<PAGE> 1
As filed with the U.S. Securities and Exchange Commission
on September 3, 1998
Securities Act File No. 333-60225
Investment Company Act File No. 811-08903
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 European Equity Fund, Inc.
.......................................
(Exact Name of Registrant as Specified in Charter)
466 Lexington Avenue
New York, New York 10017-3147
........................................................
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 878-0600
Mr. Eugene P. Grace
Warburg, Pincus European Equity 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
787 Seventh Avenue
New York, New York 10019-6099
<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
<TABLE>
<CAPTION>
WARBURG, PINCUS EUROPEAN EQUITY FUND, INC.
FORM N-1A
CROSS REFERENCE SHEET
Part A
Item No. Prospectus Heading
- -------- ------------------
<S> <C>
1. (a) Front Cover Page...................... Front Cover Page
(b) Back Cover Page....................... Back Cover Page
2. Risk/Return Summary:
Investments, Risks,
and Performance......................... Overview -- Investor
Profile; Goals and
Principal Strategies; A
Word About Risk
3. Risk/Return Summary:
Fee Table............................... Fees and Fund Expenses;
Example
4. Investment Objectives,
Principal Investment Strategies,
and Related Risks....................... Overview -- Goals and
Principal Strategies; A
Word About Risk; European
Equity Fund; Central and
Eastern Europe Fund; More
About Risk; Other
Investment Strategies
5. Management's Discussion of
Fund Performance........................ Not Applicable
6. Management, Organization and
Capital Structure......................... Overview -- Multi-Class
Structure; The Funds In
Detail; Fund Information
Key; Meet The Managers
7. Shareholder Information................... Fund Information Key;
About Your Account; Other
Information; For More
Information; Shareholder
Guide
8. Distribution Arrangements................. The Funds In Detail; Other
Information
9. Financial Highlights Information.......... Not Applicable
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
Part B
Item No.
- --------
<S> <C>
10. (a) Front Cover Page...................... Cover Page
(b) Table of Contents..................... Cover Page
11. Fund History.............................. Organization of the Funds
12. Description of the Fund and its
Investments and Risks................... Organization of the Funds;
Investment Objectives and
Policies; See Prospectus
-- ""Goals and Principal
Strategies," "A Word About
Risk," "Other Investment
Strategies," "More About
Risk," "European Equity
Fund," and "Central and
Eastern Europe Fund"
13. Management of the Fund.................... Management of the Funds;
See Prospectus -- "The
Funds In Detail," and
"Meet The Managers"
14. Control Persons and Principal
Holders of Securities................... Management of the Funds
15. Investment Advisory and
Other Services.......................... Management of the Funds;
See Prospectus -- "The
Funds In Detail," and
"Other Information"
16. Brokerage Allocation
and Other Practices..................... Investment Objectives and
Policies -- Portfolio
Transactions
17. Capital Stock and Other
Securities.............................. Management of the Funds;
-- Organization of the
Fund; See Prospectus --
"Overview -- Multi-Class
Structure"
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
18. Purchase, Redemption and Pricing
of Shares............................... Additional Purchase and
Redemption Information;
See Prospectus -- "About
Your Account," "Other
Information," "For More
Information," and
"Shareholder Guide"
19. Taxation of the Fund...................... Additional Information
Concerning Taxes; See
Prospectus -- "About Your
Account"
20. Underwriters.............................. Investment Objectives and
Policies -- Portfolio
Transactions; Management
of the Funds --
Distribution and
Shareholder Servicing; See
Prospectus -- "The Funds
In Detail," and "Other
Information"
21. Calculation of Performance Data........... Determination of
Performance
22. Financial Statements...................... Financial Statements(1);
Report of
PricewaterhouseCoopers
LLP, Independent
Accountants(1)
</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.
- --------
(1) To be filed by amendment.
<PAGE> 6
The Common Share Prospectus is incorporated by reference to the initial
registration statement filed on July 30, 1998.
<PAGE> 7
Subject to Completion, dated September 3, 1998
PROSPECTUS
October 1, 1998
BEA INSTITUTIONAL FUNDS
EUROPEAN EQUITY FUND
-
CENTRAL AND EASTERN EUROPE FUND
[LOGO]
As with all mutual funds, the Securities and Exchange Commission has not
approved these funds, nor does it guarantee that the information in this
prospectus is accurate or complete. It is a criminal offense to state otherwise.
<PAGE> 8
CONTENTS
<TABLE>
<S> <C>
OVERVIEW................................................. 3
Multi-Class Structure................................. 3
Investor Profile...................................... 3
KEY POINTS............................................... 4
Goals and Principal Strategies........................ 4
A Word About Risk..................................... 5
INVESTOR EXPENSES........................................ 6
Fees and Fund Expenses................................ 6
Example............................................... 7
THE FUNDS IN DETAIL...................................... 8
The Management Firms.................................. 8
Distribution and Service.............................. 8
Fund Information Key.................................. 9
EUROPEAN EQUITY FUND..................................... 10
CENTRAL AND EASTERN EUROPE FUND.......................... 12
MORE ABOUT RISK.......................................... 14
Introduction.......................................... 14
Types of Investment Risk.............................. 14
Certain Investment Practices.......................... 17
MEET THE MANAGERS........................................ 19
ABOUT YOUR ACCOUNT....................................... 20
Share Valuation....................................... 20
Buying and Selling Shares............................. 20
Distributions......................................... 23
Taxes................................................. 23
OTHER INFORMATION........................................ 25
About the Distributor................................. 25
FOR MORE INFORMATION..................................... 26
</TABLE>
2
<PAGE> 9
OVERVIEW
MULTI-CLASS STRUCTURE
The BEA Institutional Funds are separate Institutional Classes of shares of
certain Warburg Pincus Funds. This prospectus describes the Institutional
Classes of the Warburg Pincus European Equity Fund and the Warburg Pincus
Central and Eastern Europe Fund. The Common Class is described in a separate
prospectus.
INVESTOR PROFILE
These funds are designed for investors who:
- have longer time horizons
- are willing to assume the risk of losing money in exchange for attractive
potential long-term returns
- are investing for capital appreciation
- can accept a higher degree of volatility
- are seeking access to European markets, which can be less accessible to
individual investors
They may NOT be appropriate if you:
- are investing for a shorter time horizon
- are uncomfortable with an investment that may suffer substantial declines in
value
- are looking for a broadly diversified global or international equity fund
- are looking for income
You should base your selection of a fund on your own goals, risk preferences
and time horizon.
- -----------------------------------------------
The Central and Eastern Europe Fund
targets the emerging markets of a
single geographic region. The fund
intends to invest in Russia, a
country whose stock market has
recently experienced extreme
volatility and illiquidity. Because
this fund involves a high level of
risk, you should consider it only for
the aggressive portion of your
portfolio. The Central and Eastern
Europe Fund may not be appropriate
for everyone.
- -----------------------------------------------
3
<PAGE> 10
KEY POINTS
GOALS AND PRINCIPAL STRATEGIES
<TABLE>
<CAPTION>
FUND/RISK FACTORS GOAL STRATEGY
<S> <C> <C>
EUROPEAN EQUITY FUND Capital appreciation - Invests in European stocks
Risk factors: - Targets Western European
Market risk countries
Foreign securities - May use growth or value
Region focus approaches
CENTRAL AND EASTERN Capital appreciation - Invests primarily in Central and
EUROPE FUND Eastern European stocks
Risk Factors: - Focuses on the Czech Republic,
Market risk Hungary, Poland and Russia
Foreign securities - Combines growth and value
Emerging markets approaches
focus
Region focus
Country focus
</TABLE>
4
<PAGE> 11
A WORD ABOUT RISK
All investments involve some level of risk. Simply defined, risk is the
possibility that you will lose money or not make money.
Principal risk factors for the funds are discussed below. Before you invest,
please make sure you understand the risks that apply to your fund. As with any
mutual fund, you could lose money over any period of time.
Investments in the funds are not bank deposits. They are not FDIC-insured or
government-endorsed.
MARKET RISK
Both funds
The market value of a security may move up and down, sometimes rapidly and
unpredictably. These fluctuations, which are often referred to as "volatility,"
may cause a security to be worth less than it was worth at an earlier time.
Market risk may affect a single issuer, industry, sector of economy, or market
as a whole. Market risk is common to most investments -- including stocks and
bonds, and the mutual funds that invest in them.
FOREIGN SECURITIES
Both funds
A fund that invests outside the U.S. carries additional risks that include:
- CURRENCY RISK. Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. Adverse changes in
exchange rates may erode or reverse any gains produced by foreign-currency
denominated investments and may widen any losses.
- INFORMATION RISK. Key information about an issuer, security or market may be
inaccurate or unavailable.
- POLITICAL RISK. Foreign-government actions such as capital controls,
nationalizing a company or industry, expropriating assets, or imposing
punitive taxes could have a severe effect on foreign security prices and
impair a fund's ability to repatriate capital or income. Other political
risks include economic policy changes, social and political instability,
military action and war.
COUNTRY/REGION FOCUS
Both funds
Market swings in the targeted country or region will be likely to have a
greater effect on fund performance than they would in a more geographically
diversified equity fund.
EMERGING MARKETS FOCUS
Central and Eastern Europe Fund
Focusing on emerging (less developed) markets involves higher levels of risk,
including increased currency, information, liquidity, market, political and
valuation risk. Deficiencies in regulatory oversight, market infrastructure,
shareholder protections and company laws could expose the fund to operational
and other risks as well. Some countries may have restrictions that could limit
the fund's access to attractive opportunities. Additionally, emerging markets
often face serious economic problems (such as high external debt, inflation and
unemployment) that could subject a fund to increased volatility or substantial
declines in value.
5
<PAGE> 12
INVESTOR EXPENSES
FEES AND FUND EXPENSES
This table describes the fees and expenses you may bear as a shareholder. Annual
fund operating expense figures are estimates for fiscal 1999, but do not reflect
fee waivers and expense reimbursements.*
<TABLE>
<CAPTION>
EUROPEAN CENTRAL AND
EQUITY EASTERN EUROPE
FUND FUND
<S> <C> <C>
SHAREHOLDER FEES (paid directly from your investment)
Sales charge "load" on purchases NONE NONE
Deferred sales charge "load' NONE NONE
Sales charge "load" on reinvested distributions NONE NONE
Redemption fee (short-term trading fee) on
shares held less than six months (as a percent
of amount redeemed) NONE 1.00%(1)
Exchange fee NONE NONE
ANNUAL FUND OPERATING EXPENSES (deducted from fund assets)
Management fee 1.00% 1.25%
Distribution and service (12b-1) fee NONE NONE
Other expenses X.XX% X.XX%
TOTAL ANNUAL FUND OPERATING EXPENSES* % %
</TABLE>
(1) The short-term trading fee is waived until further notice.
* Through at least December 1999, fund service providers have voluntarily
agreed to waive some of their fees and reimburse expenses. These waivers and
reimbursements are expected to lower fund expenses as follows:
<TABLE>
<CAPTION>
Distribution Total annual
Management and service Other fund operating
fee (12b-1) fee expenses expenses
<S> <C> <C> <C> <C>
European Equity Fund: X.XX% None X.XX% 1.15%
Central and Eastern Europe
Fund: X.XX% None X.XX% 1.40%
</TABLE>
6
<PAGE> 13
EXAMPLE
This example may help you compare the cost of investing in these funds with the
cost of investing in other mutual funds. Because it uses hypothetical
conditions, your actual costs may be higher or lower.
Assume you invest $10,000, each fund returns 5% annually, expense ratios remain
as listed previously, and you close your account at the end of the time periods
shown. Based on these assumptions, your cost would be:
<TABLE>
<CAPTION>
BEFORE WAIVERS AND REIMBURSEMENTS* ONE YEAR THREE YEARS
<S> <C> <C>
EUROPEAN EQUITY FUND $ $
CENTRAL AND EASTERN EUROPE FUND $ $
</TABLE>
*Fee waivers and expense reimbursements would lower your cost as follows:
<TABLE>
<CAPTION>
One year Three years
<S> <C> <C>
European Equity Fund $ $
Central and Eastern Europe Fund $ $
</TABLE>
7
<PAGE> 14
THE FUNDS IN DETAIL
THE MANAGEMENT FIRMS
CREDIT SUISSE ASSET MANAGEMENT LIMITED
Beaufort House
15 St. Botolph Street
London, EC 3A 7JJ
- Sub-adviser for the funds under the supervision of BEA
- Credit Suisse Asset Management
currently manages approximately $138 billion in assets
- A member of Credit Suisse Asset Management and a subsidiary of Credit Suisse
Group
- Credit Suisse Asset Management also has offices in Budapest, Moscow, Prague,
Warsaw, Frankfurt, Milan, Paris, Sydney, Tokyo and Zurich; these offices are
not registered with the U.S. Securities and Exchange Commission
BEA ASSOCIATES
One Citicorp Center
153 East 53rd Street
New York, NY 10022
- Investment adviser for the funds
- A member of Credit Suisse Asset Management and a subsidiary of Credit Suisse
Group, one of the world's leading banks
- Currently manages approximately $35 billion in assets
- An investment manager for corporate and state pension funds, endowments and
other institutions
Together with its predecessor firms, BEA has been engaged in the investment
advisory business for over 60 years.
DISTRIBUTION AND
SERVICE
COUNSELLORS SECURITIES INC.
466 Lexington Avenue
New York, NY 10017
- Distributor of the funds
- A wholly owned subsidiary of Warburg Pincus Asset Management, Inc.
COUNSELLORS FUNDS SERVICE, INC.
466 Lexington Avenue
New York, NY 10017
- Provides the funds with administrative services
- A wholly owned subsidiary of Warburg Pincus Asset Management, Inc.
8
<PAGE> 15
FUND INFORMATION KEY
Concise fund-by-fund descriptions begin on the next page. Each description
provides the following information:
GOALS AND STRATEGIES
The fund's particular investment goals and the strategies it intends to use
in pursuing them. Percentages of fund assets are based on total assets unless
indicated otherwise.
PORTFOLIO INVESTMENTS
The primary types of securities in which the fund invests. Secondary
investments are described in "More About Risk."
RISK FACTORS
The major risk factors associated with the fund. Additional risk factors are
included in "More About Risk."
PORTFOLIO MANAGEMENT
The individuals designated by the investment adviser or sub-adviser to handle
the fund's day-to-day management.
INVESTOR EXPENSES
Estimated expenses for the 1999 fiscal year.
- MANAGEMENT FEE The fee paid to the investment adviser and sub-adviser for
providing investment advice to the fund. Expressed as a percentage of average
net assets after waivers.
- OTHER EXPENSES Fees paid by the fund for miscellaneous items such as
administration, transfer agency, custody, auditing, legal and registration
fees. Expressed as a percentage of average net assets after waivers, credits
and reimbursements.
9
<PAGE> 16
EUROPEAN EQUITY FUND
GOAL AND STRATEGY
The European Equity Fund seeks capital appreciation. To pursue this goal, the
fund invests primarily in stocks of Western European companies.
The fund considers Western Europe to include the European Union, Norway and
Switzerland. The European Union currently consists of: Austria, Belgium,
Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, Spain, Sweden and the United Kingdom.
Normally the fund invests at least 65% of assets in equity securities of
companies located in or conducting a majority of their business in Western
Europe. To enhance return potential, the fund may also pursue opportunities in
other European countries.
The fund intends to diversify its investments across different countries.
However, at times the fund may invest a significant part of its assets in a
single country. The fund may invest in companies of any size, although most of
the fund's investments will be in larger capitalization companies.
In choosing stocks, the portfolio managers consider a number of factors
including:
- stock price relative to the company's rate of earnings growth
- valuation relative to other European companies and market averages
- the stock's currency denomination
- merger and acquisition trends, particularly trends related to the impact of
the introduction of the new European currency, the "Euro", on the finance,
marketing and distribution strategies on European companies
PORTFOLIO INVESTMENTS
This fund intends to invest at least 80% of its assets in equity securities
of Western European companies. These equity securities include:
- common and preferred stocks
- securities convertible into common stocks
- securities such as rights and warrants, whose values are based on common
stocks
The fund may also invest in investment-grade debt securities issued by
Western European companies and governments. To a limited extent, the fund may
engage in other investment practices.
RISK FACTORS
This fund's principal risk factors are:
- market risk
- foreign securities
- region focus
The value of your investment will fluctuate in response to stock market
movements. Because the fund invests internationally, it carries additional
risks, including currency, information and political risks. These risks are
defined in "More About Risk."
Also, because the fund targets a single region, you should expect it to be
more volatile than a more geographically diversified equity fund. Fund
performance is closely tied to economic and political conditions within Europe.
"More About Risk" details certain other investment practices the fund may
10
<PAGE> 17
use. Please read that section carefully before you invest.
PORTFOLIO MANAGEMENT
Patricia Maxwell-Arnot and Susan E. Boland manage the fund's investment
portfolio. You can find out more about them in "Meet the Managers."
INVESTOR EXPENSES
Management fee X.XX%
All other expenses X.XX%
Total expenses X.XX%
11
<PAGE> 18
CENTRAL AND EASTERN EUROPE FUND
GOAL AND STRATEGY
The Central and Eastern Europe Fund seeks capital appreciation. To pursue
this goal, it invests primarily in stocks of Central and Eastern European
companies.
Under normal conditions, the fund invests at least 65% of assets in equity
securities of companies located in or conducting a majority of their business in
Central and Eastern Europe. The fund currently intends to focus on the Czech
Republic, Hungary, Poland and Russia. Although it may invest a significant part
of its assets in any of these countries, the fund will not invest more than 40%
of assets (measured at the time of purchase) in any single country. Other
Central and Eastern European countries in which the fund may invest include
Bulgaria, Croatia, Estonia, Latvia, Lithuania, Romania, Slovakia, Slovenia and
Ukraine. Up to 20% of assets (measured at the time of purchase) may be invested
in any one of these countries.
The fund may also invest in equity and debt securities of companies located
in other European countries. These include emerging markets issuers, as well as
companies expected to benefit from economic growth in Central and Eastern
Europe.
The portfolio managers seek to identify countries where economic and
political reforms are most likely to produce above-average long-term returns.
The managers then look for companies best positioned to take advantage of these
developments. The fund's managers may consider factors such as:
- operating ratios relative to other companies in the same industry
- price/cash flow ratio relative to industry peers and market averages
PORTFOLIO INVESTMENTS
This fund invests primarily in equity securities that include:
- common and preferred stocks
- securities convertible into common stocks
- securities such as rights and warrants, whose values are based on common
stocks
The fund may also invest in debt securities, including those rated below
investment grade (junk bonds). To a limited extent, the fund may engage in other
investment practices.
RISK FACTORS
This fund's principal risk factors are:
- market risk
- foreign securities
- emerging-markets focus
- region focus
- country focus
The value of your investment will fluctuate in response to stock market
movements. Because the fund invests internationally, it carries additional
risks, including currency, information and political risks. These risks, as well
as access, operational and other risks associated with the fund's
emerging-markets focus, are defined in "More About Risk."
Also, because the fund targets a single region, you should expect it to be
more volatile than a more geographically diversified equity fund. Fund perform-
12
<PAGE> 19
ance is closely tied to economic and political conditions within Central and
Eastern Europe.
To the extent that the fund invests in start-up and other small companies, it
takes on further risks that could hurt its performance. These risks are defined
in "More About Risk." That section also details other investment practices the
fund may use. Please read "More About Risk" carefully before you invest.
PORTFOLIO MANAGEMENT
Glenn Wellman and Isabel Knight manage the fund's investment portfolio. You
can find out more about them in "Meet the Managers."
INVESTOR EXPENSES
Management fee X.XX%
All other expenses X.XX%
Total expenses X.XX%
13
<PAGE> 20
MORE ABOUT RISK
INTRODUCTION
A fund's goal and principal strategies largely determine its risk profile.
You will find a concise description of each fund's risk profile in "Overview."
The fund-by-fund discussions contain more detailed information. This section
discusses other risks that may affect the funds.
The funds may use certain investment practices that have higher risks
associated with them. However, each fund has limitations and policies designed
to reduce many of the risks. "Other Investment Practices" describes these
practices and the limitations on their use.
TYPES OF INVESTMENT
RISK
The following risks are referred to throughout this prospectus.
ACCESS RISK. Some countries may restrict a fund's access to investments or
offer terms that are less advantageous than those for local investors. This
could limit the attractive investment opportunities available to a fund.
CREDIT RISK. The issuer of a security or the counterparty to a contract may
default or otherwise become unable to honor a financial obligation.
CURRENCY RISK. Fluctuations in exchange rates between the U.S. dollar and
foreign currencies may negatively affect an investment. Adverse changes in
exchange rates may erode or reverse any gains produced by foreign-currency
denominated investments and may widen any losses.
EURO CONVERSION. The planned introduction of a new European currency, the
Euro, may result in uncertainties for European securities in the markets in
which they trade and with respect to the operation of the fund. Currently, the
Euro is expected to be introduced on January 1, 1999 by eleven European
countries who are members of the European Economic and Monetary Union (EMU). The
introduction of the Euro will result in the redomination of European debt and
equity securities over a period of time which may result in various accounting
differences and/or tax treatments which would not otherwise occur. Additional
questions are raised by the fact that certain other EMU members, including the
United Kingdom, will not officially be implementing the Euro on January 1, 1999.
If the introduction of the Euro, or EMU as a whole, does not take place as
planned there could be negative effects such as severe currency fluctuations and
market disruptions.
The adviser and sub-adviser are working to address Euro-related issues and
understand that other key service providers are taking similar steps. However,
at this time no one knows precisely what the degree of impact will be. To the
extent that the market impact or effect on a fund holding is negative, it could
hurt a fund's performance.
EXPOSURE RISK. The risk associated with investments (such as derivatives) or
practices (such as short selling) that increase the amount of money a fund could
gain or lose on an investment.
- HEDGED. Exposure risk could multiply losses generated by a derivative or
practice used for hedging purposes. Such losses should be substantially
offset by gains on the hedged investment. However, while hedging
14
<PAGE> 21
can reduce or eliminate losses, it can also reduce or eliminate gains.
- SPECULATIVE. To the extent that a derivative or practice is not used as a
hedge, the fund is directly exposed to its risks. Gains or losses from
speculative positions in a derivative may be much greater than the
derivative's original cost. For example, potential losses from writing
uncovered call options and from speculative short sales are unlimited.
INFORMATION RISK. Key information about an issuer, security or market may be
inaccurate or unavailable.
INTEREST-RATE RISK. Changes in interest rates may cause a decline in the
market value of an investment. With bonds and other fixed-income securities, a
rise in interest rates typically causes a fall in values, while a fall in
interest rates typically causes a rise in values.
LIQUIDITY RISK. Certain fund securities may be difficult or impossible to
sell at the time and the price that the fund would like. A fund may have to
lower the price, sell other securities instead or forego an investment
opportunity. Any of these could have a negative effect on fund management or
performance.
15
<PAGE> 22
MARKET RISK. The market value of a security may move up and down, sometimes
rapidly and unpredictably. These fluctuations, which are often referred to as
"volatility" may cause a security to be worth less than it was worth at an
earlier time. Market risk may affect a single issuer, industry, sector of the
economy, or the market as a whole. Market risk is common to most
investments -- including stocks and bonds, and the mutual funds that invest in
them.
OPERATIONAL RISK. Some countries have less developed securities markets (and
related transaction, registration and custody practices) that could subject a
fund to losses from fraud, negligence, delay or other actions.
