<PAGE>
Rule 497(c)
Securities Act File No. 33-18632
Investment Co. Act File No. 811-5396
[LOGO]
PROSPECTUS
SEPTEMBER 29, 1995
[ ] WARBURG PINCUS CAPITAL APPRECIATION FUND
[ ] WARBURG PINCUS EMERGING GROWTH FUND
[ ] WARBURG PINCUS POST-VENTURE CAPITAL FUND
[ ] WARBURG PINCUS INTERNATIONAL EQUITY FUND
[ ] WARBURG PINCUS JAPAN OTC FUND
<PAGE>
WARBURG PINCUS FUNDS
P.O. BOX 9030
BOSTON, MASSACHUSETTS 02205-9030
TELEPHONE NUMBER: (800) 888-6878
September 29, 1995
PROSPECTUS
Warburg Pincus Funds are a family of open-end mutual funds that offer investors
a variety of investment opportunities. Five funds are described in this
Prospectus:
WARBURG, PINCUS CAPITAL APPRECIATION FUND seeks long-term capital appreciation
by investing principally in equity securities of medium-sized domestic
companies.
WARBURG, PINCUS EMERGING GROWTH FUND seeks maximum capital appreciation by
investing in equity securities of small- to medium-sized companies in the United
States with emerging or renewed growth potential.
WARBURG, PINCUS POST-VENTURE CAPITAL FUND seeks long-term growth of capital by
investing principally in equity securities of issuers in their post-venture
capital stage of development and pursues an aggressive investment strategy.
Because of the nature of the Fund's investments and certain strategies it may
use, an investment in the Fund involves certain risks and may not be appropriate
for all investors.
WARBURG, PINCUS INTERNATIONAL EQUITY FUND seeks long-term capital appreciation
by investing in international equity securities that are considered by the
Fund's investment adviser to have above-average potential for appreciation.
WARBURG, PINCUS JAPAN OTC FUND seeks long-term capital appreciation by investing
in a portfolio of securities traded in the Japanese over-the-counter market.
International investing entails special risk considerations, including currency
fluctuations, lower liquidity, economic instability, political uncertainty and
differences in accounting methods. See 'Risk Factors and Special
Considerations.'
NO LOAD CLASS OF COMMON SHARES
Each Fund offers two classes of shares. A class of Common Shares that is 'no
load' is offered by this Prospectus (i) directly from the Funds' distributor,
Counsellors Securities Inc., and (ii) through various brokerage firms including
Charles Schwab & Company, Inc. Mutual Fund OneSourceTM Program; Fidelity
Brokerage Services, Inc. FundsNetworkTM Program; Jack White & Company, Inc. and
Waterhouse Securities, Inc. The availability of the Japan OTC Fund through these
brokerage firms may vary. Common Shares of the Japan OTC Fund and the
Post-Venture Capital Fund are subject to a 12b-1 fee of .25% per annum.
LOW MINIMUM INVESTMENT
The minimum initial investment in each Fund is $2,500 ($500 for an IRA or
Uniform Gifts to Minors Act account) and the minimum subsequent investment is
$100. Through the Automatic Monthly Investment Plan, subsequent investment
minimums may be as low as $50. See 'How to Purchase Shares.'
This Prospectus briefly sets forth certain information about the Funds that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about each
Fund, contained in a Statement of Additional Information, has been filed with
the Securities and Exchange Commission (the 'SEC') and is available to investors
without charge by calling Warburg Pincus Funds at (800) 257-5614. Information
regarding the status of shareholder accounts may be obtained by calling Warburg
Pincus Funds at (800) 888-6878. The Statements of Additional Information bear
the same date as this Prospectus and are incorporated by reference in their
entirety into this Prospectus.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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<PAGE>
THE FUNDS' EXPENSES
Each of Warburg, Pincus Capital Appreciation Fund, Emerging Growth Fund,
International Equity Fund, Japan OTC Fund and Post-Venture Capital Fund (the
'Funds') currently offers two separate classes of shares: Common Shares and
Advisor Shares. For a description of Advisor Shares see 'General Information'
and 'Shareholder Servicing.' In addition, Common Shares of the Japan OTC Fund
and the Post-Venture Capital Fund pay the Fund's distributor a 12b-1 fee. See
'Management of the Funds -- Distributor.'
<TABLE>
<CAPTION>
CAPITAL EMERGING INTERNATIONAL JAPAN POST-
APPRECIATION GROWTH EQUITY OTC VENTURE
FUND FUND FUND FUND FUND
------------ -------- ------------- ----- ---------
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage
of offering price).................................... 0 0 0 0 0
Redemption Fee (as a percentage of the value of shares
redeemed)............................................. 0 0 0 1.00 %* 0
Annual Fund Operating Expenses (after fee waivers) (as a
percentage of average net assets)
Management Fees......................................... .69% .86% 1.00% .97 %`D' .69 %`D'
12b-1 Fees.............................................. 0 0 0 .25 % .25 %
Other Expenses.......................................... .36% .36% .44% .53 %`D' .71 %`D'
------ -------- ------ ----- ---------
Total Fund Operating Expenses........................... 1.05% 1.22% 1.44% 1.75 % 1.65 %
EXAMPLE
You would pay the following expenses
on a $1,000 investment, assuming (1) 5% annual return
and (2) redemption at the end of each time period:
1 year.................................................. $ 11 $ 12 $ 15 $ 18 $ 17
3 years................................................. $ 33 $ 39 $ 46 $ 55 $ 52
5 years................................................. $ 58 $ 67 $ 79 n.a. n.a.
10 years................................................ $128 $148 $ 172 n.a. n.a.
</TABLE>
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* Redemption fees are charged to shareholders redeeming their shares of the
Japan OTC Fund within six months after the date of purchase and are paid to
the Fund. The redemption fee is currently being waived until such later date
as the Japan OTC Fund may determine. See 'How to Redeem and Exchange Shares.'
`D' Estimated amounts to be charged in the current fiscal year after the
anticipated waiver of fees by the Funds' investment adviser and
co-administrator; the investment adviser and co-administrator are under no
obligation to continue these waivers.
2
<PAGE>
The expense table shows the costs and expenses that an investor will bear
directly or indirectly as a Common Shareholder of each Fund. With respect to the
Japan OTC Fund and the Post-Venture Capital Fund, 'Other Expenses' are based on
estimated amounts to be charged in the current fiscal year. Absent the
anticipated waiver of fees by the Funds' investment adviser and
co-administrator, Management Fees for the Japan OTC and Post-Venture Capital
Funds would each equal 1.25%, Other Expenses would equal .56% and .75%,
respectively, and Total Fund Operating Expenses would equal 2.06% and 2.25%,
respectively; the investment adviser and co-administrator are under no
obligation to continue these waivers. Certain broker-dealers and financial
institutions also may charge their clients fees in connection with investments
in a Fund's Common Shares, which fees are not reflected in the table. Absent the
voluntary waiver of a portion of the fees payable to the Funds' investment
adviser, the Management Fees for the Capital Appreciation Fund and the Emerging
Growth Fund would have equalled .70% and .90%, respectively, and Total Fund
Operating Expenses for the Capital Appreciation Fund and the Emerging Growth
Fund would have equalled 1.06% and 1.26%, respectively. No fees were waived in
the case of the International Equity Fund. The Example should not be considered
a representation of past or future expenses; actual Fund expenses may be greater
or less than those shown. Moreover, while the Example assumes a 5% annual
return, each Fund's actual performance will vary and may result in a return
greater or less than 5%. Long-term shareholders of the Japan OTC Fund or the
Post-Venture Capital Fund may pay more than the economic equivalent of the
maximum front-end sales charges permitted by the National Association of
Securities Dealers, Inc. (the 'NASD').
FINANCIAL HIGHLIGHTS
(FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The information regarding each Fund for the two fiscal years/period ending
October 31, 1994 has been derived from information audited by Coopers & Lybrand
L.L.P., independent auditors, whose report dated December 12, 1994 appears in
the relevant Fund's Statement of Additional Information. For the Capital
Appreciation, Emerging Growth and International Equity Funds, the information
for the prior fiscal years/period ending October 31, 1992 (up to three such
years/period) has been audited by Ernst & Young LLP, whose report was
unqualified. The information for the six months ended April 30, 1995 is
unaudited. Financial information is not presented for the Post-Venture Capital
Fund, which had not commenced operations as of April 30, 1995. Further
information about the performance of the Funds (other than the Post-Venture
Capital Fund) is contained in the Funds' annual report, dated October 31,
1994, copies of which may be obtained without charge by calling Warburg
Pincus Funds at (800) 257-5614.
3
<PAGE>
CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX AUGUST 17, 1987
MONTHS (COMMENCEMENT
ENDED OF OPERATIONS)
APRIL 30, FOR THE YEAR ENDED OCTOBER 31, THROUGH
1995 ------------------------------------------------------------------- OCTOBER 31,
(UNAUDITED) 1994 1993 1992 1991 1990 1989 1988 1987
----------- ------ ------ ------ ------ ------ ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 14.29 $15.32 $13.30 $12.16 $ 9.78 $11.48 $ 9.47 $7.74 $ 10.00
----------- ------ ------ ------ ------ ------ ------ ------ ------
Income from Investment
Operations
Net Investment Income
(Loss)............... .03 .04 .05 .04 .15 .20 .19 .17 .04
Net Gains (Loss) from
Securities (both
realized and
unrealized).......... .75 .17 2.78 1.21 2.41 (1.28) 2.15 1.70 (2.30)
----------- ------ ------ ------ ------ ------ ------ ------ ------
Total from Investment
Operations........... .78 .21 2.83 1.25 2.56 (1.08) 2.34 1.87 (2.26)
----------- ------ ------ ------ ------ ------ ------ ------ ------
Less Distributions
Dividends (from net
investment income)... .00 (.05) (.05) (.06) (.18) (.21) (.19) (.14) .00
Distributions (from
capital gains)....... (.98) (1.19) (.76) (.05) .00 (.41) (.14) .00 .00
----------- ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions.... (.98) (1.24) (.81) (.11) (.18) (.62) (.33) (.14) .00
----------- ------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value, End of
Period................. $ 14.09 $14.29 $15.32 $13.30 $12.16 $ 9.78 $11.48 $9.47 $ 7.74
----------- ------ ------ ------ ------ ------ ------ ------ ------
----------- ------ ------ ------ ------ ------ ------ ------ ------
Total Return............. 13.25%* 1.65% 22.19% 10.40% 26.39% (10.11%) 25.42% 24.31% (71.26%)*
Ratios/Supplemental Data
Net Assets, End of Period
(000s)................. $181,109 $159,346 $159,251 $117,900 $115,191 $76,537 $56,952 $29,351 $17,917
Ratios to Average Daily
Net Assets:
Operating expenses..... 1.08%* 1.05% 1.01% 1.06% 1.08% 1.04% 1.10% 1.07% 1.00%*
Net investment
income............... .49%* .26% .30% .41% 1.27% 2.07% 1.90% 2.00% 1.88%*
Decrease reflected in
above expense ratios
due to
waivers/reimbursements... .00% .01% .00% .01% .00% .01% .08% .91% .84%*
Portfolio Turnover
Rate................... 153.53%* 51.87% 48.26% 55.83% 39.50% 37.10% 36.56% 33.16% 20.00%
</TABLE>
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* Annualized.
