUE $.001.
SPECIMEN
<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 designation 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.
<PAGE> 1
EXHIBIT 8(a)
FORM OF AGREEMENT
CUSTODIAN SERVICES AGREEMENT TERMS AND CONDITIONS
This Agreement is made as of __________, 199_ by and between PNC
BANK, NATIONAL ASSOCIATION, a national banking association, and WARBURG, PINCUS
INTERNATIONAL SMALL COMPANY FUND, 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 exchange registered with the SEC under
the 1934 Act.
(c) "CFTC". The term "CFTC" shall mean the Commodities
Futures Trading
<PAGE> 2
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.
(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;
2
<PAGE> 3
(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
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
3
<PAGE> 4
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 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
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<PAGE> 5
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 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
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<PAGE> 6
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 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.
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)
6
<PAGE> 7
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 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,
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<PAGE> 8
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
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;
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<PAGE> 9
(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;
(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 held
hereunder 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, except for
securities held in a Book-Entry System. All
such securities shall be held or disposed of
only upon Written Instructions of the Fund
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
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<PAGE> 10
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
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, with respect to securities held
hereunder:
(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;
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<PAGE> 11
(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 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
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<PAGE> 12
(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 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
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<PAGE> 13
Fund's participation in the Book-Entry System
will at all times during PNC Bank's 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 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
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<PAGE> 14
System, shall execute in blank and promptly deliver all notices, 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
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 held hereunder
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
held hereunder 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
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<PAGE> 15
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 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 hereunder;
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,
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.
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<PAGE> 16
(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 adviser(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 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.
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<PAGE> 17
(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 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;
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<PAGE> 18
(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 (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 telephonic demands with respect 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
choice, having an aggregate capital,
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<PAGE> 19
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 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 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
19
<PAGE> 20
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 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.
20
<PAGE> 21
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:
-------------------------
Title:
----------------------
WARBURG, PINCUS INTERNATIONAL SMALL
COMPANY FUND, INC.
By:
-------------------------
Title:
----------------------
21
<PAGE> 22
AUTHORIZED PERSONS APPENDIX
<TABLE>
<S> <C>
NAME (TYPE) SIGNATURE
- ---------------- ----------------
- ---------------- ----------------
- ---------------- ----------------
- ---------------- ----------------
- ---------------- ----------------
- ---------------- ----------------
</TABLE>
22
<PAGE> 1
EXHIBIT 8(b)
CUSTODIAN AGREEMENT
This Agreement between WARBURG, PINCUS INTERNATIONAL SMALL COMPANY
FUND, INC., a corporation organized and existing under the laws of Maryland
with its principal place of business at 466 Lexington Avenue New York, New York
10017 (the "FUND"), and STATE STREET BANK and TRUST COMPANY, a Massachusetts
trust company with its principal place of business at 225 Franklin Street,
Boston, Massachusetts 02110 (the "CUSTODIAN"),
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
SECTION 1. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT
The Fund hereby employs the Custodian as the custodian of its assets,
including securities which the Fund desires to be held in places within the
United States ("DOMESTIC SECURITIES") and securities it desires to be held
outside the United States ("FOREIGN SECURITIES"). The Fund agrees to deliver
to the Custodian all securities and cash owned by it, and all payments of
income, payments of principal or capital distributions received by it with
respect to all securities owned by it from time to time, and the cash
consideration received by it for such new or treasury shares of beneficial
interest of the Fund ("SHARES") as may be issued or sold from time to time. The
Custodian shall not be responsible for any property of the Fund held or
received by the Fund and not delivered to the Custodian.
Upon receipt of "PROPER INSTRUCTIONS" (as such term is defined in
Section 6 hereof), the Custodian shall from time to time employ one or more
sub-custodians located in the United States, but only in accordance with an
applicable vote by the Board of Directors of the Fund (the "BOARD"), and
provided that the Custodian shall have no more or less responsibility or
liability to the Fund on account of any actions or omissions of any
sub-custodian so employed than any such sub-custodian has to the Custodian.
The Custodian may employ as sub-custodian for the Fund's foreign securities the
foreign banking institutions and foreign securities depositories designated in
Schedules A and B hereto but only in accordance with the applicable provisions
of Sections 3 and 4.
SECTION 2. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND
HELD BY THE CUSTODIAN IN THE UNITED STATES
SECTION 2.1 HOLDING SECURITIES. The Custodian shall hold and
physically segregate for the account of the Fund all non-cash property, to be
held by it in the United States including all domestic securities owned by the
Fund, other than (a) securities which are maintained pursuant to Section 2.8 in
a clearing agency which acts as a securities depository or in a book-entry
system authorized by the U.S. Department of the Treasury (each, a "U.S.
SECURITIES SYSTEM") and (b) commercial paper of an issuer for which State
Street Bank and Trust Company acts as issuing and
<PAGE> 2
paying agent ("DIRECT PAPER") which is deposited and/or maintained in the
Direct Paper System of the Custodian (the "DIRECT PAPER SYSTEM") pursuant to
Section 2.9.
SECTION 2.2 DELIVERY OF SECURITIES. The Custodian shall release
and deliver domestic securities owned by the Fund held by the Custodian or in a
U.S. Securities System account of the Custodian or in the Custodian's Direct
Paper book entry system account ("DIRECT PAPER SYSTEM ACCOUNT") only upon
receipt of Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a U.S. Securities
System, in accordance with the provisions of Section 2.8 hereof;
4) To the depository agent in connection with tender or other
similar offers for securities of the Fund;
5) 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 the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or nominees of the Custodian
or into the name or nominee name of any agent appointed pursuant to Section 2.7
or into the name or nominee name of any sub-custodian appointed pursuant to
Section 1; or for exchange for a different number of bonds, certificates or
other evidence representing the same aggregate face amount or number of units;
provided that, in any such case, the new securities are to be delivered to the
Custodian;
7) Upon the sale of such securities for the account of the Fund,
to the broker or its clearing agent, against a receipt, for examination in
accordance with "street delivery" custom; provided that in any such case, the
Custodian shall have no responsibility or liability for any loss arising from
the delivery of such securities prior to receiving payment for such securities
except as may arise from the Custodian's own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions for
conversion contained in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
2
<PAGE> 3
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or similar
securities or the surrender of interim receipts or temporary securities for
definitive securities; provided that, in any such case, the new securities and
cash, if any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Fund, but only against receipt of adequate collateral as agreed upon
from time to time by the Custodian and the Fund, which may be in the form of
cash or obligations issued by the United States government, its agencies or
instrumentalities, except that in connection with any loans for which
collateral is to be credited to the Custodian's account in the book-entry
system authorized by the U.S. Department of the Treasury, the Custodian will
not be held liable or responsible for the delivery of securities owned by the
Fund prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowing by
the Fund requiring a pledge of assets by the Fund, but only against receipt of
amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer registered under
the Securities Exchange Act of 1934 (the "EXCHANGE ACT") and a member of The
National Association of Securities Dealers, Inc. ("NASD"), relating to
compliance with the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements in connection with
transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures Commission Merchant
registered under the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any Contract Market,
or any similar organization or organizations, regarding account deposits in
connection with transactions by the Fund;
14) Upon receipt of instructions from the transfer agent for the
Fund (the "TRANSFER AGENT") for delivery to such Transfer Agent or to the
holders of Shares in connection with distributions in kind, as may be described
from time to time in the Fund's currently effective prospectus and statement of
additional information (the "PROSPECTUS"), in satisfaction of requests by
holders of Shares for repurchase or redemption; and
15) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund, a copy of a resolution of the
Board or of the Executive Committee thereof signed by an officer of the Fund
and certified by the Secretary or an Assistant Secretary thereof (a "CERTIFIED
RESOLUTION"), specifying the securities of the Fund to be delivered, setting
forth the purpose for which such delivery is to be made, declaring such purpose
to be a proper corporate purpose, and naming the person or persons to whom
delivery of such securities shall be made.
3
<PAGE> 4
SECTION 2.3 REGISTRATION OF SECURITIES. Domestic securities held
by the Custodian (other than bearer securities) shall be registered in the name
of the Fund or in the name of any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund, unless the
Fund has authorized in writing the appointment of a nominee to be used in
common with other registered investment companies having the same investment
adviser as the Fund, or in the name or nominee name of any agent appointed
pursuant to Section 2.7 or in the name or nominee name of any sub-custodian
appointed pursuant to Section 1. All securities accepted by the Custodian on
behalf of the Fund under the terms of this Agreement shall be in "street name"
or other good delivery form. If, however, the Fund directs the Custodian to
maintain securities in "street name", the Custodian shall utilize its best
efforts only to timely collect income due the Fund on such securities and to
notify the Fund on a best efforts basis only of relevant corporate actions
including, without limitation, pendency of calls, maturities, tender or
exchange offers.
SECTION 2.4 BANK ACCOUNTS. The Custodian shall open and maintain
a separate bank account or accounts in the United States in the name of the
Fund, subject only to draft or order by the Custodian acting pursuant to the
terms of this Agreement, and shall hold in such account or accounts, subject to
the provisions hereof, all cash received by it from or for the account of the
Fund, other than cash maintained by the Fund in a bank account established and
used in accordance with Rule 17f-3 under the Investment Company Act of 1940, as
amended (the "1940 ACT"). Funds held by the Custodian for the Fund may be
deposited by it to its credit as Custodian in the Banking Department of the
Custodian or in such other banks or trust companies as it may in its discretion
deem necessary or desirable; provided, however, that every such bank or trust
company shall be qualified to act as a custodian under the 1940 Act and that
each such bank or trust company and the funds to be deposited with each such
bank or trust company shall be approved by vote of a majority of the Board.
Such funds shall be deposited by the Custodian in its capacity as Custodian and
shall be withdrawable by the Custodian only in that capacity.
SECTION 2.5 COLLECTION OF INCOME. Subject to the provisions of
Section 2.3, the Custodian shall collect on a timely basis all income and other
payments with respect to registered domestic securities held hereunder to which
the Fund shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and other
payments with respect to bearer domestic securities if, on the date of payment
by the issuer, such securities are held by the Custodian or its agent thereof
and shall credit such income, as collected, to the Fund's custodian account.
Without limiting the generality of the foregoing, the Custodian shall detach
and present for payment all coupons and other income items requiring
presentation as and when they become due and shall collect interest when due on
securities held hereunder. Income due the Fund on securities loaned pursuant
to the provisions of Section 2.2 (10) shall be the responsibility of the Fund.
The Custodian will have no duty or responsibility in connection therewith,
other than to provide the Fund with such information or data as may be
necessary to assist the Fund in arranging for the timely delivery to the
Custodian of the income to which the Fund is properly entitled.
4
<PAGE> 5
SECTION 2.6 PAYMENT OF FUND MONIES. Upon receipt of Proper
Instructions, which may be continuing instructions when deemed appropriate by
the parties, the Custodian shall pay out monies of the Fund in the following
cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of the Fund but only
(a) against the delivery of such securities or evidence of title to such
options, futures contracts or options on futures contracts to the Custodian (or
any bank, banking firm or trust company doing business in the United States or
abroad which is qualified under the 1940 Act to act as a custodian and has been
designated by the Custodian as its agent for this purpose) registered in the
name of the Fund or in the name of a nominee of the Custodian referred to in
Section 2.3 hereof or in proper form for transfer; (b) in the case of a
purchase effected through a U.S. Securities System, in accordance with the
conditions set forth in Section 2.8 hereof; (c) in the case of a purchase
involving the Direct Paper System, in accordance with the conditions set forth
in Section 2.9; (d) in the case of repurchase agreements entered into between
the Fund and the Custodian, or another bank, or a broker-dealer which is a
member of NASD, (i) against delivery of the securities either in certificate
form or through an entry crediting the Custodian's account at the Federal
Reserve Bank with such securities or (ii) against delivery of the receipt
evidencing purchase by the Fund of securities owned by the Custodian along with
written evidence of the agreement by the Custodian to repurchase such
securities from the Fund or (e) for transfer to a time deposit account of the
Fund in any bank, whether domestic or foreign; such transfer may be effected
prior to receipt of a confirmation from a broker and/or the applicable bank
pursuant to Proper Instructions from the Fund as defined herein;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued as set forth
in Section 5 hereof;
4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be
in whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends on Shares declared pursuant
to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions from the Fund, a copy of a Certified
Resolution specifying the amount of such payment, setting forth the purpose for
which such payment is to be made, declaring such purpose
5
<PAGE> 6
to be a proper corporate purpose, and naming the person or persons to whom such
payment is to be made.
SECTION 2.7 APPOINTMENT OF AGENTS. The Custodian may at any time
or times in its discretion appoint (and may at any time remove) any other bank
or trust company which is itself qualified under the 1940 Act to act as a
custodian, as its agent to carry out such of the provisions of this Section 2
as the Custodian may from time to time direct; provided, however, that the
appointment of any agent shall not relieve the Custodian of its
responsibilities or liabilities hereunder.
SECTION 2.8 DEPOSIT OF FUND ASSETS IN U.S. SECURITIES SYSTEMS.
The Custodian may deposit and/or maintain securities owned by the Fund in a
clearing agency registered with the United States Securities and Exchange
Commission (the "SEC") under Section 17A of the Exchange Act, which acts as a
securities depository, or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies, collectively referred
to herein as "U.S. SECURITIES SYSTEM" in accordance with applicable Federal
Reserve Board and SEC rules and regulations, if any, and subject to the
following provisions:
1) The Custodian may keep securities of the Fund in a U.S.