POLITICAL RISK. Foreign-government actions such as capital controls,
nationalizing a company or industry, expropriating assets, or imposing punitive
taxes could have a severe effect on foreign security prices and impair a fund's
ability to repatriate capital or income. Other political risks include economic
policy changes, social and political instability, military action and war.
VALUATION RISK. The lack of an active trading market may make it difficult to
obtain an accurate price for a fund security.
YEAR 2000 PROCESSING RISK. The funds could be hurt if the computer systems
used by their adviser, sub-adviser and other service providers do not correctly
handle the change from "99" to "00" on January 1, 2000. The adviser and
sub-adviser are working to avoid such problems and to obtain assurances from
service providers that they are taking similar steps. However, there can be no
assurance that these efforts will be sufficient.
The Year 2000 issue affects practically all companies, organizations,
governments and markets throughout the world -- including companies or
governmental entities in which the funds invest. However, at this time no one
knows precisely what the degree of impact will be. To the extent that the impact
on a fund holding or on the world's economies is negative, it could hurt a
fund's performance.
16
<PAGE> 23
CERTAIN INVESTMENT PRACTICES
For each of the following practices that a fund expects to use, this table shows
the applicable investment limitation. Risks are indicated for each practice.
KEY TO TABLE:
[x] Permitted without limitation, does not indicate actual use
20% Represents an investment limitation as a percentage of net fund assets
[ ] Permitted, but not expected to be used to a significant extent
<TABLE>
<CAPTION>
EUROPEAN C&E
EQUITY EUROPE
<S> <C> <C>
- ----------------------------------------------------------------------------
BORROWING. The borrowing of money from banks to meet
redemptions or for other temporary or emergency purposes.
Speculative exposure risk. 30% 30%
COUNTRY/REGION FOCUS. Investing a significant portion of
fund assets in a single country or region. Market swings
in the targeted country or region will be likely to have a
greater effect on fund performance than they would in a
more geographically diversified equity fund. Currency,
market, political risks. [x] [x]
EMERGING MARKETS. Countries generally considered to be
relatively less developed or industrialized. Emerging
markets often face economic problems that could subject a
fund to increased volatility or substantial declines in
value. Deficiencies in regulatory oversight, market
infrastructure, shareholder protections and company laws
could expose a fund to risks beyond those normally
encountered in developed countries. Access, currency,
information, liquidity, market, operational, political,
valuation risks. [ ] [x]
FOREIGN SECURITIES. Securities of foreign issuers, which may
include depositary receipts. Currency, information,
liquidity, market, political, valuation risks. [x] [x]
NON-INVESTMENT-GRADE DEBT SECURITIES. Debt securities rated
below BBB/Baa (or of comparable quality, if unrated) are
considered junk bonds. Credit, information, interest rate,
liquidity, market, valuation risks. [ ] 35%
PRIVATIZATION PROGRAMS. Foreign governments may sell all or
part of their interests in enterprises they own or
control. Access, currency, information, liquidity,
operational, political, valuation risks. [x] [x]
RESTRICTED AND OTHER ILLIQUID SECURITIES. Securities with
restrictions on trading, or those not actively traded. May
include private placements. Liquidity, market, valuation
risks. 15% 15%
SECURITIES LENDING. Lending portfolio securities to
financial institutions; a fund receives cash, U.S.
government securities or bank letters of credit as
collateral. Credit, liquidity, market, operational risks. 50% 50%
SHORT-TERM TRADING. Selling a security shortly after
purchase. A fund engaging in short-term trading will have
higher turnover and transaction expenses. Increased
short-term capital gains distributions could raise
shareholders' income tax liability. [x] [x]
</TABLE>
17
<PAGE> 24
<TABLE>
<CAPTION>
EUROPEAN C&E
EQUITY EUROPE
<S> <C> <C>
- ----------------------------------------------------------------------------
START-UP AND OTHER SMALL COMPANIES. Companies with small
relative market capitalizations, including those with
continuous operations of less than three years.
Information, liquidity, market, valuation risks. [ ] [x]
STRUCTURED INSTRUMENTS. Swaps, structured securities and
other instruments (that allow a fund to gain access to the
performance of a benchmark asset such as an index or
selected stocks) where the fund's direct investment in the
benchmark asset is restricted. Access, credit, currency,
exposure, information, interest-rate, liquidity, market,
political, valuation risks. [x] [x]
TEMPORARY DEFENSIVE TACTICS. Placing some or all of a fund's
assets in investments such as money market obligations and
investment-grade debt securities for defensive purposes.
Although intended to avoid losses in unusual market
conditions, defensive tactics might prevent a fund from
achieving its goal. [ ] [ ]
WARRANTS. Options issued by a company granting the holder
the right to buy certain securities, generally common
stock, at a specified price and usually for a limited
time. Liquidity, market, speculative exposure risks. 15% 15%
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The purchase
or sale of securities for delivery at a future date;
market value may change before delivery. Exposure,
liquidity, market risks. 20% 20%
- ----------------------------------------------------------------------------
</TABLE>
18
<PAGE> 25
MEET THE MANAGERS
<TABLE>
<S> <C> <C> <C>
PATRICIA MAXWELL-ARNOT
SUSAN E. BOLAND Managing Director,
Senior Vice President, Credit Suisse Asset
SUSAN BLACK BEA Associates PATRICIA ARNOT Management Limited
- Co-Portfolio Manager, European
Equity Fund since fund inception - Co-Portfolio Manager, European Equity
- Joined BEA in 1996 Fund since fund inception
- Director and portfolio manager with - Joined CSAM in 1995
Barran & Partners Limited, 1995-1996 - Director at Lazard Brothers (London),
- Partner and European portfolio 1984-1994
manager for Teton Partners, 1992-
1995
- Portfolio manager and analyst with
Fidelity Management & Research
Company, 1985-1991
ISABEL KNIGHT GLENN WELLMAN
Director, Managing Director,
Credit Suisse Asset Credit Suisse Asset
ISABEL KNIGHT Management Limited GLENN WELLMAN Management Limited
- Co-Portfolio Manager, Central and - Co-Portfolio Manager, Central and
Eastern Europe Fund since fund Eastern Europe Fund since fund
inception inception
- Joined CSAM in 1997 - Joined CSAM in 1993
- Senior fund manager for emerging - Managing director and chief
Europe with Foreign & Colonial investment officer, Alliance Capital
Emerging Markets, 1995-1997 Limited, 1987-1993
- Portfolio manager for Morgan Stanley
Asset Management, 1992-1995
</TABLE>
Portfolio managers are introduced in alphabetical order.
19
<PAGE> 26
ABOUT YOUR ACCOUNT
SHARE VALUATION
The price of your shares is also referred to as their net asset value (NAV).
The NAV is determined at the close of regular trading on the New York Stock
Exchange (usually 4 p.m. Eastern Time) each day the Exchange is open for
business. It is calculated by dividing the Institutional Class's total assets,
less its liabilities, by the number of Institutional Class shares outstanding.
Each fund values its securities based on market quotations when it calculates
its NAV. If market quotations are not readily available, securities and other
assets are valued by another method that the Board believes accurately reflects
fair value. Debt obligations that will mature in 60 days or less are valued on
the basis of amortized cost, unless the Board determines that using this method
would not reflect the investments' value.
Some fund securities may be listed on foreign exchanges that are open on days
(such as U.S. holidays) when the funds do not compute their prices. This could
cause the value of a fund's portfolio investments to be affected by trading on
days when you cannot buy or sell shares.
BUYING AND SELLING SHARES
Each fund is open on those days when the New York Stock Exchange is open,
typically Monday through Friday. If we receive your request in proper
form by 4 p.m. ET, your transaction will be priced at that day's NAV. If we
receive it after 4 p.m., it will be priced at the next business day's NAV. You
are entitled to dividend and capital-gain distributions (described below) as
soon as your purchase order is executed.
The funds may authorize financial-services firms, such as banks, brokers and
investment advisers (and other intermediaries that the firms may designate), to
accept orders. Your order will be considered received by the fund when received
by an authorized firm (or its designee).
BUYING FUND SHARES
INVEST BY WIRE. Institutional Class shares are generally available only to
investors who have entered into an investment management agreement with the
adviser. Investors should complete an account application and forward it to BEA
Institutional Funds. After calling the Funds to place an order, you may wire
funds to:
State Street Bank and Trust Company ABA# 0110 000 28
Attn: Mutual Funds/Custody Department
BEA Institutional Funds
DDA# 9905-227-6
F/F/C: [Account Number and Registration]
20
<PAGE> 27
You can also purchase shares by mailing a check or Federal Reserve draft to:
BEA Institutional Funds
P.O. Box 8500
Boston, Massachusetts 02266-8500
or overnight to:
BFDS
Attn: BEA Institutional Funds
66 Brooks Drive
Braintree, Massachusetts 02184
Federal Reserve drafts are available at national banks and at state Federal
Reserve member banks. Please indicate the name of the fund being purchased on
any check or Federal Reserve draft. The application contains further
instructions.
INVEST BY PURCHASES IN KIND. With the adviser's permission, investors may
acquire Institutional Class shares in exchange for fund portfolio securities.
The portfolio securities must meet the following requirements:
- Match the investment objectives and policies of the fund to be purchased
- Be considered by the fund's adviser or sub-adviser to be an appropriate fund
investment
- Be easily valued, liquid and not subject to restrictions on transfer
You may have to pay administrative or custody costs if you make purchases in
kind and the execution of your purchase order may be delayed.
INVESTMENT MINIMUMS. Investment minimum requirements for Institutional Class
shares are the following, including investment by purchases in-kind and by
exchange (described below):
Initial investment $3,000,000
Subsequent investment $100,000
Clients of the adviser, along with the adviser's affiliates, client officers
and certain other related persons, may purchase shares without entering into an
investment management agreement with the adviser subject to an initial
investment minimum of $100,000 and a subsequent investment minimum of $1,000.
You must maintain an account balance in a fund of at least $500. If your
account balance falls below the minimum required to keep it open, the fund may
ask you to increase your balance. If it is still below the minimum after 30
days, the fund may close your account and mail you the proceeds.
SELLING FUND SHARES
SELL FUND SHARES IN WRITING. You can sell (redeem) your shares on any day the
fund is open by writing to BEA Institutional Funds. The request must be signed
by all record owners (exactly as registered) or by an authorized person such as
an investment adviser or other agent. Additional documents may be required for
redemption by a corporation, partnership, trust, fiduciary, executor or
administrator or in certain other cases.
SHORT TERM TRADING FEE. A short-term trading fee of 1.0% of the amount
redeemed will be deducted from the redemption proceeds if you sell shares of the
Central and Eastern Europe Fund after holding them less than six months. This
fee, which is currently being
21
<PAGE> 28
waived, is paid to the fund to offset costs associated with short-term
shareholder trading. It does not apply to shares acquired through reinvestment
of distributions. For purposes of computing the short-term trading fee, any
shares bought through reinvestment of distributions will be redeemed first
without the fee, followed by the shares held longest.
REDEMPTION PROCEEDS. After selling fund shares you will receive the proceeds
by either wire or check, mailed within seven days of the redemption. For shares
purchased by check, if the fund has not yet received payment on the check it
will delay sending you the proceeds until your check clears. This may take up to
10 business days after the purchase.
REDEMPTION IN KIND. Each fund reserves the right to make "redemptions in
kind"-- payment in portfolio securities rather than cash -- if the amount you
are redeeming is over $250,000 and could adversely affect fund operations.
EXCHANGING FUND SHARES
You may exchange Institutional Class shares for shares in any other BEA
Institutional Fund by writing to BEA Institutional Funds as described above
under "Buying Fund Shares." If you are purchasing shares in a new fund by
exchange, the new fund account will be registered exactly as the fund from which
you are exchanging. If you want to change registration information or procedures
you must specify this in the redemption request and have all signatures
guaranteed. You can obtain a signature guarantee from most banks or securities
dealers, but not from a notary public.
OTHER POLICIES
TRANSACTION DETAILS. Your purchase order will be canceled and you may be
liable for losses or fees incurred by the fund if:
- your investment check or Federal Reserve draft does not clear
If you wire money without first calling the fund to place an order, and your
wire arrives after the close of the New York Stock Exchange, then your order
will not be executed until the end of the next business day. In the meantime
your payment will be held uninvested.
Uncashed redemption or distribution checks do not earn interest.
SPECIAL SITUATIONS. Each fund reserves the right to:
- refuse any purchase or exchange request, including those from
any person or group who, in the fund's view, is likely to engage in excessive
trading
- change or discontinue its exchange privilege after 60 days' notice to current
investors, or temporarily suspend this privilege during unusual market
conditions
- change its minimum investment amounts after 15 days' notice to current
investors of any increases
- suspend redemptions or postpone payment dates as permitted by law
- stop offering its shares for a period of time (such as when management
believes that a substantial increase in assets could adversely affect it)
22
<PAGE> 29
ACCOUNT CHANGES. You should update your account records whenever you change
your address. You can call 800-401-2230 to change your account registration. You
can also call this number for information on how to change your account
privileges.
ACCOUNT STATEMENTS
In general, you will receive account statements as follows:
- after every transaction that affects your account balance (except for
distribution reinvestments and automatic transactions)
- after any changes of name or address of the registered owner(s)
- otherwise, every quarter
You will receive annual and semiannual financial reports. Every year you also
should receive, if applicable, a Form 1099 tax information statement mailed by
January 31.
DISTRIBUTIONS
As a fund investor, you are entitled to your share of the fund's net income
and gains on its investments. The fund passes these earnings along to its
shareholders as distributions.
Each fund earns dividends from stocks and interest from bond, money market
and other investments. These are passed along as dividend distributions. A fund
realizes capital gains whenever it sells securities for a higher price than it
paid for them. These are passed along as capital gain distributions.
Each fund typically distributes substantially all of its net income and
capital gains to shareholders annually, usually in December.
Most investors have their distributions reinvested in additional shares of
the same fund. Alternatively, you can choose to have a check for your
distributions mailed to you or sent by electronic transfer. Distributions will
be reinvested unless you select another option on your account application.
TAXES
As with any investment, you should consider how your investment in a fund
will be taxed. Unless your account is an IRA or other tax-advantaged account,
you should be aware of the potential tax implications. Please consult your tax
professional concerning your own tax situation.
TAXES ON DISTRIBUTIONS
As long as a fund continues to meet the requirements for being a
tax-qualified regulated investment company, it pays no federal income tax on the
earnings it distributes to shareholders.
Consequently, distributions you receive from a fund, whether reinvested or
taken in cash, are generally considered taxable. Distributions from a fund's
long-term capital gains are taxed as capital gains; distributions from other
sources are generally taxed as ordinary income.
Some dividends paid in January may be taxable as if they had been paid the
previous December. If you buy shares shortly before or on the "record date" -
the date that establishes you as the person to receive the upcoming distribu-
23
<PAGE> 30
tion -- you will receive a portion of the money you just invested in the form of
a taxable distribution.
The Form 1099 that is mailed to you every January details your distributions
and their federal tax category.
TAXES ON TRANSACTIONS
Any time you sell or exchange shares, it is considered a taxable event for
you. Depending on the purchase price and the sale price of the shares
you sell or exchange, you may have a gain or loss on the transaction. In
addition, you may have a gain or loss when you purchase shares in exchange for
fund portfolio securities. You are responsible for any tax liabilities generated
by your transactions.
24
<PAGE> 31
OTHER INFORMATION
ABOUT THE DISTRIBUTOR
Counsellors Securities Inc. is responsible for:
- making the funds available to you
- account servicing and maintenance
- sub-transfer agency services, sub-accounting services, and administrative
services related to sale of the Institutional Class
Some financial-services firms and their investment professionals may receive
extra compensation. This compensation, which the distributor or adviser pays out
of their own resources, may include promotional incentives as well as (for the
distributor) reimbursement for marketing costs. The distributor or adviser may
also provide opportunities to attend events such as business meetings,
conferences and training programs. Travel, meals and lodging may be included.
25
<PAGE> 32
FOR MORE INFORMATION
More information about these funds is available free upon request, including
the following:
ANNUAL/SEMIANNUAL
REPORT TO SHAREHOLDERS
Includes financial statements, portfolio investments, detailed performance
information and the auditor's report.
The Annual Report also contains a letter from the fund's manager discussing
market conditions and investment strategies that significantly affected fund
performance during its past fiscal year.
STATEMENT OF
ADDITIONAL
INFORMATION (SAI)
Provides more details about the fund. A current SAI is on file with the
Securities and Exchange Commission (SEC) and is incorporated by reference.
You may visit the SEC's Internet Web site (www.sec.gov) to view the
SAI, material incorporated by reference and other information. You can also
obtain copies by visiting the SEC's Public Reference Room in Washington, DC
(phone 800-SEC-0330) or by sending your request and a duplicating fee to the
SEC's Public Reference Section, Washington, DC 20549-6009.
Please contact BEA Institutional Funds to obtain information:
By telephone:
800-401-2230
By mail:
BEA Institutional Funds
P.O. Box 8500
Boston, MA 02266-8500
By overnight or courier service:
BFDS
Attn: BEA
Institutional Funds
66 Brooks Drive
Braintree, MA 02171
SEC file numbers:
BEA Institutional/Warburg Pincus European Equity Fund 811-xxxx
BEA Institutional/Warburg Pincus Central and Eastern Europe Fund 811-xxxx
26
<PAGE> 33
[LOGO]
BEA INSTITUTIONAL FUNDS
P.O. BOX 8500, BOSTON, MA 02266-8500
800-ASK4BEA (800-401-2230)
COUNSELLORS SECURITIES INC., DISTRIBUTOR. WPGBT-1-0498
<PAGE> 34
SUBJECT TO COMPLETION, DATED SEPTEMBER 3, 1998
STATEMENT OF ADDITIONAL INFORMATION
October 1, 1998
WARBURG PINCUS EUROPEAN EQUITY FUND
WARBURG PINCUS CENTRAL AND EASTERN EUROPE FUND
P.O. Box 9030, Boston, Massachusetts 02205-9030
For information, call (800) WARBURG
BEA INSTITUTIONAL EUROPEAN EQUITY FUND
BEA INSTITUTIONAL CENTRAL AND EASTERN EUROPE FUND
P.O. Box 8500, Boston, Massachusetts 02266-85000
For information, call (800) 401-2230
<TABLE>
<CAPTION>
CONTENTS
Page
----
<S> <C>
ORGANIZATION of the FUNDS.................................................. 2
INVESTMENT OBJECTIVES and POLICIES......................................... 2
MANAGEMENT of the FUNDS.................................................... 35
ADDITIONAL PURCHASE and REDEMPTION INFORMATION............................. 45
EXCHANGE PRIVILEGE......................................................... 46
ADDITIONAL INFORMATION CONCERNING TAXES.................................... 47
DETERMINATION of PERFORMANCE............................................... 52
INDEPENDENT ACCOUNTANTS and COUNSEL........................................ 53
FINANCIAL STATEMENTS....................................................... 53
APPENDIX - DESCRIPTION of RATINGS.......................................... A-1
</TABLE>
This combined Statement of Additional Information is meant to
be read in conjunction with the combined Prospectus for the Common Shares of
Warburg Pincus European Equity Fund (the "European Equity Fund") and Warburg
Pincus Central and Eastern Europe Fund (the "Central and Eastern Europe Fund")
(collectively the "Funds"), and with the combined Prospectus for the
Institutional Shares of each Fund, which are offered under the names BEA
Institutional European Equity Fund and BEA Institutional Central and Eastern
Europe Fund, each dated October 1, 1998, as amended or supplemented from time to
time (collectively the "Prospectus"), 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 a Fund should be made
solely upon the information contained herein. Copies of each Fund's Prospectus
and information regarding a Fund's current performance may be obtained by
calling (800) 927-2874 (Common Shares) or (800) 401-2230 (Institutional
<PAGE> 35
Shares). Information regarding the status of shareholder accounts may also be
obtained by calling the above numbers or by writing to a Fund, P.O. Box 9030,
Boston, Massachusetts 02205-9030 (Common Shares) or P.O. Box 8500, Boston,
Massachusetts 02266-8500 (Institutional Shares).
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> 36
ORGANIZATION OF THE FUNDS
The Funds are diversified open-end management investment
companies that were incorporated under the laws of the State of Maryland on July
27, 1998. Each Fund is authorized to offer three classes of shares, one of
which, the Institutional Shares, is offered under the name BEA Institutional
Funds. Unless otherwise indicated, references to a "Fund" apply to all classes
of shares of that Fund as a group, including its Institutional Shares.
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of each
Fund's investment objectives and policies in the Prospectus. There are no
assurances that the Funds will achieve their investment objectives.
The investment objective of the European Equity Fund is
capital appreciation, which it seeks to achieve by investing primarily in stocks
of Western European companies. The investment objective of the Central and
Eastern Europe Fund is capital appreciation, which it seeks to achieve by
investing primarily in stocks of Central and Eastern European companies.
The European Equity Fund: As stated in the Prospectus, the
European Equity Fund, under normal circumstances, will invest at least 65% of
its total assets in equity securities of companies (i) that, alone or on a
consolidated basis, derive 50% or more of their annual revenue from either goods
produced, sales made or services performed in Western European markets; (ii)
that are organized under the laws of, and with a principal office in, a Western
European country; or (iii) the principal securities trading market for which is
in a Western European market. Determinations as to eligibility will be made by
the Fund's investment adviser or sub-investment adviser (each an "Adviser")
based on publicly available information and inquiries made to the companies.
Additional countries may in the future be considered part of a Fund's definition
of Western Europe and appropriate spheres of investment by a Fund. The European
Equity Fund intends to invest at least 80% of its assets in equity securities of
Western European companies.
The Central and Eastern Europe Fund: As stated in the
Prospectus, the Central and Eastern Europe Fund, under normal circumstances,
will invest at least 65% of its total assets in equity securities of companies
(i) that, alone or on a consolidated basis, derive 50% or more of their annual
revenue from either goods produced, sales made or services performed in Central
and Eastern European markets; (ii) that are organized under the laws of, and
with a principal office in, a Central or Eastern European country; or (iii) the
principal securities trading market for which is in a Central or Eastern
European market. Determinations as to eligibility will be made by the Fund's
Adviser based on publicly available information and inquiries made to the
companies. The Fund considers Central Europe to be the area north of
2
<PAGE> 37
Italy and the former Yugoslavia, west of Romania and the former Soviet Union,
east of Switzerland and Germany and south of the Baltic Sea. The Fund considers
Eastern Europe to be currently comprised of, but not limited to, the countries
of the former Warsaw Pact and the European successor states of the former Soviet
Union. Additional countries may in the future be considered part of a Fund's
definition of Central and Eastern Europe and appropriate spheres of investment
by a Fund. Investment companies that invest principally in securities of Central
or Eastern European companies will also be considered to be Central or Eastern
European companies, as will American Depositary Receipts and Global Depositary
Receipts with respect to those securities. By investing in shares of investment
companies that invest in Central and Eastern Europe, the Fund will indirectly
pay a portion of the operating expenses, management expenses and brokerage costs
of such companies.
Options, Futures and Currency Exchange Transactions
Securities Options. Each Fund may write covered put and call options on
stock and debt securities and may purchase covered put and call options that are
traded on foreign and U.S. exchanges, as well as over-the-counter ("OTC").