EMERGING GROWTH FUND
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX JANUARY 21, 1988
MONTHS (COMMENCEMENT
ENDED OF OPERATIONS)
APRIL 30, FOR THE YEAR ENDED OCTOBER 31, THROUGH
1995 ----------------------------------------------------------------- OCTOBER 31,
(UNAUDITED) 1994 1993 1992 1991 1990 1989 1988
----------- -------- -------- ------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $22.38 $23.74 $18.28 $16.97 $10.83 $13.58 $11.21 $10.00
----------- -------- -------- ------- ------- ------- ------- -------
Income from Investment
Operations
Net Investment Income
(Loss)............... (.05) .00 (.10) (.03) .05 .13 .16 .07
Net Gains (Loss) from
Securities (both
realized and
unrealized).......... 1.72 .00 5.93 1.71 6.16 (2.32) 2.51 1.18
----------- -------- -------- ------- ------- ------- ------- -------
Total from Investment
Operations........... 1.67 .00 5.83 1.68 6.21 (2.19) 2.67 1.25
----------- -------- -------- ------- ------- ------- ------- -------
Less Distributions
Dividends (from net
investment income)... .00 .00 .00 (.01) (.07) (.18) (.12) (.04)
Distributions (from
capital gains)....... .00 (1.36) (.37) (.36) .00 (.38) (.18) .00
----------- -------- -------- ------- ------- ------- ------- -------
Total Distributions.... .00 (1.36) (.37) (.37) (.07) (.56) (.30) (.04)
----------- -------- -------- ------- ------- ------- ------- -------
Net Asset Value, End of
Period................. $24.05 $22.38 $23.74 $18.28 $16.97 $10.83 $13.58 $11.21
----------- -------- -------- ------- ------- ------- ------- -------
----------- -------- -------- ------- ------- ------- ------- -------
Total Return............. 15.62%* .16% 32.28% 9.87% 57.57% (16.90%) 24.20% 16.34%*
Ratios/Supplemental Data
Net Assets, End of Period
(000s)................. $ 289,226 $240,664 $165,525 $99,562 $42,061 $23,075 $26,685 $ 10,439
Ratios to Average Daily
Net Assets:
Operating expenses..... 1.25%* 1.22% 1.23% 1.24% 1.25% 1.25% 1.25% 1.25%*
Net investment income
(loss)............... (.52%)* (.58%) (.60%) (.25%) .32% 1.05% 1.38% 1.10%*
Decrease reflected in
above expense ratios
due to
waivers/reimbursements.. .00% .04% .00% .08% .47% .42% .78% 3.36%*
Portfolio Turnover
Rate................... 97.48%* 60.38% 68.35% 63.35% 97.69% 107.30% 100.18% 82.21%
</TABLE>
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* Annualized.
4
<PAGE>
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
FOR THE SIX FOR THE PERIOD
MONTHS MAY 2, 1989
ENDED (COMMENCEMENT
APRIL 30, FOR THE YEAR ENDED OCTOBER 31, OF OPERATIONS)
1995 --------------------------------------------------------- THROUGH
(UNAUDITED) 1994 1993 1992 1991 1990 OCTOBER 31, 1989
----------- ---------- -------- -------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $20.51 $17.00 $12.22 $13.66 $11.81 $11.35 $10.00
----------- ---------- -------- -------- ------- ------- ------------
Income from Investment
Operations
Net Investment Income
(Loss)............... .09 .09 .09 .15 .19 .13 .05
Net Gains (Losses) from
Securities and
Foreign Currency
Related Items (both
realized and
unrealized).......... (1.89) 3.51 4.84 (1.28) 2.03 .55 1.30
----------- ---------- -------- -------- ------- ------- ------------
Total from Investment
Operations........... (1.80) 3.60 4.93 (1.13) 2.22 .68 1.35
----------- ---------- -------- -------- ------- ------- ------------
Less Distributions
Dividends (from net
investment income)... (.07) (.04) (.02) (.16) (.33) (.10) .00
Distributions in excess
of net investment
income............... .00 (.01) .00 .00 .00 .00 .00
Distributions (from
capital gains)....... (.53) (.04) (.13) (.15) (.04) (.12) .00
----------- ---------- -------- -------- ------- ------- ------------
Total Distributions.... (.60) (.09) (.15) (.31) (.37) (.22) .00
----------- ---------- -------- -------- ------- ------- ------------
Net Asset Value, End of
Period................. $18.11 $20.51 $17.00 $12.22 $13.66 $11.81 $11.35
----------- ---------- -------- -------- ------- ------- ------------
----------- ---------- -------- -------- ------- ------- ------------
Total Return............. (17.05%)* 21.22% 40.68% (8.44%) 19.42% 5.92% 28.73%*
Ratios/Supplemental Data
Net Assets, End of Period
(000s)................. $1,796,703 $1,533,872 $378,661 $101,763 $72,553 $38,946 $ 13,260
Ratios to Average Daily
Net Assets:
Operating expenses..... 1.38%* 1.44% 1.48% 1.49% 1.50% 1.46% 1.50%*
Net investment income
(loss)............... .90%* .19% .38% .88% 1.19% 1.58% 1.33%*
Decrease reflected in
above expense ratios
due to
waivers/reimbursements... .00% .00% .00% .07% .17% .38% .89%*
Portfolio Turnover
Rate................... 22.67%* 17.02% 22.60% 53.29% 54.95% 66.12% 27.32%
</TABLE>
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* Annualized.
JAPAN OTC FUND
<TABLE>
<CAPTION>
FOR THE SIX FOR THE PERIOD
MONTHS ENDED SEPTEMBER 30, 1994
APRIL 30, (COMMENCEMENT
1995 OF OPERATIONS) THROUGH
(UNAUDITED) OCTOBER 31, 1994
------------ ----------------------
<S> <C> <C>
Net Asset Value,
Beginning of Period.... $9.85 $10.00
------------ -------
Income from Investment
Operations
Net Investment
Income............... .01 .00
Net Gains (Losses) from
Securities and
Foreign Currency
Related Items (both
realized and
unrealized).......... (2.01) (.15)
------------ -------
Total from Investment
Operations........... (2.00) (.15)
------------ -------
Less Distributions
Dividends (from net
investment income)... .00 .00
Distributions (from
capital gains)....... .00 .00
------------ -------
Total Distributions.... .00 .00
------------ -------
Net Asset Value, End of
Period................. $7.85 $9.85
------------ -------
------------ -------
Total Return............. (36.72%)* (15.84%)*
Ratios/Supplemental Data
Net Assets, End of Period
(000s)................. $ 26,573 $ 19,878
Ratios to Average Daily
Net Assets:
Operating expenses..... 1.00%* 1.00%*
Net investment
income............... .16%* .49%*
Decrease reflected in
above expense ratios
due to
waivers/reimbursements... 2.28%* 4.96%*
Portfolio Turnover
Rate................... 138.17%* .00%
</TABLE>
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* Annualized.
The Total Return shown above has been annualized; the actual Total Return
(after the effect of expense waivers) for the one-month period September 30,
1994 (commencement of operations) through October 31, 1994 was -1.50%, and the
actual Total Return (after the effect of expense waivers) for the six months
ended April 30, 1995 was -20.30%. In the absence of expense waivers, the
annualized Total Return shown above would have been -17.76% and -38.02% for
the periods ended October 31, 1994 and April 30, 1995, respectively.
5
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's objective is a fundamental policy and may not be amended
without first obtaining the approval of a majority of the outstanding shares of
that Fund. Any investment involves risk and, therefore, there can be no
assurance that any Fund will achieve its investment objective. See 'Certain
Investment Strategies' for descriptions of certain types of investments the
Funds may make.
CAPITAL APPRECIATION FUND
The Capital Appreciation Fund seeks long-term capital appreciation. The
Fund is a diversified management investment company that pursues its investment
objective by investing in a broadly diversified portfolio of equity securities
of domestic companies. The Fund will ordinarily invest substantially all of its
total assets -- but no less than 80% of its total assets -- in common stocks,
warrants and securities convertible into or exchangeable for common stocks. The
Fund intends to focus on securities of medium-sized companies, consisting of
companies having stock market capitalizations of between $500 million and $4.5
billion. (Market capitalization means the total market value of a company's
outstanding common stock.) Under normal market conditions, except for temporary
defensive purposes, the Fund will invest no less than 80% of its assets in
medium-sized companies, with the remainder invested in companies with smaller or
larger market capitalizations. The prices of securities of medium-sized
companies, which are traded on exchanges or in the over-the-counter market, tend
to fluctuate in value more than the prices of securities of large-sized
companies.
Warburg, Pincus Counsellors, Inc., the Funds' investment adviser
('Counsellors'), will attempt to identify sectors of the market and companies
within market sectors that it believes will outperform the overall market.
Counsellors also seeks to identify themes or patterns it believes to be
associated with high growth potential firms, such as significant fundamental
changes (including senior management changes) or generation of a large free cash
flow.
EMERGING GROWTH FUND
The Emerging Growth Fund seeks maximum capital appreciation. The Fund is a
non-diversified management investment company that pursues its investment
objective by investing in a portfolio of equity securities of domestic
companies. The Fund ordinarily will invest at least 65% of its total assets in
common stocks or warrants of emerging growth companies that represent attractive
opportunities for maximum capital appreciation. Emerging growth companies are
small- or medium-sized companies that have passed their start-up phase and that
show positive earnings and prospects of achieving significant profit and gain in
a relatively short period of time.
Although under current market conditions the Fund expects to invest in
companies having stock market capitalizations of up to approximately $500
million, the Fund may invest in emerging growth companies without regard to
their market capitalization. Emerging growth companies generally stand to
benefit from new products or services, technological developments or changes in
management and other factors and include smaller companies experiencing unusual
developments affecting their market value. These 'special situation companies'
include companies that are involved in the following: an acquisition or
consolidation; a reorganization; a recapitalization; a merger, liquidation, or
distribution of cash, securities or other assets; a tender or exchange offer; a
breakup or workout of a holding company; litigation which, if resolved
favorably, would improve the value of the company's stock; or a change in
corporate control.
6
<PAGE>
INTERNATIONAL EQUITY FUND
The International Equity Fund seeks long-term capital appreciation. The
Fund is a diversified management investment company that pursues its investment
objective by investing primarily in a broadly diversified portfolio of equity
securities of companies, wherever organized, that in Counsellors' judgment have
their principal business activities and interests outside the United States. The
Fund will ordinarily invest substantially all of its assets -- but no less than
65% of its total assets -- in common stocks, warrants and securities convertible
into or exchangeable for common stocks. Ordinarily the Fund will hold no less
than 65% of its total assets in at least three countries other than the United
States. The Fund intends to be widely diversified across securities of many
corporations located in a number of foreign countries. Counsellors anticipates,
however, that the Fund may from time to time invest a significant portion of its
assets in a single country such as Japan, which may involve special risks. See
'Risk Factors and Special Considerations -- Japanese Investments' below. In
appropriate circumstances, such as when a direct investment by the International
Equity Fund in the securities of a particular country cannot be made or when the
securities of an investment company are more liquid than the underlying
portfolio securities, the Fund may, consistent with the provisions of the
Investment Company Act of 1940, as amended (the '1940 Act'), invest in the
securities of closed-end investment companies that invest in foreign securities.