Securities System provided that such securities are represented in an account
of the Custodian in the U.S. Securities System (the "U.S. SECURITIES SYSTEM
ACCOUNT") which account shall not include any assets of the Custodian other
than assets held as a fiduciary, custodian or otherwise for customers;
2) The records of the Custodian with respect to securities of the
Fund which are maintained in a U.S. Securities System shall identify by
book-entry those securities belonging to the Fund;
3) The Custodian shall pay for securities purchased for the
account of the Fund upon (i) receipt of advice from the U.S. Securities System
that such securities have been transferred to the U.S. Securities System
Account, and (ii) the making of an entry on the records of the Custodian to
reflect such payment and transfer for the account of the Fund. The Custodian
shall transfer securities sold for the account of the Fund upon (i) receipt of
advice from the U.S. Securities System that payment for such securities has
been transferred to the U.S. Securities System Account, and (ii) the making of
an entry on the records of the Custodian to reflect such transfer and payment
for the account of the Fund. Copies of all advices from the U.S. Securities
System of transfers of securities for the account of the Fund shall identify
the Fund, be maintained for the Fund by the Custodian and be provided to the
Fund at its request. Upon request, the Custodian shall furnish the Fund
confirmation of each transfer to or from the account of the Fund in the form of
a written advice or notice and shall furnish to the Fund copies of daily
transaction sheets reflecting each day's transactions in the U.S. Securities
System for the account of the Fund;
4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the U.S. Securities System's accounting system, internal
accounting control and procedures for safeguarding securities deposited in the
U.S. Securities System;
6
<PAGE> 7
5) The Custodian shall have received from the Fund the initial or
annual certificate, as the case may be, required by Section 15 hereof;
6) Anything to the contrary in this Agreement notwithstanding,
the Custodian shall be liable to the Fund for any loss or damage to the Fund
resulting from use of the U.S. Securities System by reason of any negligence,
misfeasance or misconduct of the Custodian or any of its agents or of any of
its or their employees or from failure of the Custodian or any such agent to
enforce effectively such rights as it may have against the U.S. Securities
System; at the election of the Fund, it shall be entitled to be subrogated to
the rights of the Custodian with respect to any claim against the U.S.
Securities System or any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent that the Fund has
not been made whole for any such loss or damage.
SECTION 2.9 FUND ASSETS HELD IN THE CUSTODIAN'S DIRECT PAPER
SYSTEM. The Custodian may deposit and/or maintain securities owned by the Fund
in the Direct Paper System of the Custodian subject to the following
provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions;
2) The Custodian may keep securities of the Fund in the Direct
Paper System only if such securities are represented in the Direct Paper System
Account, which account shall not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the
Fund which are maintained in the Direct Paper System shall identify by
book-entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the
account of the Fund upon the making of an entry on the records of the Custodian
to reflect such payment and transfer of securities to the account of the Fund.
The Custodian shall transfer securities sold for the account of the Fund upon
the making of an entry on the records of the Custodian to reflect such transfer
and receipt of payment for the account of the Fund;
5) The Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund, in the form of a written advice or
notice, of Direct Paper on the next business day following such transfer and
shall furnish to the Fund copies of daily transaction sheets reflecting each
day's transaction in the Direct Paper System for the account of the Fund;
6) The Custodian shall provide the Fund with any report on its
system of internal accounting control as the Fund may reasonably request from
time to time.
7
<PAGE> 8
SECTION 2.10 SEGREGATED ACCOUNT. The Custodian shall upon receipt
of Proper Instructions 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, including securities maintained in an
account by the Custodian pursuant to Section 2.8 hereof, (i) in accordance with
the provisions of any agreement among the Fund, the Custodian and a
broker-dealer registered under the Exchange Act and a member of the NASD (or
any futures commission merchant registered under the Commodity Exchange Act),
relating to compliance with the rules of The Options Clearing Corporation and
of any registered national securities exchange (or the Commodity Futures
Trading Commission or any registered 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
or government securities in connection with options purchased, sold or written
by the Fund or commodity futures contracts or options thereon purchased or sold
by the Fund, (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 SEC relating to the maintenance of
segregated accounts by registered investment companies and (iv) for other
proper purposes, but only, in the case of clause (iv), upon receipt of, in
addition to Proper Instructions, a copy of a Certified Resolution setting forth
the purpose or purposes of such segregated account and declaring such
purpose(s) to be a proper corporate purpose.
SECTION 2.11 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The
Custodian shall execute ownership and other certificates and affidavits for all
federal and state tax purposes in connection with receipt of income or other
payments with respect to domestic securities of the Fund held by it and in
connection with transfers of securities.
SECTION 2.12 PROXIES. The Custodian shall, with respect to the
domestic securities held hereunder, cause to be promptly executed by the
registered holder of such securities, if the securities are registered
otherwise than in the name of the Fund or a nominee of the Fund, all proxies,
without indication of the manner in which such proxies are to be voted, and
shall promptly deliver to the Fund such proxies, all proxy soliciting materials
and all notices relating to such securities.
SECTION 2.13 COMMUNICATIONS RELATING TO FUND SECURITIES. Subject
to the provisions of Section 2.3, the Custodian shall transmit promptly to the
Fund all written information (including, without limitation, pendency of calls
and maturities of domestic securities and expirations of rights in connection
therewith and notices of exercise of call and put options written by the Fund
and the maturity of futures contracts purchased or sold by the Fund) received
by the Custodian from issuers of the securities being held for the Fund. With
respect to tender or exchange offers, the Custodian shall transmit promptly to
the Fund all written information received by the Custodian from issuers of the
securities whose tender or exchange is sought and from the party (or his
agents) making the tender or exchange offer. If the Fund desires to take
action with respect to any tender offer, exchange offer or any other similar
transaction, the Fund shall notify the Custodian at least three business days
prior to the date on which the Custodian is to take such action.
8
<PAGE> 9
SECTION 3. THE CUSTODIAN AS FOREIGN CUSTODY MANAGER OF THE FUND
SECTION 3.1 DEFINITIONS. The following capitalized terms shall
have the indicated meanings:
Capitalized terms in this Article 3 shall have the following meanings:
"COUNTRY RISK" means all factors reasonably related to the systemic risk of
holding Foreign Assets in a particular country including, but not limited to,
such country's political environment; economic and financial infrastructure
(including any Mandatory Securities Depositories operating in the country);
prevailing or developing custody and settlement practices; and laws and
regulations applicable to the safekeeping and recovery of Foreign Assets held
in custody in that country.
"ELIGIBLE FOREIGN CUSTODIAN" has the meaning set forth in section (a)(1) of
Rule 17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank
(as defined in Rule 17f-5), a bank holding company meeting the requirements of
an Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other
appropriate action of the U.S. Securities and Exchange Commission (the "SEC")),
or a foreign branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act)
meeting the requirements of a custodian under Section 17(f) of the 1940 Act,
except that the term does not include Mandatory Securities Depositories.
"FOREIGN ASSETS" means any of the Fund's investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Fund's
transactions in such investments.
"FOREIGN CUSTODY MANAGER" has the meaning set forth in section (a)(2) of Rule
17f-5.
"MANDATORY SECURITIES DEPOSITORY" means a foreign securities depository or
clearing agency that, either as a legal or practical matter, must be used if
the Fund determines to place Foreign Assets in a country outside the United
States (i) because required by law or regulation; (ii) because securities
cannot be withdrawn from such foreign securities depository or clearing agency;
or (iii) because maintaining or effecting trades in securities outside the
foreign securities depository or clearing agency is not consistent with
prevailing or developing custodial or market practices.
SECTION 3.2 DELEGATION TO THE CUSTODIAN AS FOREIGN CUSTODY
MANAGER. The Fund, by resolution adopted by the Board, hereby delegates to the
Custodian, subject to Section (b) of Rule 17f-5, the responsibilities set forth
in this Section 3 with respect to Foreign Assets held outside the United
States, and the Custodian hereby accepts such delegation, as Foreign Custody
Manager of the Fund.
SECTION 3.3 COUNTRIES COVERED. The Foreign Custody Manager
shall be responsible for performing the delegated responsibilities defined
below only with respect to the countries and
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<PAGE> 10
custody arrangements for each such country listed on Schedule A to this
Agreement, which list of countries may be amended from time to time by the Fund
with the agreement of the Foreign Custody Manager. The Foreign Custody Manager
shall list on Schedule A the Eligible Foreign Custodians selected by the
Foreign Custody Manager to maintain the Fund's assets, which list of Eligible
Foreign Custodians may be amended from time to time in the sole discretion of
the Foreign Custody Manager. Mandatory Securities Depositories are listed on
Schedule B to this Contract, which Schedule B may be amended from time to time
by the Foreign Custody Manager. The Foreign Custody Manager will provide
amended versions of Schedules A and B in accordance with Section 3.7 hereof.
Upon the receipt by the Foreign Custody Manager of Proper Instructions
to open an account, or to place or maintain Foreign Assets, in a country listed
on Schedule A, and the fulfillment by the Fund of the applicable account
opening requirements for such country, the Foreign Custody Manager shall be
deemed to have been delegated by the Board responsibility as Foreign Custody
Manager with respect to that country and to have accepted such delegation.
Following the receipt of Proper Instructions directing the Foreign Custody
Manager to close the account of the Fund with the Eligible Foreign Custodian
selected by the Foreign Custody Manager in a designated country, the delegation
by the Board to the Custodian as Foreign Custody Manager for that country shall
be deemed to have been withdrawn and the Custodian shall immediately cease to
be the Foreign Custody Manager of the Fund with respect to that country.
The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to
the Fund. Thirty days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Fund, the Custodian shall have
no further responsibility as Foreign Custody Manager to the Fund with respect
to the country as to which the Custodian's acceptance of delegation is
withdrawn.
SECTION 3.4 SCOPE OF DELEGATED RESPONSIBILITIES.
3.4.1. Selection of Eligible Foreign Custodians. Subject to the
provisions of this Section 3, the Foreign Custody Manager may place and
maintain the Foreign Assets in the care of the Eligible Foreign Custodian
selected by the Foreign Custody Manager in each country listed on Schedule A,
as amended from time to time. In performing its delegated responsibilities as
Foreign Custody Manager to place or maintain Foreign Assets with an Eligible
Foreign Custodian, the Foreign Custody Manager shall determine that the Foreign
Assets will be subject to reasonable care, based on the standards applicable to
custodians in the country in which the Foreign Assets will be held by that
Eligible Foreign Custodian, after considering all factors relevant to the
safekeeping of such assets, including, without limitation the factors specified
in Rule 17f-5(c)(1).
3.4.2. Contracts With Eligible Foreign Custodians. The Foreign
Custody Manager shall determine that the contract (or the rules or established
practices or procedures in the case of an Eligible Foreign Custodian that is a
foreign securities depository or clearing agency) governing the foreign custody
arrangements with each Eligible Foreign Custodian selected by the Foreign
Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).
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<PAGE> 11
3.4.3. Monitoring. In each case in which the Foreign Custody Manager
maintains Foreign Assets with an Eligible Foreign Custodian selected by the
Foreign Custody Manager, the Foreign Custody Manager shall establish a system
to monitor (i) the appropriateness of maintaining the Foreign Assets with such
Eligible Foreign Custodian and (ii) the contract governing the custody
arrangements established by the Foreign Custody Manager with the Eligible
Foreign Custodian (or the rules or established practices and procedures in the
case of an Eligible Foreign Custodian selected by the Foreign Custody Manager
which is a foreign securities depository or clearing agency that is not a
Mandatory Securities Depository). In the event the Foreign Custody Manager
determines that the custody arrangements with an Eligible Foreign Custodian it
has selected are no longer appropriate, the Foreign Custody Manager shall
notify the Board in accordance with Section 3.7 hereunder.
SECTION 3.5 GUIDELINES FOR THE EXERCISE OF DELEGATED AUTHORITY.
For purposes of this Section 3, the Board shall be deemed to have considered
and determined to accept such Country Risk as is incurred by placing and
maintaining the Foreign Assets in each country for which the Custodian is
serving as Foreign Custody Manager of the Fund, and the Board shall be deemed
to be monitoring on a continuing basis such Country Risk to the extent that the
Board considers necessary or appropriate. The Fund and the Custodian each
expressly acknowledge that the Foreign Custody Manager shall not be delegated
any responsibilities under this Section 3 with respect to Mandatory Securities
Depositories.
SECTION 3.6 STANDARD OF CARE AS FOREIGN CUSTODY MANAGER OF THE
FUND. In performing the responsibilities delegated to it, the Foreign Custody
Manager agrees to exercise reasonable care, prudence and diligence such as a
person having responsibility for the safekeeping of assets of management
investment companies registered under the 1940 Act would exercise.
SECTION 3.7 REPORTING REQUIREMENTS. The Foreign Custody Manager
shall report the withdrawal of the Foreign Assets from an Eligible Foreign
Custodian and the placement of such Foreign Assets with another Eligible
Foreign Custodian by providing to the Board amended Schedules A or B at the end
of the calendar quarter in which an amendment to either Schedule has occurred.
The Foreign Custody Manager shall make written reports notifying the Board of
any other material change in the foreign custody arrangements of the Fund
described in this Section 3 after the occurrence of the material change.
SECTION 3.8 REPRESENTATIONS WITH RESPECT TO RULE 17f-5. The
Foreign Custody Manager represents to the Fund that it is a U.S. Bank as
defined in section (a)(7) of Rule 17f-5. The Fund represents to the Custodian
that the Board has determined that it is reasonable for the Board to rely on
the Custodian to perform the responsibilities delegated pursuant to this
Agreement to the Custodian as the Foreign Custody Manager of the Fund.
SECTION 3.9 EFFECTIVE DATE AND TERMINATION OF THE CUSTODIAN AS
FOREIGN CUSTODY MANAGER. The Board's delegation to the Custodian as Foreign
Custody Manager of the Fund shall be effective as of the date of execution of
this Agreement and shall remain in effect
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until terminated at any time, without penalty, by written notice from the
terminating party to the non-terminating party. Termination will become
effective thirty (30) days after receipt by the non-terminating party of such
notice. The provisions of Section 3.3 hereof shall govern the delegation to
and termination of the Custodian as Foreign Custody Manager of the Fund with
respect to designated countries.