Each 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, a 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,
a 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 a 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 a Fund that are deemed covered by
virtue of a 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 a Fund has written
options may exceed the time within which a Fund must make delivery in accordance
with an exercise notice. In these instances, a Fund may
3
<PAGE> 38
purchase or temporarily borrow the underlying securities for purposes of
physical delivery. By so doing, a Fund will not bear any market risk, since a
Fund will have the absolute right to receive from the issuer of the underlying
security an equal number of shares to replace the borrowed securities, but a
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 a Fund may write covered call options. For example, if a 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, a 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 a 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. Each Fund may write (i) in-the-money call options when a Fund's
Adviser 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
the Adviser 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 the Adviser 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, each 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 a Fund prior to the
exercise of options that it has purchased or written, respectively, of options
of the same series) in which a 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 a Fund has purchased an option and engages in a closing sale
transaction, whether a 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 a Fund initially paid for the original option plus the related
transaction costs. Similarly, in cases where a 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.
4
<PAGE> 39
A Fund may engage in a closing purchase transaction to realize a profit, to
prevent an underlying security with respect to which it has written an option
from being called or put or, in the case of a call option, to unfreeze an
underlying security (thereby permitting its sale or the writing of a new option
on the security prior to the outstanding option's expiration). The obligation of
a Fund under an option it has written would be terminated by a closing purchase
transaction, but a Fund would not be deemed to own an option as a result of the
transaction. So long as the obligation of a Fund as the writer of an option
continues, a Fund may be assigned an exercise notice by the broker-dealer
through which the option was sold, requiring a Fund to deliver the underlying
security against payment of the exercise price. This obligation terminates when
the option expires or a Fund effects a closing purchase transaction. A 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, a 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. Each Fund, however, intends to purchase OTC options only from
dealers whose debt securities, as determined by its Adviser are considered to be
investment grade. If, as a covered call option writer, a 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, a 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 Funds and
other clients of their Advisers and certain of their 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. Each 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
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in the index, fluctuating with changes in the market values of the securities
included in the 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. Each 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 a 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 a Fund, a 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, a 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 a 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 a Fund
originally wrote the option. Although each 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 a Fund, there can be no assurance
that a 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 a Fund. Until a 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 a 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, a Fund may be unable to liquidate a dealer
option.
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Futures Activities. Each 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.
No Fund will 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 a Fund's net asset value after taking into account unrealized
profits and unrealized losses on any such contracts it has entered into. Each
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 a Fund's policies. There is no
overall limit on the percentage of a Fund's assets that may be at risk with
respect to futures activities.
The over the counter market in forward foreign currency exchange
contracts offers less protection against defaults by the other party to such
instruments than is available for currency instruments traded on an exchange.
Such contracts are subject to the risk that the counterparty to the contract
will default on its obligations. Since these contracts are not guaranteed by an
exchange or clearinghouse, a default on the contract would deprive a Fund of
unrealized profits, transaction costs or the benefits of a currency hedge or
force a Fund to cover its purchase or sale commitments, if any, at the current
market price. Currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors as seen from an international perspective. Currency exchange
rates also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks, or the failure to intervene, or by currency
controls or political developments in the U.S. or abroad.
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 a Fund upon entering into a
futures contract. Instead, a 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
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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 a 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
a 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." A Fund will also incur
brokerage costs in connection with entering into futures transactions.
At any time prior to the expiration of a futures contract, a Fund may
elect to close the position by taking an opposite position, which will operate
to terminate a Fund's existing position in the contract. Positions in futures
contracts and options on futures contracts (described below) may be closed out
only on the exchange on which they were entered into (or through a linked
exchange). No secondary market for such contracts exists. Although each 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 a Fund to substantial losses. In such event, and in the
event of adverse price movements, a Fund would be required to make daily cash
payments of variation margin. In such situations, if a 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 a
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 a Fund's
performance.
Options on Futures Contracts. Each 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
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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 a
Fund.
Currency Exchange Transactions. The value in U.S. dollars of the assets
of a Fund that are invested in foreign securities may be affected favorably or
unfavorably by changes in exchange control regulations, and a 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. Each Fund will conduct its currency exchange
transactions (i) on a spot (i.e., cash) basis at the rate prevailing in the
currency exchange market, (ii) through entering into futures contracts or
options on such contracts (as described above), (iii) through entering into
forward contracts to purchase or sell currency or (iv) by purchasing
exchange-traded currency options.
Forward Currency Contracts. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract as agreed upon by the
parties, at a price set at the time of the contract. These contracts are entered
into in the interbank market conducted directly between currency traders
(usually large commercial banks and brokers) and their customers. Forward
currency contracts are similar to currency futures contracts, except that
futures contracts are traded on commodities exchanges and are standardized as to
contract size and delivery date.
At or before the maturity of a forward contract, a 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 a Fund retains the portfolio security and engages in an offsetting
transaction, a 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. Each 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. Each 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 a 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. No Fund may
position hedge to an extent greater than the aggregate market value (at the time
of entering into the hedge) of the hedged securities.
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A decline in the U.S. dollar value of a foreign currency in which a
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, a Fund may purchase currency put options.
If the value of the currency does decline, a 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, a Fund may purchase
call options on the particular currency. The purchase of these options could
offset, at least partially, the effects of the adverse movements in exchange
rates. The benefit to a 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, a 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
a Fund's investments and a currency hedge may not be entirely successful in
mitigating changes in the value of a Fund's investments denominated in that
currency. A currency hedge, for example, should protect a bond denominated in a
foreign currency against a decline in the particular currency, but will not
protect a Fund against a price decline if the issuer's creditworthiness
deteriorates.
Swaps. Each Fund may enter into swaps relating to indexes, currencies
and equity interests of foreign issuers without limit. A swap transaction is an
agreement between a Fund and a counterparty to act in accordance with the terms
of the swap contract. Index swaps involve the exchange by a 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. Each 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 a Fund anticipates purchasing at a later date. Each 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, 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,
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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
Each 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 a 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 a Fund is
contractually obligated to make. If the counterparty to a swap defaults, a
Fund's risk of loss consists of the net amount of payments that a Fund is
contractually entitled to receive. Where swaps are entered into for good faith
hedging purposes, the Adviser believes such obligations do not constitute senior
securities under the 1940 Act and, accordingly, will not treat them as being
subject to a Fund's borrowing restrictions. Where swaps are entered into for
other than hedging purposes, a Fund will segregate an amount of cash or liquid
securities having a value equal to the accrued excess of its obligations over
entitlements with respect to each swap on a daily basis.
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, each 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 a Fund, an increase in the value of the
futures contracts could only mitigate, but not totally offset, the decline in
the value of a Fund's assets.
In hedging transactions based on an index, whether a 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 a 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, a 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
a 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 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
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<PAGE> 46
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 each Fund's Adviser still may not result in a
successful hedging transaction.
Each Fund will engage in hedging transactions only when deemed
advisable by its Adviser, and successful use by a Fund of hedging transactions
will be subject to its Adviser'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 a Fund's
performance.
Asset Coverage for Forward Contracts, Options, Futures and Options on
Futures. Each 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 a 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 a Fund of cash or liquid securities.
For example, a call option written by a Fund on securities may require
a 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 a Fund on an index may require a 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 a Fund may require a Fund to
segregate assets (as described above) equal to the exercise price. A 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 a Fund. If a Fund holds a futures
or forward contract, a 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. A Fund may enter into fully or partially offsetting transactions
so that its net position, coupled with any segregated assets (equal to any
remaining obligation), equals its net obligation. Asset coverage may be achieved
by other means when consistent with applicable regulatory policies.
Additional Information on Other Investment Practices
Foreign Investments.
Investors should recognize that investing in foreign companies, whether
in emerging or more developed countries, involves certain risks, including those
discussed below, which are not typically associated with investing in U.S.
issuers. These risks include
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currency exchange rates and exchange control regulations, less publicly
available information, different accounting and reporting standards, less liquid
markets, more volatile markets, higher brokerage commissions and other fees,
possibility of nationalization or expropriation, confiscatory taxation,
political instability, and less protection provided by the judicial system. In
addition, changes in government administrations or economic or monetary policies
in the U.S. or abroad could result in appreciation or depreciation of
portfolio securities and could favorably or adversely affect a Fund's
operations. Furthermore, the economies of individual foreign nations may differ
from that of the U.S., whether favorably or unfavorably, in areas such as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Any foreign
investments made by the Funds must be made in compliance with U.S. and foreign
currency restrictions and tax laws restricting the amounts and types of foreign
investments.
Foreign Currency Exchange. Since the Funds will invest in securities
denominated in currencies other than the U.S. dollar, and since the Funds may
temporarily hold funds in bank deposits or other money market investments
denominated in foreign currencies, the Funds 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 Funds' 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 Funds. 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 Funds may use hedging
techniques with the objective of protecting against loss through the fluctuation
of the value of foreign currencies against the U.S. dollar, particularly the
forward market in foreign exchange, currency options and currency futures. See
"Currency Transactions" and "Futures Activities" above.
EURO CONVERSION. The planned introduction of a single European
currency, the Euro, on January 1, 1999 for participating European nations in
the Economic and Monetary Union presents unique risks and uncertainties for
investors in those countries, including (i) whether the payment and operational
systems of banks and other financial institutions will be ready by the
scheduled launch date; (ii) the creation of suitable clearing and settlement
payment schemes for the Euro; (iii) the legal treatment of outstanding
financial contracts after January 1, 1999 that refer to existing currencies
rather than the Euro; (iv) the fluctuation of the Euro relative to non-Euro
currencies during the transition period from January 1, 1999 to December 31,
2000 and beyond; and (v) whether the interest rate, tax and labor regimes of
the European countries participating in the Euro will converge over time.
Further, the conversion of the currencies of other Economic and Monetary Union
countries, such as the United Kingdom, and the admission of other countries,
including Central and Eastern European countries, to the Economic and Monetary
Union could adversely affect the Euro. These or other factors may cause market
disruptions before or after the introduction of the Euro and could adversely
affect the value of foreign securities and currencies held by the Funds. The
Euro conversion also raises tax issues such as whether the conversion of a
non-Euro currency to the Euro creates a "realization event" for a financial
instrument denominated in the non-Euro currency and the appropriate time to
recognize any gain or loss. Depending on how the tax authorities rule on these
issues, the Euro conversion may result in taxable gain or loss on non-Euro
denominated instruments that have not been sold by the Funds at the time of
conversion.
Information. The majority of the securities held by the Funds 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 Funds, political or social instability,
or domestic developments which could affect U.S. investments in those and
neighboring countries.
Emerging Markets. Investing in securities of issuers located in
"emerging markets" (less developed countries located outside of the U.S.)
involves not only the risks
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described above 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 markets countries during the latter part of 1997
and the first half of 1998. Other characteristics of emerging markets that may
affect investment 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 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.
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 Funds to market and foreign exchange fluctuations brought about by such
delays, and due to the corresponding negative impact on the Funds' liquidity,
the Funds will take reasonable steps to mitigate investing in countries which
are known to experience settlement delays which may expose the Funds to
unreasonable risk of loss.
Increased Expenses. The operating expenses of the Funds can be expected
to be higher than that of an investment company investing exclusively in U.S.
securities, since the expenses of the Funds, 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. Each Fund may invest in debt securities (other
than money market obligations) and preferred stocks that are not convertible
into common stock for the purpose of seeking capital appreciation. Each Fund's
holdings of debt securities will be considered investment grade at the time of
purchase, except that each Fund may purchase a certain amount of below
investment grade securities (see "Below Investment Grade Securities"). 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 Service ("S&P") or, if unrated, is determined to be of comparable
quality by a Fund's Adviser. 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 Funds may invest
generally consist of obligations issued or backed by national, state or
provincial governments or similar
14
<PAGE> 49
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 Union 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, capital reinvestment, resource self-sufficiency, and
balance of payments positions. The Funds 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.
Sovereign Debt. Investments in sovereign debt involve special risks.
The issuer of the debt or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal or interest
when due in accordance with the terms of such debt, and a Fund may have limited
legal recourse in the event of a default.
Sovereign debt differs from debt obligations issued by private entities
in that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore somewhat limited. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt obligations, are of considerable significance. Also, there can be no
assurance that the holders of commercial bank loans to the same sovereign entity
may not contest payments to the holders of sovereign debt in the event of
default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which a
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local government
or agency.
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<PAGE> 50
The occurrence of political, social or diplomatic changes in one or
more of the countries issuing sovereign debt could adversely affect a Fund's
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their sovereign debt. While the Adviser intends to manage the Funds in a manner
that will minimize the exposure to such risks, there can be no assurance that
adverse political changes will not cause a Fund to suffer a loss of interest or
principal on any of its holdings.
Investors should also be aware that certain sovereign debt instruments
in which a Fund may invest involve great risk. Sovereign debt issued by issuers
in many emerging markets generally is deemed to be the equivalent in terms of
quality to securities rated below investment grade by Moody's and S&P. Such
securities are regarded as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligations and involve major risk exposure to adverse conditions.
Some of such sovereign debt, which may not be paying interest currently or may
be in payment default, may be comparable to securities rated "D" by S&P or "C"
by Moody's. A Fund may have difficulty disposing of certain sovereign debt
obligations because there may be a limited trading market for such securities.
Because there is no liquid secondary market for many of these securities, the
Funds anticipate that such securities could be sold only to a limited number of
dealers or institutional investors. The lack of a liquid secondary market may
have an adverse impact on the market price of such securities and a Fund's
ability to dispose of particular issues when necessary to meet a Fund's
liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities also may make it more difficult for a
Fund to obtain accurate market quotations for purposes of valuing a Fund's
portfolio and calculating its net asset value. When and if available, fixed
income securities may be purchased by a Fund at a discount from face value.
However, the Funds do not intend to hold such securities to maturity for the
purpose of achieving potential capital gains, unless current yields on these
securities remain attractive. From time to time, a Fund may purchase securities
not paying interest at the time acquired if, in the opinion of its Adviser, such
securities have the potential for future income or capital appreciation.
Privatizations. Each Fund may invest in privatizations (i.e. foreign
government programs of selling interests in government-owned or controlled
enterprises). The ability of U.S. entities, such as the Funds, to participate in
privatizations may be limited by local law, or the terms for participation may
be less advantageous than for local investors. There can be no assurance that
privatization programs will be available or successful.
Central and Eastern European Countries. Both Funds will be exposed to
the risks of investing in Central and Eastern Europe although to a different
extent. The risks normally associated with investing in foreign securities are
increased in Central and Eastern European countries due to the infancy of
political and economic structures. As noted in the Prospectus, the Funds may
invest in Russia, a country facing serious economic and political issues and
whose stock markets have experienced extreme volatility and illiquidity in
recent months. Many of these countries lack the political and economic
stability characteristic of more developed countries, and political or social
developments may adversely affect the value of a Fund's investment in a
material way. The small size and inexperience of the securities markets and the
limited volume of trading in such securities may make a Fund's investments
illiquid and more volatile than investments in more developed countries. There
may be little financial or accounting
16
<PAGE> 51
information available with respect to companies located in certain Central and
Eastern European countries and it may be difficult to assess the value of an
investment in such companies. These securities markets are substantially
smaller, less liquid and significantly more volatile than U.S. or Western
European markets. As a result, obtaining prices on portfolio securities from
independent sources may be more difficult. These factors may make it more
difficult for a Fund to calculate an accurate net asset value on a daily basis
and to respond to significant shareholder redemptions.
The value of a Fund's assets may be materially, adversely affected by
political, economic, and social factors, changes in the law or regulations of
Central and Eastern European countries and the status of political and economic
foreign relations of Central and Eastern European countries. Communist factions
continue to play a role in the political structure of some of these countries
and there is also speculation that organized crime exerts significant influence
on certain countries in this region. Developments in the region may also affect
the value of a Fund's assets. Actions of Central and Eastern European
governments could significantly adversely affect private sector companies and
the Funds, market conditions, and prices and yields of securities in each
Fund's portfolio. Despite privatization programs that have been implemented,
the governments of Central and Eastern European countries have exercised and
continue to exercise significant influence over many aspects of the local
economies, and the number of public sector enterprises in Central and Eastern
Europe is substantial. New governments and new economic policies may also have
an unpredictable adverse impact on Central and Eastern European economies and,
consequently, on a Fund's investments.
Many of the countries in Central and Eastern Europe experienced
extremely high rates of inflation, particularly in the early 1990s when central
planning was first being replaced by the capitalist free market system. As a
result, the exchange rates of such countries experienced significant
depreciation relative to the U.S. dollar. The possibility of significant loss
arising from foreign currency depreciation or devaluation must be considered
as a serious risk. Although Central and Eastern European governments are
currently implementing reforms directed at political and economic
liberalization, there is no assurance that these reforms will continue or, if
continued, will be successful.
The economies of Central and Eastern European countries are heavily
dependent on the manufacturing sector, and adverse developments affecting this
sector in a particular country could adversely affect the economy as a whole.
Labor unrest resulting from economic instability in the region could adversely
affect the profitability and success of businesses in this and other sectors. In
addition, these economies generally are heavily dependent upon international
trade and have been and may continue to be adversely affected by trade barriers
and other protectionist measures, exchange controls and relative currency
values. These economies may also be adversely affected by economic or political
developments in or controversies with neighboring countries and major trading
partners. The economies of certain Central and Eastern European countries are
heavily dependent on oil and gas imported from Russia via pipelines through the
Ukraine and the Slovak Republic. Political or economic turmoil in any one of
these nations could result in an energy crisis that could affect the economic
stability of certain Central and Eastern European countries, and consequently
adversely affect the Funds. Political or economic turmoil in nearby regions
could also lead to an influx of refugees to one or more Central or Eastern
European countries with adverse economic and political effects on such
countries.
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<PAGE> 52
Investments in Central and Eastern European countries may include the
securities of both large and small companies. Small companies may offer greater
opportunities for capital appreciation than larger companies, but these
investments may involve certain special risks. Small companies may have limited
product lines, markets, or financial resources and may be dependent on a limited
management group. Securities issued by small companies may trade less frequently
and in smaller volume than more widely held securities issued by large
companies. Also, the values of securities issued by small companies may
fluctuate more sharply than those issued by larger companies, and a Fund may
experience some difficulty in establishing or closing out positions in small
company securities at prevailing prices.
Central and Eastern European countries may be subject to a greater
amount of social, political and economic instability resulting from
extra-constitutional changes or attempted changes in government, popular unrest
and hostile relations with neighboring countries or territories. Investments in
Central and Eastern Europe could also be adversely affected by developments in
other emerging markets, such as Asia or Latin America.
Some Central and Eastern European countries, especially Russia, have
substantial external debt. Although, some countries have entered into debt
restructuring agreements with foreign creditors and some are negotiating the
rescheduling of their debt, there can be no assurance that such negotiations
will succeed. In many cases, it may be necessary to adopt economic policies to
facilitate debt service requirements (such as taking steps to control
inflation) and these measures may lead to periods of lower economic growth.
Central and Eastern European countries have been characterized by declining
real gross domestic product, high inflation, rising unemployment and declining
personal income (in real terms). Countries in this region lack a developed
infrastructure, telecommunications generally are poor and banks and financial
systems are not well developed. There is also a limited supply of domestic
savings in the region and businesses can experience difficulty in obtaining
working capital.
Many Central and Eastern European currencies are not fully convertible.
Some currencies have depreciated in value substantially against the U.S. dollar
and could depreciate further in the future. Since the net asset value of each
Fund will be calculated and reported in U.S. dollars, depreciation in these
currencies could adversely impact a Fund's performance.
Changes in local exchange control regulations, tax laws, withholding
taxes and economic or monetary policies may also affect the value of an
investment in the Funds, and may give rise to a capital gains tax liability on a
Fund's investment gains. The tax laws and regulations are not well drafted and
are difficult to comply with, and a company may incur substantial penalties
despite using all reasonable efforts to ensure compliance. The tax laws and
regulations may be given retroactive effect which could result in additional
taxes that are not taken into account when calculating a Fund's net asset value.
The system of taxation in certain Central and Eastern European countries may
deter investment and hinder financial stability by concentrating on the taxation
of industry with relatively little emphasis on individual taxation. Finally,
accounting standards do not generally correspond to generally accepted
accounting principles or accepted international accounting standards, and a Fund
may have access to less financial information on investments than would normally
be the case in more sophisticated markets.
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<PAGE> 53
Many Central and Eastern European businesses do not have established
histories of operating within a market-oriented economy. These businesses
generally lack experience operating in the free market environment, modern
technology and a sufficient capital base with which to develop and expand
operations. Many of these countries are in need of restructuring their
industries to, among other things, close out-dated facilities and increase
investment in technology and management.
The securities in which a Fund may invest may not be listed or traded
on any securities market for the foreseeable future and, in some cases, may not
be registered for resale under the securities laws of any country. There may be
significant disparities between the prices paid for securities in private
transactions and the prices at which the same securities trade on an exchange or
in an over-the-counter market. These factors may limit a Fund's ability to
obtain accurate market quotations for purposes of valuing its portfolio
securities and calculating its net asset value. Although, many Central and
Eastern European countries are developing stock exchanges and formulating rules
and regulations, it is unlikely that these stock exchanges will, in the
foreseeable future, offer the liquidity available in western securities markets.
Accordingly, there may be no readily available market for the timely liquidation
of investments made by a Fund, particularly in periods when the relevant market
is declining.
The lack of environmental controls in Central and Eastern Europe has
led to widespread pollution and the legislative framework for environmental
liability and the extent of any exposure of businesses to the costs of pollution
clean-up have not been fully established. The extent of responsibility, if any,
for pollution-related liabilities of any business may not be determinable at the
time a Fund is considering an investment. Environmental liability could have a
significant adverse effect on the performance of companies in which a Fund
invests.
Legislative change in Central and Eastern Europe has been rapid, but it
is difficult to anticipate the impact of legislative reforms on the companies in
which a Fund will invest. Although there appears to be political support for
legislative change to a market economy, it is not certain that legislation when
enacted will advance this objective or that this support will continue. It will
be more difficult for a Fund to obtain effective redress or enforcement of its
rights in certain Central and Eastern European countries than in western
jurisdictions. Also, the judicial and civil procedure system in this region has
not been modernized to a material extent and many courts lack experience in
commercial dispute resolution. Further, many of the procedural remedies for
enforcement and the protection of legal rights typically found in western
jurisdictions are not available in Central and Eastern Europe.
Employment and labor legislation can be pro-employee, particularly in
matters such as termination of employment, maternity benefits, overtime
restrictions and trade union participation. Laws regulating ownership, control
and corporate governance of companies as well as protection of minority
shareholders have been adopted recently and have virtually never been tested in
the courts. The judicial systems have very limited experience with the
adjudication of securities claims and corporate disputes. Consequently, it may
be more difficult for a Fund to obtain a judgment in a court outside the U.S. to
the extent that there is a default with respect to a security of a Central or
Eastern European issuer or a Fund has any other claim against such an issuer.
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<PAGE> 54
Disclosure and reporting requirements are minimal and anti-fraud and
insider trading legislation is generally rudimentary. Due to the newness of
Central and Eastern European securities markets, there is a low level of
monitoring and regulation of the markets and the activities of investors in such
markets, and there has been no or very limited enforcement to date of existing
regulations. The concept of fiduciary duties on the part of management or
directors to their companies as a whole is undeveloped. The regulatory
requirements for participants in the securities markets in the region as well as
the structure of relevant regulatory authorities are subject to constant change.
This may result in challenges to the validity of any license, permission,
consent or registration which is required in the particular country and which
were originally obtained in compliance with the laws.