The Fund intends to invest principally in the securities of financially
strong companies with opportunities for growth within growing international
economies and markets through increased earning power and improved utilization
or recognition of assets. Investment may be made in equity securities of
companies of any size, whether traded on or off a national securities exchange.
JAPAN OTC FUND
The Japan OTC Fund seeks long-term capital appreciation. The Fund is a
non-diversified management investment company that pursues its investment
objective by investing in a portfolio of securities traded in the Japanese
over-the-counter market. The Fund is designed to provide an opportunity to
participate in the dynamic structural changes in the Japanese industrial system
through investment in less-established, higher growth companies that can be
expected to benefit from these changes. At all times, except during temporary
defensive periods, the Fund will maintain at least 65% of its total assets in
securities of companies traded through JASDAQ, the primary Japanese over-the-
counter market, or the Japanese Second Section OTC Market (the 'Frontier
Market'). The portion of the Fund's assets that is not invested through JASDAQ
or the Frontier Market may be invested in securities of Japanese issuers that
are not traded through JASDAQ or the Frontier Market or exchange-traded and
over-the-counter securities of issuers in other Asian markets, in addition to
the other instruments described below. The Fund may invest up to 35% of its
total assets in securities of other Asian issuers, with no more than 10%
invested in any one country. The Fund will not invest in securities of non-Asian
issuers, except that the Fund may, for defensive purposes, invest in U.S. debt
securities and money market instruments. The Fund intends its portfolio to
consist principally of equity securities (common stock, warrants and securities
convertible into common stock), which may include shares of closed-end
investment companies investing in Asia. The Japan OTC Fund may also invest up to
5% of the Fund's net assets in each of the following: foreign debt securities,
including foreign government securites and debt obligations of supranational
entities, mortgage-backed securities, asset-backed securities and zero coupon
securities. The Japan OTC Fund may involve a greater degree of risk than an
investment in other mutual funds that seek
7
<PAGE>
capital appreciation by investing in better-known, larger companies. From time
to time, the Japan OTC Fund may hedge part or all of its exposure to the
Japanese yen, thereby reducing or substantially eliminating any favorable or
unfavorable impact of changes in the value of the yen in relation to the U.S.
dollar.
At December 31, 1994, 581 issues were traded through JASDAQ, having an
aggregate market capitalization in excess of 14 trillion yen (approximately $134
billion as of September 19, 1995). The entry requirements for JASDAQ generally
require a minimum of 2 million shares outstanding at the time of registration, a
minimum of 200 shareholders, minimum pre-tax profits of 10 yen (approximately
$.10 as of September 19, 1995) per share over the prior fiscal year and net
worth of 200 million yen (approximately $1.92 million as of September 19, 1995).
JASDAQ has generally attracted small growth companies or companies whose major
shareholders wish to sell only a small portion of the company's equity.
The Frontier Market is under the jurisdiction of JASDAQ, which is overseen
by the Japanese Securities and Exchange Commission. The Frontier Market has less
stringent entry requirements than those described above for JASDAQ and is
designed to enable early stage companies access to capital markets. Frontier
Market companies need not have a history of earnings, provided their spending on
research and development equals at least 3% of revenues. In addition, companies
traded through the Frontier Market are not required to have 2 million shares
outstanding at the time of registration. As a result, investments in companies
traded through the Frontier Market may involve a greater degree of risk than
investments in companies traded through JASDAQ. As of the date of this
Prospectus, there were not yet any registrations on the Frontier Market, but the
first registrations are expected to be effective in November 1995.
POST-VENTURE CAPITAL FUND
The Post-Venture Capital Fund seeks long-term growth of capital. The Fund
is a diversified management investment company that pursues its investment
objective by investing primarily in equity securities of companies considered by
Counsellors to be in their post-venture capital stage. The Fund is not designed
to provide venture capital financing. Rather, under normal market conditions,
the Fund will invest at least 65% of its total assets in equity securities of
'post-venture capital companies.' A post-venture capital company is a company
that has received venture capital financing either (a) during the early stages
of the company's existence or the early stages of the development of a new
product or service, or (b) as part of a restructuring or recapitalization of the
company. The investment of venture capital financing, distribution of such
company's securities to venture capital investors, or initial public offering
('IPO'), whichever is later, will have been made within ten years prior to the
Fund's purchase of the company's securities.
Counsellors believes that venture capital participation in a company's
capital structure can lead to revenue/earnings growth rates above those of
older, public companies such as those in the Dow Jones Industrial Average or the
Fortune 500. Venture capitalists finance start-up companies, companies in the
early stages of developing new products or services and companies undergoing a
restructuring or recapitalization, since these companies may not have access to
conventional forms of financing (such as bank loans or public issuances of
stock). Venture capitalists may hold substantial positions in companies that may
have been acquired at prices significantly below the initial public offering
price. This may create a potential adverse impact in the short-term on the
market price of a company's stock due to sales in the open market by a venture
capitalist or others who acquired the stock at lower prices prior to the
company's IPO. Counsellors will consider the impact of
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such sales in selecting post-venture capital investments. Venture capitalists
may be individuals or funds organized by venture capitalists which are typically
offered only to large institutions, such as pension funds and endowments, and
certain accredited investors. Venture capital participation in a company is
often reduced when the company engages in an IPO of its securities or when it is
involved in a merger, tender offer or acquisition.
Counsellors has experience in researching smaller companies, companies in
the early stages of development and venture capital-financed companies. Its team
of analysts, led by Elizabeth Dater and Stephen Lurito, regularly monitors
portfolio companies whose securities are held by over 250 of the larger domestic
venture capital funds. Ms. Dater and Mr. Lurito have managed post-venture equity
securities in separate accounts for institutions since 1989 and currently manage
over $800 million of such assets for institutions. The Fund will invest in
securities of post-venture capital companies that are traded on a national
securities exchange or in an organized over-the-counter market. The Fund may
also hold non-publicly traded equity securities of companies in the venture and
post-venture stages of development, such as those of closely-held companies or
private placements of public companies. The portion of the Fund's assets
invested in these non-publicly traded securities, which together with the Fund's
other illiquid assets may not exceed 15% of the Fund's assets, will vary over
time depending on investment opportunities and other factors. The Fund may also
invest up to 35% of its assets in exchange-traded and over-the-counter
securities that do not meet the definition of post-venture capital companies
without regard to market capitalization. Up to 10% of the Fund's assets may be
invested in securities of issuers engaged in 'special situations,' such as a
restructuring or recapitalization; an acquisition, consolidation, merger or
tender offer; a change in corporate control or investment by a venture
capitalist.
To attempt to reduce risk, the Fund will diversify its investments over a
broad range of issuers operating in a variety of industries. The Fund may hold
securities of companies of any size, and will not limit capitalization of
companies it selects to invest in. However, due to the nature of the venture
capital to post-venture cycle, the Fund anticipates that the average market
capitalization of companies in which it invests will be less than $1 billion at
the time of investment. Although the Fund will invest primarily in U.S.
companies, up to 20% of the Fund's assets may be invested in securities of
issuers located in any foreign country. Equity securities in which the Fund will
invest are common stock, preferred stock, warrants and securities convertible
into or exchangeable for common stock. The Fund may engage in a variety of
strategies to reduce risk or seek to enhance return, including engaging in short
selling (see 'Certain Investment Strategies').
PORTFOLIO INVESTMENTS
INVESTMENT GRADE DEBT. The International Equity Fund and the Japan OTC Fund each
may invest up to 35% of its total assets, and the Capital Appreciation Fund, the
Emerging Growth Fund and the Post-Venture Capital Fund each may invest up to 20%
of its total assets, in investment grade debt securities (other than money
market instruments) and preferred stocks that are not convertible into common
stock for the purpose of seeking capital appreciation. The interest income to be
derived may be considered as one factor in selecting debt securities for
investment by Counsellors. Because the market value of debt obligations can be
expected to vary inversely to changes in prevailing interest rates, investing in
debt obligations may provide an opportunity for capital appreciation when
interest rates are expected to decline. The success of such a strategy is
dependent upon Counsellors' ability to accurately forecast changes in interest
rates. The market value of debt obligations may
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also be expected to vary depending upon, among other factors, the ability of the
issuer to repay principal and interest, any change in investment rating and
general economic conditions. A security will be deemed to be investment grade if
it is rated within the four highest grades by Moody's Investors Service, Inc.
('Moody's') or Standard & Poor's Ratings Group ('S&P') or, if unrated, is
determined to be of comparable quality by Counsellors. Bonds rated in the fourth
highest grade may have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade
bonds. Subsequent to its purchase by a Fund, an issue of securities may cease to
be rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither event will require sale of such securities. Counsellors will
consider such event in its determination of whether the Fund should continue to
hold the securities. The Japan OTC Fund does not currently intend during the
coming year to hold more than 5% of its net assets in securities that have been
downgraded below investment grade.
When Counsellors believes that a defensive posture is warranted, each Fund
may invest temporarily without limit in investment grade debt obligations and in
domestic and foreign money market obligations, including repurchase agreements
as discussed below. When such a defensive posture is warranted, the
International Equity Fund and the Japan OTC Fund may also invest temporarily
without limit in securities of U.S. companies.
MONEY MARKET OBLIGATIONS. Each Fund is authorized to invest, under normal market
conditions, up to 20% of its total assets in domestic and foreign money market
obligations having a maturity of one year or less at the time of purchase and
for temporary defensive purposes may invest in these securities without limit.
These short-term instruments consist of obligations issued or guaranteed by the
United States government, its agencies or instrumentalities ('U.S. government
securities') (including, in the case of the Capital Appreciation, Emerging
Growth and International Equity Funds, repurchase agreements with respect to
such securities); bank obligations (including certificates of deposit, time
deposits and bankers' acceptances of domestic or foreign banks, domestic savings
and loans and similar institutions) that are high quality investments or, if
unrated, deemed by Counsellors to be high quality investments; commercial paper
rated no lower than A-2 by S&P or Prime-2 by Moody's or the equivalent from
another major rating service or, if unrated, of an issuer having an outstanding,
unsecured debt issue then rated within the three highest rating categories and,
in the case of the Japan OTC Fund and the Post-Venture Capital Fund, repurchase
agreements with respect to the foregoing.