SECTION 4. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND
HELD OUTSIDE OF THE UNITED STATES
SECTION 4.1 DEFINITIONS. Capitalized terms in this Section 4
shall have the following meanings:
"FOREIGN SECURITIES SYSTEM" means either a clearing agency or a securities
depository listed on Schedule A hereto or a Mandatory Securities Depository
listed on Schedule B hereto.
"FOREIGN SUB-CUSTODIAN" means a foreign banking institution serving as an
Eligible Foreign Custodian.
SECTION 4.2 HOLDING SECURITIES.__The Custodian shall identify on
its books as belonging to the Fund the foreign securities held by each Foreign
Sub-Custodian or Foreign Securities System. The Custodian may hold foreign
securities for all of its customers, including the Fund, with any Foreign
Sub-Custodian in an account that is identified as belonging to the Custodian
for the benefit of its customers, provided however, that (i) the records of the
Custodian with respect to foreign securities of the Fund which are maintained
in such account shall identify those securities as belonging to the Fund and
(ii), to the extent permitted and customary in the market in which the account
is maintained, the Custodian shall require that securities so held by the
Foreign Sub-Custodian be held separately from any assets of such Foreign
Sub-Custodian or of other customers of such Foreign Sub-Custodian.
SECTION 4.3 FOREIGN SECURITIES SYSTEMS. Foreign securities shall
be maintained in a Foreign Securities System in a designated country only
through arrangements implemented by the Foreign Sub-Custodian in such country
pursuant to the terms of this Agreement.
SECTION 4.4 TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT.
4.4.1. Delivery of Foreign Securities. The Custodian or a Foreign
Sub-Custodian shall release and deliver foreign securities of the Fund held by
such Foreign Sub-Custodian, or in a Foreign Securities System account, only
upon receipt of Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, and only in the following cases:
(i) upon the sale of such foreign securities for the Fund in
accordance with commercially reasonable market practice in the country where
such foreign securities are held or traded, including, without limitation: (A)
delivery against expectation of receiving later payment;
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or (B) in the case of a sale effected through a Foreign Securities System in
accordance with the rules governing the operation of the Foreign Securities
System;
(ii) in connection with any repurchase agreement related to foreign
securities;
(iii) to the depository agent in connection with tender or other
similar offers for foreign securities of the Fund;
(iv) to the issuer thereof or its agent when such foreign
securities are called, redeemed, retired or otherwise become payable;
(v) to the issuer thereof, or its agent, for transfer into the
name of the Custodian (or the name of the respective Foreign Sub-Custodian or
of any nominee of the Custodian or such Foreign Sub-Custodian) or for exchange
for a different number of bonds, certificates or other evidence representing
the same aggregate face amount or number of units;
(vi) to brokers, clearing banks or other clearing agents for
examination or trade execution in accordance with market custom; provided that
in any such case the Foreign Sub-Custodian shall have no responsibility or
liability for any loss arising from the delivery of such securities prior to
receiving payment for such securities except as may arise from the Foreign
Sub-Custodian's own negligence or willful misconduct;
(vii) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions for
conversion contained in such securities, or pursuant to any deposit agreement;
(viii) in the case of warrants, rights or similar foreign securities,
the surrender thereof in the exercise of such warrants, rights or similar
securities or the surrender of interim receipts or temporary securities for
definitive securities;
(ix) for delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund;
(x) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(xi) in connection with the lending of foreign securities; and
(xii) for any other proper purpose, but only upon receipt of, in
addition to Proper Instructions, a copy of a Certified Resolution specifying
the foreign securities to be delivered, setting forth the purpose for which
such delivery is to be made, declaring such purpose to be a
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proper corporate purpose, and naming the person or persons to whom delivery of
such securities shall be made.
4.4.2. Payment of Fund Monies.
Upon receipt of Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay out, or direct the
respective Foreign Sub-Custodian or the respective Foreign Securities System to
pay out, monies of the Fund in the following cases only:
(i) upon the purchase of foreign securities for the Fund, unless
otherwise directed by Proper Instructions, by (A) delivering money to the
seller thereof or to a dealer therefor (or an agent for such seller or dealer)
against expectation of receiving later delivery of such foreign securities; or
(B) in the case of a purchase effected through a Foreign Securities System, in
accordance with the rules governing the operation of such Foreign Securities
System;
(ii) in connection with the conversion, exchange or surrender of
foreign securities of the Fund;
(iii) for the payment of any expense or liability of the Fund,
including but not limited to the following payments: interest, taxes,
investment advisory fees, transfer agency fees, fees under this Agreement,
legal fees, accounting fees, and other operating expenses;
(iv) for the purchase or sale of foreign exchange or foreign
exchange contracts for the Fund, including transactions executed with or
through the Custodian or its Foreign Sub-Custodians;
(v) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(vii) in connection with the borrowing or lending of foreign
securities; and
(viii) for any other proper purpose, but only upon receipt of, in
addition to Proper Instructions, a copy of a Certified Resolution specifying
the amount of such payment, setting forth the purpose for which such payment is
to be made, declaring such purpose to be a proper corporate purpose, and naming
the person or persons to whom such payment is to be made.
4.4.3. Market Conditions. Notwithstanding any provision of this
Agreement to the contrary, settlement and payment for Foreign Assets received
for the account of the Fund and delivery of Foreign Assets maintained for the
account of the Fund may be effected in accordance with the customary
established securities trading or processing practices and procedures in the
country or market in which the transaction occurs, including, without
limitation, delivering Foreign Assets to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) with the expectation of
receiving later payment for such Foreign Assets from such purchaser or dealer.
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The Custodian shall provide to the Board the information with respect
to custody and settlement practices in countries in which the Custodian employs
a Foreign Sub-Custodian, including without limitation information relating to
Foreign Securities Systems, described on Schedule C hereto at the time or times
set forth on such Schedule. The Custodian may revise Schedule C from time to
time, provided that no such revision shall result in the Board being provided
with substantively less information than had been previously provided
hereunder.
SECTION 4.5 REGISTRATION OF FOREIGN SECURITIES. The foreign
securities maintained in the custody of a Foreign Sub-Custodian (other than
bearer securities) shall be registered in the name of the Fund or in the name
of the Custodian or in the name of any Foreign Sub-Custodian or in the name of
any nominee of the foregoing, and the Fund agrees to hold any such nominee
harmless from any liability as a holder of record of such foreign securities.
The Custodian or a Foreign Sub-Custodian shall not be obligated to accept
securities on behalf of the Fund under the terms of this Agreement unless the
form of such securities and the manner in which they are delivered are in
accordance with reasonable market practice.
SECTION 4.6 BANK ACCOUNTS. The Custodian shall identify on its
books as belonging to the Fund cash (including cash denominated in foreign
currencies) deposited with the Custodian. Where the Custodian is unable to
maintain, or market practice does not facilitate the maintenance of, cash on
the books of the Custodian, a bank account or bank accounts opened and
maintained outside the United States on behalf of the Fund with a Foreign
Sub-Custodian shall be subject only to draft or order by the Custodian or such
Foreign Sub-Custodian, acting pursuant to the terms of this Agreement to hold
cash received by or from or for the account of the Fund.
SECTION 4.7 COLLECTION OF INCOME. The Custodian shall use
reasonable commercial efforts to collect all income and other payments with
respect to the Foreign Assets 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 Custodian shall consult as to such measures and as to the compensation and
expenses of the Custodian relating to such measures.
SECTION 4.8 SHAREHOLDER RIGHTS. With respect to the foreign
securities held pursuant to this Agreement, the Custodian will use reasonable
commercial efforts to facilitate the exercise of voting and other shareholder
rights, subject always to the laws, regulations and practical constraints that
may exist in the country where such securities are issued. The Fund
acknowledges that local conditions, including lack of regulation, onerous
procedural obligations, lack of notice and other factors may have the effect of
severely limiting the ability of the Fund to exercise shareholder rights.
SECTION 4.9 COMMUNICATIONS RELATING TO FOREIGN SECURITIES. The
Custodian shall transmit promptly to the Fund written information (including,
without limitation, pendency of calls and maturities of foreign securities and
expirations of rights in connection therewith) received by the Custodian via
the Foreign Sub-Custodians from issuers of the foreign securities
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<PAGE> 16
being held for the account of the Fund. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund written information
so received by the Custodian from issuers of the foreign securities whose
tender or exchange is sought or from the party (or its agents) making the
tender or exchange offer. The Custodian shall not be liable for any untimely
exercise of any tender, exchange or other right or power in connection with
foreign securities or other property of the Fund at any time held by it unless
(i) the Custodian or the respective Foreign Sub-Custodian is in actual
possession of such foreign securities or property and (ii) the Custodian
receives Proper Instructions with regard to the exercise of any such right or
power, and both (i) and (ii) occur at least three business days prior to the
date on which the Custodian is to take action to exercise such right or power.
SECTION 4.10 LIABILITY OF FOREIGN SUB-CUSTODIANS AND FOREIGN
SECURITIES SYSTEMS. Each agreement pursuant to which the Custodian employs as
a Foreign Sub-Custodian shall, to the extent possible, require the Foreign
Sub-Custodian to exercise reasonable care in the performance of its duties and,
to the extent possible, to indemnify, and hold harmless, the Custodian from and
against any loss, damage, cost, expense, liability or claim arising out of or
in connection with the Foreign Sub-Custodian's performance of such obligations.
At the Fund's election, it shall be entitled to be subrogated to the rights of
the Custodian with respect to any claims against a Foreign Sub-Custodian as a
consequence of any such loss, damage, cost, expense, liability or claim if and
to the extent that the Fund has not been made whole for any such loss, damage,
cost, expense, liability or claim.
SECTION 4.11 TAX LAW. The Custodian shall have no
responsibility or liability for any obligations now or hereafter imposed on the
Fund or the Custodian as custodian of the Fund by the tax law of the United
States or of any state or political subdivision thereof. It shall be the
responsibility of the Fund to notify the Custodian of the obligations imposed
on the Fund or the Custodian as custodian of the Fund by the tax law of
countries other than those mentioned in the above sentence, including
responsibility for withholding and other taxes, assessments or other
governmental charges, certifications and governmental reporting. The sole
responsibility of the Custodian with regard to such tax law shall be to use
reasonable efforts to assist the Fund with respect to any claim for exemption
or refund under the tax law of countries for which the Fund has provided such
information.
SECTION 4.12 CONFLICT. If the Custodian is delegated the
responsibilities of Foreign Custody Manager pursuant to the terms of Section 3
hereof, in the event of any conflict between the provisions of Sections 3 and 4
hereof, the provisions of Section 3 shall prevail.
SECTION 5. PAYMENTS FOR SALES OR REPURCHASES OR REDEMPTIONS OF SHARES
The Custodian shall receive from the distributor for the Shares or
from the Transfer Agent and deposit into the Fund's account such payments as
are received for Shares issued or sold from time to time by the Fund. The
Custodian will provide timely notification to the Fund and the Transfer Agent
of any receipt by it of payments for Shares of the Fund.
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From such funds as may be available for the purpose, the Custodian
shall, upon receipt of instructions from the Transfer Agent, make funds
available for payment to holders of Shares who have delivered to the Transfer
Agent a request for redemption or repurchase of their Shares. In connection
with the redemption or repurchase of Shares, the Custodian is authorized upon
receipt of instructions from the Transfer Agent to wire funds to or through a
commercial bank designated by the redeeming shareholders. In connection with
the redemption or repurchase of Shares, the Custodian shall honor checks drawn
on the Custodian by a holder of Shares, which checks have been furnished by the
Fund to the holder of Shares, when presented to the Custodian in accordance
with such procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
SECTION 6. PROPER INSTRUCTIONS
Proper Instructions as used throughout this Agreement means a writing
signed or initialed by one or more person or persons as the Board shall have
from time to time authorized. Each such writing shall set forth the specific
transaction or type of transaction involved, including a specific statement of
the purpose for which such action is requested. Oral instructions will be
considered Proper Instructions if the Custodian reasonably believes them to
have been given by a person authorized to give such instructions with respect
to the transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. Upon receipt of a certificate of the Secretary or an
Assistant Secretary as to the authorization by the Board accompanied by a
detailed description of procedures approved by the Board, Proper Instructions
may include communications effected directly between electro-mechanical or
electronic devices provided that the Board and the Custodian are satisfied that
such procedures afford adequate safeguards for the Fund's assets. For purposes
of this Section, Proper Instructions shall include instructions received by the
Custodian pursuant to any three - party agreement which requires a segregated
asset account in accordance with Section 2.10.
SECTION 7. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority from
the Fund:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its duties under this
Agreement, provided that all such payments shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
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4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Fund except as otherwise
directed by the Board.
SECTION 8. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the
Fund. The Custodian may receive and accept a copy of a Certified Resolution as
conclusive evidence (a) of the authority of any person to act in accordance
with such resolution or (b) of any determination or of any action by the Board
as described in such resolution, and such resolution may be considered as in
full force and effect until receipt by the Custodian of written notice to the
contrary.
SECTION 9. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND
CALCULATION OF NET ASSET VALUE AND NET INCOME
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board to keep the books of account of
the Fund and/or compute the net asset value per Share of the outstanding Shares
or, if directed in writing to do so by the Fund, shall itself keep such books
of account and/or compute such net asset value per Share. If so directed, the
Custodian shall also calculate daily the net income of the Fund as described in
the Prospectus and shall advise the Fund and the Transfer Agent daily of the
total amounts of such net income and, if instructed in writing by an officer of
the Fund to do so, shall advise the Transfer Agent periodically of the division
of such net income among its various components. The calculations of the net
asset value per Share and the daily income of the Fund shall be made at the
time or times described from time to time in the Prospectus.