Foreign investment in the securities of Central and Eastern European
companies is restricted and controlled to varying degrees. These restrictions or
controls may limit or preclude foreign investment in certain cases, may require
government approval prior to foreign investment, or may give preferential
treatment to nationals over foreign investors. Issuers in certain Central and
Eastern Europe countries are allowed by law to restrict the rights of foreign
investors to participate in the subscription of securities. This may result in
the disenfranchisement of foreign investors in respect of their rights to
participate in bonus issues, rights and issues or other corporate actions. This
may result in dilution of holdings and loss of voting power. A high proportion
of the shares of many Central and Eastern European companies are held by a
limited number of investment funds and other institutional investors, which may
limit the number of shares available for investment by the Funds. In addition,
minority shareholders in companies, such as the Funds, have limited rights
against actions taken by controlling parties, and those actions may adversely
affect the value of a Fund's holdings. A limited number of issuers represents a
disproportionately large percentage of market capitalization and trading value.
The prices at which a Fund may acquire investments may be affected by
the market's anticipation of a Fund's investing. In addition, trading on
material non-public information and securities transactions by brokers in
anticipation of transactions by a Fund in particular securities may impact such
prices. These and other factors may also affect the rate at which a Fund can
initially invest its assets.
Shareholders should be aware that settlement and safe custody of
securities in Central and Eastern Europe involves certain risks and
considerations which do not normally apply in more developed countries.
Verification and perfection of legal ownership in securities also differs and
are less effective than in Western Europe. In certain countries, securities are
issued only in bearer form. In other countries, no certificates are issued and
legal ownership of shares is perfected through registration either in the share
register of the company or at a central depository, in either case by a third
party over whom a Fund may not have control. In certain countries, the market
practice is settlement against production of evidence of title in the form of
extracts from the shareholders' register. Such extracts do not in themselves
constitute securities or constitute definitive evidence of title or ownership
rights. As such, these extracts do not guarantee that title to the securities
has in fact passed. In addition, fraudulent or incorrect registration may result
in title being removed from the securities register of an issuer. Access to
securities registers may also be limited and therefore registers may be
difficult to check.
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<PAGE> 55
Fixed Income Securities. The value of the securities held by a Fund,
and thus the net asset value of the shares of a Fund, generally will vary
inversely in relation to changes in prevailing interest rates. Thus, if interest
rates have increased from the time a debt or other fixed income security was
purchased, such security, if sold, might be sold at a price less than its cost.
Conversely, if interest rates have declined from the time such a security was
purchased, such security, if sold, might be sold at a price greater than its
cost. Also, the value of such securities may be affected by changes in real or
perceived creditworthiness of the issuers. Thus, if creditworthiness is
enhanced, the price may rise. Conversely, if creditworthiness declines, the
price may decline. A Fund is not restricted to any maximum or minimum time to
maturity in purchasing portfolio securities, and the average maturity of a
Fund's assets will vary based on its Adviser's assessment of economic and market
conditions.
Below Investment Grade Securities. The European Equity Fund may invest
up to 20% of its net assets and the Central and Eastern Europe Fund may invest
up to 35% of its net assets in below investment grade securities (securities
that are rated below the fourth highest grade at the time of purchase by Moody's
or S&P, or, if unrated, deemed by the Adviser to be of comparable quality).
Subsequent to its purchase by a Fund, an issue of securities may cease to be
rated or its rating may be reduced. Neither event will require a sale of such
securities by a Fund, although its Adviser will consider such event in its
determination of whether a Fund should continue to hold the securities. The
widespread expansion of government, consumer and corporate debt within the
economy has made the corporate sector, especially cyclically sensitive
industries, more vulnerable to economic downturns or increased interest rates.
Because lower-rated securities involve issuers with weaker credit fundamentals
(such as debt-to- equity ratios, interest charge coverage, earnings history and
the like), an economic downturn, or increases in interest rates, could severely
disrupt the market for lower-rated securities and adversely affect the value of
outstanding securities and the ability of the issuers to repay principal and
interest.
Securities rated below investment grade are regarded as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations and involve large
uncertainties or major risk exposures to adverse conditions. 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. If the issuer of a security owned by a Fund
defaulted, a Fund could incur additional expenses in seeking recovery with no
guarantee of recovery. Also, a 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. Lower-rated securities also present risks based on payment
expectations. For example, lower-rated securities may contain redemption or call
provisions. If an issuer exercises these provisions in a declining interest rate
market, a Fund would have to replace the security with a lower yielding
security, resulting in a decreased return for investors.
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<PAGE> 56
The Funds 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 Funds anticipate 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 a 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 Funds to obtain accurate market quotations for
purposes of valuing the Funds 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 a Fund's net asset
value. The Funds will rely on the judgment, analysis and experience of their
Advisers in evaluating the creditworthiness of an issuer. In this evaluation, an
Adviser will consider, 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 Funds 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.
Securities of Other Investment Companies. The Funds 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, each 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 each Fund's total assets and
(iii) when added to all other investment company securities held by each Fund,
do not exceed 10% of the value of a Fund's total assets.
Lending of Portfolio Securities. The Funds may lend portfolio
securities to brokers, dealers and other financial organizations that meet
capital and other credit requirements or other criteria established by each
Fund's Board of Directors (the "Board"). These loans, if and when made, may not
exceed 50% of a Fund's net assets taken at value. No Fund will lend portfolio
securities to affiliates of Warburg Pincus Asset Management, Inc. ("Warburg"),
or to affiliates of its Adviser 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 102% of the current
market value of loaned U.S. securities and at least 105% of the current market
value of loaned non-U.S. 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 Funds. From time to time, the Funds 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 Funds and
that is acting as a "finder."
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<PAGE> 57
By lending its securities, each 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 Funds, income
received could be used to pay the Funds' expenses and would increase an
investor's total return. Each Fund will adhere to the following conditions
whenever its portfolio securities are loaned: (i) each Fund must receive 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) each Fund must be able to terminate the loan at any time; (iv)
each 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) each Fund may pay only reasonable custodian fees
in connection with the loan; and (vi) voting rights on the loaned securities may
pass to the borrower, provided, however, that if a material event adversely
affecting the investment occurs, the Board must terminate the loan and regain
the right to vote the securities. Loan agreements involve certain risks in the
event of default or insolvency of the other party including possible delays or
restrictions upon a Fund's ability to recover the loaned securities or dispose
of the collateral for the loan.
When-Issued Securities, Delayed-Delivery Transactions and Forward
Commitments. Each Fund may utilize up to 20% of its total assets to purchase
securities on a "when-issued" basis, for delayed delivery (i.e., payment or
delivery occur beyond the normal settlement date at a stated price and yield) or
on a forward commitment basis. Each Fund does not intend to engage in these
transactions for speculative purposes, but only in furtherance of its investment
objectives. These transactions occur when securities are purchased or sold by a
Fund with payment and delivery taking place in the future to secure what is
considered an advantageous yield and price to a Fund at the time of entering
into the transaction. 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, delayed-delivery basis or forward commitment 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 a Fund agrees to purchase when-issued, delayed-delivery securities
or securities on a forward commitment basis, 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 a 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 a Fund's commitment. The
assets contained in the segregated account will be marked-to-market daily. It
may be expected that a 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 a Fund engages in when-issued, delayed-delivery or
forward commitment transactions, it relies on the other party to consummate the
trade. Failure of the seller to do so may result in a Fund's incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
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Brady Bonds. Each Fund may invest in so-called "Brady Bonds," which are
securities created through the exchange of existing commercial bank loans to
public and private entities for new bonds in connection with debt restructurings
under a debt restructuring plan announced by former U.S. Secretary of the
Treasury Nicholas F. Brady (the "Brady Plan"). Brady Bonds may be collateralized
or uncollateralized, are issued in various currencies (primarily the U.S.
dollar) and are currently actively traded in the over-the-counter secondary
market for debt instruments.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate
par bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on these Brady Bonds generally are collateralized by
cash or securities in an amount that, in the case of fixed rate bonds, is equal
to at least one year of rolling interest payments or, in the case of floating
rate bonds, initially is equal to at least one year's rolling interest payments
based on the applicable interest rate at that time and is adjusted at regular
intervals thereafter.
Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk").
Repurchase Agreements. Each Fund may agree to purchase securities from
a bank or recognized securities dealer and simultaneously commit to resell the
securities to the bank or dealer at an agreed-upon date and price reflecting a
market rate of interest unrelated to the coupon rate or maturity of the
purchased securities ("repurchase agreements"). Such Fund would maintain custody
of the underlying securities prior to their repurchase; thus, the obligation of
the bank or dealer to pay the repurchase price on the date agreed to would be,
in effect, secured by such securities. If the value of such securities were less
than the repurchase price, plus interest, the other party to the agreement would
be required to provide additional collateral so that at all times the collateral
is at least 102% of the repurchase price plus accrued interest. Default by or
bankruptcy of a seller would expose a Fund to possible loss because of adverse
market action, expenses and/or delays in connection with the disposition of the
underlying obligations. The financial institutions with which a Fund may enter
into repurchase agreements will be banks and non-bank dealers of U.S. Government
securities that are listed on the Federal Reserve Bank of New York's list of
reporting dealers, if such banks and non-bank dealers are deemed creditworthy by
a Fund's Adviser. A Fund's Adviser will continue to monitor creditworthiness of
the seller under a repurchase agreement, and will require the seller to maintain
during the term of the agreement the value of the securities subject to the
agreement to equal at least 102% of the repurchase price (including accrued
interest). In addition, a Fund's Adviser will require that the value of this
collateral, after transaction costs (including loss of interest) reasonably
expected to be incurred on a default, be equal to 102% or greater than the
repurchase price (including accrued premium) provided in the repurchase
agreement or the daily amortization of the difference between the purchase price
and the repurchase price specified in the repurchase agreement. A Fund's adviser
will mark-to-market daily the value of the securities. There are no percentage
limits on a Fund's ability to enter into repurchase agreements. Repurchase
agreements are considered to be loans by the Fund under the 1940 Act.
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Loan Participations and Assignments. Each Fund may invest in fixed and
floating rate loans ("Loans") arranged through private negotiations between a
foreign government and one or more financial institutions ("Lenders"). The
majority of the Funds' investments in Loans are expected to be in the form of
participations in Loans ("Participations") and assignments of portions of Loans
from third parties ("Assignments"). Participations typically will result in a
Fund having a contractual relationship only with the Lender, not with the
borrower. A participating Fund will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In connection with purchasing Participations, a Fund
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the Loan ("Loan Agreement"), nor any
rights of set-off against the borrower, and a Fund may not directly benefit from
any collateral supporting the Loan in which it has purchased the Participation.
As a result, participating Funds will assume the credit risk of both the
borrower and the Lender that is selling the Participation. In the event of the
insolvency of the Lender selling a Participation, a Fund may be treated as a
general creditor of the Lender and may not benefit from any set-off between the
Lender and the borrower. The Funds will acquire Participations only if the
Lender interpositioned between the Funds and the borrower is determined by the
Adviser to be creditworthy. Each Fund currently anticipates that it will not
invest more than 5% of its net assets in Loan Participations and Assignments.
Convertible Securities. A convertible security is a bond, debenture,
note, preferred stock or other security that may be converted into or exchanged
for a prescribed amount of common stock of the same or a different issuer within
a particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Before conversion, convertible securities have
characteristics similar to nonconvertible debt securities in that they
ordinarily provide a stable stream of income with generally higher yields than
those of common stocks of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure but are usually
subordinated to comparable nonconvertible securities. While no securities
investment is completely without risk, investments in convertible securities
generally entail less risk than the corporation's common stock, although the
extent to which such risk is reduced depends in large measure upon the degree to
which the convertible security sells above its value as a fixed-income security.
Convertible securities have unique investment characteristics in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (2) are less subject to fluctuation in
value than the underlying stock since they have fixed-income characteristics and
(3) provide the potential for capital appreciation if the market price of the
underlying common stock increases. Most convertible securities currently are
issued by U.S. companies, although a substantial Eurodollar convertible
securities market has developed, and the markets for convertible securities
denominated in local currencies are increasing.
The value of a convertible security is a function of its "investment
value" (determined by its yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and its "conversion value" (the security's worth, at market value, if
converted into the underlying common stock). The
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investment value of a convertible security is influenced by changes in interest
rates, with investment value declining as interest rates increase and increasing
as interest rates decline. The credit standing of the issuer and other factors
also may have an effect on the convertible security's investment value. The
conversion value of a convertible security is determined by the market price of
the underlying common stock. If the conversion value is low relative to the
investment value, the price of the convertible security is governed principally
by its investment value. Generally the conversion value decreases as the
convertible security approaches maturity. To the extent the market price of the
underlying common stock approaches or exceeds the conversion price, the price of
the convertible security will be increasingly influenced by its conversion
value. A convertible security generally will sell at a premium over its
conversion value by the extent to which investors place value on the right to
acquire the underlying common stock while holding a fixed-income security.
A convertible security might be subject to redemption at the option of
the issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Fund is called for redemption,
the Fund will be required to permit the issuer to redeem the security, convert
it into the underlying common stock or sell it to a third party. The Funds will
invest in convertible securities without regard to their credit rating.
Structured Notes. The Funds may invest in structured notes. The
distinguishing feature of a structured note is that the amount of interest
and/or principal payable on the notes is based on the performance of a benchmark
asset or market other than fixed-income securities or interest rates. Examples
of a benchmark include stock prices, currency exchange rates and physical
commodity prices. Investing in a structured note allows a Fund to gain exposure
to the benchmark asset or market, such as investments in certain emerging
markets that restrict investment by foreigners. The structured note fixes the
maximum loss that a Fund may experience in the event that the market does not
perform as expected. The performance tie can be a straight relationship or
leveraged, although the Adviser generally will not use leverage in its
structured note strategies. Depending on the terms of the note, a Fund may
forego all or part of the interest and principal that would be payable on a
comparable conventional note; a Fund's loss cannot exceed this foregone interest
and/or principal. An investment in a structured note involves risks similar to
those associated with a direct investment in the benchmark asset. Structured
notes will be treated as illiquid securities for investment limitation purposes.
Short Sales. In a short sale, a 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 a Fund engages in a
short sale, the collateral for the short position will be maintained by the
Funds' custodian or qualified sub-custodian. While the short sale is open, a
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 a
Fund's long position.
While a short sale is made by selling a security a Fund does not own, a
short sale is "against the box" to the extent that a 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
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engage in short sales against the box for investment purposes. Each 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 a
Fund (or a security convertible or exchangeable for such security). In such
case, any future losses in a 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 each Fund owns. There will be certain additional
transactions costs associated with short sales against the box, but the Funds
will endeavor to offset these costs with the income from the investment of the
cash proceeds of short sales.
If a 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 a 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 Funds 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. Because such
companies normally have fewer shares outstanding than larger, more established
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. 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.
Depositary Receipts. The assets of each 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
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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.
Temporary Investments. The short-term and medium-term debt securities
in which each Fund may invest for temporary defensive purposes consist of: (a)
obligations of the United States or foreign governments, their respective
agencies or instrumentalities; (b) bank deposits and bank obligations (including
certificates of deposit, time deposits and bankers' acceptances) of U.S. or
foreign banks denominated in any currency; (c) floating rate securities and
other instruments denominated in any currency issued by international
development agencies; (d) finance company and corporate commercial paper and
other short-term corporate debt obligations of U.S. and foreign corporations;
and (e) repurchase agreements with banks and broker-dealers with respect to such
securities.
Rights Offerings and Purchase Warrants. Each Fund may invest up to 15%
of its net assets in rights and warrants to purchase newly created equity
securities consisting of common and preferred stock. The equity security
underlying a right or warrant is outstanding at the time the right or warrant is
issued or is issued together with the right or warrant.
Investing in rights and 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 right or 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.
Rights and warrants generally pay no dividends and confer no voting or other
rights other than to purchase the underlying security.
Non-Publicly Traded and Illiquid Securities. No Fund may 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
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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. Each Fund's
Adviser 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 a Fund's limit on the purchase of illiquid securities
unless the Board or its delegates determines that the Rule 144A Securities are
liquid. In reaching liquidity decisions, the Board or its delegates may
consider, inter alia, the following factors: (i) the unregistered nature of the
security; (ii) the frequency of trades and quotes for the security; (iii) the
number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (iv) dealer undertakings to make a market in the
security and (v) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer).
Borrowing. Each Fund may borrow up to 30% of its net 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 a Fund's net assets.
Although the principal of such borrowings will be fixed, a Fund's assets may
change in value during the time the borrowing is outstanding. Each 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.
Stand-By Commitments. Each Fund may acquire "stand-by commitments" with
respect to securities held in its portfolio. Under a stand-by commitment, a
dealer agrees to purchase at a Fund's option specified securities at a specified
price. A Fund's right to exercise stand-by commitments is unconditional and
unqualified. Stand-by commitments acquired by a Fund may also be referred to as
"put" options. A stand-by commitment is not transferable by a Fund, although a
Fund can sell the underlying securities to a third party at any time.
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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 Funds intends to enter into stand-by commitments only with brokers,
dealers and banks that, in the opinion of their Advisers, present minimal credit
risks. In evaluating the creditworthiness of the issuer of a stand-by
commitment, each Fund's Adviser will periodically review relevant financial
information concerning the issuer's assets, liabilities and contingent claims. A
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 a Fund upon its exercise of a stand-by commitment
is normally (i) a 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 a Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date during that period.
Each Fund expects that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a 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 a Fund's portfolio will not
exceed 1/2 of 1% of the value of a Fund's total assets calculated immediately
after each stand-by commitment is acquired.
A 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 a Fund would be valued at zero in determining net asset value. Where
a 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 a Fund. Stand-by commitments would not affect
the average weighted maturity of a 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 each 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 a Fund are present or represented by proxy, or (ii) more
than 50% of the outstanding shares. Investment limitations 10 through 13 may be
changed by a vote of the Board at any time.
Each Fund may not:
1. Borrow money except that the Fund may borrow from banks for
temporary or emergency purposes provided that any such borrowing by the Fund may
not exceed 30% of the value of the Fund's net assets at the time of such
borrowing. For purposes of this restriction, short sales and the entry into
currency transactions, options, futures contracts,
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options on futures contracts, and forward commitment 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.
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
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forward commitment or delayed-delivery basis and collateral and initial or
variation margin arrangements with respect to currency transactions, options,
futures contracts, and options on futures contracts.
12. Invest more than 15% of the Fund's net assets in securities which
may be illiquid because of legal or contractual restrictions on resale or
securities for which there are no readily available market quotations. For
purposes of this limitation, repurchase agreements with maturities greater than
seven days shall be considered illiquid securities.
13. Make additional investments (including roll-overs) if the Fund's
borrowings exceed 5% of its net assets.
If a percentage restriction (other than the percentage limitations 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 a 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 each
Fund is determined for purposes of sales and redemptions. The following is a
description of the procedures used by each 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 market value of portfolio
investments, the Funds 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 Funds 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 Funds 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.
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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 a Fund's net asset value is not calculated. As a result,
calculation of a Fund's net asset value does not take place contemporaneously
with the determination of the prices of the majority of a 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
Each Fund's Adviser is responsible for establishing, reviewing and,
where necessary, modifying each Fund's investment program to achieve its
investment objective. Purchases and sales of newly issued portfolio securities
are usually principal transactions without brokerage commissions effected
directly with the issuer or with an underwriter acting as principal. Other
purchases and sales may be effected on a securities exchange or
over-the-counter, depending on where it appears that the best price or execution
will be obtained. The purchase price paid by the Funds 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.
Each Fund's Adviser will select specific portfolio investments and
effect transactions for each Fund and in doing so, seeks to obtain the overall
best execution of portfolio transactions. In evaluating prices and executions,
the Adviser 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. The Adviser 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 Funds and/or other accounts over which the Adviser exercises
investment discretion. The Adviser 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
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the Adviser 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 the Adviser. Research and
other services received may be useful to the Adviser in serving each Fund and
their other clients and, conversely, research or other services obtained by the
placement of business of other clients may be useful to the Adviser in carrying
out its obligations to the Funds. 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 the Adviser in carrying out its responsibilities.
Research received from brokers or dealers is supplemental to the Adviser's own
research program. The fees paid to the Adviser under its advisory agreement with
a Fund are not reduced by reason of its receiving any brokerage and research
services.
Investment decisions for the Funds concerning specific portfolio
securities are made independently from those for other clients advised by the
Adviser. Such other investment clients may invest in the same securities as the
Funds. When purchases or sales of the same security are made at substantially
the same time on behalf of such other clients, transactions are averaged as to
price and available investments allocated as to amount, in a manner which the
Adviser believes to be equitable to each client, including a Fund. In some
instances, this investment procedure may adversely affect the price paid or
received by a Fund or the size of the position obtained or sold for a Fund. To
the extent permitted by law, the Adviser may aggregate the securities to be sold
or purchased for a Fund with those to be sold or purchased for such other
investment clients in order to obtain best execution.
The Funds may use Counsellors Securities Inc. ("Counsellors
Securities"), the Distributor, or affiliates of Credit Suisse Group in
connection with the purchase or sale of securities in accordance with rules or
exemptive orders adopted by the SEC when the Adviser believes that the charge
for the transaction does not exceed usual and customary levels. 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
Counsellors Securities, BEA Associates ("BEA"), Credit Suisse Asset Management
Limited ("CSAM"), or any affiliated person of such companies. In addition, the
Funds will not give preference to any institutions with whom a Fund enters into
distribution or shareholder servicing agreements concerning the provision of
administrative and other support services.
Transactions for each Fund may be effected on foreign securities
exchanges. In transactions for securities not actively traded on a foreign
securities exchange, the Funds will
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<PAGE> 69
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 Funds may participate, if and when practicable, in bidding for the
purchase of securities for each Fund's portfolio directly from an issuer in
order to take advantage of the lower purchase price available to members of such
a group. A Fund will engage in this practice, however, only when its Adviser, in
its sole discretion, believes such practice to be otherwise in a Fund's
interest.
Portfolio Turnover
The Funds do not intend to seek profits through short-term trading, but
the rate of turnover will not be a limiting factor when the Funds deem it
desirable to sell or purchase securities. Each 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 Funds 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 Funds 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 Funds may be higher than mutual funds
having a similar objective that do not utilize these strategies. Each Fund
expects its turnover rate for its first year of operation to total approximately
100%.
MANAGEMENT OF THE FUNDS
Officers and Board of Directors
The business and affairs of each Fund is managed by its Board of
Directors in accordance with the laws of the State of Maryland. Each Board
elects officers who are responsible for the day-to-day operations of a Fund and
who execute policies formulated by the Board. Under each Fund's Charter, a Board
may classify or reclassify any unissued shares of the Funds 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. A 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 Funds.
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<PAGE> 70
The names (and ages) of each 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 Intelligence
1737 Cambridge Street Council from June 1995 until January 1997; Director or
Cambridge, Massachusetts 02138 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 of Fritz
P.O. Box 483 Broadcasting, Inc. and Fritz Communications (developers and
Wilson, Wyoming 83014 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 Director of Warburg;
New York, New York 10017-3147 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 William S. Beinecke
New Haven, Connecticut 06520-8200 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.
36
<PAGE> 71
<TABLE>
<S> <C>
Arnold M. Reichman *(50) Director
466 Lexington Avenue Managing Director, Chief Operating Officer and Assistant
New York, New York 10017-3147 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. (business consulting)
5th Floor from January 1990 to November 1996; Director or Trustee of
Washington, DC 20004 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 with Warburg since
New York, New York 10017-3147 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 with Warburg since
New York, New York 10017-3147 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.