Repurchase Agreements. The Funds may invest in repurchase agreement
transactions on portfolio securities with member banks of the Federal Reserve
System and certain non-bank dealers. Repurchase agreements are contracts under
which the buyer of a security simultaneously commits to resell the security to
the seller at an agreed-upon price and date. Under the terms of a typical
repurchase agreement, a Fund would acquire any underlying security for a
relatively short period (usually not more than one week) subject to an
obligation of the seller to repurchase, and the Fund to resell, the obligation
at an agreed-upon price and time, thereby determining the yield during the
Fund's holding period. This arrangement results in a fixed rate of return that
is not subject to market fluctuations during the Fund's holding period. The
value of the underlying securities will at all times be at least equal to the
total amount of the purchase obligation, including interest. The Fund bears a
risk of loss in the event that the other party to a repurchase agreement
defaults on its obligations or becomes bankrupt and the Fund is delayed or
prevented from exercising its right to dispose of the collateral securities,
including the
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risk of a possible decline in the value of the underlying securities during the
period while the Fund seeks to assert this right. Counsellors, acting under the
supervision of the Fund's Board of Directors or Board of Trustees ('governing
Board' or 'Board'), monitors the creditworthiness of those bank and non-bank
dealers with which each Fund enters into repurchase agreements to evaluate this
risk. A repurchase agreement is considered to be a loan under the 1940 Act.
Money Market Mutual Funds. Where Counsellors believes that it would be
beneficial to the Fund and appropriate considering the factors of return and
liquidity, each Fund may invest up to 5% of its assets in securities of money
market mutual funds that are unaffiliated with the Fund, Counsellors or, in the
case of the Japan OTC Fund, the sub-investment adviser (each investment adviser
and sub-investment adviser referred to individually as an 'Adviser'). As a
shareholder in any mutual fund, a Fund will bear its ratable share of the mutual
fund's expenses, including management fees, and will remain subject to payment
of the Fund's administration fees and other expenses with respect to assets so
invested.
U.S. GOVERNMENT SECURITIES. U.S. government securities in which a Fund may
invest include: direct obligations of the U.S. Treasury, and obligations issued
by U.S. government agencies and instrumentalities, including instruments that
are supported by the full faith and credit of the United States, instruments
that are supported by the right of the issuer to borrow from the U.S. Treasury
and instruments that are supported by the credit of the instrumentality.
CONVERTIBLE SECURITIES. Convertible securities in which a Fund may invest,
including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an investor
to benefit from increases in the market price of the underlying common stock.
Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. The value of convertible securities fluctuates in relation to
changes in interest rates like bonds and, in addition, fluctuates in relation to
the underlying common stock. The Japan OTC Fund will invest only in convertible
securities rated investment grade at the time of purchase or deemed to be of
equivalent quality. The Japan OTC Fund does not currently intend during the
coming year to hold more than 5% of its net assets in the aggregate of
investment grade convertible securities and investment grade debt downgraded
below investment grade subsequent to acquisition by the Fund.
RISK FACTORS AND SPECIAL
CONSIDERATIONS
EMERGING GROWTH AND SMALL COMPANIES. Investing in common stocks and securities
convertible into common stocks is subject to the inherent risk of fluctuations
in the prices of such securities. Investing in securities of emerging growth
companies, which may include JASDAQ and Frontier Market securities, may involve
greater risks since these securities may have limited marketability and, thus,
may be more volatile. In addition, small- and medium-sized companies are
typically subject to a greater degree of changes in earnings and business
prospects than are larger, more established companies. Because small- and
medium-sized companies normally have fewer shares outstanding than larger
companies, it may be more difficult for a Fund to buy or sell significant
amounts of such shares without an unfavorable impact on prevailing prices. There
is typically less publicly available information concerning small- and
medium-sized companies than for larger, more established ones. Securities of
issuers in 'special situations' also may be more volatile, since the market
value of these securities may decline in value if the anticipated benefits do
not materialize. Companies in 'special situations' include, but are not limited
to,
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companies involved in an acquisition or consolidation; reorganization;
recapitalization; merger, liquidation or distribution of cash, securities or
other assets; a tender or exchange offer, a breakup or workout of a holding
company; or litigation which, if resolved favorably, would improve the value of
the companies' securities. Although investing in securities of emerging growth
companies or 'special situations' offers potential for above-average returns if
the companies are successful, the risk exists that the companies will not
succeed and the prices of the companies' shares could significantly decline in
value. Therefore, an investment in the Capital Appreciation Fund, the Emerging
Growth Fund, the Japan OTC Fund or the Post-Venture Capital Fund may involve a
greater degree of risk than an investment in other mutual funds that seek
capital appreciation by investing in better-known, larger companies. For certain
additional risks relating to each Fund's investments, see 'Portfolio
Investments' beginning at page 9 and 'Certain Investment Strategies' beginning
at page 14.
JAPANESE INVESTMENTS. A significant portion of the Japan OTC Fund's assets will
be invested in securities traded through JASDAQ. Trading of equity securities
through the JASDAQ market is conducted by securities firms in Japan, primarily
through an organization which acts as a 'matching agent,' as opposed to a
recognized stock exchange. Consequently, securities traded through JASDAQ may,
from time to time, and especially in falling markets, become illiquid and
experience short-term price volatility and wide spreads between bid and offer
prices. This combination of limited liquidity and price volatility may have an
adverse effect on the investment performance of the Fund. In periods of rapid
price increases, the limited liquidity of JASDAQ restricts the Fund's ability to
adjust its portfolio quickly in order to take full advantage of a significant
market increase, and conversely, during periods of rapid price declines, it
restricts the ability of the Fund to dispose of securities quickly in order to
realize gains previously made or to limit losses on securities held in its
portfolio. In addition, although JASDAQ has generally experienced sustained
growth in aggregate market capitalization and trading volume, there have been
periods in which aggregate market capitalization and trading volume have
declined. The Frontier Market is expected to present greater liquidity,
volatility and trading considerations than JASDAQ.
Investing in Japanese securities may involve the risks described below
associated with investing in foreign securities generally. In addition, because
the Japan OTC Fund invests primarily in Japan and the International Equity Fund
may from time to time have a large position in Japanese securities, these Funds
will be subject to general economic and political conditions in Japan. The Japan
OTC Fund should be considered a vehicle for diversification, but the Fund itself
is not diversified.
Securities in Japan are denominated and quoted in 'yen.' Yen are fully
convertible and transferable based on floating exchange rates into all
currencies, without administrative or legal restrictions for both non-residents
and residents of Japan. In determining the net asset value of shares of each
Fund, assets or liabilities initially expressed in terms of Japanese yen will be
translated into U.S. dollars at the current selling rate of Japanese yen against
U.S. dollars. As a result, in the absence of a successful currency hedge, the
value of each Fund's assets as measured in U.S. dollars may be affected
favorably or unfavorably by fluctuations in the value of Japanese yen relative
to the U.S. dollar.
Japan is largely dependent upon foreign economies for raw materials.
International trade is important to Japan's economy, as exports provide the
means to pay for many of the raw materials it must import. Because of the
concentration of Japanese exports in highly visible products such as
automobiles, machine tools and semiconductors, and the large trade surpluses
ensuing therefrom, Japan has entered a difficult
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phase in its relations with its trading partners, particularly with respect to
the United States, with whom the trade imbalance is the greatest.
JASDAQ-traded securities can be volatile, which would result in the Japan
OTC Fund's net asset value fluctuating in response. The decline in the Japanese
securities markets since 1989 has contributed to a weakness in the Japanese
economy, and the impact of a further decline cannot be ascertained. The common
stocks of many Japanese companies continue to trade at high price-earnings
ratios in comparison with those in the United States, even after the recent
market decline. Differences in accounting methods make it difficult to compare
the earnings of Japanese companies with those of companies in other countries,
especially the United States.
Japan has a parliamentary form of government. In 1993 a coalition
government was formed which, for the first time since 1955, did not include the
Liberal Democratic Party. Since mid-1993, there have been several changes in
leadership in Japan. What, if any, effect the current political situation will
have on prospective regulatory reforms on the economy in Japan cannot be
predicted. Recent and future developments in Japan and neighboring Asian
countries may lead to changes in policy that might adversely affect the Funds
investing there. For additional information, see 'Japan and its Securities
Markets,' beginning at page 28 of the Statement of Additional Information for
the Japan OTC Fund, and 'Investment Policies -- Japanese Investments,' beginning
at page 3 of the Statement of Additional Information for the International
Equity Fund.
EMERGING MARKETS. The International Equity and Japan OTC Funds may invest in
securities of issuers located in less developed countries considered to be
'emerging markets.' Investing in securities of issuers located in emerging
markets involves not only the risks described below, with respect to investing
in foreign securities, but also other risks, including exposure to economic
structures that are generally less diverse and mature than, and to political
systems that can be expected to have less stability than, those of developed
countries. Other characteristics of emerging markets that may affect investment
there include certain national policies that may restrict investment by
foreigners in issuers or industries deemed sensitive to relevant national
interests and the absence of developed legal structures governing private and
foreign investments and private property. The typically small size of the
markets for securities of issuers located in emerging markets and the
possibility of a low or nonexistent volume of trading in those securities may
also result in a lack of liquidity and in price volatility of those securities.
INVESTMENTS IN NON-PUBLICLY TRADED SECURITIES. Although the Funds expect to
invest primarily in publicly traded equity securities, each Fund may invest up
to 10% of its assets (15% in the case of the Japan OTC Fund and the Post-Venture
Capital Fund) in non-publicly traded equity securities, which may involve a high
degree of business and financial risk and may result in substantial losses.
Because of the absence of any liquid trading market currently for these
investments, a Fund may take longer to liquidate these positions than would be
the case for publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized on such sales could be
less than those originally paid by the Fund. Further, companies whose securities
are not publicly traded may not be subject to the disclosure and other investor
protection requirements applicable to companies whose securities are publicly
traded. A Fund's investment in illiquid securities is subject to the risk that
should the Fund desire to sell any of these securities when a ready buyer is not
available at a price that is deemed to be representative of their value, the
value of the Fund's net assets could be adversely affected. Except in the case
of the Japan OTC Fund, each Fund's limitation on illiquid securities excludes
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Rule 144A Securities determined by the Fund's Board to be liquid.
NON-DIVERSIFIED STATUS. Each of the Emerging Growth Fund and the Japan OTC Fund
is classified as a non-diversified investment company under the 1940 Act, which
means that each Fund is not limited by the 1940 Act in the proportion of its
assets that it may invest in the obligations of a single issuer. Each Fund will,
however, comply with diversification requirements imposed by the Internal
Revenue Code of 1986, as amended (the 'Code'), for qualification as a regulated
investment company. As a non-diversified investment company, each Fund may
invest a greater proportion of its assets in the obligations of a small number
of issuers and, as a result, may be subject to greater risk with respect to
portfolio securities. To the extent that a Fund assumes large positions in the
securities of a small number of issuers, its return may fluctuate to a greater
extent than that of a diversified company as a result of changes in the
financial condition or in the market's assessment of the issuers.