SECTION 10. RECORDS
The Custodian shall create and maintain all records relating to its
activities and obligations under this Agreement in such manner as will meet the
obligations of the Fund under the 1940 Act, with particular attention to
Section 31 thereof and Rules 31a-1 and 31a-2 thereunder. All such records
shall be the property of the Fund and shall at all times during the regular
business hours of the Custodian be open for inspection by duly authorized
officers, employees or agents of the Fund and employees and agents of the SEC.
The Custodian shall, at the Fund's request, supply the Fund with a tabulation
of securities owned by the Fund and held by the Custodian and shall, when
requested to do so by the Fund and for such compensation as shall be agreed
upon between the Fund and the Custodian, include certificate numbers in such
tabulations.
SECTION 11. OPINION OF FUND'S INDEPENDENT ACCOUNTANT
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The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-1A, and Form N-SAR or
other annual reports to the SEC and with respect to any other requirements
thereof.
SECTION 12. REPORTS TO FUND BY INDEPENDENT PUBLIC ACCOUNTANTS
The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for safeguarding
securities, futures contracts and options on futures contracts, including
securities deposited and/or maintained in a U.S. Securities System or a Foreign
Securities System, relating to the services provided by the Custodian under
this Agreement; such reports, shall be of sufficient scope and in sufficient
detail, as may reasonably be required by the Fund to provide reasonable
assurance that any material inadequacies would be disclosed by such
examination, and, if there are no such inadequacies, the reports shall so
state.
SECTION 13. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between
the Fund and the Custodian.
SECTION 14. RESPONSIBILITY OF CUSTODIAN
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Agreement and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Agreement,
but shall be kept indemnified by and shall be without liability to the Fund for
any action taken or omitted by it in good faith without negligence. It shall
be entitled to rely on and may act upon advice of counsel (who may be counsel
for the Fund) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice. The Custodian shall be
without liability to the Fund for any loss, liability, claim or expense
resulting from or caused by anything which is (A) part of Country Risk (as
defined in Section 3 hereof), including without limitation nationalization,
expropriation, currency restrictions, or acts of war, revolution, riots or
terrorism, or (B) part of the "prevailing country risk" of the Fund, as such
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term is used in SEC Release Nos. IC-22658; IS-1080 (May 12, 1997) or as such
term or other similar terms are now or in the future interpreted by the SEC or
by the staff of the Division of Investment Management thereof.
Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a sub-custodian or agent,
the Custodian shall be without liability to the Fund for any loss, liability,
claim or expense resulting from or caused by; (i) events or circumstances
beyond the reasonable control of the Custodian or any sub-custodian or
Securities System or any agent or nominee of any of the foregoing, including,
without limitation, the interruption, suspension or restriction of trading on
or the closure of any securities market, power or other mechanical or
technological failures or interruptions, computer viruses or communications
disruptions, work stoppages, natural disasters, or other similar events or
acts; (ii) errors by the Fund or the Investment Advisor in their instructions
to the Custodian provided such instructions have been in accordance with this
Agreement; (iii) the insolvency of or acts or omissions by a Securities System;
(iv) any delay or failure of any broker, agent or intermediary, central bank or
other commercially prevalent payment or clearing system to deliver to the
Custodian's sub-custodian or agent securities purchased or in the remittance or
payment made in connection with securities sold; (v) any delay or failure of
any company, corporation, or other body in charge of registering or
transferring securities in the name of the Custodian, the Fund, the Custodian's
sub-custodians, nominees or agents or any consequential losses arising out of
such delay or failure to transfer such securities including non-receipt of
bonus, dividends and rights and other accretions or benefits; (vi) delays or
inability to perform its duties due to any disorder in market infrastructure
with respect to any particular security or Securities System; and (vii) any
provision of any present or future law or regulation or order of the United
States of America, or any state thereof, or any other country, or political
subdivision thereof or of any court of competent jurisdiction.
The Custodian shall be liable for the acts or omissions of a Foreign
Sub-Custodian (as defined in Section 4 hereof) to the same extent as set forth
with respect to sub-custodians generally in this Agreement.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned
to the Fund being liable for the payment of money or incurring liability of
some other form, the Fund, as a prerequisite to requiring the Custodian to take
such action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not
limited to securities settlements, foreign exchange contracts and assumed
settlement) or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Agreement, except such as may arise
from its or its nominee's own negligent action, negligent failure to act or
willful misconduct, any property at any time held for the account of the Fund
shall be security therefor and should the Fund fail to repay the Custodian
promptly,
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the Custodian shall be entitled to utilize available cash and to dispose of the
Fund's assets to the extent necessary to obtain reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
SECTION 15. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT
This Agreement shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing; provided,
however that the Custodian shall not act under Section 2.8 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Board has approved the initial use of a particular
Securities System, as required by Rule 17f-4 under the 1940 Act, and that the
Custodian shall not act under Section 2.9 hereof in the absence of receipt of
an initial certificate of the Secretary or an Assistant Secretary that the
Board has approved the initial use of the Direct Paper System; provided
further, however, that the Fund shall not amend or terminate this Agreement in
contravention of any applicable federal or state regulations, or any provision
of the Fund's Articles of Incorporation, and further provided, that the Fund
may at any time by action of its Board (i) substitute another bank or trust
company for the Custodian by giving notice as described above to the Custodian,
or (ii) immediately terminate this Agreement in the event of the appointment of
a conservator or receiver for the Custodian by the Comptroller of the Currency
or upon the happening of a like event at the direction of an appropriate
regulatory agency or court of competent jurisdiction.
Upon termination of the Agreement, the Fund shall pay to the Custodian
such compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian for its costs, expenses and disbursements.
SECTION 16. SUCCESSOR CUSTODIAN
If a successor custodian for the Fund shall be appointed by the Board,
the Custodian shall, upon termination, deliver to such successor custodian at
the office of the Custodian, duly endorsed and in the form for transfer, all
securities then held by it hereunder and shall transfer to an account of the
successor custodian all of the securities held in a Securities System. If no
such successor custodian shall be appointed, the Custodian shall, in like
manner, upon receipt of a copy of a Certified Resolution, deliver at the office
of the Custodian and transfer such securities, funds and other properties in
accordance with such resolution. In the event that no written order
designating a successor custodian or copy of a Certified Resolution shall have
been delivered to the Custodian on or before the date when such termination
shall become effective, then the Custodian shall have the right to deliver to a
bank or trust company, which is a "bank" as defined
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in the 1940 Act, doing business in Boston, Massachusetts, or New York, New
York, of its own selection, having an aggregate capital, surplus, and undivided
profits, as shown by its last published report, of not less than $25,000,000,
all securities, funds and other properties held by the Custodian and all
instruments held by the Custodian relative thereto and all other property held
by it under this Agreement, and to transfer to an account of such successor
custodian all of the Fund's securities held in any Securities System.
Thereafter, such bank or trust company shall be the successor of the Custodian
under this Agreement.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the Certified Resolution to appoint a successor
custodian, the Custodian shall be entitled to fair compensation for its
services during such period as the Custodian retains possession of such
securities, funds and other properties and the provisions of this Agreement
relating to the duties and obligations of the Custodian shall remain in full
force and effect.
SECTION 17. INTERPRETIVE AND ADDITIONAL PROVISIONS
In connection with the operation of this Agreement, the Custodian and
the Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Agreement as may in their joint opinion be
consistent with the general tenor of this Agreement. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall
be annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision
of the Fund's Articles of Incorporation. No interpretive or additional
provisions made as provided in the preceding sentence shall be deemed to be an
amendment of this Agreement.
SECTION 18. MASSACHUSETTS LAW TO APPLY
This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with laws of The Commonwealth of
Massachusetts.
SECTION 19. PRIOR AGREEMENTS
This Agreement supersedes and terminates, as of the date hereof, all
prior Agreements between the Fund and the Custodian relating to the custody of
the Fund's assets.
SECTION 20. NOTICES.
Any notice, instruction or other instrument required to be given
hereunder may be delivered in person to the offices of the parties as set forth
herein during normal business hours or
22
<PAGE> 23
delivered prepaid registered mail or by telex, cable or telecopy to the parties
at the following addresses or such other addresses as may be notified by any
party from time to time.
<TABLE>
<S> <C>
To the Fund: Warburg, Pincus International Small Company Fund
466 Lexington Avenue
New York, New York 10017
Attention: Al Fulgieri
Telephone: (212) 872-9428
Telecopy:
To the Custodian: STATE STREET BANK AND TRUST COMPANY
1776 Heritage Drive
North Quincy, Massachusetts 02171
Attention: Neal J. Chansky
Telephone: (617) 985-5127
Telecopy:
</TABLE>
Such notice, instruction or other instrument shall be deemed to have
been served in the case of a registered letter at the expiration of five
business days after posting, in the case of cable twenty-four hours after
dispatch and, in the case of telex, immediately on dispatch and if delivered
outside normal business hours it shall be deemed to have been received at the
next time after delivery when normal business hours commence and in the case of
cable, telex or telecopy on the business day after the receipt thereof.
Evidence that the notice was properly addressed, stamped and put into the post
shall be conclusive evidence of posting.
SECTION 21. 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.
SECTION 22. SHAREHOLDER COMMUNICATIONS ELECTION
SEC Rule 14b-2 requires banks which hold securities for the account of
customers to respond to requests by issuers of securities for the names,
addresses and holdings of beneficial owners of securities of that issuer held
by the bank unless the beneficial owner has expressly
23
<PAGE> 24
objected to disclosure of this information. In order to comply with the rule,
the Custodian needs the Fund to indicate whether it authorizes the Custodian to
provide the Fund's name, address, and share position to requesting companies
whose securities the Fund owns. If the Fund tells the Custodian "no", the
Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below,
the Custodian is required by the rule to treat the Fund as consenting to
disclosure of this information for all securities owned by the Fund or any
funds or accounts established by the Fund. For the Fund's protection, the Rule
prohibits the requesting company from using the Fund's name and address for any
purpose other than corporate communications. Please indicate below whether the
Fund consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's
name, address, and share positions.
NO [ ] The Custodian is not authorized to release the Fund's
name, address, and share positions.
24
<PAGE> 25
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and
its seal to be hereunder affixed as of ____________.
<TABLE>
<CAPTION>
WARBURG, PINCUS INTERNATIONAL SMALL FUND SIGNATURE ATTESTED TO BY:
COMPANY FUND, INC.
<S> <C> <C> <C>
By: By:
------------------------- ----------------------------
Name: Name:
------------------------- ----------------------------
Title: Title: *[secretary/ass't secretary]
------------------------- ----------------------------
</TABLE>
<TABLE>
<CAPTION>
STATE STREET BANK AND TRUST COMPANY SIGNATURE ATTESTED TO BY:
<S> <C> <C> <C>
By: By:
---------------------------------- -----------------------------------------
Name: Ronald E. Logue Name: *[attorney's name]
---------------------------------- ----------------------------------------
Title: Executive Vice President Title: *[attorney's title]
---------------------------------- ----------------------------------------
</TABLE>
<PAGE> 26
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Argentina Citibank, N.A. --
Australia Westpac Banking Corporation --
Austria Erste Bank der oesterreichischen --
Sparkasen AG
Bahrain The British Bank of the Middle East --
(as delegate of the Hongkong and
Shanghai Banking Corporation Limited)
Bangladesh Standard Chartered Bank --
Belgium Generale Bank --
Bermuda The Bank of Bermuda Limited --
Bolivia Banco Boliviano Americano --
Botswana Barclays Bank of Botswana Limited --
Brazil Citibank, N.A. --
Bulgaria ING Bank N.V. --
Canada Canada Trustco Mortgage Company --
Chile Citibank, N.A. --
People's Republic The Hongkong and Shanghai --
of China Banking Corporation Limited,
Shanghai and Shenzhen branches
Colombia Cititrust Colombia S.A. --
Sociedad Fiduciaria
</TABLE>
<PAGE> 27
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<S> <C> <C>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
</TABLE>
<PAGE> 28
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Croatia Privredana banka Zagreb d.d --
Cyprus Barclays Bank PLC --
Cyprus Offshore Banking Unit
Czech Republic Ceskoslovenska Obchodni --
Banka A.S.
Denmark Den Danske Bank --
Ecuador Citibank, N.A. --
Egypt National Bank of Egypt --
Estonia Hansabank --
Finland Merita Bank Ltd. --
France Banque Paribas --
Germany Dresdner Bank AG --
Ghana Barclays Bank of Ghana Limited --
Greece National Bank of Greece S.A Bank of Greece
Hong Kong Standard Chartered Bank --
Hungary Citibank Budapest Rt. --
Iceland Icebank Limited
India Deutsche Bank AG; --
</TABLE>
<PAGE> 29
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
The Hongkong and Shanghai
Banking Corporation Limited
Indonesia Standard Chartered Bank --
Ireland Bank of Ireland --
Israel Bank Hapoalim B.M. --
Italy Banque Paribas --
Ivory Coast Societe Generale de Banques --
en Cote d'Ivoire
Jamaica Scotiabank Trust and Merchant Bank --
Japan The Daiwa Bank, Limited; Japan Securities Depository
The Fuji Bank, Limited; Center;
Jordan The British Bank of the Middle East --
(as delegate of the Hongkong and
Shanghai Banking Corporation Limited)
Kenya Barclays Bank of Kenya Limited --
Republic of Korea The Hongkong and Shanghai Banking
Corporation Limited
Latvia Hansabank --
Lebanon The British Bank of the Middle East Custodian and Clearing Center of Financial
(as delegate of the Hongkong and Instruments for Lebanon (MIDCLEAR) S.A.L.;
Shanghai Banking Corporation Limited)
Lithuania Vilniaus Bankas AB --
</TABLE>
<PAGE> 30
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Malaysia Standard Chartered Bank --
Malaysia Berhad
Mauritius The Hongkong and Shanghai --
Banking Corporation Limited
Mexico Citibank Mexico, S.A. --
Morocco Banque Commerciale du Maroc --
Namibia (via) Standard Bank of South Africa -
The Netherlands MeesPierson N.V. --
New Zealand ANZ Banking Group --
(New Zealand) Limited
Norway Christiania Bank og --
Kreditkasse
Oman The British Bank of the Middle East --
(as delegate of the Hongkong and
Shanghai Banking Corporation Limited)
Pakistan Deutsche Bank AG --
Peru Citibank, N.A. --
Philippines Standard Chartered Bank --
Poland Citibank Poland S.A. --
Portugal Banco Comercial Portugues --
</TABLE>
<PAGE> 31
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Romania ING Bank, N.V. --
Russia Credit Suisse First Boston, Zurich --
via Credit Suisse First Boston
Limited, Moscow
Singapore The Development Bank --
of Singapore Ltd.