37
<PAGE> 72
<TABLE>
<S> <C>
Eugene P. Grace (46) Vice President and Secretary
466 Lexington Avenue Senior Vice President of Warburg; Associated with Warburg
New York, New York 10017-3147 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 with Warburg since
New York, New York 10017-3147 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 with Warburg since
New York, New York 10017-3147 1995; Associated with BlackRock Financial Management, Inc.
from September 1994 to October 1995; Associated
with BEA from April 1993 to September 1994; Associated
with Ernst & Young LLP from 1990 to 1993; Officer of
other investment companies advised by Warburg.
Hal Liebes (34) Assistant Secretary
153 East 53rd Street Senior Vice President and General Counsel of BEA from March
New York, New York 10022 1997 to present; Vice President and Legal Counsel for BEA
from June 1995 to March 1997; Chief Compliance
Officer, CS First Boston Investment Management from
1994 to 1995; Staff Attorney, Division of Enforcement, U.S.
Securities and Exchange Commission from 1991 to
1994; Associate, Morgan, Lewis & Bockius from 1989
to 1991; Officer of other investment companies advised by BEA.
Janna Manes, Esq. (30) Assistant Secretary
466 Lexington Avenue Vice President of Warburg; Associated with Warburg since
New York, New York 10017-3147 1996; Associated with the law firm of Willkie Farr &
Gallagher from 1993 to 1996; Officer of other investment
companies advised by Warburg.
</TABLE>
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<PAGE> 73
<TABLE>
<S> <C>
Michael A. Pignataro (38) Assistant Secretary
153 East 53rd Street Vice President of BEA from December 1995 to present;
New York, New York 10022 Assistant Vice President and Chief Administrative Officer
for Investment Companies of BEA from 1989 to December
1995; Officer of other investment companies
advised by BEA.
Rocco A. Del Guercio (35) Assistant Treasurer
Administrative Officer for BEA-advised investment
companies from June 1996 to the present; Assistant
Treasurer, Bankers Trust Corp. -- Fund
Administration from March 1994 to June 1996; Mutual
Fund Accounting Supervisor, Dreyfus Corporation from
April 1987 to March 1994; Officer of other investment
companies advised by BEA.
Wendy S. Setnicka ( 33) Assistant Treasurer
Assistant Vice President of BEA from January 1997 to
the present; Administrative Officer for Investment
Companies of BEA from November 1993 to the
present; Supervisor of Fund Accounting and
Administration at Reich & Tang LP from June 1989 to
November 1993; Officer of other investment companies
advised by BEA.
</TABLE>
The Funds pay directors who are not "affiliated persons" (as defined in
the 1940 Act) of its Adviser, co-administrators or distributors an annual fee of
$500 and $250 for each meeting of the Board attended by him for his services as
a Director, and is reimbursed for expenses incurred in connection with his
attendance at Board meetings. Each member of the Audit Committee receives an
annual fee of $250, and the Chairman of the Audit Committee receives an annual
fee of $325.
Directors' Total Compensation:
<TABLE>
<CAPTION>
Total Compensation from the
Name of Director The Fund+ Fund and the Fund Complex++
---------------- --------- ---------------------------
<S> <C> <C>
John L. Furth* None None
Arnold M. Reichman* None None
Richard N. Cooper 1,750 73,250
Jack W. Fritz 1,750 73,250
Jeffrey E. Garten 1,750 73,250
Alexander B. Trowbridge 1,825 76,025
</TABLE>
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<PAGE> 74
+ Amounts shown are estimates of payments to be made for the remaining
period of the fiscal year ending August 31, 1999 pursuant to existing
arrangements.
++ A Fund Complex means two or more investment companies that hold
themselves out to investors as related companies for purposes of
investment and investor services, or have a common investment adviser
or have an investment adviser that is an affiliated person of the
investment adviser of any other investment company. Each Director
serves as a Director or Trustee of 40 investment companies in the
Fund Complex.
* Mr. Furth and Mr. Reichman receive compensation as affiliates of
Warburg and, accordingly, receive no compensation from the Fund or any
other investment company in the Fund Complex.
Portfolio Managers
The Portfolio Managers of the European Equity Fund are Susan E. Boland
and Patricia Maxwell-Arnot. Ms. Boland joined BEA in 1996, and is a Senior Vice
President. From 1995-1996, Ms. Boland was a Director and Portfolio Manager of
Barran & Partners Limited, and from 1992 to 1995, she was a Partner and European
Portfolio Manager for Teton Partners. Ms. Boland was also a Portfolio Manager
and Analyst with Fidelity Management & Research Company from 1985-1991. Ms.
Maxwell-Arnot joined CSAM in 1995, and is a Managing Director. From 1984-1994,
Ms. Maxwell-Arnot was a Director at Lazard Brothers (London).
The Portfolio Managers of the Central and Eastern Europe Fund are Glenn
Wellman and Isabel Knight. Mr. Wellman joined CSAM in 1993, and is a Managing
Director. From 1987-1993, Mr. Wellman was a Managing Director and Chief
Investment Officer of Alliance Capital Limited. Ms. Knight joined CSAM in 1997,
and is a Director. From 1995-1997, she was a Senior Fund Manager for emerging
Europe with Foreign & Colonial Emerging Markets, and from 1992-1995, she was a
Portfolio Manager for Morgan Stanley Asset Management.
Control Persons and Principal Holders of Securities
CSAM will hold all of the shares of each Fund on the date each Fund's
Registration Statement become effective.
Investment Advisers and Co-Administrators
BEA, located at One Citicorp Center, 153 East 53rd Street, New York,
New York 10022, serves as investment adviser to each Fund pursuant to separate
written agreements (the "Advisory Agreements"). BEA is a diversified investment
adviser, managing global equity, fixed-income and derivative securities accounts
for corporate pension and profit-sharing plans, state pension funds, union
funds, endowments and other charitable institutions. BEA currently manages
approximately $35 billion in assets, and is a member of CSAM and a subsidiary of
Credit Suisse Group, one of the world's leading banks. BEA is a registered
investment adviser under the Investment Advisers Act of 1940, as amended. As an
investment adviser, BEA emphasizes a global investment strategy. BEA currently
acts as investment adviser for eleven other investment companies registered
under the 1940 Act. They are: BEA Strategic Global Income Fund, Inc., BEA Income
Fund, Inc., The Brazilian Equity Fund, Inc., The Chile Fund, Inc., The Emerging
Markets Infrastructure Fund, Inc., The Emerging Markets Telecommunications Fund,
Inc., The First Israel Fund, Inc., The Indonesia Fund,
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<PAGE> 75
Inc., The Latin America Equity Fund, Inc., The Latin America Investment Fund,
Inc., and The Portugal Fund, Inc. In addition, BEA acts as sub-adviser to
certain portfolios of thirteen other registered investment companies or
portfolios: American Odyssey Funds, Inc. (Global High Yield Bond Fund), American
United Life (Conservative Investor Portfolio, Moderate Investor Portfolio and
Aggressive Investor Portfolio), Frank Russell Investment Company (Fixed Income
III Fund and Multi-strategy Bond Fund), Panorama (LifeSpan Balanced Account,
LifeSpan Capital Appreciation Account and LifeSpan Diversified Income Account),
SEI Institutional Managed Trust (High Yield Bond Fund), AGA Series Trust (Credit
Suisse Growth and Income Fund), Touchstone International Equity Fund and
Touchstone Variable Annuity International Equity Fund.
CSAM, located at Beaufort House, 15 St. Botolph Street, GB-London EC3A
7JJ, serves as sub-investment adviser to each Fund pursuant to separate written
agreements (the "Advisory Agreements"). CSAM is a wholly owned, indirectly held,
subsidiary of Credit Suisse Group. CSAM is a registered investment adviser under
the Investment Advisers Act of 1940, and currently manages $138 billion in
assets. CSAM also has offices in Budapest, Moscow, Prague, Warsaw, Frankfurt,
Milan, Paris, Sydney, Tokyo and Zurich; these offices are not registered with
the U.S. Securities and Exchange Commission.
For the services provided by BEA to the European Equity Fund, the Fund
pays a fee calculated at an annual rate of 1.00% of the Fund's average daily net
assets computed daily and payable quarterly (out of which BEA pays CSAM for its
sub-investment advisory services). For the services provided by BEA to the
Central and Eastern Europe Fund, the Fund pays a fee calculated at an annual
rate of 1.25% of the Fund's average daily net assets computed daily and payable
quarterly (out of which BEA pays CSAM for its sub-investment advisory services).
BEA and CSAM may voluntarily waive a portion of their fees from time to time and
temporarily limit the expenses to be borne by a Fund.
Under the Advisory Agreements, neither BEA nor CSAM will be liable for
any error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the matters to which the Advisory Agreements relate. The
Advisory Agreements for the Funds were approved on July 20, 1998 by vote of the
Funds' Board of Directors, including a majority of those directors who are not
parties to the Advisory Agreements or interested persons (as defined in the 1940
Act) of such parties. The Advisory Agreements were also approved by each Fund's
initial shareholder. The BEA Advisory Agreements are terminable by vote of the
Funds' Board of Directors or by the holders of a majority of the outstanding
voting securities of the relevant Fund, and at any time without penalty, on 60
days' written notice to BEA. The BEA Advisory Agreements may also be terminated
by BEA on 90 days' written notice to a fund. The BEA Advisory Agreements
terminate automatically in the event of an assignment. The CSAM Sub-Advisory
Agreements are terminable by BEA on 60 days' written notice to the Fund and
CSAM, by vote of the Funds' Board of Directors or by the holders of a majority
of the outstanding voting securities of the relevant Fund on 60 days' written
notice to BEA and CSAM, or by CSAM upon 60 days' written notice to a Fund and
BEA. The CSAM Sub-Advisory Agreements terminate automatically in the event of an
assignment.
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<PAGE> 76
Counsellors Funds Service, Inc. ("Counsellors Service"), a wholly owned
subsidiary of Warburg, and PFPC Inc. ("PFPC"), an indirect, wholly owned
subsidiary of PNC Bank serve as co-administrators to each Fund pursuant to
separate written agreements. Counsellors Service provides shareholder liaison
services to each 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 Funds and their various
service providers, furnishing certain corporate secretarial services, which
include preparing materials for meetings of the Board, assisting with proxy
statements and annual and semiannual reports, assisting in the preparation of
tax returns and monitoring and developing certain compliance procedures for the
Funds. As compensation, the Common Shares of each Fund pay Counsellors Service a
fee calculated at an annual rate of .10% of the Common Shares' average daily net
assets. Counsellors Service provides co-administration services to the BEA
Institutional Funds without compensation.
PFPC calculates each Fund's net asset value, provides all accounting
services for each Fund and assists in related aspects of each Fund's operations.
As compensation, each Fund pays PFPC a fee calculated at an annual rate of .12%
of a 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.
Each class of Shares of a Fund bears its proportionate share of fees
payable to BEA, CSAM and PFPC in the proportion that its assets bear to the
aggregate assets of a Fund at the time of calculation. These fees are calculated
at an annual rate based on a percentage of a Fund's average daily net assets.
Each 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 a Fund.
Custodians and Transfer Agents
Brown Brothers Harriman & Co. ("BBH") acts as custodian for each Fund
and also acts as the custodian for each Fund's foreign securities pursuant to a
written Custodian Agreement (the "Custodian Agreement"). BBH will (i) maintain a
separate account or accounts in the name of each Fund, (ii) hold and transfer
portfolio securities on account of each Fund, (iii) accept receipts and
disbursements of money on behalf of each Fund, (iv) collect and receive all
income and other payments and distributions for the account of each Fund's
portfolio securities and (v) make periodic reports to the Board concerning each
Fund's custodial arrangements. BBH is authorized to select one or more foreign
banking institutions and foreign securities depositories to serve as
sub-custodian on behalf of the Funds, provided that BBH remains responsible for
the performance of all its duties under the Custodian Agreement and holds the
Funds harmless from the negligent acts and omissions of any sub-custodian. For
its services to the Funds under the Custodian Agreement, BBH receives a fee
which is calculated based upon each Fund's average daily gross assets, exclusive
of transaction charges and out-of-pocket expenses, which are also charged to the
Funds. BBH's principal business address is 40 Water Street, Boston,
Massachusetts 02109.
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<PAGE> 77
State Street Bank and Trust Company ("State Street") will serve as each
Fund's shareholder servicing, transfer and dividend disbursing agent pursuant to
a Transfer Agency and Service Agreement, under which State Street (i) issues and
redeems shares of the Funds, (ii) addresses and mails all communications by the
Funds to record owners of each 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 Funds. State Street has
delegated to Boston Financial Data Services, Inc., a 50% owned subsidiary
("BFDS"), responsibility for most shareholder servicing functions. State
Street's principal business address is 225 Franklin Street, Boston,
Massachusetts 02110. BFDS's principal business address is 2 Heritage Drive,
North Quincy, Massachusetts 02171.
Organization of the Funds
Each Fund's Charter authorizes the Board to issue three billion full
and fractional shares of capital stock, $.001 par value per share, of which one
billion shares are designated Common Shares, one billion shares are designated
Institutional Shares and one billion are designated Advisor Shares. The Funds
currently offer Common and Institutional Shares. Shareholders of each 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.
Investors in each Fund are entitled to one vote for each full share
held and fractional votes for fractional shares held. Shareholders of each 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 a 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.
Distribution and Shareholder Servicing
Counsellors Securities serves as distributor of the shares of each
Fund. Counsellors Securities is a wholly owned subsidiary of Warburg, and is
located at 466 Lexington Avenue, New York, New York 10017-3147.
Common Shares. Each 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 each 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 each Fund. Services
performed by Counsellors Securities include (i) the
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<PAGE> 78
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 a 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
a 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 Funds to prospective shareholders of the Funds; and (f) costs
involved in obtaining whatever information, analyses and reports with respect to
marketing and promotional activities that the Funds may, from time to time, deem
advisable.
Pursuant to the 12b-1 Plan, Counsellors Securities will provide each
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. Each 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 a 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 each 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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<PAGE> 79
purchase of Fund shares. Prospectuses are available from a Fund's distributor
upon request. No preference will be shown in the selection of a Fund's 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 each Board, including a majority of the Directors who are not
interested persons of a 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 each Fund.
Institutional Shares. The Institutional Shares will be distributed
under the name "BEA Institutional Funds." Counselors Securities serves without
compensation as distributor of the Institutional Shares.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of each Fund's shares is equal to the per share net
asset value of the relevant class of shares of a Fund.
Under the 1940 Act, the Funds 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. (A Fund may also suspend or postpone the recordation of an
exchange of its shares upon the occurrence of any of the foregoing conditions.)
If a Board determines that conditions exist which make payment of
redemption proceeds wholly in cash unwise or undesirable, a 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 Funds will comply with Rule 18f-1 promulgated under the 1940 Act
with respect to redemptions in kind.
As stated in the Prospectus, with respect to the Central and Eastern
Europe Fund only, a short-term trading fee of 1.0% of the amount of shares
redeemed will be deducted from the redemption amount if a shareholder sells
shares of the Central and Eastern Europe Fund after holding them less than six
months. This fee, which is currently being waived, is paid to the Central and
Eastern Europe Fund to offset costs associated with short-term shareholder
trading. It does not apply to shares acquired through reinvestment of
45
<PAGE> 80
distributions. If a shareholder purchased shares of the Central and Eastern
Europe Fund on different days, any shares purchased through reinvestment of
distributions would be redeemed first, followed by the shares of the Central and
Eastern Europe Fund held the longest.
Automatic Cash Withdrawal Plan. An automatic cash withdrawal plan (the
"Plan") is available to the holders of Common Shares of each Fund who wish to
receive specific amounts of cash periodically. Withdrawals may be made under the
Plan by redeeming as many Common Shares of a 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 a
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 Funds.
EXCHANGE PRIVILEGE
Investors can exchange their Fund Common Shares for Common Shares of
other Warburg Pincus Funds. Investors in the BEA Institutional Funds can
exchange their shares for those of other BEA Institutional Funds.
The exchange privilege enables shareholders to acquire shares in a fund
with a different investment objective when they believe that a shift between
funds is an appropriate investment decision. 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, Institutional 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 a Fund into which an exchange is being considered. Shareholders may obtain a
prospectus of the relevant class of a Fund into which they are contemplating an
exchange by calling (800) 927-2874 (Common Shares) or (800) 401-22033
(Institutional Shares).
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 a Fund being acquired. The exchange privilege
may be modified or terminated at any time upon 30 days' notice to shareholders.
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<PAGE> 81
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 Funds. 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 Funds. The summary is based on the laws in
effect on the date of this Statement of Additional Information, which are
subject to change.
The Funds and Their Investments
Each Fund intends to qualify to be treated as a regulated investment
company each taxable year under the Code. To so qualify, a 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 a Fund's taxable year, (i) at least 50% of the market
value of a 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 a 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 of other regulated investment companies) of
any one issuer or any two or more issuers that a Fund controls and are
determined to be engaged in the same or similar trades or businesses or related
trades or businesses. Each 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, each 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, each 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 a 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 a Fund not later than
such December 31, provided that such dividend is actually paid by a Fund during
January of the following calendar year.
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<PAGE> 82
Each Fund intends to distribute annually to its shareholders
substantially all of its investment company taxable income. Each 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). Each Fund currently expects to distribute any excess annually
to its shareholders. However, if a 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, each 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 a 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 a Fund upon filing appropriate returns or claims for refund
with the Internal Revenue Service (the "IRS"). Even if a Fund makes such an
election, it is possible that a 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 each Fund to the
extent a Fund does not distribute by the end of any calendar year at least 98%
of its net investment 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 a 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. Each 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 a 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 each Fund and
may limit a 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, a 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 a Fund in computing its taxable income. In addition, in the event
of a failure to qualify, each Fund's distributions, to the extent derived from
each 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 a Fund fails to
48
<PAGE> 83
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 a Fund failed to qualify as a
regulated investment company for a period greater than one taxable year, a 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.
Each 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 Funds (i.e., may affect whether gains or losses
are ordinary or capital), accelerate recognition of income to a Funds and defer
Fund losses. These rules could therefore affect the character, amount and timing
of distributions to shareholders. These provisions also (a) will require each
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 each 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. Each 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 a Fund as a regulated investment company.
Passive Foreign Investment Companies. If a 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 a Fund to its
shareholders. Additional charges in the nature of interest may be imposed on a
Fund in respect of deferred taxes arising from such distributions or gains. Any
tax paid by a Fund as a result of its ownership of shares in a PFIC will not
give rise to any deduction or credit to a Fund or any shareholder. If a 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, a 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 a
Fund, and such amounts would be subject to the 90% and excise tax distribution
requirements described above. In order to make this election, each 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 a Fund were able to make the election described in this paragraph,
a 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
49
<PAGE> 84
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, each 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 a Fund, unless
revoked with the consent of the IRS. By making the election, each 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. Each Fund may have to
distribute this "phantom" income and gain to satisfy its distribution
requirement and to avoid imposition of the 4% excise tax. Each Fund will make
the appropriate tax elections, if possible, and take any additional steps that
are necessary to mitigate the effect of these rules.
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 a 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 a
Fund. Dividends and distributions paid by a 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 a 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 a
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 a 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
a 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 a Fund acquired such stock.
Accordingly, in order to satisfy its income distribution requirements, each 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
50
<PAGE> 85
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 a 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 a 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.
Backup Withholding. Each 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 each 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 Funds and Their Investments") made by the Fund to its
shareholders. Furthermore, shareholders will also receive, if appropriate,
various written notices after the close of a 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 Funds 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 FUNDS.
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<PAGE> 86
DETERMINATION OF PERFORMANCE
From time to time, each Fund may quote the total return of its Common
Shares, Institutional 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.
Each Fund may advertise, from time to time, comparisons of the
performance of its Common Shares, Institutional Shares and/or Advisor Shares
with that of one or more other mutual funds with similar investment objectives.
Each Fund may advertise average annual calendar year-to-date and calendar
quarter returns, which are calculated according to the formula set forth in the
preceding paragraph, except that the relevant measuring period would be the
number of months that have elapsed in the current calendar year or most recent
three months, as the case may be. Investors should note that this performance
may not be representative of a Fund's total return in longer market cycles.
The performance of a class of a Fund's shares will vary from time to
time depending upon market conditions, the composition of a 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, a 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 a Fund's total return, and such fees, if charged,
will reduce the actual return received by customers on their investments.
In its reports, investor communications or advertisements, each Fund
may include: (i) its total return performance; (ii) its performance compared
with various indexes or other mutual funds; (iii) published evaluations by
nationally recognized ranking services and financial publications; (iv) updates
concerning its strategies and portfolio investments; (v) information about its
goals, risk factors and expenses including comparisons with other mutual funds;
(vi) analysis of its investments by industry, country, credit quality and other
characteristics; (vii) a discussion of the risk/return continuum relating to
different investments; (viii) the potential impact of adding foreign stocks to
a domestic portfolio and (ix) portfolio manager quotations and commentary.
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<PAGE> 87
INDEPENDENT ACCOUNTANTS AND COUNSEL
PricewaterhouseCoopers LLP ("Pricewaterhouse"), with principal offices
at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as the
independent accountant for each Fund. The statements of assets and liabilities
of each Fund, as of [insert], 1998, that appear in this Statement of Additional
Information have been audited by Pricewaterhouse, 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 each Fund as well as
counsel to Counsellors Securities and Counsellors Service.
FINANCIAL STATEMENTS
Each Fund's financial statement follows the Report of Independent
Accountants.
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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> 89
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> 90
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> 91
PART C
OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits
<S> <C>
Exhibit No. Description of Exhibit
(a) Articles of Incorporation(2).
(b) By-Laws(2).
(c) Registrant's Forms of Stock Certificates.
(d) (1) Form of Investment Advisory Agreement.
(2) Form of Sub-Advisory Agreement.
(e) Distribution Agreement.(3)
(f) Not applicable.
(g) Custodian Agreement with Brown Brothers Harriman
& Co.(3)
(h) (1) Transfer Agency and Service Agreement.(3)
(2) Form of Co-Administration Agreement with
Counsellors Funds Service, Inc.
(3) Form of Co-Administration Agreement with
PFPC Inc.
(i) (1) Opinion and Consent of Willkie Farr &
Gallagher, counsel to the Fund.
(2) Opinion and Consent of Venable, Baetjer and
Howard, LLP, Maryland counsel to the Fund.
(j) Consent of PricewaterhouseCoopers LLP, Independent
Accountants.(1)
(k) Not applicable.
</TABLE>
- --------
(1) To be filed by amendment.
(2) Incorporated by reference to Registrant's Registration Statement on
Form N-1A filed July 30, 1998 (Securities Act File No. 333-60225).
(3) Incorporated by reference; material provisions of this exhibit are
substantially similar to those of the corresponding exhibit in
Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-1A of Warburg, Pincus Emerging Markets II Fund, Inc., filed on August
14, 1998 (Securities Act File No. 333-60677).
<PAGE> 92
<TABLE>
<S> <C>
(l) Form of Purchase Agreement.
(m) (1) Shareholder Servicing and Distribution Plan.(3)
(2) Distribution Plan.(3)
(3) Distribution Agreement(3)
(4) Fund/SERV Agreement(3)
(n) Not applicable.
(o) 18f-3 Plan.(3)
</TABLE>
Item 24. Persons Controlled by or Under Common Control
with Registrant
All of the outstanding shares of common stock of Registrant on
the date Registrant's Registration Statement becomes effective will be owned
by Credit Suisse Asset Management Limited ("Credit Suisse"), a corporation
formed under English law.