PORTFOLIO TRANSACTIONS AND
TURNOVER RATE
A Fund will attempt to purchase securities with the intent of holding them
for investment but may purchase and sell portfolio securities whenever an
Adviser believes it to be in the best interests of the relevant Fund. A Fund
will not consider portfolio turnover rate a limiting factor in making investment
decisions consistent with its investment objective and policies. It is not
possible to predict the Japan OTC or the Post-Venture Capital Fund's portfolio
turnover rate. However, it is anticipated that each Fund's annual turnover rate
should not exceed 100%. High portfolio turnover rates (100% or more) may result
in dealer mark ups or underwriting commissions as well as other transaction
costs, including correspondingly higher brokerage commissions. In addition,
short-term gains realized from portfolio turnover may be taxable to shareholders
as ordinary income. See 'Dividends, Distributions and Taxes -- Taxes' below and
'Investment Policies -- Portfolio Transactions' in each Fund's Statement of
Additional Information.
All orders for transactions in securities or options on behalf of a Fund
are placed by an Adviser with broker-dealers that it selects, including
Counsellors Securities Inc., the Funds' distributor ('Counsellors Securities').
A Fund may utilize Counsellors Securities in connection with a purchase or sale
of securities when Counsellors believes that the charge for the transaction does
not exceed usual and customary levels and when doing so is consistent with
guidelines adopted by the governing Board.
CERTAIN INVESTMENT STRATEGIES
Although there is no intention of doing so during the coming year, each
Fund is authorized to engage in the following investment strategies: (i)
purchasing securities on a when-issued basis and purchasing or selling
securities for delayed delivery and (ii) lending portfolio securities. As
described below, the Funds may invest in investments commonly referred to as
'derivative securities,' such as options on securities, stock indexes and
currencies; futures contracts and options on futures contracts; and currency
forward contracts. These strategies may be used for the purpose of hedging
against a decline in value of its portfolio holdings or to generate income to
offset expenses or increase return. SUCH TRANSACTIONS THAT ARE NOT CONSIDERED
HEDGING SHOULD BE CONSIDERED SPECULATIVE AND MAY SERVE TO INCREASE THE FUND'S
INVESTMENT RISK. Detailed information concerning these strategies and their
related risks is contained below and in each Fund's Statement of Additional
Information.
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STRATEGIES AVAILABLE TO ALL FUNDS
FOREIGN SECURITIES. The International Equity Fund and the Japan OTC Fund each
will ordinarily hold no less than 65% of its total assets in foreign securities.
The Emerging Growth Fund may invest up to 10% and the Capital Appreciation Fund
and the Post-Venture Capital Fund may each invest up to 20% of its total assets
in the securities of foreign issuers. There are certain risks involved in
investing in securities of companies and governments of foreign nations which
are in addition to the usual risks inherent in domestic investments. These risks
include those resulting from fluctuations in currency exchange rates,
revaluation of currencies, future adverse political and economic developments
and the possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions, reduced availability of public information
concerning issuers, the lack of uniform accounting, auditing and financial
reporting standards and other regulatory practices and requirements that are
often generally less rigorous than those applied in the United States. Moreover,
securities of many foreign companies may be less liquid and their prices more
volatile than those of securities of comparable U.S. companies. Certain foreign
countries are known to experience long delays between the trade and settlement
dates of securities purchased or sold. In addition, with respect to certain
foreign countries, there is the possibility of expropriation, nationalization,
confiscatory taxation and limitations on the use or removal of funds or other
assets of the Funds, including the withholding of dividends. Foreign securities
may be subject to foreign government taxes that would reduce the net yield on
such securities. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments positions. Investment in foreign securities will also result
in higher operating expenses due to the cost of converting foreign currency into
U.S. dollars, the payment of fixed brokerage commissions on foreign exchanges,
which generally are higher than commissions on U.S. exchanges, higher valuation
and communications costs and the expense of maintaining securities with foreign
custodians.
RULE 144A SECURITIES. The Funds may purchase securities that are not registered
under the Securities Act of 1933, as amended (the '1933 Act'), but that can be
sold to 'qualified institutional buyers' in accordance with Rule 144A under the
1933 Act ('Rule 144A Securities'). An investment in Rule 144A Securities will be
considered illiquid and therefore subject to each Fund's limitation on the
purchase of illiquid securities, unless the Fund's governing Board determines on
an ongoing basis that an adequate trading market exists for the security. In the
case of the Japan OTC Fund, Rule 144A Securities will be limited to 10% of the
Fund's net assets, included within the Fund's 15% limit on illiquid securities.
In addition to an adequate trading market, the Board will also consider factors
such as trading activity, availability of reliable price information and other
relevant information in determining whether a Rule 144A Security is liquid. This
investment practice could have the effect of increasing the level of illiquidity
in the Funds to the extent that qualified institutional buyers become
uninterested for a time in purchasing Rule 144A Securities. The governing Board
of each Fund will carefully monitor any investments by the Fund in Rule 144A
Securities. The governing Board may adopt guidelines and delegate to an Adviser
the daily function of determining and monitoring the liquidity of Rule 144A
Securities, although each Board will retain ultimate responsibility for any
determination regarding liquidity.
WRITING OPTIONS ON SECURITIES. Each Fund may write covered call options and, in
the case of the Japan OTC Fund and the Post-Venture Capital Fund, covered put
options on up to 25% of the net asset value of the stock and debt securities in
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its portfolio and will realize fees (referred to as 'premiums') for granting the
rights evidenced by the options. 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. Thus, the purchaser of a put option written by a Fund has the right to
compel the purchase by the Fund of the underlying security at an agreed-upon
price for a specified time period or at a specified time, while the purchaser of
a call option written by a Fund has the right to purchase from the Fund the
underlying security owned by the Fund at the agreed-upon price for a specified
time period or at a specified time.
Upon the exercise of a put option written by the Japan OTC Fund or the
Post-Venture Capital Fund, the Fund may suffer an economic loss equal to the
excess of the exercise price of the option over the security's market value at
the time of the option exercise, less the premium received for writing the
option. Upon the exercise of a call option written by a Fund, the Fund may
suffer an economic loss equal to the excess of the security's market value at
the time of the option exercise over the Fund's acquisition cost of the
security, less the premium received for writing the option.
A Fund may engage in a closing purchase transaction to realize a profit, to
prevent an underlying security 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). To effect a closing purchase transaction, a Fund would purchase,
prior to the holder's exercise of an option that the Fund has written, an option
of the same series as that on which the Fund desires to terminate its
obligation. The obligation of a Fund under an option that it has written would
be terminated by a closing purchase transaction, but the Fund would not be
deemed to own an option as the result of the transaction. The ability of a Fund
to engage in closing transactions with respect to options depends on the
existence of a liquid secondary market. While a Fund generally will purchase or
write options only if there appears to be a liquid secondary market for the
options purchased or sold, for some options, no such secondary market may exist
or the market may cease to exist, particularly with respect to options that
trade over-the-counter ('OTC options').
Option writing for each Fund may be limited by position and exercise limits
established by securities exchanges and the NASD. Furthermore, a Fund may, at
times, have to limit its option writing in order to qualify as a regulated
investment company under the Code.
In addition to writing covered options to generate income, each Fund may
enter into options 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 on a portfolio position
with a gain on the hedge position; at the same time, however, a properly
correlated hedge will result in a gain on the portfolio position being offset by
a loss on the hedge position. Each Fund bears the risk that the prices of the
securities being hedged will not move in the same amount as the hedge. A Fund
will engage in hedging transactions only when deemed advisable by an Adviser.
Successful use by a Fund of options for hedging purposes will depend on an
Adviser's ability to correctly predict movements in the direction of the
security underlying the option or, in the case of stock index options (described
below), the underlying securities market, which could prove to be inaccurate.
Losses incurred in options transactions and the costs of these transactions will
affect each Fund's performance. Even if an
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Adviser's expectations are correct, where options are used as a hedge there may
be an imperfect correlation between the change in the value of the options and
of the portfolio securities hedged. Therefore, an investment in the Funds may
involve a greater risk than an investment in other mutual funds that seek
capital appreciation or growth of capital.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES. The International Equity Fund,
the Japan OTC Fund and the Post-Venture Capital Fund each may utilize up to 10%
of its assets to purchase put and call options on stocks and debt securities
that are traded on foreign as well as U.S. exchanges, as well as OTC options.
The Capital Appreciation Fund and the Emerging Growth Fund each may utilize up
to 2% of its assets to purchase U.S. exchange-traded and OTC put and call
options on stocks and debt securities.
By buying a put, a Fund limits its risk of loss from a decline in the
market value of the underlying security until the put expires. Any appreciation
in the value of and yield otherwise available from the underlying security,
however, will be partially offset by the amount of the premium paid for the put
option and any related transaction costs. Call options may be purchased by each
Fund in order to acquire the underlying securities for the Fund at a price that
avoids any additional cost that would result from a substantial increase in the
market value of a security. Each Fund also may purchase call options to increase
its return to investors at a time when the option is expected to increase in
value due to anticipated appreciation of the underlying security.
Prior to their expirations, put and call options may be sold in closing
sale transactions (sales by a Fund, prior to the exercise of options that it has
purchased, of options of the same series), and profit or loss from the sale will
depend on whether the amount received is more or less than the premium paid for
the option plus the related transaction costs.
STOCK INDEX OPTIONS. In addition to purchasing and writing options on
securities, each Fund may utilize up to 10% of its total assets to purchase
exchange-listed and, in the case of the International Equity Fund, the Japan OTC
Fund and the Post-Venture Capital Fund, OTC put and call options on stock
indexes, and may write put and call options on such indexes. A stock index
measures the movement of a certain group of stocks by assigning relative values
to the common stocks included in the index. Options on stock indexes are similar
to options on stock except that (i) the expiration cycles of stock index options
are monthly, while those of stock options are currently quarterly, and (ii) the
delivery requirements are different. Instead of giving the right to take or make
delivery of stock at a specified price, an option on a stock index gives the
holder the right to receive a cash 'exercise settlement amount' equal to (a) the
amount, if any, by which the fixed exercise price of the option exceeds (in the
case of a put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise multiplied by (b) a fixed 'index
multiplier.' The discussion of options on securities above, and the related
risks, is applicable to options on securities indexes.
FUTURES CONTRACTS AND OPTIONS. Each Fund may enter into interest rate, stock
index and, in the case of the International Equity, Japan OTC and Post-Venture
Capital Funds, currency futures contracts and purchase and write (sell) related
options that are traded on an exchange designated by the Commodity Futures
Trading Commission (the 'CFTC') or consistent with CFTC regulations on foreign
exchanges. These transactions may be entered into for 'bona fide hedging' as
defined in CFTC regulations and other permissible purposes including (i)
protecting against anticipated changes in the value of portfolio securities the
Fund intends to purchase and (ii) increasing return.
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An interest rate futures contract is a standardized contract for the future
delivery of a specified interest rate sensitive security (such as a U.S.
Treasury Bond or U.S. Treasury Note or its equivalent) at a future date at a
price set at the time of the contract. Stock indexes are capitalization weighted
indexes which reflect the market value of the stock listed on the indexes. A
stock index futures contract is an agreement to be settled by delivery of an
amount of cash equal to a specified multiplier times the difference between the
value of the index at the beginning and at the end of the contract period. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract at a specified exercise
price at any time prior to the expiration date of the option. 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 foreign currency at a
specified price, date, time and place.