Slovak Republic Ceskoslovenska Obchodna --
Banka A.S.
Slovenia Banka Creditanstalt d.d. --
South Africa Standard Bank of South Africa Limited --
Spain Banco Santander, S.A. --
Sri Lanka The Hongkong and Shanghai --
Banking Corporation Limited
Swaziland Stanbic Bank of Swaziland Limited --
Sweden Skandinaviska Enskilda Banken --
Switzerland Union Bank of Switzerland --
Taiwan - R.O.C. Central Trust of China --
Thailand Standard Chartered Bank --
Trinidad & Tobago Republic Bank Ltd. --
</TABLE>
<PAGE> 32
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Tunisia Banque Internationale Arabe de Tunisie --
Turkey Citibank, N.A. --
United Kingdom State Street Bank and Trust --
Uruguay Citibank, N.A. --
Venezuela Citibank, N.A. --
Zambia Barclays Bank of Zambia Limited --
Zimbabwe Barclays Bank of Zimbabwe Limited --
Euroclear (The Euroclear System)
Cedel (Cedel Bank, societe anonyme)
INTERSETTLE (for EASDAQ Securities)
</TABLE>
<PAGE> 33
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Argentina -Caja de Valores S.A.;
-CRYL
Australia -Austraclear Limited;
-Reserve Bank Information and
Transfer System
Austria -Oesterreichische Kontrollbank AG
(Wertpapiersammelbank Division)
Belgium -Caisse Interprofessionnelle de Depots et
de Virements de Titres S.A.;
-Banque Nationale de Belgique
Brazil -Camara de Liquidacao de Sao Paulo, (Calispa);
-Bolsa de Valores de Rio de Janeiro
-All SSB clients presently use Calispa
-Central de Custodia e de Liquidacao Financeira
de Titulos
-Banco Central do Brasil,
Systema Especial de Liquidacao e
Custodia
Bulgaria -Central Depository AD
Canada -The Canadian Depository
for Securities Limited; West Canada
Depository Trust Company [depositories
linked]
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 34
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
People's Republic -Shanghai Securities Central Clearing and
of China Registration Corporation;
-Shenzhen Securities Central Clearing
Co., Ltd.
Croatia Ministry of Finance
Czech Republic -Stredisko cennych papiru(Degree)
;
-Czech National Bank
Denmark -Vaerdipapircentralen - The Danish
Securities Center
Egypt -Misr Company for Clearing, Settlement,
and Central Depository
Estonia -Eesti Vaartpaberite Keskdepositooruim
Finland -The Finnish Central Securities
Depository
France -Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres;
-Banque de France,
Saturne System
Germany -The Deutscher Kassenverein AG
Greece -The Central Securities Depository
(Apothetirion Titlon A.E.);
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 35
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Hong Kong -The Central Clearing and
Settlement System;
-The Central Money Markets Unit
Hungary -The Central Depository and Clearing
House (Budapest) Ltd.
[Mandatory for Gov't Bonds only;
SSB does not use for other securities]
India The National Securities Depository Limited
Indonesia -Bank of Indonesia
Ireland -The Central Bank of Ireland,
The Gilt Settlement Office
Israel -The Clearing House of the
Tel Aviv Stock Exchange;
-Bank of Israel
Italy -Monte Titoli S.p.A.;
-Banca d'Italia
Japan -Bank of Japan Net System
Republic of Korea -Korea Securities Depository Corporation
Latvia -The Latvian Central Depository
Lebanon -The Central Bank of Lebanon
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 36
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Lithuania - The Central Securities Depository of Lithuania
Malaysia -Malaysian Central Depository Sdn.
Bhd.;
-Bank Negara Malaysia,
Scripless Securities Trading and Safekeeping
Systems
Mauritius -The Central Depository & Settlement
Co. Ltd.
Mexico -S.D. INDEVAL, S.A. de C.V.
(Instituto para el Deposito de
Valores);
The Netherlands -Nederlands Centraal Instituut voor
Giraal Effectenverkeer B.V. ("NECIGEF");
New Zealand -New Zealand Central Securities
Depository Limited
Norway -Verdipapirsentralen - The Norwegian
Registry of Securities
Oman -Muscat Securities Market
Peru -Caja de Valores y Liquidaciones
(CAVALI, S.A.)
Philippines -The Philippines Central Depository Inc.
-The Book-Entry-System of Bangko
Sentral ng Pilipinas;
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 37
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
-The Registry of Scripless Securities of the
Bureau of the Treasury
Poland -The National Depository of Securities
(Krajowy Depozyt Papierow Wartosciowych);
-National Bank of Poland
Portugal -Central de Valores Mobiliarios
Romania -National Securities Clearing, Settlement and
Depository Co.;
-Bucharest Stock Exchange;
-National Bank of Romania
Singapore -The Central Depository (Pvt.)
Limited;
-Monetary Authority of Singapore
Slovak Republic -Stredisko Cennych Papierov;
-National Bank of Slovakia
Slovenia - Klirinsko Depotna Bruzba
South Africa -The Central Depository Limited
Spain -Servicio de Compensacion y
Liquidacion de Valores, S.A.;
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 38
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
-Banco de Espana,
Anotaciones en Cuenta
Sri Lanka -Central Depository System
(Pvt) Limited
Sweden -Vardepapperscentralen VPC AB -
The Swedish Central Securities Depository
Switzerland -Schweizerische Effekten - Giro AG;
Taiwan - R.O.C. -The Taiwan Securities Central
Depository Company, Ltd.
Thailand -Thailand Securities Depository
Company Limited
Tunisia -STICODEVAM;
-Central Bank of Tunisia;
-Tunisian Treasury
Turkey -Takas ve Saklama Bankasi A.S.;
-Central Bank of Turkey
United Kingdom -The Bank of England,
The Central Gilts Office;
The Central Moneymarkets Office
Uruguay -Central Bank of Uruguay
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 39
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Zambia -Lusaka Central Depository
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 40
SCHEDULE C
MARKET INFORMATION
<TABLE>
<CAPTION>
PUBLICATION/TYPE OF INFORMATION BRIEF DESCRIPTION
(FREQUENCY)
<S> <C>
The Guide to Custody in World Markets
(annually): An overview of safekeeping and settlement practices and
procedures in each market in which State Street Bank and
Trust Company offers custodial services.
The Depository Review (annually): Information relating to the operating history and structure of
depositories located in the markets in which State Street Bank
and Trust Company offers custodial services, including
transnational depositories.
legal opinions (annually): With respect to each market in which State Street Bank and
Trust Company offers custodial services, opinions relating to
whether local law restricts (i) access of a fund's independent
public accountants to books and records of a Foreign Sub-
Custodian or Foreign Securities System, (ii) the Fund's ability
to recover in the event of bankruptcy or insolvency of a
Foreign Sub-Custodian or Foreign Securities System, (iii) the
Fund's ability to recover in the event of a loss by a Foreign
Sub-Custodian or Foreign Securities System, and (iv) the
ability of a foreign investor to convert cash and cash
equivalents to U.S. dollars.
Network Bulletins (weekly): Developments of interest to investors in the markets in which
State Street Bank and Trust Company offers custodial services.
Foreign Custody Advisories (as
necessary): With respect to markets in which State Street Bank and Trust
Company offers custodial services which exhibit special custody
risks, developments which may impact State Street's ability to
deliver expected levels of service.
</TABLE>
<PAGE> 41
DATA ACCESS SERVICES ADDENDUM TO CUSTODIAN AGREEMENT
AGREEMENT between Warburg, Pincus International Small Company Fund,
Inc. (the "Customer") and State Street Bank and Trust Company ("State
Street").
PREAMBLE
WHEREAS, State Street has been appointed as custodian of certain assets of
the Customer pursuant to a certain Custodian Agreement (the "Custodian
Agreement") dated as of ________________, 199__;
WHEREAS, State Street has developed and utilizes proprietary accounting
and other systems, including State Street's proprietary Multicurrency
HORIZON(SM) Accounting System, in its role as custodian of the Customer, and
maintains certain Customer-related data ("Customer Data") in databases under the
control and ownership of State Street (the "Data Access Services"); and
WHEREAS, State Street makes available to the Customer certain Data Access
Services solely for the benefit of the Customer, and intends to provide
additional services, consistent with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and for other good and valuable consideration, the parties
agree as follows:
1. SYSTEM AND DATA ACCESS SERVICES
(a) System. Subject to the terms and conditions of this Agreement, State
Street hereby agrees to provide the Customer with access to State Street's
Multicurrency HORIZON(SM) Accounting System and the other information systems
(collectively, the "System") as described in Attachment A, on a remote basis for
the purpose of obtaining reports and information, solely on computer hardware,
system software and telecommunication links as listed in Attachment B (the
"Designated Configuration") of the Customer, or certain third parties approved
by State Street that serve as investment advisors or investment managers of the
Customer (the "Investment Advisor"), and solely with respect to the Customer or
on any designated substitute or back-up equipment configuration with State
Street's written consent, such consent not to be unreasonably withheld.
(b) Data Access Services. State Street agrees to make available to the
Customer the Data Access Services subject to the terms and conditions of this
Agreement and data access operating standards and procedures as may be issued by
State Street from time to time. The ability of the Customer to originate
electronic instructions to State Street on behalf of the Customer in order to
(i) effect the transfer or movement of cash or securities held under custody by
State Street or (ii) transmit accounting or other information (such transactions
are referred to herein as "Client Originated Electronic Financial
Instructions"), and (iii) access data for the purpose of reporting and analysis,
shall be deemed to be Data Access Services for purposes of this Agreement.
(c) Additional Services. State Street may from time to time agree to make
available to the Customer additional Systems that are not described in the
attachments to this Agreement. In the absence of any other written agreement
concerning such additional systems, the term "System" shall include, and this
Agreement shall govern, the Customer's access to and use of any additional
System made available by State Street and/or accessed by the Customer.
<PAGE> 42
2. NO USE OF THIRD PARTY SYSTEMS-LEVEL SOFTWARE
State Street and the Customer acknowledge that in connection with the Data
Access Services provided under this Agreement, the Customer will have access,
through the Data Access Services, to Customer Data and to functions of State
Street's proprietary systems; provided, however that in no event will the
Customer have direct access to any third party systems-level software that
retrieves data for, stores data from, or otherwise supports the System.
3. LIMITATION ON SCOPE OF USE
a. Designated Equipment; Designated Location. The System and the Data
Access Services shall be used and accessed solely on and through the Designated
Configuration at the offices of the Customer or the Investment Advisor located
in New York, New York ("Designated Location").
b. Designated Configuration; Trained Personnel. State Street shall be
responsible for supplying, installing and maintaining the Designated
Configuration at the Designated Location. State Street and the Customer agree
that each will engage or retain the services of trained personnel to enable both
parties to perform their respective obligations under this Agreement. State
Street agrees to use commercially reasonable efforts to maintain the System so
that it remains serviceable, provided, however, that State Street does not
guarantee or assure uninterrupted remote access use of the System.
c. Scope of Use. The Customer will use the System and the Data Access
Services only for the processing of securities transactions, the keeping of
books of account for the Customer and accessing data for purposes of reporting
and analysis. The Customer shall not, and shall cause its employees and agents
not to (i) permit any third party to use the System or the Data Access Services,
(ii) sell, rent, license or otherwise use the System or the Data Access Services
in the operation of a service bureau or for any purpose other than as expressly
authorized under this Agreement, (iii) use the System or the Data Access
Services for any fund, trust or other investment vehicle without the prior
written consent of State Street, (iv) allow access to the System or the Data
Access Services through terminals or any other computer or telecommunications
facilities located outside the Designated Locations, (v) allow or cause any
information (other than portfolio holdings, valuations of portfolio holdings,
and other information reasonably necessary for the management or distribution of
the assets of the Customer) transmitted from State Street's databases, including
data from third party sources, available through use of the System or the Data
Access Services to be redistributed or retransmitted to another computer,
terminal or other device for other than use for or on behalf of the Customer or
(vi) modify the System in any way, including without limitation, developing any
software for or attaching any devices or computer programs to any equipment,
system, software or database which forms a part of or is resident on the
Designated Configuration.
d. Other Locations. Except in the event of an emergency or of a planned
System shutdown, the Customer's access to services performed by the System or to
Data Access Services at the Designated Location may be transferred to a
different location only upon the prior written consent of State Street. In the
event of an emergency or System shutdown, the Customer may use any back-up site
included in the Designated Configuration or any other back-up site agreed to by
State Street, which agreement will not be unreasonably withheld. The Customer
may secure from State Street the right to access the System or the Data Access
Services through computer and
<PAGE> 43
telecommunications facilities or devices complying with the Designated
Configuration at additional locations only upon the prior written consent of
State Street and on terms to be mutually agreed upon by the parties.
e. Title. Title and all ownership and proprietary rights to the System,
including any enhancements or modifications thereto, whether or not made by
State Street, are and shall remain with State Street.
f. No Modification. Without the prior written consent of State Street, the
Customer shall not modify, enhance or otherwise create derivative works based
upon the System, nor shall the Customer reverse engineer, decompile or otherwise
attempt to secure the source code for all or any part of the System.
g. Security Procedures. The Customer shall comply with data access
operating standards and procedures and with user identification or other
password control requirements and other security procedures as may be issued
from time to time by State Street for use of the System on a remote basis and to
access the Data Access Services. The Customer shall have access only to the
Customer Data and authorized transactions agreed upon from time to time by State
Street and, upon notice from State Street, the Customer shall discontinue remote
use of the System and access to Data Access Services for any security reasons
cited by State Street; provided, that, in such event, State Street shall, for a
period not less than 180 days (or such other shorter period specified by the
Customer) after such discontinuance, assume responsibility to provide accounting
services under the terms of the Custodian Agreement.
h. Inspections. State Street shall have the right to inspect the use of
the System and the Data Access Services by the Customer and the Investment
Advisor to ensure compliance with this Agreement. The on-site inspections shall
be upon prior written notice to the Customer and the Investment Advisor and at
reasonably convenient times and frequencies so as not to result in an
unreasonable disruption of the Customer's or the Investment Advisor's business.