Item 25. Indemnification
Registrant, officers and directors of BEA Associates ("BEA"),
Credit Suisse, Counsellors Securities Inc. ("Counsellors Securities") and of
Registrant are covered by insurance policies indemnifying them for liability
incurred in connection with the operation of Registrant. These policies
provide insurance for any "Wrongful Act" of an officer, director or trustee.
Wrongful Act is defined as breach of duty, neglect, error, misstatement,
misleading statement, omission or other act done or wrongfully attempted by
an officer, director or trustee in connection with the operation of
Registrant. Insurance coverage does not extend to (a) conflicts of interest
or gain in fact any profit or advantage to which one is not legally entitled,
(b) intentional non-compliance with any statute or regulation or (c)
commission of dishonest, fraudulent acts or omissions. Insofar as it related
to Registrant, the coverage is limited in amount and, in certain
circumstances, is subject to a deductible.
Under Article VIII of the Articles of Incorporation (the
"Articles"), the Directors and officers of Registrant shall not have any
liability to Registrant or its stockholders for money damages, to the fullest
extent permitted by Maryland law. This limitation on liability applies to
events occurring at the time a person serves as a Director or officer of
Registrant whether or not such person is a Director or officer at the time of
any proceeding in which liability is asserted. No provision of Article VIII
shall protect or purport to protect any Director or officer of Registrant
against any liability to Registrant or its stockholders to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office. Registrant shall indemnify and advance expenses to its currently
<PAGE> 93
acting and its former Director to the fullest extent that indemnification of
Directors and advancement of expenses to Directors is permitted by the
Maryland General Corporation Law.
Registrant shall indemnify and advance expenses to its officers
to the same extent as its Directors and to such further extent as is
consistent with such law. The Board of Directors may, through a by-law,
resolution or agreement, make further provisions for indemnification of
directors, officers, employees and agents to the fullest extent permitted by
the Maryland General Corporation Law.
Article V of the By-Laws further limits the liability of the
Directors by providing that any person who was or is a party or is threatened
to be made a party in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such person is a current or former director or
officer of Registrant, or is or was serving while a director or officer of
Registrant at the request of Registrant as a director, officer, partner,
trustee, employee, agent or fiduciary of another corporation, partnership,
joint venture, trust, enterprise or employee benefit plan, shall be
indemnified by Registrant against judgments, penalties, fines, excise taxes,
settlements and reasonable expenses (including attorneys' fees)actually
incurred by such person in connection with such action, suit or proceeding to
the full extent permissible under the Maryland General Corporation Law, the
1993 Act and the 1940 Act, as such statutes are now or hereafter in force,
except that such indemnity shall not protect any such person against any
liability to Registrant or any stockholder thereof to which such person would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of
this office.
Item 26. Business and Other Connections of Investment Adviser
BEA acts as investment adviser to the Registrant. BEA renders
investment advice to a wide variety of individual and institutional clients.
Credit Suisse acts as sub-adviser to the Registrant. Credit Suisse renders
investment advice and provides full-service private equity programs to
clients. The list required by this Item 26 of officers and directors of BEA
and Credit Suisse, together with information as to their other businesses,
professions, vocations 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 BEA (SEC File No. 801-37170), and to Schedules A and D of Form ADV
filed by Credit Suisse (SEC File No. 801-40177).
Item 27. Principal Underwriter
(a) Counsellors Securities will act as distributor for
Registrant, as well as for Warburg Pincus Balanced Fund;
<PAGE> 94
Warburg Pincus Capital Appreciation Fund; Warburg Pincus Cash Reserve Fund;
Warburg Pincus Central and Eastern Europe Fund; Warburg Pincus Emerging Growth
Fund; Warburg Pincus Emerging Markets Fund; Warburg Pincus Emerging Markets II
Fund; Warburg Pincus European Equity Fund; Warburg Pincus Fixed Income Fund;
Warburg Pincus Global Fixed Income Fund; Warburg Pincus Global Post-Venture
Capital Fund; Warburg Pincus Global Telecommunications Fund; Warburg Pincus
Growth & Income Fund; Warburg Pincus Health Sciences Fund; Warburg Pincus High
Yield Fund; Warburg Pincus Institutional Fund; Warburg Pincus Intermediate
Maturity Government Fund; Warburg Pincus International Equity Fund; Warburg
Pincus International Growth Fund; Warburg Pincus International Small Company
Fund; Warburg Pincus Japan Growth Fund; Warburg Pincus Japan Small Company Fund;
Warburg Pincus Long-Short Equity Fund; Warburg Pincus Long-Short Market Neutral
Fund; Warburg Pincus Major Foreign Markets Fund; Warburg Pincus Money Market
Fund; Warburg Pincus Municipal Bond Fund; Warburg Pincus New York Intermediate
Municipal Fund; Warburg Pincus New York Tax Exempt Fund; Warburg Pincus
Post-Venture Capital Fund; Warburg Pincus Select Economic Value Equity Fund;
Warburg Pincus Small Company Growth Fund; Warburg Pincus Small Company Value
Fund; Warburg Pincus Strategic Global Fixed Income Fund; Warburg Pincus
Strategic Value Fund; Warburg Pincus Tax Free Money Market Fund; Warburg Pincus
Trust; Warburg Pincus Trust II; Warburg Pincus U.S. Core Equity Fund and Warburg
Pincus U.S. Core Fixed Income Fund.
(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 28. Location of Accounts and Records
(1) Warburg, Pincus European Equity Fund, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(Fund's Articles of Incorporation, By-Laws and minute books)
(2) BEA Associates
One Citicorp Center
153 East 53rd Street
New York, New York 10022
(records relating to its functions as
investment adviser)
(3) Credit Suisse Asset Management Limited
Beaufort House
15 St. Botolph Street
GB-London
EC3A 7JJ
<PAGE> 95
(records relating to its functions as sub-adviser)
(4) PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
(records relating to its functions as
co-administrator)
(5) Counsellors Funds Service, Inc.
466 Lexington Avenue
New York, New York 10017-3147
(records relating to its functions as co-administrator)
(6) State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
(records relating to its functions as transfer agent and
dividend disbursing agent)
(7) Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, Massachusetts 02171
(records relating to its functions as transfer agent and
dividend disbursing agent)
(8) Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
(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 29. Management Services
Not applicable.
Item 30. Undertakings.
Not applicable.
<PAGE> 96
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 3rd day of September, 1998.
WARBURG, PINCUS EUROPEAN EQUITY 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 Board September 3, 1998
- -------------------------- of Directors
John L. Furth
/s/Eugene L. Podsiadlo President September 3, 1998
- --------------------------
Eugene L. Podsiadlo
/s/Howard Conroy Vice President and September 3, 1998
- -------------------------- Chief Financial
Howard Conroy Officer
/s/Daniel S. Madden Treasurer and Chief September 3, 1998
- -------------------------- Accounting Officer
Daniel S. Madden
/s/Richard N. Cooper Director September 3, 1998
- --------------------------
Richard N. Cooper
/s/Jack W. Fritz Director September 3, 1998
- --------------------------
Jack W. Fritz
/s/Jeffrey E. Garten Director September 3, 1998
- --------------------------
Jeffrey E. Garten
/s/Arnold M. Reichman Director September 3, 1998
- --------------------------
Arnold M. Reichman
/s/Alexander B. Trowbridge Director September 3, 1998
- --------------------------
Alexander B. Trowbridge
</TABLE>
<PAGE> 97
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<S> <C>
(c) Registrant's Forms of Stock Certificates.
(d)(1) Form of Investment Advisory Agreement.
(d)(2) Form of Sub-Advisory Agreement.
Form of Co-Administration Agreement with Counsellors Funds
(h)(2) Service, Inc.
(h)(3) Form of Co-Administration Agreement with PFPC Inc.
Opinion and Consent of Willkie Farr & Gallagher, counsel to
(i)(1) the Fund.
Opinion and Consent of Venable, Baetjer and Howard, LLP,
(i)(2) Maryland counsel to the Fund.
(l) Form of Purchase Agreement.
</TABLE>
<PAGE> 1
EXHIBIT C
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
WARBURG, PINCUS EUROPEAN EQUITY FUND, INC.
THE CORPORATION IS AUTHORIZED TO ISSUE THREE BILLION SHARES, PAR VALUE $.001.
SPECIMEN
<PAGE> 2
The Corporation is authorized to issue three 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> 3
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
WARBURG, PINCUS EUROPEAN EQUITY FUND, INC.
THE CORPORATION IS AUTHORIZED TO ISSUE ONE BILLION SHARES, PAR VALUE $.001.
DESIGNATED INSTITUTIONAL SHARES
SPECIMEN
-2-
<PAGE> 4
The Corporation is authorized to issue three 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 d(1)
INVESTMENT ADVISORY AGREEMENT
______________ ___, 1998
BEA Associates
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Dear Sirs:
Warburg, Pincus European Equity Fund, Inc. (the "Fund"), a
corporation organized and existing under the laws of the State of Maryland,
herewith confirms its agreement with BEA Associates (the "Adviser"), a general
partnership organized under the laws of the State of New York, as follows:
1. Investment Description; Appointment
The Fund desires to employ the capital of the Fund by investing and
reinvesting in investments of the kind and in accordance with the limitations
specified in its Articles of Incorporation, as may be amended from time to time,
and in the Fund's Prospectus(es) and Statement(s) of Additional Information as
from time to time in effect (the "Prospectus" and "SAI," respectively), and in
such manner and to such extent as may from time to time be approved by the Board
of Directors of the Fund. Copies of the Fund's Prospectus and SAI have been or
will be submitted to the Adviser. The Fund desires to employ and hereby appoints
the Adviser to act as investment adviser to the Fund. The Adviser accepts the
appointment and agrees to furnish the services for the compensation set forth
below.
2. Services as Investment Adviser
Subject to the supervision and direction of the Board of Directors of
the Fund, the Adviser will (a) act in strict conformity with the Fund's Articles
of Incorporation, the Investment Company Act of 1940 (the "1940 Act") and the
Investment Advisers Act of 1940, as the same may from time to time be amended
(the "Advisers Act"), (b) manage the Fund's assets in accordance with the Fund's
investment objective and policies as stated in the Fund's Prospectus and SAI,
(c) make investment decisions for the Fund, (d) place purchase and sale
<PAGE> 2
orders for securities on behalf of the Fund, (e) exercise voting rights in
respect of portfolio securities and other investments for the Fund, and (f)
monitor and evaluate the services provided by the Fund's investment
sub-adviser(s), if any, under the terms of the applicable investment
sub-advisory agreement. In providing those services, the Adviser will provide
investment research and supervision of the Fund's investments and conduct a
continual program of investment, evaluation and, if appropriate, sale and
reinvestment of the Fund's assets. In addition, the Adviser will furnish the
Fund with whatever statistical information the Fund may reasonably request with
respect to the securities that the Fund may hold or contemplate purchasing.
Subject to the approval of the Board of Directors of the Fund and,
where required by law, the Fund's shareholders, the Adviser may engage an
investment sub-adviser or sub-advisers to provide advisory services in respect
of the Fund and may delegate to such investment sub-adviser(s) the
responsibilities described in subparagraphs (b), (c), (d) and (e) above. In the
event that an investment sub-adviser's engagement has been terminated, the
Adviser shall be responsible for furnishing the Fund with the services required
to be performed by such investment sub-adviser(s) under the applicable
investment sub-advisory agreement(s) or arranging for a successor investment
sub-adviser(s) to provide such services on terms and conditions acceptable to
the Fund and the Fund's Board of Directors and subject to the requirements of
the 1940 Act.
3. Brokerage
In executing transactions for the Fund, selecting brokers or dealers
and negotiating any brokerage commission rates, the Adviser will use its best
efforts to seek the best overall terms available. In assessing the best overall
terms available for any portfolio transaction, the Adviser will consider all
factors it deems relevant including, but not limited to, breadth of the market
in the security, the price of the security, the financial condition and
execution capability of the broker or dealer and the reasonableness of any
commission for the specific transaction and for transactions executed through
the broker or dealer in the aggregate. In selecting brokers or dealers to
execute a particular transaction and in evaluating the best overall terms
available, the Adviser may consider the brokerage and research services (as
those terms are defined in Section 28(e) of the Securities Exchange Act of 1934,
as the same may from time to time be amended) provided to the Fund and/or other
accounts over which the Adviser or an affiliate exercises investment discretion.
4. Information Provided to the Fund
The Adviser will keep the Fund informed of developments materially
affecting the Fund, and will, on its own initiative,
-2-
<PAGE> 3
furnish the Fund from time to time with whatever information the Adviser
believes is appropriate for this purpose.
5. Disclosure Regarding the Adviser
(a) The Adviser has reviewed the disclosure about the Adviser
contained in the Fund's registration statement and represents and warrants that,
with respect to such disclosure about the Adviser or information related,
directly or indirectly, to the Adviser, such registration statement contains, as
of the date hereof, no untrue statement of any material fact and does not omit
any statement of a material fact which is required to be stated therein or
necessary to make the statements contained therein not misleading.
(b) The Adviser agrees to notify the Fund promptly of (i) any
statement about the Adviser contained in the Fund's registration statement that
becomes untrue in any material respect, (ii) any omission of a material fact
about the Adviser in the Fund's registration statement which is required to be
stated therein or necessary to make the statements contained therein not
misleading, (iii) any reorganization or change in the Adviser, including any
change in its ownership or key employees, or (iv) any change in the membership
of the Adviser, as long as the Adviser is a partnership.
(c) Prior to the Fund or any affiliated person (as defined in the
1940 Act, an "Affiliate") of the Fund using or distributing sales literature or
other promotional material referring to the Adviser ("Promotional Material"),
the Fund shall forward such material to the Adviser and shall allow the Adviser
reasonable time to review the material. The Adviser will not act unreasonably in
its review of Promotional Material and the Fund will use all reasonable efforts
to ensure that all Promotional Material used or distributed by or on behalf of
the Fund will comply with the requirements of the Advisers Act, the 1940 Act and
the rules and regulations promulgated thereunder.
(d) The Adviser has supplied the Fund copies of its Form ADV with all
exhibits and attachments thereto and will hereinafter supply the Fund, promptly
upon preparation thereof, copies of all amendments or restatements of such
document.
6. Compliance
(a) The Adviser agrees that it shall promptly notify the Fund (i) in
the event that the SEC or any other regulatory authority has censured its
activities, functions or operations; suspended or revoked its registration as an
investment adviser; or has commenced proceedings or an investigation that may
result in any of these actions, (ii) in the event that there is a change
-3-
<PAGE> 4
in the Adviser, financial or otherwise, that adversely affects its ability to
perform services under this Agreement or (iii) upon having a reasonable basis
for believing that, as a result of the Adviser's investing the Fund's assets,
the Fund's investment portfolio has ceased to adhere to the Fund's investment
objectives, policies and restrictions as stated in the Prospectus or SAI or is
otherwise in violation of applicable law.
(b) The Fund agrees that it shall promptly notify the Adviser in the
event that the SEC has censured the Fund; placed limitations upon any of its
activities, functions or operations; or has commenced proceedings or an
investigation that may result in any of these actions.
(c) The Fund shall be given access to the records of the Adviser at
reasonable times solely for the purpose of monitoring compliance with the terms
of this Agreement and the rules and regulations applicable to the Adviser
relating to its providing investment advisory services to the Fund, including
without limitation records relating to trading by employees of the Adviser for
their own accounts and on behalf of other clients. The Adviser agrees to
cooperate with the Fund and its representatives in connection with any such
monitoring efforts.
7. Books and Records
(a) In compliance with the requirements of Rule 31a-3 under the 1940
Act, the Adviser hereby agrees that all records which it maintains for the Fund
are the property of the Fund and further agrees to surrender promptly to the
Fund any of such records upon request. The Adviser further agrees to preserve
for the periods prescribed by Rule 31a-2 under the 1940 Act the records required
to be maintained by Rule 31a-1 under the 1940 Act and to preserve the records
required by Rule 204-2 under the Advisers Act for the period specified therein.
(b) The Adviser agrees on behalf of itself and its employees to treat
confidentially and as proprietary information of the Fund all records and other
information relative to the Fund and prior, present or potential shareholders
and not to use such records and information for any purpose other than
performance of its responsibilities and duties hereunder except after prior
notification to and approval in writing of the Fund, which approval shall not be
unreasonably withheld and may not be withheld where the Adviser may be exposed
to civil or criminal contempt proceedings for failure to comply or when
requested to divulge such information by duly constituted authorities.
(c) The Adviser hereby agrees to furnish to regulatory authorities
having the requisite authority any information or reports in connection with
services that the Adviser renders
-4-
<PAGE> 5
pursuant to this Agreement which may be requested in order to ascertain whether
the operations of the Fund are being conducted in a manner consistent with
applicable laws and regulations.
8. Standard of Care
The Adviser shall exercise its best judgment in rendering the
services listed in paragraphs 2, 3 and 4 above. The Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the Fund
in connection with the matters to which this Agreement relates, provided that
nothing herein shall be deemed to protect or purport to protect the Adviser
against any liability to the Fund or to shareholders of the Fund to which the
Adviser would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or by reason of
the Adviser's reckless disregard of its obligations and duties under this
Agreement.
9. Compensation
In consideration of the services rendered pursuant to this Agreement,
the Fund will pay the Adviser an annual fee calculated at an annual rate of
1.00% of the Fund's average daily net assets. The fee for the period from the
date the Fund's initial registration statement is declared effective by the
Securities and Exchange Commission to the end of the year during which the
initial registration statement is declared effective shall be prorated according
to the proportion that such period bears to the full yearly period. Upon any
termination of this Agreement before the end of a year, the fee for such part of
that year shall be prorated according to the proportion that such period bears
to the full yearly period and shall be payable upon the date of termination of
this Agreement. For the purpose of determining fees payable to the Adviser, the
value of the Fund's net assets shall be computed at the times and in the manner
specified in the Fund's Prospectus or SAI.
10. Expenses
The Adviser will bear all expenses in connection with the performance
of its services under this Agreement, including the fees payable to any
investment sub-adviser engaged pursuant to paragraph 2 of this Agreement. The
Fund will bear its proportionate share of certain other expenses to be incurred
in its operation, including: investment advisory and administration fees; taxes,
interest, brokerage fees and commissions, if any; fees of Directors of the Fund
who are not officers, directors, or employees of the Adviser or any of its
affiliates; fees of any pricing service employed to value shares of the Fund;
Securities and Exchange Commission fees and state blue sky qualification fees;
charges of custodians and transfer and dividend disbursing agents; the Fund's
proportionate share of insurance premiums;
-5-
<PAGE> 6
outside auditing and legal expenses; costs of maintenance of the Fund's
existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of shareholders' reports
and meetings of the shareholders of the Fund and of the officers or Board of
Directors of the Fund; and any extraordinary expenses.
The Fund will be responsible for nonrecurring expenses which may
arise, including costs of litigation to which the Fund is a party and of
indemnifying officers and Directors of the Fund with respect to such litigation
and other expenses as determined by the Directors.
11. Services to Other Companies or Accounts
The Fund understands that the Adviser now acts, will continue to act
and may act in the future as investment adviser to fiduciary and other managed
accounts and to one or more other investment companies or series of investment
companies, and the Fund has no objection to the Adviser so acting, provided that
whenever the Fund and one or more other accounts or investment companies or
portfolios advised by the Adviser have available funds for investment,
investments suitable and appropriate for each will be allocated in accordance
with a formula believed to be equitable to each entity. The Fund recognizes that
in some cases this procedure may adversely affect the size of the position
obtainable for the Fund. In addition, the Fund understands that the persons
employed by the Adviser to assist in the performance of the Adviser's duties
hereunder will not devote their full time to such service and nothing contained
herein shall be deemed to limit or restrict the right of the Adviser or any
affiliate of the Adviser to engage in and devote time and attention to other
businesses or to render services of whatever kind or nature, provided that doing
so does not adversely affect the ability of the Adviser to perform its services
under this Agreement.
12. Term of Agreement
This Agreement shall continue until April 17, 2000 and thereafter
shall continue automatically for successive annual periods, provided such
continuance is specifically approved at least annually by (a) the Board of
Directors of the Fund or (b) a vote of a "majority" (as defined in the 1940 Act)
of the Fund's outstanding voting securities, provided that in either event the
continuance is also approved by a majority of the Board of Directors who are not
"interested persons" (as defined in said Act) of any party to this Agreement, by
vote cast in person at a meeting called for the purpose of voting on such
approval. This Agreement is terminable, without penalty, on 60 days' written
notice, by the Board of Directors of the Fund or by vote of
-6-
<PAGE> 7
holders of a majority of the Fund's shares, or upon 90 days' written notice, by
the Adviser. This Agreement will also terminate automatically in the event of
its assignment (as defined in said Act).
13. Representations by the Parties
(a) The Adviser represents and warrants that it is a duly registered
investment adviser under the Advisers Act, a duly registered investment adviser
in any and all states of the United States in which the Adviser is required to
be so registered and has obtained all necessary licenses and approvals in order
to perform the services provided in this Agreement. The Adviser covenants to
maintain all necessary registrations, licenses and approvals in effect during
the term of this Agreement.
(b) The Adviser represents that it has read and understands the
Prospectus and SAI and warrants that in investing the Fund's assets it will use
all reasonable efforts to adhere to the Fund's investment objectives, policies
and restrictions contained therein.
(c) The Adviser represents that it has adopted a written Code of
Ethics in compliance with Rule 17j-1 under the 1940 Act and will provide the
Fund with any amendments to such Code.
(d) The Fund represents that a copy of its Articles of Incorporation,
dated July 26, 1998, together with all amendments thereto, is on file in the
Department of Assessments and Taxation of the State of Maryland.
14. Miscellaneous
The Adviser represents that it is the sole owner of the name and mark
"BEA," as used with respect to investment vehicles or services. The Adviser
hereby grants to the Fund and its affiliates a non-exclusive license to use the
"BEA" name and mark or a derivation thereof in connection with the Fund,
including, without limitation, use of the "BEA" name and mark in any disclosure
document, advertisement, sales literature or other materials describing or
promoting the Fund. If the Adviser ceases to act as the investment adviser of
the Fund's shares, the Fund agrees that, at the Adviser's request, the Fund's
license to use the "BEA" name and mark will terminate and the Fund will take all
necessary action to discontinue any use of the "BEA" name and mark.
The Adviser agrees that it will not use the name and mark "Warburg
Pincus" except in regulatory filings or as expressly permitted by the Fund in
writing.
-7-
<PAGE> 8
Please confirm that the foregoing is in accordance with your
understanding by indicating your acceptance hereof at the place below indicated,
whereupon it shall become a binding agreement between us.
Very truly yours,
WARBURG, PINCUS EUROPEAN
EQUITY FUND, INC.
By:
-------------------------
Name:
------------------
Title:
------------------
Accepted:
BEA ASSOCIATES
By:
-----------------------
Name:
-----------------
Title:
-----------------
-8-
<PAGE> 1
EXHIBIT d(2)
SUB-INVESTMENT ADVISORY AGREEMENT
____________ __, 1998
Credit Suisse Asset Management Limited
Beaufort House
15 St Botolph Street
London EC3A7JJ
Dear Sirs:
Warburg, Pincus European Equity Fund, Inc. (the "Fund"), a
corporation organized and existing under the laws of the State of Maryland, and
BEA Associates, as investment adviser to the Fund ("BEA"), herewith confirms
their agreement with Credit Suisse Asset Management Limited (the "Sub-Adviser"),
a corporation organized under the laws of England, as follows:
1. Investment Description; Appointment
The Fund desires to employ the capital of the Fund by investing and
reinvesting in securities of the kind and in accordance with the limitations
specified in the Fund's Articles of Incorporation, as may be amended from time
to time (the "Articles of Incorporation"), and in the Fund's Prospectus(es) and
Statement(s) of Additional Information, as from time to time in effect (the
"Prospectus" and "SAI," respectively), and in such manner and to such extent as
may from time to time be approved by the Board of Directors of the Fund. Copies
of the Prospectus, SAI and Articles of Incorporation have been or will be
submitted to the Sub-Adviser. The Fund agrees to provide the Sub-Adviser copies
of all amendments to the Prospectus and SAI on an on-going basis. The Fund
employs BEA as its investment adviser. BEA desires to employ and hereby appoints
the Sub-Adviser to act as its sub-investment adviser upon the terms set forth in
this Agreement. The Sub-Adviser accepts the appointment and agrees to furnish
the services set forth below for the compensation provided for herein.