Parties to a futures contract must make 'initial margin' deposits to secure
performance of the contract. There are also requirements to make 'variation
margin' deposits from time to time as the value of the futures contract
fluctuates. The Funds are not commodity pools and, in compliance with CFTC
regulations currently in effect, may enter into any futures contracts and
related options for 'bona fide hedging' purposes and, in addition, for other
purposes, provided that aggregate initial margin and premiums required to
establish positions other than those considered by the CFTC to be 'bona fide
hedging' will not exceed 5% of each Fund's net asset value, after taking into
account unrealized profits and unrealized losses on any such contracts. Each
Fund reserves the right to engage in transactions involving futures and options
thereon to the extent allowed by CFTC regulations in effect from time to time
and in accordance with the Fund's policies. Certain provisions of the Code may
limit the extent to which the Fund may enter into futures contracts or engage in
options transactions.
There are several risks in connection with the use of futures contracts.
Successful use of futures contracts is subject to the ability of the Advisers to
predict correctly movements in the direction of the currency, interest rate or
stock index underlying the particular futures contract or related option. These
predictions and, thus, the use of futures contracts involve skills and
techniques that are different from those involved in the management of portfolio
securities. In addition, there can be no assurance that there will be a
correlation between movements in the currencies, interest rate or index
underlying the futures contract and movements in the price of the portfolio
securities which are the subject of a hedge. A decision concerning whether, when
and how to utilize futures involves the exercise of skill and judgment, and even
a well-conceived hedge may be unsuccessful to some degree because of unexpected
market behavior or trends in foreign currencies, interest rates or stock
indexes. Losses incurred in futures transactions and the costs of these
transactions will affect the Fund's performance.
A further risk involves the lack of a liquid secondary market for a futures
contract and the resulting inability to close out a futures contract. Futures
and options contracts may only be closed out by entering into offsetting
transactions on the exchange where the position was entered into (or a linked
exchange), and as a result of daily price fluctuation limits there can no
assurance that an offsetting transaction could be entered into at an
advantageous price at any particular time. Consequently, a Fund may realize a
loss on a futures contract or option that is not offset by an increase in the
value of the Fund's securities that are being hedged or the Fund may not be able
to close a futures or options position without incurring a loss in the event of
adverse price movements.
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ASSET COVERAGE FOR FORWARD CONTRACTS, OPTIONS, FUTURES AND OPTIONS ON FUTURES.
Each Fund will comply with guidelines established by the SEC designed to
eliminate any potential for leverage with respect to options written by the Fund
on currencies, securities and indexes; currency, interest rate and index futures
contracts and options on these futures contracts and forward currency contracts.
The use of these strategies may require that a Fund maintain cash or certain
liquid high-grade debt securities or other assets that are acceptable as
collateral to the appropriate regulatory authority in a segregated account with
its custodian or a designated sub-custodian to the extent the Fund's obligations
with respect to these strategies are not otherwise 'covered' through ownership
of the underlying security, financial instrument or currency or by other
portfolio positions or by other means consistent with applicable regulatory
policies. Segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. As a result, there is a possibility that segregation of a large percentage
of a Fund's assets could impede portfolio management or the Fund's ability to
meet redemption requests or other current obligations.
STRATEGY AVAILABLE TO THE INTERNATIONAL EQUITY FUND, THE JAPAN OTC FUND AND THE
POST-VENTURE CAPITAL FUND
CURRENCY EXCHANGE TRANSACTIONS. Each Fund may engage in currency exchange
transactions to protect against uncertainty in the level of future exchange
rates and to increase the Fund's income and total return (except that the
International Equity Fund may only enter into forward currency contracts for
hedging purposes). 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 forward contracts to purchase or sell
currency, (iii) as described above, through entering into foreign currency
futures contracts or options on such contracts or (iv) in the case of the Japan
OTC Fund and the Post-Venture Capital Fund, by purchasing 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 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 their customers. The use of forward
currency contracts as a hedge 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. In addition, although forward currency contracts 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.
STRATEGIES AVAILABLE TO THE JAPAN OTC FUND
AND THE POST-VENTURE CAPITAL FUND
CURRENCY OPTIONS. Each Fund may purchase exchange-traded put and call options on
currencies. An option on a foreign currency gives the purchaser, in return for a
premium, the right to sell, in the case of a put, and buy, in the case of a
call, the underlying currency at a specified price during the term of the
option. The benefit to the Fund derived from purchases of foreign currency
options, like the benefit derived from other types of options, will be reduced
by the amount of the premium and related transaction costs. In addition, if
currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options that would require it to forgo a portion or all of the benefits of
advantageous changes in the rates.
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REVERSE REPURCHASE AGREEMENTS. Each of the Japan OTC Fund and the Post-Venture
Capital Fund may also enter into reverse repurchase agreements with the same
parties with whom it may enter into repurchase agreements. Reverse repurchase
agreements involve the sale of securities held by the Fund pursuant to its
agreement to repurchase them at a mutually agreed upon date, price and rate of
interest. At the time the Fund enters into a reverse repurchase agreement, it
will establish and maintain a segregated account with an approved custodian
containing cash or liquid high-grade debt securities having a value not less
than the repurchase price (including accrued interest). The assets contained in
the segregated account will be marked-to-market daily and additional assets will
be placed in such account on any day in which the assets fall below the
repurchase price (plus accrued interest). The Fund's liquidity and ability to
manage its assets might be affected when it sets aside cash or portfolio
securities to cover such commitments. Reverse repurchase agreements involve the
risk that the market value of the securities retained in lieu of sale may
decline below the price of the securities the Fund has sold but is obligated to
repurchase. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, such buyer or its trustee
or receiver may receive an extension of time to determine whether to enforce the
Fund's obligation to repurchase the securities, and the Fund's use of the
proceeds of the reverse repurchase agreement may effectively be restricted
pending such decision. Reverse repurchase agreements are considered to be
borrowings under the 1940 Act.
DOLLAR ROLL TRANSACTIONS. Each Fund also may enter into 'dollar rolls,' in which
the Fund sells fixed income securities for delivery in the current month and
simultaneously contracts to repurchase similar but not identical (same type,
coupon and maturity) securities on a specified future date. During the roll
period, the Fund would forgo principal and interest paid on such securities. The
Fund would be compensated by the difference between the current sales price and
the forward price for the future purchase, as well as by the interest earned on
the cash proceeds of the initial sale. At the time that the Fund enters into a
dollar roll transaction, it will place in a segregated account maintained with
an approved custodian cash or other liquid high-grade debt obligations having a
value not less than the repurchase price (including accrued interest) and will
subsequently monitor the account to ensure that its value is maintained. For
financial reporting and tax purposes, each Fund proposes to treat dollar rolls
as two separate transactions, one involving the sale of a security and a
separate transaction involving the purchase of a security. The Funds do not
currently intend to enter into dollar rolls that are accounted for as a
financing.
STRATEGY AVAILABLE TO THE POST-VENTURE CAPITAL FUND
SHORT SELLING. The Fund may from time to time sell securities short. A short
sale is a transaction in which the Fund sells borrowed securities in
anticipation of a decline in the market price of the securities. Possible losses
from short sales differ from losses that could be incurred from a purchase of a
security, because losses from short sales may be unlimited, whereas losses from
purchases can equal only the total amount invested. The current market value of
the securities sold short will not exceed 10% of the Fund's assets.
When the Fund makes a short sale, the proceeds it receives from the sale
are retained by a broker until the Fund replaces the borrowed securities. To
deliver the securities to the buyer, the Fund must arrange through a broker to
borrow the securities and, in so doing, the Fund becomes obligated to replace
the securities borrowed at their market price at the time of replacement,
whatever that price may be. The Fund may have to pay a premium to borrow the
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securities and must pay any dividends or interest payable on the securities
until they are replaced.
The Fund's obligation to replace the securities borrowed in connection with
a short sale will be secured by cash or U.S. government securities deposited as
collateral with the broker. In addition, the Fund will place in a segregated
account with its custodian or a qualified subcustodian an amount of cash or U.S.
government securities equal to the difference, if any, between (i) the market
value of the securities sold at the time they were sold short and (ii) any cash
or U.S. government securities deposited as collateral with the broker in
connection with the short sale (not including the proceeds of the short sale).
Until it replaces the borrowed securities, the Fund will maintain the segregated
account daily at a level so that (a) the amount deposited in the account plus
the amount deposited with the broker (not including the proceeds from the short
sale) will equal the current market value of the securities sold short and (b)
the amount deposited in the account plus the amount deposited with the broker
(not including the proceeds from the short sale) will not be less than the
market value of the securities at the time they were sold short.
Short Sales Against the Box. The Fund may, in addition to engaging in short
sales as described above, enter into a short sale of securities such that when
the short position is open the Fund owns an equal amount of the securities sold
short or owns preferred stocks or debt securities, convertible or exchangeable
without payment of further consideration, into an equal number of securities
sold short. This kind of short sale, which is referred to as one 'against the
box,' will be entered into by the Fund for the purpose of receiving a portion of
the interest earned by the executing broker from the proceeds of the sale. The
proceeds of the sale will generally be held by the broker until the settlement
date when the Fund delivers securities to close out its short position. Although
prior to delivery the Fund will have to pay an amount equal to any dividends
paid on the securities sold short, the Fund will receive the dividends from the
securities sold short or the dividends from the preferred stock or interest from
the debt securities convertible or exchangeable into the securities sold short,
plus a portion of the interest earned from the proceeds of the short sale. The
Fund will deposit, in a segregated account with its custodian or a qualified
subcustodian, the securities sold short or convertible or exchangeable preferred
stocks or debt securities in connection with short sales against the box. The
Fund will endeavor to offset transaction costs associated with short sales
against the box with the income from the investment of the cash proceeds. Not
more than 10% of the Fund's net assets (taken at current value) may be held as
collateral for short sales against the box at any one time.
The extent to which the Fund may make short sales may be limited by Code
requirements for qualification as a regulated investment company. See
'Dividends, Distributions and Taxes' for other tax considerations applicable to
short sales.
INVESTMENT GUIDELINES
The International Equity Fund, the Capital Appreciation Fund and the
Emerging Growth Fund may each invest up to 10% of its total assets (15% of net
assets, in the case of the Japan OTC Fund and the Post-Venture Capital Fund) in
securities with contractual or other restrictions on resale and other
instruments that are not readily marketable ('illiquid securities'), including
(i) securities issued as part of a privately negotiated transaction between an
issuer and one or more purchasers; (ii) repurchase agreements with maturities
greater than seven days; (iii) time deposits maturing in more than seven
calendar days; and (iv) in the case of the Japan OTC Fund, Rule 144A Securities.