4. PROPRIETARY INFORMATION
a. Proprietary Information. The Customer acknowledges and State Street
represents that the System and the databases, computer programs, screen formats,
report formats, interactive design techniques, documentation and other
information made available to the Customer by State Street as part of the Data
Access Services and through the use of the System constitute copyrighted, trade
secret, or other proprietary information of substantial value to State Street.
Any and all such information provided by State Street to the Customer shall be
deemed proprietary and confidential information of State Street (hereinafter
"Proprietary Information"). The Customer agrees that it will hold such
Proprietary Information in the strictest confidence and secure and protect it in
a manner consistent with its own procedures for the protection of its own
confidential information and to take appropriate action by instruction or
agreement with its employees who are permitted access to the Proprietary
Information to satisfy its obligations hereunder. The Customer further
acknowledges that State Street shall not be required to provide the Investment
Advisor with access to the System unless it has first received from the
Investment Advisor an undertaking with respect to State Street's Proprietary
Information in the form of Attachment C to this Agreement. The Customer shall
use all commercially reasonable efforts to assist State Street in identifying
and preventing any unauthorized use, copying or disclosure of the Proprietary
Information or any portions thereof or any of the logic, formats or designs
contained therein.
<PAGE> 44
b. Cooperation. Without limitation of the foregoing, the Customer shall
advise State Street immediately in the event the Customer learns or has reason
to believe that any person to whom the Customer has given access to the
Proprietary Information, or any portion thereof, has violated or intends to
violate the terms of this Agreement, and the Customer will, at its expense,
co-operate with State Street in seeking injunctive or other equitable relief in
the name of the Customer or State Street against any such person.
c. Injunctive Relief. The Customer acknowledges that the disclosure of any
Proprietary Information, or of any information which at law or equity ought to
remain confidential, will immediately give rise to continuing irreparable injury
to State Street inadequately compensable in damages at law. In addition, State
Street shall be entitled to obtain immediate injunctive relief against the
breach or threatened breach of any of the foregoing undertakings, in addition to
any other legal remedies which may be available.
d. Survival. The provisions of this Section 4 shall survive the
termination of this Agreement.
5. LIMITATION ON LIABILITY
a. Limitation on Amount and Time for Bringing Action. The Customer agrees
that any liability of State Street to the Customer or any third party arising
out of State Street's provision of Data Access Services or the System under this
Agreement shall be limited to the amount paid by the Customer for the preceding
24 months for such services. In no event shall State Street be liable to the
Customer or any other party for any special, indirect, punitive or consequential
damages even if advised of the possibility of such damages. No action,
regardless of form, arising out of this Agreement may be brought by the Customer
more than two years after the Customer has knowledge that the cause of action
has arisen.
b. Limited Warranties. NO OTHER WARRANTIES, WHETHER EXPRESS OR IMPLIED,
INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE, ARE MADE BY STATE STREET.
c. Third-Party Data. Organizations from which State Street may obtain
certain data included in the System or the Data Access Services are solely
responsible for the contents of such data, and State Street shall have no
liability for claims arising out of the contents of such third-party data,
including, but not limited to, the accuracy thereof.
d. Regulatory Requirements. As between State Street and the Customer, the
Customer shall be solely responsible for the accuracy of any accounting
statements or reports produced using the Data Access Services and the System and
the conformity thereof with any requirements of law.
e. Force Majeure. Neither party shall be liable for any costs or damages
due to delay or nonperformance under this Agreement arising out of any cause or
event beyond such party's control, including without limitation, cessation of
services hereunder or any damages resulting therefrom to the other party, or the
Customer as a result of work stoppage, power or other mechanical failure,
computer virus, natural disaster, governmental action, or communication
disruption.
<PAGE> 45
6. INDEMNIFICATION
The Customer agrees to indemnify and hold State Street harmless from any loss,
damage or expense including reasonable attorney's fees, (a "loss") suffered by
State Street arising from (i) the negligence or willful misconduct in the use by
the Customer of the Data Access Services or the System, including any loss
incurred by State Street resulting from a security breach at the Designated
Location or committed by the Customer's employees or agents or the Investment
Advisor and (ii) any loss resulting from incorrect Client Originated Electronic
Financial Instructions. State Street shall be entitled to rely on the validity
and authenticity of Client Originated Electronic Financial Instructions without
undertaking any further inquiry as long as such instruction is undertaken in
conformity with security procedures established by State Street from time to
time.
7. FEES
Fees and charges for the use of the System and the Data Access Services and
related payment terms shall be as set forth in the Custody Fee Schedule in
effect from time to time between the parties (the "Fee Schedule"). Any tariffs,
duties or taxes imposed or levied by any government or governmental agency by
reason of the transactions contemplated by this Agreement, including, without
limitation, federal, state and local taxes, use, value added and personal
property taxes (other than income, franchise or similar taxes which may be
imposed or assessed against State Street) shall be borne by the Customer. Any
claimed exemption from such tariffs, duties or taxes shall be supported by
proper documentary evidence delivered to State Street.
8. TRAINING, IMPLEMENTATION AND CONVERSION
a. Training. State Street agrees to provide training, at a designated
State Street training facility or at the Designated Location, to the Customer's
personnel in connection with the use of the System on the Designated
Configuration. The Customer agrees that it will set aside, during regular
business hours or at other times agreed upon by both parties, sufficient time to
enable all operators of the System and the Data Access Services, designated by
the Customer, to receive the training offered by State Street pursuant to this
Agreement.
b. Installation and Conversion. State Street shall be responsible for the
technical installation and conversion ("Installation and Conversion") of the
Designated Configuration. The Customer shall have the following responsibilities
in connection with Installation and Conversion of the System:
(i) The Customer shall be solely responsible for the timely acquisition
and maintenance of the hardware and software that attach to the
Designated Configuration in order to use the Data Access Services at
the Designated Location.
(ii) State Street and the Customer each agree that they will assign
qualified personnel to actively participate during the Installation
and Conversion phase of the System implementation to enable both
parties to perform their respective obligations under this
Agreement.
9. SUPPORT
<PAGE> 46
During the term of this Agreement, State Street agrees to provide the
support services set out in Attachment D to this Agreement.
10. TERM OF AGREEMENT
a. Term of Agreement. This Agreement shall become effective on the date of
its execution by State Street and shall remain in full force and effect until
terminated as herein provided.
b. Termination of Agreement. Either party may terminate this Agreement (i)
for any reason by giving the other party at least one-hundred and eighty days'
prior written notice in the case of notice of termination by State Street to the
Customer or thirty days' notice in the case of notice from the Customer to State
Street of termination; or (ii) immediately for failure of the other party to
comply with any material term and condition of the Agreement by giving the other
party written notice of termination. In the event the Customer shall cease doing
business, shall become subject to proceedings under the bankruptcy laws (other
than a petition for reorganization or similar proceeding) or shall be
adjudicated bankrupt, this Agreement and the rights granted hereunder shall, at
the option of State Street, immediately terminate with notice to the Customer.
This Agreement shall in any event terminate as to any Customer within 90 days
after the termination of the Custodian Agreement applicable to such Customer.
c. Termination of the Right to Use. Upon termination of this Agreement for
any reason, any right to use the System and access to the Data Access Services
shall terminate and the Customer shall immediately cease use of the System and
the Data Access Services. Immediately upon termination of this Agreement for any
reason, the Customer shall return to State Street all copies of documentation
and other Proprietary Information in its possession; provided, however, that in
the event that either party terminates this Agreement or the Custodian Agreement
for any reason other than the Customer's breach, State Street shall provide the
Data Access Services for a period of time and at a price to be agreed upon by
the parties.
<PAGE> 47
11. MISCELLANEOUS
a. Assignment; Successors. This Agreement and the rights and obligations
of the Customer and State Street hereunder shall not be assigned by either party
without the prior written consent of the other party, except that State Street
may assign this Agreement to a successor of all or a substantial portion of its
business, or to a party controlling, controlled by, or under common control with
State Street.
b. Survival. All provisions regarding indemnification, warranty, liability
and limits thereon, and confidentiality and/or protection of proprietary rights
and trade secrets shall survive the termination of this Agreement.
c. Entire Agreement. This Agreement and the attachments hereto constitute
the entire understanding of the parties hereto with respect to the Data Access
Services and the use of the System and supersedes any and all prior or
contemporaneous representations or agreements, whether oral or written, between
the parties as such may relate to the Data Access Services or the System, and
cannot be modified or altered except in a writing duly executed by the parties.
This Agreement is not intended to supersede or modify the duties and liabilities
of the parties hereto under the Custodian Agreement or any other agreement
between the parties hereto except to the extent that any such agreement
specifically refers to the Data Access Services or the System. No single waiver
of any right hereunder shall be deemed to be a continuing waiver.
d. Severability. If any provision or provisions of this Agreement shall be
held to be invalid, unlawful, or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall not in any way be affected or
impaired.
e. Governing Law. This Agreement shall be interpreted and construed in
accordance with the internal laws of The Commonwealth of Massachusetts without
regard to the conflict of laws provisions thereof.
<PAGE> 48
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
effective as of ________________, 199_.
STATE STREET BANK AND TRUST COMPANY
By:________________________________________
Title:_____________________________________
Date:______________________________________
WARBURG, PINCUS INTERNATIONAL SMALL
COMPANY FUND, INC.
By:________________________________________
Title:_____________________________________
Date:______________________________________
<PAGE> 49
ATTACHMENT A
Multicurrency HORIZON(SM) Accounting System
System Product Description
I. The Multicurrency HORIZON(SM) Accounting System is designed to provide lot
level portfolio and general ledger accounting for SEC and ERISA type
requirements and includes the following services: 1) recording of general ledger
entries; 2) calculation of daily income and expense; 3) reconciliation of daily
activity with the trial balance, and 4) appropriate automated feeding mechanisms
to (i) domestic and international settlement systems, (ii) daily, weekly and
monthly evaluation services, (iii) portfolio performance and analytic services,
(iv) customer's internal computing systems and (v) various State Street provided
information services products.
II. GlobalQuest(R) is designed to provide customer access to the following
information maintained on The Multicurrency HORIZON(SM) Accounting System: 1)
cash transactions and balances; 2) purchases and sales; 3) income receivables;
4) tax refund receivables; 5) daily priced positions; 6) open trades; 7)
settlement status; 8) foreign exchange transactions; 9) trade history, and 10)
daily, weekly and monthly evaluation services.
III. HORIZON(R) Gateway. HORIZON(R) Gateway provides customers with the ability
to (i) generate reports using information maintained on the Multicurrency
HORIZON(R) Accounting System which may be viewed or printed at the customer's
location; (ii) extract and download data from the Multicurrency HORIZON(R)
Accounting System; and (iii) access previous day and historical data. The
following information which may be accessed for these purposes: 1) holdings; 2)
holdings pricing; 3) transactions, 4) open trades; 5) income; 6) general ledger
and 7) cash.
IV. SaFiRe(SM). SaFiRe(SM) is designed to provide the customer with the ability
to prepare its own financial reports by permitting the customer to access
customer information maintained on the Multicurrency HORIZON(R) Accounting
System, to organize such information in a flexible reporting format and to have
such reports printed on the customer's desktop or by its printing provider.
V. State Street Interchange. State Street Interchange is an open information
delivery architecture wherein proprietary communication products, data formats
and workstation tools are replaced by industry standards and is designed to
enable the connection of State Street's network to customer networks, thereby
facilitating the sharing of information.
<PAGE> 50
ATTACHMENT B
DESIGNATED CONFIGURATION
<PAGE> 51
ATTACHMENT C
UNDERTAKING
The undersigned understands that in the course of its employment as
Investment Advisor to Warburg, Pincus International Small Company Fund, Inc.
(the "Customer") it will have access to State Street Bank and Trust Company's
("State Street") Multicurrency HORIZON(SM) Accounting System and other
information systems (collectively, the "System").