2. Services as Sub-Investment Adviser
(a) Subject to the supervision and direction of BEA, the Sub-Adviser
will assist BEA in providing investment advisory and portfolio management advice
to the Fund in accordance with (a) the Articles of Incorporation, (b) the
Investment Company Act of 1940, as amended (the "1940 Act"), and the Investment
Advisers
<PAGE> 2
Act of 1940, as amended (the "Advisers Act"), and all applicable Rules and
Regulations of the Securities and Exchange Commission (the "SEC") and all other
applicable laws and regulations, and (c) the Fund's investment objective and
policies as stated in the Prospectus and SAI and investment parameters provided
by BEA from time to time. In connection therewith, the Sub-Adviser will assist
BEA in:
(i) providing a continuous investment program for the Fund,
including investment research and management with respect to securities,
investments, cash and cash equivalents in the Fund's portfolio;
(ii) determining whether to purchase, retain or sell securities and
other investments (collectively, "Investments") on behalf of the Fund. The
Sub-Adviser is hereby authorized to execute, or place orders for the
execution of, Investments on behalf of the Fund;
(iii) assisting the custodian and accounting agent for the Fund in
determining or confirming, consistent with the procedures and policies
stated in the Prospectus and SAI, the value of any Investments for which
the custodian and accounting agent seek assistance from or identify for
review by the Sub-Adviser;
(iv) monitoring the execution of orders for the purchase or sale of
Investments and the settlement and clearance of those orders;
(v) exercising voting rights in respect of Investments; and
(vi) providing reports to the Fund's Board of Directors for
consideration at quarterly meetings of the Board on Investments and
furnishing the Fund's Board of Directors with such periodic and special
reports as the Fund may reasonably request.
(b) In connection with the performance of the services of the
Sub-Adviser provided for herein, the Sub-Adviser: (i) will furnish BEA with such
periodic and special reports as BEA may reasonably request, and (ii) may
contract at its own expense with third parties for the acquisition of research,
clerical services and other administrative services that would not require such
parties to be required to register as an investment adviser under the Advisers
Act; provided that the Sub-Adviser shall remain liable for the performance of
its duties hereunder.
<PAGE> 3
3. Execution of Transactions
(a) The Sub-Adviser will execute transactions for the Fund only
through brokers or dealers appearing on a list of brokers and dealers approved
by BEA. In executing transactions for the Fund, selecting brokers or dealers and
negotiating any brokerage commission rates, the Sub-Adviser will use its best
efforts to seek the best overall terms available. In assessing the best overall
terms available for any portfolio transaction, the Sub-Adviser will consider all
factors it deems relevant including, but not limited to, the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer and the reasonableness of any
commission for the specific transaction and for transactions executed through
the broker or dealer in the aggregate. In selecting brokers or dealers to
execute a particular transaction and in evaluating the best overall terms
available, to the extent that the execution and price offered by more than one
broker or dealer are comparable the Sub-Adviser may consider any brokerage and
research services (as those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934) provided to the Sub-Adviser or to BEA for use on behalf of
the Fund or other clients of the Sub-Adviser or BEA.
(b) The Sub-Adviser will not effect orders for the purchase or sale
of securities on behalf of the Fund through brokers or dealers as agents.
(c) It is understood that the services of the Sub-Adviser are not
exclusive, and nothing in this Agreement shall prevent the Sub-Adviser from
providing similar services to other investment companies or from engaging in
other activities, provided that those activities do not adversely affect the
ability of the Sub-Adviser to perform its services under this Agreement. The
Fund and BEA further understand and acknowledge that the persons employed by the
Sub-Adviser to assist in the performance of its duties under this Agreement will
not devote their full time to that service. Nothing contained in this Agreement
will be deemed to limit or restrict the right of the Sub-Adviser or any
affiliate of the Sub-Adviser to engage in and devote time and attention to other
businesses or to render services of whatever kind or nature, provided that doing
so does not adversely affect the ability of the Sub-Adviser to perform its
services under this Agreement.
(d) On occasions when the Sub-Adviser deems the purchase or sale of a
security to be in the best interest of the Fund as well as of other investment
advisory clients of the Sub-Adviser, the Sub-Adviser may, to the extent
permitted by applicable laws and regulations, but shall not be obligated to,
aggregate the securities to be so sold or purchased with those of its other
clients. In such event, allocation of the securities
<PAGE> 4
so purchased or sold, as well as the expenses incurred in the transaction, will
be made by the Sub-Adviser in a manner that is fair and equitable, in the
judgment of the Sub-Adviser, in the exercise of its fiduciary obligations to the
Fund and to such other clients. The Sub-Adviser shall provide to BEA and the
Fund all information reasonably requested by BEA and the Fund relating to the
decisions made by the Sub-Adviser regarding allocation of securities purchased
or sold, as well as the expenses incurred in a transaction, among the Fund and
the Sub-Adviser's other investment advisory clients.
(e) In connection with the purchase and sale of securities for the
Fund, the Sub-Adviser will provide such information as may be reasonably
necessary to enable the custodian and co-administrators to perform their
administrative and recordkeeping responsibilities with respect to the Fund.
4. Disclosure Regarding the Sub-Adviser
(a) The Sub-Adviser has reviewed the disclosure about the Sub-Adviser
contained in the Fund's registration statement and represents and warrants that,
with respect to such disclosure about the Sub-Adviser or information related,
directly or indirectly, to the Sub-Adviser, such registration statement
contains, as of the date hereof, no untrue statement of any material fact and
does not omit any statement of a material fact which is required to be stated
therein or necessary to make the statements contained therein not misleading.
(b) The Sub-Adviser agrees to notify BEA and the Fund promptly of (i)
any statement about the Sub-Adviser contained in the Fund's registration
statement that becomes untrue in any material respect, (ii) any omission of a
material fact about the Sub-Adviser in the Fund's registration statement which
is required to be stated therein or necessary to make the statements contained
therein not misleading, or (iii) any reorganization or change in the
Sub-Adviser, including any change in its ownership or key employees.
(c) Prior to the Fund or BEA or any affiliated person (as defined in
the 1940 Act, an "Affiliate") of either using or distributing sales literature
or other promotional material referring to the Sub-Adviser ("Promotional
Material"), the Fund or BEA, where applicable, shall forward such material to
the Sub-Adviser and shall allow the Sub-Adviser reasonable time to review the
material. The Sub-Adviser will not act unreasonably in its review of Promotional
Material and the Fund or BEA, where applicable, will use all reasonable efforts
to ensure that all Promotional Material used or distributed by or on behalf of
the Fund or BEA will comply with the requirements of the Advisers
<PAGE> 5
Act, the 1940 Act and the rules and regulations promulgated thereunder.
(d) The Sub-Adviser has supplied BEA and the Fund copies of its Form
ADV with all exhibits and attachments thereto and will hereinafter supply BEA
and the Fund, promptly upon preparation thereof, copies of all amendments or
restatements of such document.
5. Certain Representations and
Warranties of the Sub-Adviser
(a) The Sub-Adviser represents and warrants that it is a duly
registered investment adviser under the Advisers Act, a duly registered
investment adviser in any and all states of the United States in which the
Sub-Adviser is required to be so registered and has obtained all necessary
licenses and approvals in order to perform the services provided in this
Agreement. The Sub-Adviser covenants to maintain all necessary registrations,
licenses and approvals in effect during the term of this Agreement.
(b) The Sub-Adviser represents that it has read and understands the
Prospectus and SAI and warrants that in investing the Fund's assets it will use
all reasonable efforts to adhere to the Fund's investment objectives, policies
and restrictions contained therein.
(c) The Sub-Adviser represents that it has adopted a written Code of
Ethics in compliance with Rule 17j-1 under the 1940 Act and will provide the
Fund with any amendments to such Code.
6. Compliance
(a) The Sub-Adviser agrees that it shall promptly notify BEA and the
Fund (i) in the event that the SEC or any other regulatory authority has
censured its activities, functions or operations; suspended or revoked its
registration as an investment adviser; or has commenced proceedings or an
investigation that may result in any of these actions, (ii) in the event that
there is a change in the Sub-Adviser, financial or otherwise, that adversely
affects its ability to perform services under this Agreement or (iii) upon
having a reasonable basis for believing that, as a result of the Sub-Adviser's
investing the Fund's assets, the Fund's investment portfolio has ceased to
adhere to the Fund's investment objectives, policies and restrictions as stated
in the Prospectus or SAI or is otherwise in violation of applicable law.
<PAGE> 6
(b) BEA agrees that it shall promptly notify the Sub-Adviser in the
event that the SEC has censured BEA or the Fund; placed limitations upon any of
their activities, functions or operations; suspended or revoked BEA's
registration as an investment adviser; or has commenced proceedings or an
investigation that may result in any of these actions.
(c) The Fund and BEA shall be given access to the records of the
Sub-Adviser at reasonable times solely for the purpose of monitoring compliance
with the terms of this Agreement and the rules and regulations applicable to the
Sub-Adviser relating to its providing investment advisory services to the Fund,
including without limitation records relating to trading by employees of the
Sub-Adviser for their own accounts and on behalf of other clients. The
Sub-Adviser agrees to cooperate with the Fund and BEA and their representatives
in connection with any such monitoring efforts.
7. Books and Records
(a) In compliance with the requirements of Rule 31a-3 under the 1940
Act, the Sub-Adviser hereby agrees that all records which it maintains for the
Fund are the property of the Fund and further agrees to surrender promptly to
the Fund any of such records upon request. The Sub-Adviser further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records
required to be maintained by Rule 31a-1 under the 1940 Act and to preserve the
records required by Rule 204-2 under the Advisers Act for the period specified
therein.
(b) The Sub-Adviser hereby agrees to furnish to regulatory
authorities having the requisite authority any information or reports in
connection with services that the Sub-Adviser renders pursuant to this Agreement
which may be requested in order to ascertain whether the operations of the Fund
are being conducted in a manner consistent with applicable laws and regulations.
8. Provision of Information;
Proprietary and Confidential Information
(a) BEA agrees that it will furnish to the Sub-Adviser information
related to or concerning the Fund that the Sub-Adviser may reasonably request.
(b) The Sub-Adviser agrees on behalf of itself and its employees to
treat confidentially and as proprietary information of the Fund all records and
other information relative to the Fund, BEA and prior, present or potential
shareholders and not to use such records and information for any purpose other
than performance of its responsibilities and duties hereunder except
<PAGE> 7
after prior notification to and approval in writing of the Fund, which approval
shall not be unreasonably withheld and may not be withheld where the Sub-Adviser
may be exposed to civil or criminal contempt proceedings for failure to comply
or when requested to divulge such information by duly constituted authorities.
(c) The Sub-Adviser represents and warrants that neither it nor any
affiliate will use the name of the Fund, BEA or any of their affiliates in any
prospectus, sales literature or other material in any manner without the prior
written approval of the Fund or BEA, as applicable.
9. Standard of Care
The Sub-Adviser shall exercise its best judgment in rendering the
services described herein. The Sub-Adviser shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund or BEA in
connection with the matters to which this Agreement relates, except that the
Sub-Adviser shall be liable for a loss resulting from a breach of fiduciary duty
by the Sub-Adviser with respect to the receipt of compensation for services;
provided that nothing herein shall be deemed to protect or purport to protect
the Sub-Adviser against any liability to the Fund or BEA or to shareholders of
the Fund to which the Sub-Adviser would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or by reason of the Sub-Adviser's reckless disregard
of its obligations and duties under this Agreement. The Fund and BEA understand
and agree that the Sub-Adviser may rely upon information furnished to it
reasonably believed by the Sub-Adviser to be accurate and reliable and, except
as herein provided, the Sub-Adviser shall not be accountable for loss suffered
by the Fund by reason of such reliance of the Sub-Adviser.
10. Compensation
In consideration of the services rendered pursuant to this Agreement,
BEA will pay the Sub-Adviser a quarterly fee equal to 50% of the net quarterly
amount received by BEA from the Fund for its services as the Fund's investment
adviser. The fee for the period from the date of this Agreement to the end of
the quarter during which this Agreement commenced shall be prorated according to
the proportion that such period bears to the full quarterly period. Such fee
shall be paid by BEA to the Sub-Adviser within ten (10) business days after the
last day of each quarter or, upon termination of this Agreement before the end
of a quarter, within ten (10) business days after the effective date of such
termination. Upon any termination of this Agreement before the end of a quarter,
the fee for such part of that
<PAGE> 8
quarter shall be prorated according to the proportion that such period bears to
the full quarterly period. For the purpose of determining fees payable to the
Sub-Adviser, the net quarterly advisory fee received by BEA from the Fund shall
be the advisory fee set forth in the Investment Advisory Agreement between BEA
and the Fund reduced by any applicable fee waivers or expense reimbursements
provided by BEA. The Sub-Adviser shall have no right to obtain compensation
directly from the Fund for services provided hereunder and agrees to look solely
to BEA for payment of fees due.
11. Expenses
(a) The Sub-Adviser will bear all expenses in connection with the
performance of its services under this Agreement, which shall not include the
Fund's expenses listed in paragraph 11(b).
(b) The Fund will bear certain other expenses to be incurred in its
operation, including: investment advisory and administration fees; taxes,
interest, brokerage fees and commissions, if any; fees of Directors of the Fund
who are not officers, directors, or employees of the Fund, BEA or the
Sub-Adviser or affiliates of any of them; fees of any pricing service employed
to value shares of the Fund; SEC fees, state Blue Sky qualification fees and any
foreign qualification fees; charges of custodians and transfer and dividend
disbursing agents; the Fund's proportionate share of insurance premiums; outside
auditing and legal expenses; costs of maintenance of the Fund's existence; costs
attributable to investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses and statements
of additional information for regulatory purposes and for distribution to
existing shareholders; costs of shareholders' reports and meetings of the
shareholders of the Fund and of the officers or Board of Directors of the Fund;
and any extraordinary expenses.
12. Term of Agreement
This Agreement shall commence on the date first written above and
shall continue until April 17, 2000, and thereafter shall continue automatically
for successive annual periods, provided such continuance is specifically
approved at least annually by (a) the Board of Directors of the Fund or (b) a
vote of a "majority" (as defined in the 1940 Act) of the Fund's outstanding
voting securities, provided that in either event the continuance is also
approved by a majority of the Board of Directors who are not "interested
persons" (as defined the 1940 Act) of any party to this Agreement, by vote cast
in person at a meeting called for the purpose of voting on such approval. This
Agreement is terminable, without penalty, (i) by BEA on 60
<PAGE> 9
(sixty) days' written notice to the Fund and the Sub-Adviser, (ii) by the Board
of Directors of the Fund or by vote of holders of a majority of the Fund's
shares on 60 (sixty) days' written notice to BEA and the Sub-Adviser, or (iii)
by the Sub-Adviser upon 60 (sixty) days' written notice to the Fund and BEA.
This Agreement will also terminate automatically in the event of its assignment
(as defined in the 1940 Act) by any party hereto. In the event of termination of
this Agreement for any reason, all records relating to the Fund kept by the
Sub-Adviser shall promptly be returned to BEA or the Fund, free from any claim
or retention of rights in such records by the Sub-Adviser. In the event this
Agreement is terminated or is not approved in the foregoing manner, the
provisions contained in paragraph numbers 4(c), 7, 8 and 9 shall remain in
effect.
13. Amendments
No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought, and no amendment of this Agreement shall be effective until approved by
an affirmative vote of (a) the holders of a majority of the outstanding voting
securities of the Fund and (b) the Board of Directors of the Fund, including a
majority of Directors who are not "interested persons" (as defined in the 1940
Act) of the Fund or of either party to this Agreement, by vote cast in person at
a meeting called for the purpose of voting on such approval, if such approval is
required by applicable law.
14. Notices
All communications hereunder shall be given (a) if to the
Sub-Adviser, to Credit Suisse Asset Management Limited, Beaufort House, 15 St
Botolph Street, London EC3A7JJ (Attention: [INSERT]), telephone: [INSERT],
telecopy: [INSERT], (b) if to BEA, to BEA Associates, One Citicorp Center, 153
East 53rd Street, New York, New York 10022 (Attention: [INSERT]), telephone:
[INSERT], telecopy: [INSERT], and (c) if to the Fund, c/o Warburg Pincus Funds,
466 Lexington Avenue, New York, New York 10017-3147, telephone: (212) 878-0600,
telecopy: (212) 878-9351 (Attention: President).
15. Choice of Law
This Agreement shall be governed by, and construed in accordance
with, the laws of the State of New York in the United States, including choice
of law principles; provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Advisers Act or any applicable rules,
regulations or orders of the SEC.
<PAGE> 10
16. Miscellaneous
(a) The captions of this Agreement are included for convenience only
and in no way define or limit any of the provisions herein or otherwise affect
their construction or effect.
(b) If any provision of this Agreement shall be held or made invalid
by a court decision, by statute or otherwise, the remainder of this Agreement
shall not be affected thereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(c) Nothing herein shall be construed to make the Sub-Adviser an
agent of BEA or the Fund.
(d) This Agreement may be executed in counterparts, with the same
effect as if the signatures were upon the same instrument.
Please confirm that the foregoing is in accordance with your
understanding by indicating your acceptance hereof at the place below indicated,
whereupon it shall become a binding agreement between us.
Very truly yours,
BEA ASSOCIATES
By:
-----------------------------------
Name:
Title:
WARBURG, PINCUS EUROPEAN EQUITY FUND, INC.
By:
-----------------------------------
Name:
Title:
CREDIT SUISSE ASSET
MANAGEMENT LIMITED
By:
---------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT h(2)
CO-ADMINISTRATION AGREEMENT
_________ ___, 1998
Counsellors Funds Service, Inc.
466 Lexington Avenue
New York, New York 10017-3147
Dear Sirs:
Warburg, Pincus European Equity Fund, Inc. (the "Fund"), a
corporation organized and existing under the laws of the State of Maryland,
confirms its agreement with Counsellors Funds Service, Inc. ("Counsellors
Service") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the limitations
specified in its Articles of Incorporation, as amended from time to time (the
"Articles"), in its By-Laws, as amended from time to time (the "By-laws"), in
the Fund's prospectus (the "Prospectus") and Statement of Additional
Information (the "Statement of Additional Information") as in effect from
time to time, and in such manner and to the extent as may from time to time
be approved by the Board of Directors of the Fund. Copies of the Prospectus,
Statement of Additional Information and the Articles and By-laws have been
submitted to Counsellors Service. The Fund employs BEA Associates (the
"Adviser") as its investment adviser and desires to employ and hereby
appoints Counsellors Service as its co-administrator. Counsellors Service
accepts this appointment and agrees to furnish the services for the
compensation set forth below.
2. Services as Co-Administrator
Subject to the supervision and direction of the Board of
Directors of the Fund, Counsellors Service will:
(a) assist in supervising all aspects of the Fund's operations,
except those performed by other parties pursuant to written agreements with
the Fund;
(b) provide various shareholder liaison services including, but
not limited to, responding to inquiries of
<PAGE> 2
shareholders regarding the Fund, providing information on shareholder
investments, assisting shareholders of the Fund in changing dividend options,
account designations and addresses, and other similar services;
(c) provide certain administrative services including, but not
limited to, providing periodic statements showing the account balance of a
Fund shareholder and integrating the statements with those of other
transactions and balances in the shareholder's other accounts serviced by the
Fund's custodian or transfer agent;
(d) supply the Fund with office facilities (which may be
Counsellors Service's own offices), data processing services, clerical,
internal executive and administrative services, and stationery and office
supplies;
(e) furnish corporate secretarial services, including assisting
in the preparation of materials for Board of Directors' meetings and
distributing those materials and preparing minutes of meetings of the Fund's
Board of Directors and any committees thereof and of the Fund's shareholders;
(f) coordinate the preparation of reports to the Fund's
shareholders of record and filings with the Securities and Exchange
Commission (the "SEC") including, but not limited to, proxy statements;
annual, semi-annual and quarterly reports to shareholders; and post-effective
amendments to the Fund's Registration Statement on Form N-1A (the
"Registration Statement");
(g) assist in the preparation of the Fund's tax returns and
assist in other regulatory filings as necessary;
(h) assist the Adviser, at the Adviser's request, in monitoring
and developing compliance procedures for the Fund which will include, among
other matters, procedures to assist the Adviser in monitoring compliance with
the Fund's investment objective, policies, restrictions, tax matters and
applicable laws and regulations; and
(i) act as liaison between the Fund and the Fund's independent
public accountants, counsel, custodian or custodians, transfer agent and
co-administrator and take all reasonable action in the performance of its
obligations under this Agreement to assure that all necessary information is
made available to each of them.
In performing all services under this Agreement, Counsellors
Service shall act in conformity with applicable law, the Articles and
By-laws, and the investment objective, investment policies and other
practices and policies set forth in the Registration Statement, as such
Registration Statement and practices and policies may be amended from time to
time.
-2-
<PAGE> 3
3. Compensation
In consideration of services rendered pursuant to this Agreement,
the Fund will pay Counsellors Service on the first business day of each month
a fee for the previous month at an annual rate of .10% of the Fund's average
daily net assets attributable to Common Shares and Advisor Shares.
Counsellors Service shall provide co-administration services with respect to
the Fund's Institutional Shares without compensation. The fee for the period
from the date the Fund commences its investment operations to the end of the
month during which the Fund commences its investment operations shall be
prorated according to the proportion that such period bears to the full
monthly period. Upon any termination of this Agreement before the end of any
month, the fee for such part of a month shall be prorated according to the
proportion which such period bears to the full monthly period and shall be
payable upon the date of termination of this Agreement. For the purpose of
determining fees payable to Counsellors Service, fees shall be calculated
monthly and the value of the Fund's net assets shall be computed at the times
and in the manner specified in the Prospectus and Statement of Additional
Information as from time to time in effect.
4. Expenses
Counsellors Service will bear all expenses in connection with the
performance of its services under this Agreement; provided, however, that the
Fund will reimburse Counsellors Service for the out-of-pocket expenses
incurred by it on behalf of the Fund. Such reimbursable expenses shall
include, but not be limited to, postage, telephone, telex and FedEx charges.
Counsellors Service will bill the Fund as soon as practicable after the end
of each calendar month for the expenses it is entitled to have reimbursed.
The Fund will bear certain other expenses to be incurred in its
operation, including: taxes, interest, brokerage fees and commissions, if
any; fees of Directors of the Fund who are not officers, directors, or
employees of the Adviser or Counsellors Service; SEC fees and state blue sky
qualification fees; charges of custodians and transfer and dividend
disbursing agents; certain insurance premiums; outside auditing and legal
expenses; costs of maintenance of corporate existence; except as otherwise
provided herein, costs attributable to investor services, including without
limitation, telephone and personnel expenses; costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of shareholders' reports
and meetings, and meetings of the officers of the Board of Directors of the
Fund; costs of any pricing services; and any extraordinary expenses.