In addition, up to 5% of each Fund's total assets may be invested in the
securities of issuers which have been in continuous operation for less than
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three years, and up to an additional 5% of its total assets may be invested in
warrants. Each Fund may borrow from banks for temporary or emergency purposes,
such as meeting anticipated redemption requests, provided that reverse
repurchase agreements and any other borrowing by the Fund may not exceed 10% of
its total assets (30% in the case of the International Equity Fund, the Japan
OTC Fund and the Post-Venture Capital Fund) and may pledge up to 10% of its
assets (to the extent necessary to secure permitted borrowings in the case of
the Japan OTC Fund and the Post-Venture Capital Fund) in connection with
borrowings. Whenever borrowings (including reverse repurchase agreements) exceed
5% of the value of the Fund's total assets, the Fund will not make any
investments (including roll-overs). Except for the limitations on borrowing, the
investment guidelines set forth in this paragraph may be changed at any time
without shareholder consent by vote of the governing Board of each Fund, subject
to the limitations contained in the 1940 Act. A complete list of investment
restrictions that each Fund has adopted identifying additional restrictions that
cannot be changed without the approval of the majority of the Fund's outstanding
shares is contained in each Fund's Statement of Additional Information.
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISERS. Each Fund employs Counsellors as investment adviser to the
Fund. The Japan OTC Fund employs SPARX Investment & Research, USA, Inc. ('SPARX
USA') as its sub-investment adviser. With respect to each Fund other than the
Japan OTC Fund, Counsellors, subject to the control of each Fund's officers and
the governing Board, manages the investment and reinvestment of the assets of
the Funds in accordance with each Fund's investment objective and stated
investment policies. Counsellors makes investment decisions for each such Fund
and places orders to purchase or sell securities on behalf of each such Fund.
With respect to the Japan OTC Fund, Counsellors has general oversight for the
day-to-day management of the Fund, manages the Fund's U.S. investments and
investments in debt securities, determines the country allocation and industry
allocation of Fund assets, monitors Fund expenses and evaluates the services
provided by the sub-investment adviser to the Fund. Counsellors also employs a
support staff of management personnel to provide services to the Funds and
furnishes each Fund with office space, furnishings and equipment. SPARX USA, in
accordance with the investment objective and policies of the Japan OTC Fund and
under the supervision of Counsellors and the Fund's governing Board, makes
investment decisions for the Fund involving Japanese and other Asian equity
securities, places orders to buy and sell such securities on behalf of the Fund
and provides research to the Fund relating to Japanese and other Asian companies
and securities markets.
For the services provided by Counsellors, the Capital Appreciation Fund,
the Emerging Growth Fund, the International Equity Fund and the Post-Venture
Capital Fund will each pay Counsellors a fee calculated at an annual rate of
.70%, .90%, 1.00% and 1.25%, respectively, of the Fund's average daily net
assets. The Japan OTC Fund pays Counsellors an advisory fee calculated at an
annual rate of 1.25% of the Fund's average daily net assets, out of which
Counsellors pays SPARX USA a fee of .625%. Although in the case of the Emerging
Growth Fund, the International Equity Fund, the Japan OTC Fund and the
Post-Venture Capital Fund this advisory fee is higher than that paid by most
other investment companies, including money market and fixed income funds,
Counsellors believes that it is comparable to fees charged by other mutual funds
with similar policies and strategies. The advisory agreement between each Fund
and Counsellors provides that Counsellors will reimburse the Fund to the extent
certain expenses that are described in the Statement of Additional Information
exceed applicable state
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expense limitations. Counsellors, SPARX USA and 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 the Fund.
Counsellors is a professional investment counselling firm which provides
investment services to investment companies, employee benefit plans, endowment
funds, foundations and other institutions and individuals. As of August 31,
1995, Counsellors managed approximately $11.4 billion of assets, including
approximately $5.8 billion of assets of twenty investment companies or
portfolios. Incorporated in 1970, Counsellors is a wholly owned subsidiary of
Warburg, Pincus Counsellors G.P. ('Counsellors G.P.'), a New York general
partnership. E.M. Warburg, Pincus & Co., Inc. ('EMW') controls Counsellors
through its ownership of a class of voting preferred stock of Counsellors.
Counsellors G.P. has no business other than being a holding company of
Counsellors and its subsidiaries. Counsellors' address is 466 Lexington Avenue,
New York, New York 10017-3147.
SPARX USA, a Delaware corporation, is a wholly owned subsidiary of SPARX.
SPARX USA, which has not previously acted as adviser to a U.S. investment
company, is registered as an investment adviser under the U.S. Investment
Advisers Act of 1940. SPARX is an independent investment advisory company, which
is owned by Shuhei Abe. The predecessor of SPARX was incorporated in Tokyo in
July 1988 and was registered as an investment adviser under the Investment
Advisory Act of 1986 of Japan. SPARX has no business other than providing
investment advisory services, and as of August 31, 1995 had approximately $554
million in assets under management. SPARX USA's address is 413 Seaside Avenue,
Honolulu, Hawaii 96815.
PORTFOLIO MANAGERS. The portfolio manager of the International Equity Fund is
Richard H. King. Together with Shuhei Abe of SPARX USA, Mr. King, Nicholas P.W.
Horsley and Nicholas Edwards are co-portfolio managers of the Japan OTC Fund.
The president of the International Equity Fund, the Japan OTC Fund and Warburg
Pincus Emerging Markets Fund is Mr. King. Mr. King has been a portfolio manager
of the International Equity Fund since its inception on May 2, 1989, and Mr.
King, Mr. Horsley and Mr. Abe have been co-portfolio managers of the Japan OTC
Fund since its inception on September 30, 1994. Mr. Edwards has been a
co-portfolio manager of the Japan OTC Fund since October 1995. Mr. King has been
a managing director of EMW since 1989. From 1984 until 1988 he was chief
investment officer and a director at Fiduciary Trust Company International S.A.
in London, with responsibility for all international equity management and
investment strategy. From 1982 to 1984 he was a director in charge of Far East
equity investments at N.M. Rothschild International Asset Management,
a London merchant bank. Mr. Horsley is a senior vice president of Counsellors
and has been with Counsellors since 1993, before which time he was a director,
portfolio manager and analyst at Barclays deZoete Wedd in New York City. Mr.
Edwards has been with Counsellors since August 1995, before which time he was a
director at Jardine Fleming Investment Advisers, Tokyo. He was a vice president
of Robert Fleming Inc. in New York City from 1988 to 1991.
Together with Mr. Horsley and Mr. Edwards, Harold W. Ehrlich and Vincent J.
McBride are associate portfolio managers and research analysts for the
International Equity Fund. Mr. Ehrlich is a senior vice president of Counsellors
and has been with Counsellors and the Fund since February 1995, before which
time he was a senior vice president, portfolio manager and analyst at Templeton
Investment Counsel Inc. Mr. McBride has been with Counsellors and the Fund since
1994. Prior to joining Counsellors, Mr. McBride was an international equity
analyst at Smith Barney Inc. from 1993 to 1994 and at General Electric
Investment Corporation from 1992 to 1993. From 1989 to 1992 he was a portfolio
manager/analyst at United Jersey Bank.
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Shuhei Abe of SPARX USA, a co-portfolio manager of the Japan OTC Fund, is
the founder and president of SPARX Asset Management Company Ltd. ('SPARX'), the
parent company of SPARX USA. Prior to founding SPARX in 1989 (by assuming
control of a predecessor company), Mr. Abe worked for Soros Fund Management and
Credit Suisse Trust Bank as an independent adviser. Toshikatsu Kimura is an
associate portfolio manager of the Japan OTC Fund. Mr. Kimura has been a
portfolio manager and analyst at SPARX since 1992, before which time he was a
warrant trader and portfolio manager, respectively, at Sanyo Securities and
Sanyo Investment Management from 1986 to 1990, and at Funai Capital from 1990 to
1992.
The co-portfolio managers of the Emerging Growth Fund and the Post-Venture
Capital Fund are Elizabeth B. Dater and Stephen J. Lurito, co-presidents of the
Emerging Growth Fund. Ms. Dater has been portfolio manager of the Emerging
Growth Fund since its inception on January 21, 1988. She is a managing director
of EMW and has been a portfolio manager of Counsellors since 1978. Mr. Lurito
has been a portfolio manager of the Emerging Growth Fund since 1990. He is a
managing director of EMW and has been with Counsellors since 1987, before which
time he was a research analyst at Sanford C. Bernstein & Company, Inc. Robert S.
Janis and Christopher M. Nawn are associate portfolio managers and research
analysts for the Post-Venture Capital Fund. Mr. Janis has been with Counsellors
since October 1994, before which time he was a vice president and senior
research analyst at U.S. Trust Company of New York. Mr. Nawn has been with
Counsellors since September 1994, before which time he was a senior sector
analyst and portfolio manager at the Dreyfus Corporation.
George U. Wyper and Susan L. Black have been co-portfolio managers of the
Capital Appreciation Fund since December 1994. Mr. Wyper is a managing director
of EMW, which he joined in August 1994, before which time he was chief
investment officer of White River Corporation and president of Hanover Advisers,
Inc. (1993-August 1994), chief investment officer of Fund American Enterprises,
Inc. (1990-1993) and the director of fixed income investments at Fireman's Fund
Insurance Company (1987-1990). Ms. Black is a managing director of EMW and has
been with Counsellors since 1985.
CO-ADMINISTRATORS. The Funds employ Counsellors Funds Service, Inc.
('Counsellors Service'), a wholly owned subsidiary of Counsellors, as a
co-administrator. As co-administrator, Counsellors Service provides shareholder
liaison services to the Funds 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 corporate secretarial services, which include
preparing materials for meetings of the governing Board, preparing proxy
statements and annual, semiannual and quarterly reports, assisting in other
regulatory filings as necessary and monitoring and developing compliance
procedures for the Funds. As compensation, each Fund pays Counsellors Service a
fee calculated at an annual rate of .10% of the Fund's average daily net assets.
Counsellors may, at its own expense, provide promotional incentives to
qualified recipients who support the sale of shares of the Funds. Qualified
recipients are securities dealers who have sold Fund shares or others, including
banks and other financial institutions, under special arrangements. In some
instances, these incentives may be offered only to certain institutions whose
representatives provide services in connection with the sale or expected sale of
significant amounts of Fund shares.
Each Fund employs PFPC Inc. ('PFPC'), an indirect, wholly owned subsidiary
of PNC Bank Corp., as a co-administrator. As a co-administrator, PFPC calculates
the Fund's net asset value, provides all accounting services for
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the Fund and assists in related aspects of the Fund's operations. As
compensation the Emerging Growth Fund, the Capital Appreciation Fund and the
Post-Venture Capital Fund each pays PFPC a fee calculated at an annual rate of
.10% of each Fund's average daily net assets, and the International Equity Fund
and the Japan OTC Fund each pays PFPC a fee calculated at an annual rate of .12%
of each Fund's first $250 million in average daily net assets, .10% of the next
$250 million in average daily net assets, .08% of the next $250 million in
average daily net assets, and .05% of average daily net assets over $750
million, subject in each case to a minimum annual fee and exclusive of out-of-
pocket expenses. PFPC has its principal offices at 400 Bellevue Parkway,
Wilmington, Delaware 19809.