The undersigned acknowledges that the System and the databases, computer
programs, screen formats, report formats, interactive design techniques,
documentation and other information made available to the undersigned by State
Street as part of the Data Access Services provided to the Customer and through
the use of the System constitute copyrighted, trade secret, or other proprietary
information of substantial value to State Street. Any and all such information
provided by State Street to the Undersigned shall be deemed proprietary and
confidential information of State Street (hereinafter "Proprietary
Information"). The undersigned agrees that it will hold such Proprietary
Information in confidence and secure and protect it in a manner consistent with
its own procedures for the protection of its own confidential information and to
take appropriate action by instruction or agreement with its employees who are
permitted access to the Proprietary Information to satisfy its obligations
hereunder.
The undersigned will not attempt to intercept data, gain access to data in
transmission, or attempt entry into any system or files for which it is not
authorized. It will not intentionally adversely affect the integrity of the
System through the introduction of unauthorized code or data, or through
unauthorized deletion.
Upon notice by State Street for any reason, any right to use the System
and access to the Data Access Services shall terminate and the undersigned shall
immediately cease use of the System and the Data Access Services. Immediately
upon notice by State Street for any reason, the undersigned shall return to
State Street all copies of documentation and other Proprietary Information in
its possession.
WARBURG, PINCUS ASSET MANAGEMENT, INC.
By:________________________________________
Title:_____________________________________
Date:______________________________________
<PAGE> 52
ATTACHMENT D
SUPPORT
During the term of this Agreement, State Street agrees to provide the
following on-going support services:
a. Telephone Support. The Customer Designated Persons may contact State
Street's Multicurrency HORIZON(SM) Help Desk and Customer Assistance Center
between the hours of 8 a.m. and 6 p.m. (Eastern time) on all business days for
the purpose of obtaining answers to questions about the use of the System, or to
report apparent problems with the System. From time to time, the Customer shall
provide to State Street a list of persons, not to exceed five in number, who
shall be permitted to contact State Street for assistance (such persons being
referred to as "the Customer Designated Persons").
b. Technical Support. State Street will provide technical support to
assist the Customer in using the System and the Data Access Services. The total
amount of technical support provided by State Street shall not exceed 10
resource days per year. State Street shall provide such additional technical
support as is expressly set forth in the fee schedule in effect from time to
time between the parties (the "Fee Schedule"). Technical support, including
during installation and testing, is subject to the fees and other terms set
forth in the Fee Schedule.
c. Maintenance Support. State Street shall use commercially reasonable
efforts to correct system functions that do not work according to the System
Product Description as set forth on Attachment A in priority order in the next
scheduled delivery release or otherwise as soon as is practicable.
d. System Enhancements. State Street will provide to the Customer any
enhancements to the System developed by State Street and made a part of the
System; provided that, sixty (60) days prior to installing any such enhancement,
State Street shall notify the Customer and shall offer the Customer reasonable
training on the enhancement. Charges for system enhancements shall be as
provided in the Fee Schedule. State Street retains the right to charge for
related systems or products that may be developed and separately made available
for use other than through the System.
e. Custom Modifications. In the event the Customer desires custom
modifications in connection with its use of the System, the Customer shall make
a written request to State Street providing specifications for the desired
modification. Any custom modifications may be undertaken by State Street in its
sole discretion in accordance with the Fee Schedule.
f. Limitation on Support. State Street shall have no obligation to support
the Customer's use of the System: (i) for use on any computer equipment or
telecommunication facilities which does not conform to the Designated
Configuration or (ii) in the event the Customer has modified the System in
breach of this Agreement.
<PAGE> 53
[STATE STREET LOGO]
FUNDS TRANSFER
OPERATING GUIDELINES
1. OBLIGATION OF THE SENDER: State Street is authorized to promptly debit
client's account(s) upon the receipt of a payment order in compliance with the
selected Security Procedure chosen for funds transfer and in the amount of money
that State Street has been instructed to transfer. State Street shall execute
payment orders in compliance with the Security Procedure and with the
Client's/Investment Manager's instructions on the execution date provided that
such payment order is received by the customary deadline for processing such a
request, unless the payment order specifies a later time. All payment orders and
communications received after this time will be deemed to have been received on
the next business day.
2. SECURITY PROCEDURE: The Client acknowledges that the Security Procedure it
has designated on the Selection Form was selected by the Client from Security
Procedures offered by State Street. The Client shall restrict access to
confidential information relating to the Security Procedure to authorized
persons as communicated in writing to State Street. The Client must notify State
Street immediately if it has reason to believe unauthorized persons may have
obtained access to such information or of any change in the Client's authorized
personnel. State Street shall verify the authenticity of all instructions
according to the Security Procedure.
3. ACCOUNT NUMBERS: State Street shall process all payment orders on the basis
of the account number contained in the payment order. In the event of a
discrepancy between any name indicated on the payment order and the account
number, the account number shall take precedence and govern.
4. REJECTION: State Street reserves the right to decline to process or delay the
processing of a payment order which (a) is in excess of the collected balance in
the account to be charged at the time of State Street's receipt of such payment
order; (b) if initiating such payment order would cause State Street, in State
Street's sole judgment, to exceed any volume, aggregate dollar, network, time,
credit or similar limits upon wire transfers which are applicable to State
Street; or (c) if State Street, in good faith, is unable to satisfy itself that
the transaction has been properly authorized.
5. CANCELLATION OR AMENDMENT: State Street shall use reasonable efforts to act
on all authorized requests to cancel or amend payment orders received in
compliance with the Security Procedure provided that such requests are received
in a timely manner affording State Street reasonable opportunity to act.
However, State Street assumes no liability if the request for amendment or
cancellation cannot be satisfied.
6. ERRORS: State Street shall assume no responsibility for failure to detect any
erroneous payment order provided that State Street complies with the payment
order instructions as received and State Street complies with the Security
Procedure. The Security Procedure is established for the purpose of
authenticating payment orders only and not for the detection of errors in
payment orders.
7. INTEREST AND LIABILITY LIMITS: State Street shall assume no responsibility
for lost interest with respect to the refundable amount of any unauthorized
payment order, unless State Street is notified of the unauthorized payment order
within thirty (30) days of notification by State Street of the acceptance of
such payment order. In no event shall State Street be liable for special,
indirect or consequential damages, even if advised of the possibility of such
damages and even for failure to execute a payment order.
8. AUTOMATED CLEARING HOUSE ("ACH") CREDIT ENTRIES/PROVISIONAL PAYMENTS: When a
Client initiates or receives ACH credit and debit entries pursuant to these
Guidelines and the rules of the National Automated Clearing House Association
and the New England Clearing House Association, State Street will act as an
Originating Depository Financial Institution and/or Receiving Depository
Institution, as the case may be, with respect to such entries. Credits given by
State Street with respect to an ACH credit entry are provisional until State
Street receives final settlement for such entry from the Federal Reserve Bank.
If State Street does not receive such final settlement, the Client agrees that
State Street shall receive a refund of the amount credited to the Client in
connection with such entry, and the party making payment to the Client via such
entry shall not be deemed to have paid the amount of the entry.
9. CONFIRMATION STATEMENTS: Confirmation of State Street's execution of payment
orders shall ordinarily be provided within 24 hours notice which may be
delivered through State Street's proprietary information systems, such as, but
not limited to Horizon and GlobalQuest(R), or by facsimile or callback. The
Client must report any objections to the execution of a payment order within 30
days.
I understand and agree to the terms and conditions described above. I am
authorized to sign on behalf of each of the mutual funds or other entities named
on Schedule A attached.
EACH OF THE PARTIES NAMED ON SCHEDULE A ATTACHED HERETO
By:_________________________ ____________________ __________ ________
Type or Print Name Authorized Signature Title Date
<PAGE> 54
[STATE STREET LOGO]
FUNDS TRANSFER SECURITY PROCEDURES
Selection Form
Please select one or more of the funds transfer security procedures indicated
below.
[ ] SWIFT
SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a
cooperative society owned and operated by member financial institutions that
provides telecommunication services for its membership. Participation is limited
to securities brokers and dealers, clearing and depository institutions,
recognized exchanges for securities, and investment management institutions.
SWIFT provides a number of security features through encryption and
authentication to protect against unauthorized access, loss or wrong delivery of
messages, transmission errors, loss of confidentiality and fraudulent changes to
messages. SWIFT is considered to be one of the most secure and efficient
networks for the delivery of funds transfer instructions.
Selection of this security procedure would be most appropriate for existing
SWIFT members.
[ ] STANDING INSTRUCTIONS
Standing Instructions may be used where funds are transferred to a broker on the
Client's established list of brokers with which it engages in foreign exchange
transactions. Only the date, the currency and the currency amount are variable.
In order to establish this procedure, State Street will send to the Client a
list of the brokers that State Street has determined are used by the Client. The
Client will confirm the list in writing, and State Street will verify the
written confirmation by telephone. Standing Instructions will be subject to a
mutually agreed upon limit. If the payment order exceeds the established limit,
the Standing Instruction will be confirmed by telephone prior to execution.
[ ] REMOTE BATCH TRANSMISSION
Wire transfer instructions are delivered via Computer-to-Computer (CPU-CPU) data
communications between the Client and State Street. Security procedures include
encryption and or the use of a test key by those individuals authorized as
Automated Batch Verifiers.
Clients selecting this option should have an existing facility for completing
CPU-CPU transmissions. This delivery mechanism is typically used for high-volume
business.
[ ] GLOBAL HORIZON INTERCHANGE(SM) FUNDS TRANSFER SERVICE
Global Horizon Interchange Funds Transfer Service (FTS) is a State Street
proprietary microcomputer-based wire initiation system. FTS enables Clients to
electronically transmit authenticated Fedwire, CHIPS or internal book transfer
instructions to State Street.
This delivery mechanism is most appropriate for Clients with a low-to-medium
number of transactions (5-75 per day), allowing Clients to enter, batch, and
review wire transfer instructions on their PC prior to release to State Street.
[ ] TELEPHONE CONFIRMATION (CALLBACK)
Telephone confirmation will be used to verify all non-repetitive funds transfer
instructions received via untested facsimile or phone. This procedure requires
Clients to designate individuals as authorized initiators and authorized
verifiers. State Street will verify that the instruction contains the signature
of an authorized person and prior to execution, will contact someone other than
the originator at the Client's location to authenticate the instruction.
Selection of this alternative is appropriate for Clients who do not have the
capability to use other security procedures.
[ ] REPETITIVE WIRES
For situations where funds are transferred periodically (minimum of one
instruction per calendar quarter) from an existing authorized account to the
same payee (destination bank and account number) and only the date and currency
amount are variable, a repetitive wire may be implemented. Repetitive wires will
be subject to a mutually agreed upon limit. If the payment order exceeds the
established limit, the instruction will be confirmed by telephone prior to
execution. Telephone confirmation is used to establish this process. Repetitive
wire instructions must be reconfirmed annually.
This alternative is recommended whenever funds are frequently transferred
between the same two accounts.
[ ] TRANSFERS INITIATED BY FACSIMILE
The Client faxes wire transfer instructions directly to State Street Mutual Fund
Services. Standard security procedure requires the use of a random number test
key for all transfers. Every six months the Client receives test key logs from
State Street. The test key contains alpha-numeric characters, which the Client
puts on each document faxed to State Street. This procedure ensures all wire
instructions received via fax are authorized by the Client.
We provide this option for Clients who wish to batch wire instructions and
transmit these as a group to State Street Mutual Fund Services once or several
times a day.
[ ] AUTOMATED CLEARING HOUSE (ACH)
State Street receives an automated transmission or a magnetic tape from a Client
for the initiation of payment (credit) or collection (debit) transactions
through the ACH network. The transactions contained on each transmission or tape
must be authenticated by the Client. Clients using ACH must select one or more
of the following delivery options:
IMPORTANT: SIGNATURE REQUIRED ON THE REVERSE SIDE
<PAGE> 55
[STATE STREET LOGO]
FUNDS TRANSFER SECURITY PROCEDURES
[ ] GLOBAL HORIZON INTERCHANGE AUTOMATED CLEARING HOUSE SERVICE
Transactions are created on a microcomputer, assembled into batches and
delivered to State Street via fully authenticated electronic transmissions in
standard NACHA formats.
[ ] Transmission from Client PC to State Street Mainframe with Telephone
Callback
[ ] Transmission from Client Mainframe to State Street Mainframe with Telephone
Callback
[ ] Transmission from DST Systems to State Street Mainframe with Encryption
[ ] Magnetic Tape Delivered to State Street with Telephone Callback
State Street is hereby instructed to accept funds transfer instructions only via
the delivery methods and security procedures indicated. The selected delivery
methods and security procedure(s) will be effective ___________________ for
payment orders initiated by our organization.
I am authorized to sign below on behalf of each of the mutual funds or other
entities named in Schedule A attached.
EACH OF THE PARTIES NAMED ON SCHEDULE A ATTACHED HERETO
By:____________________________ ____________________ _________ _______
Type or Print Name Authorized Signature Title Date
KEY CONTACT INFORMATION
Whom shall we contact to implement your selection(s)?