5. Standard of Care
-3-
<PAGE> 4
Counsellors Service shall exercise its best judgment in rendering
the services listed in paragraph 2 above. Counsellors Service shall not be
liable for any error of judgment or mistake of law or for any loss suffered
by the Fund in connection with the matters to which this Agreement relates
provided that nothing in this Agreement shall be deemed to protect or purport
to protect Counsellors Service against liability to the Fund or its
shareholders to which Counsellors Service would otherwise be subject by
reason of willful misfeasance, bad faith or negligence on its part in the
performance of its duties or by reason of Counsellors Service's reckless
disregard of its obligations and duties under this Agreement.
6. Term of Agreement
This Agreement shall become effective as of the date the Fund
commences its investment operations and shall continue until April 17, 2000
and shall continue automatically (unless terminated as provided herein) for
successive annual periods ending on April 17th of each year, provided that
such continuance is specifically approved at least annually by the Board of
Directors of the Fund, including a majority of the Board of Directors who are
not "interested persons" (as defined in the Investment Company Act of 1940,
as amended) of any party to this Agreement, by vote cast in person at a
meeting called for the purpose of voting on such approval. This Agreement is
terminable, without penalty, on sixty (60) days' written notice, by the Board
of Directors of the Fund or by vote of holders of a majority of the Fund's
shares, or upon sixty (60) days' written notice, by Counsellors Service.
7. Service to Other Companies or Accounts
The Fund understands that Counsellors Service now acts, will
continue to act and may act in the future as administrator, co-administrator
or administrative services agent to one or more other investment companies,
and the Fund has no objection to Counsellors Service's so acting. The Fund
understands that the persons employed by Counsellors Service to assist in the
performance of Counsellors Service's duties hereunder will not devote their
full time to such service and nothing contained in this Agreement shall be
deemed to limit or restrict the right of Counsellors Service or any affiliate
of Counsellors Service to engage in and devote time and attention to other
businesses or to render services of whatever kind or nature.
-4-
<PAGE> 5
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance hereof by signing and returning to us the enclosed
copy hereof.
Very truly yours,
WARBURG, PINCUS EUROPEAN EQUITY FUND, INC.
By:
-------------------------
Name:
------------------
Title:
------------------
Accepted:
COUNSELLORS FUNDS SERVICE, INC.
By:
-----------------------------
Name:
-------------------
Title:
-------------------
-5-
<PAGE> 1
EXHIBIT h(3)
CO-ADMINISTRATION AGREEMENT
TERMS AND CONDITIONS
This Agreement is made as of ____________ ___, 1998 by and
between Warburg, Pincus European Equity Fund, Inc. (the "Fund"), a Maryland
corporation, and PFPC Inc. ("PFPC"), a Delaware corporation, which is an
indirect, wholly owned subsidiary of PNC Bank Corp.
The Fund is registered as an open-end investment company under
the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund
wishes to retain PFPC to provide certain administration and accounting
services, and PFPC wishes to furnish such services.
In consideration of the promises and mutual covenants herein
contained, the parties agree as follows:
1. Definitions.
(a) "Authorized Person." The term "Authorized Person" shall
mean any officer of the Fund and any other person, who is duly authorized by
the Fund's Board of Directors, to give Oral and Written Instructions on
behalf of the Fund. Such persons are listed in the Certificate attached
hereto as the Authorized Persons Appendix to each Services Attachment to this
Agreement. If PFPC provides more than one service hereunder, the Fund's
designation of Authorized Persons may vary by service.
(b) "Board of Directors." The term "Board of Directors" shall
mean the Fund's Board of Directors or, where duly authorized, a competent
committee thereof.
(c) "CFTC." The term "CFTC" shall mean the Commodities Futures
Trading Commission.
(d) "Oral Instructions." The term "Oral Instructions" shall
mean oral instructions received by PFPC from an Authorized Person or from a
person reasonably believed by PFPC to be an Authorized Person.
(e) "PNC." The term "PNC" shall mean PNC Bank or a subsidiary
or affiliate of PNC Bank.
(f) "SEC." The term "SEC" shall mean the Securities and
Exchange Commission.
(g) "Securities and Commodities Laws." The terms the "1933
Act" shall mean the Securities Act of 1933, as amended, the "1934 Act" shall
mean the Securities Exchange Act of 1934, as amended, the "1940 Act" shall
mean the Investment Company Act
<PAGE> 2
1940, as amended, and the "CEA" shall mean the Commodities Exchange Act, as
amended.
(h) "Services." The term "Services" shall mean the service
provided to the Fund by PFPC.
(i) "Shares." The term "Shares" shall mean the shares of any
class of common stock, par value $.001 per share, of the Fund.
(j) "Property." The term "Property" shall mean:
(i) any and all securities and other investment
items which the Fund may from time to time
deposit, or cause to be deposited, with PNC or
which PNC may from time to time hold for the
Fund;
(ii) all income in respect of any of such securities
or other investment items;
(iii) all proceeds of the sale of any of such
securities or investment items; and
(iv) all proceeds of the sale of securities issued
by the Fund, which are received by PNC from
time to time, from or on behalf of the Fund.
(k) "Written Instructions." The term "Written Instructions"
shall mean written instructions signed by two Authorized Persons and received
by PFPC. The instructions may be delivered by hand, mail, tested telegram,
cable, telex or facsimile sending device.
2. Appointment.
The Fund hereby appoints PFPC to provide administration and
accounting services, in accordance with the terms set forth in this
Agreement. PFPC accepts such appointment and agrees to furnish such services.
3. Delivery of Documents.
The Fund has provided or, where applicable, will provide PFPC
with the following:
(a) certified or authenticated copies of the resolutions of the
Board of Directors, approving the appointment of PNC or its
affiliates to provide services to the Fund;
(b) a copy of the Fund's most recent effective registration
statement;
-2-
<PAGE> 3
(c) a copy of the Fund's advisory agreement;
(d) a copy of the Fund's distribution agreements;
(e) a copy of the Fund's co-administration agreement if PFPC is
not providing the Fund with such services;
(f) copies of any shareholder servicing agreements made in
respect of the Fund; and
(g) certified or authenticated copies of any and all amendments
or supplements to the foregoing.
4. Compliance with Government Rules and Regulations. PFPC
undertakes to comply with all applicable requirements of the 1933 Act, the
1934 Act, the 1940 Act, and the CEA, and any laws, rules and regulations of
governmental authorities having jurisdiction with respect to all duties to be
performed by PFPC hereunder. Except as specifically set forth herein, PFPC
assumes no responsibility for such compliance by the Fund.
5. Instructions.
Unless otherwise provided in this Agreement, PFPC shall act only
upon Oral and Written Instructions.
PFPC shall be entitled to rely upon any Oral and Written
Instructions it receives from an Authorized Person (or from a person
reasonably believed by PFPC to be an Authorized Person) pursuant to this
Agreement. PFPC may assume that any Oral or Written Instruction received
hereunder is not in any way inconsistent with the provisions of
organizational documents or this Agreement or of any vote, resolution or
proceeding of the Board of Directors or of the Fund's shareholders.
The Fund agrees to forward to PFPC Written Instructions
confirming Oral Instructions so that PFPC receives the Written Instructions
by the close of business on the same day that such Oral Instructions are
received. The fact that such confirming Written Instructions are not
received by PFPC shall in no way invalidate the transactions or
enforceability of the transactions authorized by the Oral Instructions. The
Fund further agrees that PFPC shall incur no liability to the Fund in acting
upon Oral or Written Instructions provided such instructions reasonably
appear to have been received from an Authorized Person.
6. Right to Receive Advice.
(a) Advice of the Fund. If PFPC is in doubt as to any action
it should or should not take, PFPC may request directions or advice,
including Oral or Written Instructions, from the Fund.
-3-
<PAGE> 4
(b) Advice of Counsel. If PFPC shall be in doubt as to any
questions of law pertaining to any action it should or should not take, PFPC
may request advice at its own cost from such counsel of its own choosing (who
may be counsel for the Fund, the Fund's investment adviser (the "Adviser") or
PFPC, at the option of PFPC).
(c) Conflicting Advice. In the event of a conflict between
directions, advice or Oral or Written Instructions PNC receives from the
Fund, and the advice it receives from counsel, PFPC shall be entitled to rely
upon and follow the advice of counsel.
(d) Protection of PFPC. PFPC shall be protected in any action
it takes or does not take in reliance upon directions, advice or Oral or
Written Instructions it receives from the Fund or from counsel and which PFPC
believes, in good faith, to be consistent with those directions, advice and
Oral or Written Instructions.
Nothing in this paragraph shall be construed so as to impose an
obligation upon PFPC (i) to seek such directions, advice or Oral or Written
Instructions, or (ii) to act in accordance with such directions, advice or
Oral or Written Instructions unless, under the terms of other provisions of
this Agreement, the same is a condition of PFPC's properly taking or not
taking such action.
7. Records.
The books and records pertaining to the Fund, which are in the
possession of PFPC, shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the 1940 Act and
other applicable securities laws, rules and regulations. The Fund, or the
Fund's Authorized Persons, shall have access to such books and records at all
times during PFPC's normal business hours. Upon the reasonable request of
the Fund, copies of any such books and records shall be provided by PFPC to
the Fund or to an Authorized Person of the Fund, at the Fund's expense.
PFPC shall keep the following records:
(a) all books and records with respect to the Fund's books of
account;
(b) records of the Fund's securities transactions; and
(c) all other books and records as PFPC is required to maintain
pursuant to Rule 31a-1 of the 1940 Act and as specifically
set forth in Appendix A hereto.
-4-
<PAGE> 5
8. Confidentiality.
PFPC agrees to keep confidential all records of the Fund and
information relative to the Fund and its shareholders (past, present and
potential), unless the release of such records or information is otherwise
consented to, in writing, by the Fund. The Fund agrees that such consent
shall not be unreasonably withheld. The Fund further agrees that, should
PFPC be required to provide such information or records to duly constituted
authorities (who may institute civil or criminal contempt proceedings for
failure to comply), PFPC shall not be required to seek the Fund's consent
prior to disclosing such information.
9. Liaison with Accountants.
PFPC shall act as liaison with the Fund's independent public
accountants and shall provide account analyses, fiscal year summaries, and
other audit-related schedules. PFPC shall take all reasonable action in the
performance of its obligations under this Agreement to assure that the
necessary information is made available to such accountants for the
expression of their opinion, as such may be required by the Fund from time to
time.
10. Disaster Recovery.
PFPC shall enter into and shall maintain in effect with
appropriate parties one or more agreements making reasonable provision of
emergency use of electronic data processing equipment to the extent
appropriate equipment is available. In the event of equipment failures, PFPC
shall, at no additional expense to the Fund, take reasonable steps to
minimize service interruptions but shall have no liability with respect
thereto.
11. Compensation.
As compensation for services rendered by PFPC during the term of
this Agreement, the Fund will pay PFPC a fee or fees as may be agreed to in
writing by the Fund and PFPC.
12. Indemnification.
The Fund agrees to indemnify and hold harmless PFPC and its
nominees from all taxes, charges, expenses, assessments, claims and
liabilities (including, without limitation, liabilities arising under the
1933 Act, the 1934 Act, the 1940 Act, the CEA, and any state and foreign
securities and blue sky laws, and amendments thereto, and expenses, including
(without limitation) attorneys' fees and disbursements, arising directly or
indirectly from any action which PFPC takes or does not take (a) at the
request or on the direction of or in reliance on the advice of the Fund or
(b) upon Oral or Written Instructions. Neither PFPC, nor any of its
nominees, shall be indemnified against any liability to the Fund or to its
shareholders (or any
-5-
<PAGE> 6
expenses incident to such liability) arising out of PFPC's own willful
misfeasance, bad faith, negligence or reckless disregard of its duties and
obligations under this Agreement.
13. Responsibility of PFPC.
PFPC shall be under no duty to take any action on behalf of the
Fund except as specifically set forth herein or as may be specifically agreed
to by PFPC, in writing. PFPC shall be obligated to exercise care and
diligence in the performance of its duties hereunder, to act in good faith
and to use its best efforts, within reasonable limits, in performing
services provided for under this Agreement. PFPC shall be responsible for
its own negligent failure to perform its duties under this Agreement.
Notwithstanding the foregoing, PFPC shall not be responsible for losses
beyond its control, provided that PFPC has acted in accordance with the
standard of care set forth above; and provided further that PFPC shall only
be responsible for that portion of losses or damages suffered by the Fund
that are attributable to the negligence of PFPC.
Without limiting the generality of the foregoing or of any other
provision of this Agreement, PFPC, in connection with its duties under this
Agreement, shall not be liable for (a) the validity or invalidity or
authority or lack thereof of any Oral or Written Instruction, notice or other
instrument which conforms to the applicable requirements of this Agreement,
and which PFPC reasonably believes to be genuine; or (b) delays or errors or
loss of data occurring by reason of circumstances beyond PFPC's control,
including acts of civil or military authority, national emergencies, labor
difficulties, fire, flood or catastrophe, acts of God, insurrection, war,
riots or failure of the mails, transportation, communication or power supply.
Notwithstanding anything in this Agreement to the contrary, PFPC
shall have no liability to the Fund for any consequential, special or
indirect losses or damages which the Fund may incur or suffer by or as a
consequence of PFPC's performance of the services provided hereunder, whether
or not the likelihood of such losses or damages was known by PFPC.
14. Description of Accounting Services.
(a) Services on a Continuing Basis. PFPC will perform the
following accounting functions if required:
(i) Journalize the Fund's investment, capital share
and income and expense activities;
(ii) Verify investment buy/sell trade tickets when
received from the Adviser and transmit trades
to the Fund's custodian for proper settlement;
-6-
<PAGE> 7
(iii) Maintain individual ledgers for investment
securities;
(iv) Maintain historical tax lots for each security;
(v) Reconcile cash and investment balances of the
Fund with the custodian, and provide the
Adviser with the beginning cash balance
available for investment purposes;
(vi) Update the cash availability throughout the day
as required by the Adviser;
(vii) Post to and prepare the Fund's Statement of
Assets and Liabilities and the Statement of
Operations;
(viii) Calculate various contractual expenses (e.g.,
advisory and custody fees);
(ix) Monitor the expense accruals and notify the
Fund's management of any proposed adjustments;
(x) Control all disbursements from the Fund and
authorize such disbursements upon Written
Instructions;
(xi) Calculate capital gains and losses;
(xii) Determine the Fund's net income;
(xiii) Obtain security market quotes from independent
pricing services approved by the Adviser, or if
such quotes are unavailable, then obtain such
prices from the Adviser, and in either case
calculate the market value of the Fund's
investments;
(xiv) Transmit or mail a copy of the daily portfolio
valuation to the Adviser;
(xv) Compute the net asset value of the Fund;
(xvi) As appropriate, compute the Fund's yield, total
return, expense ratios, portfolio turnover
rate, and, if required, portfolio average
dollar-weighted maturity; and
-7-
<PAGE> 8
(xvii) Prepare a monthly financial statement, which
will include the following items:
Schedule of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Cash Statement
Schedule of Capital Gains and Losses.
15. Description of Administration Services.
(a) Services on a Continuing Basis.
(i) Prepare quarterly broker security transactions
summaries;
(ii) Prepare monthly security transaction listings;
(iii) Prepare for execution and file the Fund's
federal and state tax returns;
(iv) Prepare and file the Fund's semiannual reports
with the SEC on Form N-SAR;
(v) Prepare and file with the SEC the Fund's annual
and semiannual shareholder reports;
(vi) Assist with the preparation of registration
statements and other filings relating to the
registration of Shares; and
(vii) Monitor the Fund's status as a regulated
investment company under Sub-Chapter M of the
Internal Revenue Code of 1986, as amended.
16. Duration and Termination.
This Agreement shall continue until terminated by the Fund or by
PFPC on sixty (60) days' prior written notice to the other party.
17. Notices.
-8-
<PAGE> 9
All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. If notice is sent by confirming telegram, cable,
telex or facsimile sending device, it shall be deemed to have been given
immediately. If notice is sent by first-class mail, it shall be deemed to
have been given three days after it has been mailed. If notice is sent by
messenger, it shall be deemed to have been given on the day it is delivered.
Notices shall be addressed (a) if to PFPC, at PFPC's address, 400 Bellevue
Parkway, Wilmington, Delaware 19809; (b) if to the Fund, at the address of
the Fund; or (c) if to neither of the foregoing, at such other address as
shall have been notified to the sender of any such notice or other
communication.
18. Amendments.
This Agreement, or any term thereof, may be changed or waived
only by written amendment, signed by the party against whom enforcement of
such change or waiver is sought.
19. Delegation.
PFPC may assign its rights and delegate its duties hereunder to
any wholly owned direct or indirect subsidiary of PNC Bank or PNC Bank Corp.,
provided that (a) PFPC gives the Fund thirty (30) days' prior written notice;
(b) the delegate agrees with PFPC to comply with all relevant provisions of
the 1940 Act; and (c) PFPC and such delegate promptly provide such
information as the Fund may request, and respond to such questions as the
Fund may ask, relative to the delegation, including (without limitation) the
capabilities of the delegate.
20. Counterparts.
This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
21. Further Actions.
Each party agrees to perform such further acts and execute such
further documents as are necessary to effectuate the purposes hereof.
22. Miscellaneous.
This Agreement embodies the entire agreement and understanding
between the parties and supersedes all prior agreements and understandings
relating to the subject matter hereof, provided that the parties may embody
in one or more separate documents their agreement, if any, with respect to
delegated and/or Oral Instructions.
-9-
<PAGE> 10
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 Delaware
and governed by Delaware law. If any provision of this agreement shall be
held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby. This Agreement
shall be binding and shall inure to the benefit of the parties hereto and
their respective successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their officers designated below on the day and year first
above written.
PFPC INC.
By:
----------------------------
Name:
---------------------
Title:
---------------------
WARBURG, PINCUS EUROPEAN EQUITY FUND, INC.
By:
----------------------------
Name:
---------------------
Title:
---------------------
-10-
<PAGE> 11
APPENDIX A
None.
-11-
<PAGE> 12
_______ ___, 1998
Warburg, Pincus European Equity Fund, Inc.
466 Lexington Avenue
New York, New York 10017
RE: CO-ADMINISTRATION SERVICE FEES
Gentlemen:
This letter constitutes our agreement with respect to
compensation to be paid to PFPC Inc. ("PFPC") under the terms of a
Co-Administration Agreement dated _________ ___, 1998 between you (the
"Fund") and PFPC. Pursuant to Paragraph 11 of that Agreement, and in
consideration of the services to be provided to you, you will pay PFPC an
annual co-administration fee, to be calculated daily and paid monthly. You
will also reimburse PFPC for its out-of-pocket expenses incurred on behalf of
the Fund, including, but not limited to: postage and handling, telephone,
telex, FedEx and outside pricing service charges.
The annual administration and accounting fee shall be the
following percentages of the Fund's average daily net assets.:
<TABLE>
<CAPTION>
Percentage Net Assets
---------- ----------
<S> <C>
0.12 First US$250,000,000
0.10 Next US$250,000,000
0.08 Next US$250,000,000
0.05 Over US$750,000,000
</TABLE>
The fee for the period from the day of the year this agreement is
entered into until the end of that year shall be pro-rated according to the
proportion which such period bears to the full annual period.
-12-
<PAGE> 13
If the foregoing accurately sets forth our agreement, and you
intend to be legally bound thereby, please execute a copy of this letter and
return it to us.
Very truly yours,
PFPC INC.
By:
--------------------------
Name:
--------------------
Title:
-------------------
Accepted: WARBURG, PINCUS EUROPEAN EQUITY FUND, INC.
By:
---------------------------
Name:
--------------------
Title:
--------------------
-13-
<PAGE> 1
EXHIBIT i(1)
WILLKIE FARR & GALLAGHER
September 3, 1998
Warburg, Pincus European Equity Fund, Inc.
466 Lexington Avenue
New York, New York 10017-3147
Ladies and Gentlemen:
We have acted as counsel to Warburg, Pincus European Equity 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," one
billion of which are designated "Institutional Shares," and one
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, 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. 333-60225 and
Investment Company Act File No. 811-08903 (the "Registration
Statement"), all resolutions adopted by the Fund's Board of Directors
(the "Board") at its organizational meeting held on July 20, 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 the above 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 European
Equity Fund, Inc.
September 3, 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 Institutional
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 i(2)
VENABLE, BAETJER AND HOWARD, LLP
1800 MERCANTILE BANK AND TRUST BUILDING
TWO HOPKINS PLAZA
BALTIMORE, MARYLAND 21201
September 1, 1998
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019-6099
Re: Warburg, Pincus European Equity Fund, Inc.
Ladies and Gentlemen:
We have acted as special Maryland counsel for Warburg, Pincus
European Equity Fund, Inc., a Maryland corporation (the "Fund"), in
connection with the organization of the Fund and the issuance of shares of
its common stock, par value $.001 per share including the Common Shares,
the Institutional Shares and the Advisor Shares.
As Maryland counsel for the Fund, we are familiar with its
Charter and Bylaws, as amended. We have examined its Registration
Statement on Form N-1A, Securities Act File No. 333-60225 and Investment
Company Act File No. 811-08903, 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 and so advise
you that:
1. The Fund is a corporation duly organized and validly
existing in good standing under the laws of the State of
Maryland.
2. 10,000 Institutional Shares have been duly authorized for
sale to Credit Suisse Asset Management Limited and when paid
for will be validly issued, fully paid and nonassessable.
3. The Common Shares, the Institutional Shares and the
Advisor 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.
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
<PAGE> 1
EXHIBIT L
PURCHASE AGREEMENT
Warburg, Pincus European Equity Fund, Inc. (the "Fund"), a
corporation organized under the laws of the State of Maryland, and Credit Suisse
Asset Management Limited ("Credit Suisse") hereby agree as follows:
1. The Fund offers Credit Suisse and Credit Suisse hereby purchases
10,000 shares of common stock of the Fund, which shall be designated
Institutional Shares, having a par value $.001 per share (the "Shares"), at a
price of $10.00 per Share (the "Initial Shares"). Credit Suisse hereby
acknowledges receipt of a certificate representing the Initial Shares and the
Fund hereby acknowledges receipt from Credit Suisse of $100,000.00 in full
payment for the Initial Shares.
2. Credit Suisse represents and warrants to the Fund that the Initial
Shares are being acquired for investment purposes and not for the purpose of
distributing them.
3. Credit Suisse agrees that if any holder of the Initial Shares
redeems such Shares in the Fund before five years after the date upon which the
Fund commences its investment activities, the redemption proceeds will be
reduced by the amount of unamortized organizational expenses, in the same
proportion as the Initial Shares being redeemed bears to the Initial Shares
outstanding at the time of redemption. The parties hereby
<PAGE> 2
acknowledge that any Shares acquired by Credit Suisse other than the Initial
Shares have not been acquired to fulfill the requirements of Section 14 of the
Investment Company Act of 1940, as amended, and, if redeemed, their redemption
proceeds will not be subject to reduction based on the unamortized
organizational expenses of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the ____ day of ________________, 1998.
WARBURG, PINCUS EUROPEAN EQUITY
FUND, INC.
By:
--------------------------------
Name:
Title:
ATTEST:
- ----------------------
CREDIT SUISSE ASSET MANAGEMENT
LIMITED
By:
--------------------------------
Name:
Title:
ATTEST:
- -----------------------
-2-