CLIENT OPERATIONS CONTACT ALTERNATE CONTACT
__________________________________ ___________________________________
Name Name
__________________________________ ___________________________________
Address Address
__________________________________ ___________________________________
City/State/Zip Code City/State/Zip Code
__________________________________ ___________________________________
Telephone Number Telephone Number
__________________________________ ___________________________________
Facsimile Number Facsimile Number
__________________________________
SWIFT Number
__________________________________
Telex Number
<PAGE> 56
[STATE STREET LOGO]
FUNDS TRANSFER INSTRUCTIONS
TELEPHONE CONFIRMATION
CLIENT / INVESTMENT MANAGER Warburg, Pincus Asset Management
________________________________
Company
AUTHORIZED INITIATORS
Please Type or Print
Please provide a listing of your staff members who are currently authorized to
INITIATE wire transfer instructions to State Street:
<TABLE>
<CAPTION>
NAME TITLE SPECIMEN SIGNATURE
<S> <C> <C>
______________________ _____________________ ______________________
______________________ _____________________ ______________________
______________________ _____________________ ______________________
______________________ _____________________ ______________________
______________________ _____________________ ______________________
</TABLE>
AUTHORIZED VERIFIERS
Please Type or Print
Please provide a listing of your staff members who will be CALLED BACK to verify
the initiation of repetitive wires of $10 million or more and all non repetitive
wire instructions:
<TABLE>
<CAPTION>
NAME CALLBACK PHONE NUMBER DOLLAR LIMITATION (IF ANY)
<S> <C> <C>
______________________ _____________________ ______________________
______________________ _____________________ ______________________
______________________ _____________________ ______________________
______________________ _____________________ ______________________
______________________ _____________________ ______________________
</TABLE>
___________________________________ _______________________________
Type or Print Name Authorized Signature
___________________________________ _______________________
Title Date
<PAGE> 57
[STATE STREET LOGO]
FUNDS TRANSFER
SCHEDULE A
NAME OF MANAGEMENT COMPANY: WARBURG, PINCUS ASSET MANAGEMENT
FUND NAME(S): Warburg, Pincus International Small Company Fund, Inc.
AUTHORIZED SIGNATURE: __________________________________
DATE: __________________________________
<PAGE> 1
Exhibit 9(a)
TRANSFER AGENCY AND SERVICE AGREEMENT
between
WARBURG, PINCUS INTERNATIONAL SMALL COMPANY FUND, INC.
and
STATE STREET BANK AND TRUST COMPANY
1A - Domestic/Corporation
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Terms of Appointment; Duties of the Bank ............................ 1
2. Fees and Expenses ................................................... 3
3. Representations and Warranties of the Bank .......................... 3
4. Representations and Warranties of the Fund .......................... 4
5. Wire Transfer Operating Guidelines .................................. 4
6. Data Access and Proprietary Information ............................. 6
7. Indemnification ..................................................... 7
8. Standard of Care .................................................... 8
9. Year 2000 ........................................................... 8
10. Confidentiality ..................................................... 9
11. Covenants of the Fund and the Bank .................................. 9
12. Termination of Agreement ............................................ 10
13. Assignment .......................................................... 10
14. Amendment ........................................................... 10
15. Massachusetts Law to Apply .......................................... 10
16. Force Majeure ....................................................... 11
17. Consequential Damages ............................................... 11
18. Merger of Agreement ................................................. 11
19. Counterparts ........................................................ 11
20. Reproduction of Documents ........................................... 11
</TABLE>
<PAGE> 3
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the day of , 1998, by and between
WARBURG, PINCUS INTERNATIONAL SMALL COMPANY FUND, INC. , a Maryland corporation,
having its principal office and place of business at 466 Lexington Avenue, New
York, New York 10017 (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, $ 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;
(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;
(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
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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
Shareholder proxies, 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 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
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<PAGE> 5
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
(e.g., 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, mailing and 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. 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.
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<PAGE> 6
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 .
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. Wire Transfer Operating Guidelines/Articles 4A of the Uniform
Commercial Code
5.1 The Bank is authorized to promptly debit the appropriate Fund account(s)
upon the receipt of a payment order in compliance with the selected
security procedure (the "Security Procedure") chosen for funds transfer
and in the amount of money that the Bank has been instructed to
transfer. The Bank shall execute payment orders in compliance with the
Security Procedure and with the Fund instructions on the execution date
provided that such payment order is received by the customary deadline
for processing such a request, unless the payment order specifies a
later time. All payment orders and communications received after this
the customary deadline will be deemed to have been received the next
business day.
5.2 The Fund acknowledges that the Security Procedure it has designated on
the Fund Selection Form was selected by the Fund from security
procedures offered by the Bank. The Fund shall restrict access to
confidential information relating to the Security Procedure to
authorized persons as communicated to the Bank in writing. The Fund must
notify the Bank immediately if it has reason to believe unauthorized
persons may have obtained access to such information or of any change in
the Fund's authorized personnel. The Bank shall verify the authenticity
of all Fund instructions according to the Security Procedure.
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<PAGE> 7
5.3 The Bank shall process all payment orders on the basis of the account
number contained in the payment order. In the event of a discrepancy
between any name indicated on the payment order and the account number,
the account number shall take precedence and govern.
5.4 The Bank reserves the right to decline to process or delay the
processing of a payment order which (a) is in excess of the collected
balance in the account to be charged at the time of the Bank's receipt
of such payment order; (b) if initiating such payment order would cause
the Bank, in the Bank's sole judgement, to exceed any volume, aggregate
dollar, network, time, credit or similar limits which are applicable to
the Bank; or (c) if the Bank, in good faith, is unable to satisfy itself
that the transaction has been properly authorized.
5.5 The Bank shall use reasonable efforts to act on all authorized requests
to cancel or amend payment orders received in compliance with the
Security Procedure provided that such requests are received in a timely
manner affording the Bank reasonable opportunity to act. However, the
Bank assumes no liability if the request for amendment or cancellation
cannot be satisfied.
5.6 The Bank shall assume no responsibility for failure to detect any
erroneous payment order provided that the Bank complies with the payment
order instructions as received and the Bank complies with the Security
Procedure. The Security Procedure is established for the purpose of
authenticating payment orders only and not for the detection of errors
in payment orders.
5.7 The Bank shall assume no responsibility for lost interest with respect
to the refundable amount of any unauthorized payment order, unless the
Bank is notified of the unauthorized payment order within thirty (30)
days of notification by the Bank of the acceptance of such payment
order. In no event (including failure to execute a payment order) shall
the Bank be liable for special, indirect or consequential damages, even
if advised of the possibility of such damages.
5.8 When the Fund initiates or receives Automated Clearing House credit and
debit entries pursuant to these guidelines and the rules of the National
Automated Clearing House Association and the New England Clearing House
Association, the Bank will act as an Originating Depository Financial
Institution and/or receiving depository Financial Institution, as the
case may be, with respect to such entries. Credits given by the Bank
with respect to an ACH credit entry are provisional until the Bank
receives final settlement for such entry from the Federal Reserve Bank.
If the Bank does not receive such final settlement, the Fund agrees that
the Bank shall receive a refund of the amount credited to the Fund in
connection with such entry, and the party making payment to the Fund via
such entry shall not be deemed to have paid the amount of the entry.
5.9 Confirmation of Bank's execution of payment orders shall ordinarily be
provided within twenty four (24) hours notice of which may be delivered
through the Bank's proprietary information systems, or by facsimile or
call-back. Fund must report any objections to the execution of an order
within thirty (30) days.
6. Data Access and Proprietary Information
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<PAGE> 8
6.1 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")
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 6. The obligations of this Section shall
survive any earlier termination of this Agreement.
6.2 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
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<PAGE> 9
EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO, THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
6.3 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.
7. Indemnification
7.1 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 federal or state
securities laws or regulations requiring that such Shares be
registered or in violation of any stop order or other
determination or ruling by any federal or any state agency with
respect to the offer or sale of such Shares;
(f) the negotiations and processing of checks made payable to
prospective or existing Shareholders tendered to the Bank for the
purchase of Shares, such checks are commonly known as "third party
checks"; and
(g) upon the Fund's request entering into any agreements required by
the National Securities Clearing Corporation (the "NSCC") required
by the NSCC for the transmission of Fund or Shareholder data
through the NSCC clearing systems.
7.2 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
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<PAGE> 10
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 , 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
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.
7.3 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.
8. 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.
9. Year 2000
The Bank will take reasonable steps to ensure that its products (and
those of its third-party suppliers) reflect the available technology to
offer products that are Year 2000 ready, including, but not limited to,
century recognition of dates, calculations that correctly compute same
century and multi century formulas and date values, and interface values
that reflect the date issues arising between now and the next
one-hundred years, and if any changes are required, the Bank will make
the changes to its products at a price to be agreed upon by the parties
and in a commercially reasonable time frame and will require third-party
suppliers to do likewise.
10. Confidentiality
10.1 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.
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<PAGE> 11
10.2 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.
11. Covenants of the Fund and the Bank
11.1 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.
11.2 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.
11.3 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 Fund 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 available in accordance with such Section
and Rules, and will be surrendered promptly to the Fund on and in
accordance with its request.
11.4 In the event that any requests or demands are made for the inspection of
the Shareholder records of the Company, other than request for records of
Shareholders pursuant to standard subpoenas from state or federal
government authorities (i.e., divorce and criminal actions), the Bank
will endeavor to notify the Company and to secure instructions from an
authorized officer of the Company as to such inspection. The Bank
expressly reserves the right, however, to exhibit the Shareholder records
to any person whenever it is advised by counsel that it may be held
liable for the failure to exhibit the Shareholder records to such person.
12. Termination of Agreement
12.1 This Agreement may be terminated by either party upon one hundred twenty
(120) days written notice to the other.
12.2 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 a
charge equivalent to the average of three (3) months' fees.
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13. Assignment
13.1 Except as provided in Section 13.3 below, neither this Agreement nor any
rights or obligations hereunder may be assigned by either party without
the written consent of the other party.
13.2 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
13.3 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.
14. 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.
15. 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.
16. 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.
17. 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.
18. 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.
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19. 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.
20. 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 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
shall likewise be admissible in evidence.
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<PAGE> 14
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 INTERNATIONAL SMALL
COMPANY FUND, INC.
BY: __________________________________
ATTEST:
- --------------------------------
STATE STREET BANK AND TRUST COMPANY
BY: ___________________________________
Executive Vice President
ATTEST:
- --------------------------------
<PAGE> 15
STATE STREET BANK & TRUST COMPANY
FUND SERVICE RESPONSIBILITIES*
<TABLE>
<CAPTION>
Service Performed Responsibility
- -------------------------------------------------------------------------
Bank Fund
---- ----
<S> <C> <C>
1. Receives orders for the purchase X X
of Shares.
2. Issue Shares and hold Shares in X X
Shareholders accounts.
3. Receive redemption requests. X
4. Effect transactions 1-3 above X
directly with broker-dealers.
5. Pay over monies to redeeming X
Shareholders.
6. Effect transfers of Shares. X
7. Prepare and transmit dividends X
and distributions.
8. Issue Replacement Certificates. X
9. Reporting of abandoned property. X X
10. Maintain records of account. X
11. Maintain and keep a current and X
accurate control book for
each issue of securities.
12. Mail proxies. X
13. Mail Shareholder reports. X X
14. Mail prospectuses to current X X
Shareholders.
15. Withhold taxes on U.S. resident X
and non-resident alien accounts.
</TABLE>
<PAGE> 16
<TABLE>
<CAPTION>
Service Performed Responsibility
___________________________________________________________________________
Bank Fund
____ ____
<S> <C> <C>
16. Prepare and file U.S. Treasury X
Department forms.
17. Prepare and mail account and X X
confirmation statements for
Shareholders.
18. Provide Shareholder account X information. X
19. Blue sky reporting. X X
</TABLE>
* Such services are more fully described in Section 1.2 (a), (b) and (c) of
the Agreement.
WARBURG, PINCUS INTERNATIONAL SMALL
COMPANY FUND, INC.
BY:_______________________________________
ATTEST:
_________________________________
STATE STREET BANK AND TRUST COMPANY
BY:_______________________________________
Executive Vice President
ATTEST:
_________________________________
<PAGE> 1
EXHIBIT 10(a)
May 20, 1998
Warburg, Pincus International Small Company Fund, Inc.
466 Lexington Avenue
New York, New York 10017-3147
Ladies and Gentlemen:
We have acted as counsel to Warburg, Pincus International Small Company 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 two billion of which are designated "Advisor
Shares", par value $.001 per share (collectively, the "Shares").
We have examined copies of the Charter and By-Laws of the Fund, as amended, 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. 333-49537 and Investment Company Act File No. 811-08737
(the "Registration Statement"), all resolutions adopted by the Fund's Board of
Directors (the "Board") at its organizational meeting held on April 3, 1998,
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.
<PAGE> 2
Warburg, Pincus International Small Company Fund, Inc.
May 20, 1998
Page 2
Based upon the foregoing, 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 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 Shares of the Fund 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 the
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 or the 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,
/s/Willkie Farr & Gallagher
<PAGE> 1
Exhibit 10(b)
VENABLE, BAETJER AND HOWARD, LLP
1800 MERCANTILE BANK AND TRUST BUILDING
TWO HOPKINS PLAZA
BALTIMORE, MARYLAND 21201
May 20, 1998
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, NY 10022-4677
Re: Warburg, Pincus International Small Company Fund, Inc.
Ladies and Gentlemen:
We have acted as special Maryland counsel for Warburg, Pincus
International Small Company 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 (the "Common Stock").
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. 333-49537 and Investment Company Act File No. 811-08737, 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:
1. The Fund is duly organized and validly existing in good
standing under the laws of the State of Maryland.
2. The 10,000 presently issued and outstanding shares of Common
Stock of the Fund have been duly authorized and are validly
issued, fully paid and nonassessable.
3. The Common Stock of the Fund to be offered for sale pursuant
to the Registration Statement is, 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 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,
/s/VENABLE, BAETJER AND HOWARD, LLP
2
<PAGE> 1
Exhibit 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion of our report dated May 15, 1998 on our audit
of the financial statement of Warburg, Pincus International Small Company Fund,
Inc. in the Statement of Additional Information with respect to Pre-Effective
Amendment No. 1 to the Registration Statement (No. 333-49537) on Form N-1A under
the Securities Act of 1933 of Warburg, Pincus International Small Company Fund,
Inc. We also consent to the references to our Firm under the heading "General
Information" in the Prospectus and "Independent Accountants and Counsel" in the
Statement of Additional Information.
/s/ Coopers & Lybrand L.L.P.
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Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
May 20, 1998