CUSTODIAN. Fiduciary Trust Company International ('Fiduciary') serves as
custodian of the International Equity Fund's assets and State Street Bank and
Trust Company ('State Street') serves as custodian of the Japan OTC Fund's
assets. Fiduciary's principal business address is Two World Trade Center, New
York, New York 10048. State Street's principal business address is 225 Franklin
Street, Boston, Massachusetts 02110.
PNC Bank, National Association ('PNC'), serves as custodian
of the Post-Venture Capital Fund's U.S. assets, and State Street serves as
custodian of the Fund's non-U.S. assets. PNC serves as custodian of the
assets of the Capital Appreciation Fund and the Emerging Growth Fund
and also provides certain custodial services generally in connection
with purchases and sales of International Equity Fund shares. Like PFPC,
PNC is a subsidiary of PNC Bank Corp. and its principal business
address is Broad and Chestnut Streets, Philadelphia, Pennsylvania 19101.
TRANSFER AGENT. State Street also serves as shareholder servicing agent,
transfer agent and dividend disbursing agent for the Funds. It has delegated to
Boston Financial Data Services, Inc., a 50% owned subsidiary ('BFDS'),
responsibility for most shareholder servicing functions. BFDS's principal
business address is 2 Heritage Drive, North Quincy, Massachusetts 02171.
DISTRIBUTOR. Counsellors Securities serves as distributor of the shares of the
Funds. Counsellors Securities is a wholly owned subsidiary of Counsellors and is
located at 466 Lexington Avenue, New York, New York 10017-3147. No compensation
is payable by the International Equity, Emerging Growth or Capital Appreciation
Funds to Counsellors Securities for distribution services. Counsellors
Securities receives a fee at an annual rate equal to .25% of the average daily
net assets of each of the Japan OTC and Post-Venture Capital Fund's Common
Shares for distribution services, pursuant to a shareholder servicing and
distribution plan ('12b-1 Plan') adopted by each Fund pursuant to Rule 12b-1
under the 1940 Act. Amounts paid to Counsellors Securities under a 12b-1 Plan
may be used by Counsellors Securities to cover expenses that are primarily
intended to result in, or that are primarily attributable to, (i) the sale of
the Common Shares, (ii) ongoing servicing and/or maintenance of the accounts of
Common Shareholders of the Fund and (iii) sub-transfer agency services,
subaccounting services or administrative services related to the sale of the
Common Shares, all as set forth in the 12b-1 Plans. Payments under the 12b-1
Plans are not tied exclusively to the distribution expenses actually incurred by
Counsellors Securities and the payments may exceed distribution expenses
actually incurred. The governing Boards of the Japan OTC Fund and the
Post-Venture Capital Fund evaluate the appropriateness of the 12b-1 Plan on a
continuing basis and in doing so consider all relevant factors, including
expenses borne by Counsellors Securities and amounts received under the 12b-1
Plans.
DIRECTORS AND OFFICERS. The officers of each Fund manage its day-to-day
operations and are directly responsible to its governing Board. The Boards set
broad policies for each Fund and choose its officers. A list of the
Direc-
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tors/Trustees and officers of each Fund and a brief statement of their present
positions and principal occupations during the past five years is set forth in
the Statement of Additional Information of each Fund.
HOW TO OPEN AN ACCOUNT
In order to invest in a Fund, an investor must first complete and sign an
account application. To obtain an application, an investor may telephone Warburg
Pincus Funds at (800) 257-5614. An investor may also obtain an account
application by writing to:
Warburg Pincus Funds
P.O. Box 9030
Boston, Massachusetts 02205-9030
Completed and signed account applications should be mailed to Warburg
Pincus Funds at the above address.
RETIREMENT PLANS AND UGMA ACCOUNTS. For information about investing in the Funds
through a tax-deferred retirement plan, such as an Individual Retirement Account
('IRA') or a Simplified Employee Pension IRA ('SEP-IRA'), or about opening a
Uniform Gifts to Minors Act or Uniform Transfers to Minors Act ('UGMA') account,
an investor should telephone Warburg Pincus Funds at (800) 888-6878 or write to
Warburg Pincus Funds at the address set forth above. Investors should consult
their own tax advisers about the establishment of retirement plans and UGMA
accounts.
CHANGES TO ACCOUNT. For information on how to make changes to an account, an
investor should telephone Warburg Pincus Funds at (800) 888-6878.
HOW TO PURCHASE SHARES
Common Shares of each Fund may be purchased either by mail or, with special
advance instructions, by wire.
BY MAIL. If the investor desires to purchase Common Shares by mail, a check or
money order made payable to the Fund or Warburg Pincus Funds (in U.S. currency)
should be sent along with the completed account application to Warburg Pincus
Funds through its distributor, Counsellors Securities Inc., at the address set
forth above. Checks payable to the investor and endorsed to the order of the
Fund or Warburg Pincus Funds will not be accepted as payment and will be
returned to the sender. If payment is received in proper form before 4:00 p.m.
(Eastern time) on a day that the Fund calculates its net asset value (a
'business day'), the purchase will be made at the Fund's net asset value
calculated at the end of that day. If payment is received after 4:00 p.m., the
purchase will be effected at the Fund's net asset value determined for the next
business day after payment has been received. Checks or money orders that are
not in proper form or that are not accompanied or preceded by a complete account
application will be returned to the sender. Shares purchased by check or money
order are entitled to receive dividends and distributions beginning on the day
after payment has been received. Checks or money orders in payment for shares of
more than one Warburg Pincus Fund should be made payable to Warburg Pincus Funds
and should be accompanied by a breakdown of amounts to be invested in each fund.
If a check used for purchase does not clear, the Fund will cancel the purchase
and the investor may be liable for losses or fees incurred. For a description of
the manner of calculating the Fund's net asset value, see 'Net Asset Value'
below.
BY WIRE. Investors may also purchase Common Shares in a Fund by wiring funds
from their banks. Telephone orders by wire will not be accepted until a
completed account application in proper form has been received and an account
number has been established. Investors should place an order with the Fund prior
to wiring funds by telephoning (800) 888-6878. Federal
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funds may be wired to Counsellors Securities Inc. using the following wire
address:
State Street Bank and Trust Co.
225 Franklin St.
Boston, MA 02101
ABA# 0110 000 28
Attn: Mutual Funds/Custody Dept.
[Insert Warburg Pincus fund name(s) here]
DDA# 9904-649-2
[Shareowner name]
[Shareowner account number]
If a telephone order is received by the close of regular trading on the New
York Stock Exchange (the 'NYSE') (currently 4:00 p.m., Eastern time) and payment
by wire is received on the same day in proper form in accordance with
instructions set forth above, the shares will be priced according to the net
asset value of the Fund on that day and are entitled to dividends and
distributions beginning on that day. If payment by wire is received in proper
form by the close of the NYSE without a prior telephone order, the purchase will
be priced according to the net asset value of the Fund on that day and is
entitled to dividends and distributions beginning on that day. However, if a
wire in proper form that is not preceded by a telephone order is received after
the close of regular trading on the NYSE, the payment will be held uninvested
until the order is effected at the close of business on the next business day.
Payment for orders that are not accepted will be returned to the prospective
investor after prompt inquiry. If a telephone order is placed and payment by
wire is not received on the same day, the Fund will cancel the purchase and the
investor may be liable for losses or fees incurred.
The minimum initial investment in each Fund is $2,500 and the minimum
subsequent investment is $100, except that subsequent minimum investments can be
as low as $50 under the Automatic Monthly Investment Plan described in the next
section. For a tax-deferred retirement plan, such as an IRA or an UGMA account,
the minimum initial and subsequent investment is $500. The Fund reserves the
right to change the initial and subsequent investment minimum requirements at
any time. In addition, the Fund may, in its sole discretion, waive the initial
and subsequent investment minimum requirements with respect to investors who are
employees of EMW or its affiliates or persons with whom Counsellors has entered
into an investment advisory agreement. Existing investors will be given 15 days'
notice by mail of any increase in investment minimum requirements.
After an investor has made his initial investment, additional shares may be
purchased at any time by mail or by wire in the manner outlined above. Wire
payments for initial and subsequent investments should be preceded by an order
placed with the Fund and should clearly indicate the investor's account number
and the name of the Fund in which shares are being purchased. In the interest of
economy and convenience, physical certificates representing shares in the Funds
are not normally issued.
The Funds understand that some broker-dealers (other than Counsellors
Securities), financial institutions, securities dealers and other industry
professionals may impose certain conditions on their clients that invest in the
Funds, which are in addition to or different than those described in this
Prospectus, and, to the extent permitted by applicable regulatory authority, may
charge their clients direct fees. Certain features of the Funds, such as the
initial and subsequent investment minimums, may be modified in these programs,
and administrative charges may be imposed for the services rendered. Therefore,
a client or customer should contact the organization acting on his behalf
concerning the fees (if any) charged in connection with a purchase or redemption
of Fund shares and should read this Prospectus in light of the terms governing
his accounts with the organization. These organizations will be responsible for
promptly transmitting client or customer purchase and redemption orders to the
Funds in
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accordance with their agreements with clients or customers.
Common Shares of each Fund are available through the Charles Schwab &
Company, Inc. Mutual Fund OneSourceTM Program, Fidelity Brokerage Services, Inc.
Funds-NetworkTM Program, Jack White & Company, Inc. and Waterhouse Securities,
Inc. The availability of the Japan OTC Fund through these brokerage firms may
vary. Generally, these programs do not require customers to pay a transaction
fee in connection with purchases. These and other organizations that have
entered into agreements with a Fund or its agent may enter confirmed purchase
orders on behalf of customers, with payment to follow no later than the Funds'
pricing on the following business day. If payment is not received by such time,
the organization could be held liable for resulting fees or losses.
AUTOMATIC MONTHLY INVESTING. Automatic monthly investing allows shareholders to
authorize a Fund to debit their bank account monthly ($50 minimum) for the
purchase of Fund shares on or about either the tenth or twentieth calendar day
of each month. To establish the automatic monthly investing option, obtain a
separate application or complete the 'Automatic Investment Program' section of
the account applications and include a voided, unsigned check from the bank
account to be debited. Only an account maintained at a domestic financial
institution which is an automated clearing house member may be used.
Shareholders using this service must satisfy the initial investment minimum for
the Fund prior to or concurrent with the start of any Automatic Investment
Program. Please refer to an account application for further information, or
contact Warburg Pincus Funds at (800) 888-6878 for information or to modify or
terminate the program. Investors should allow a period of up to 30 days in order
to implement an automatic investment program. The failure to provide complete
information could result in further delays.
HOW TO REDEEM AND EXCHANGE
SHARES
REDEMPTION OF SHARES. An investor in a Fund may redeem (sell) his shares on any
day that the Fund's net asset value is calculated (see 'Net Asset Value' below).
Proceeds from the redemption of shares of the Japan OTC Fund will be reduced by
the amount of any applicable redemption fee (see below).
Common Shares of the Funds may either be redeemed by mail or by telephone.
Investors should realize that in using the telephone redemption and exchange
option, you may be giving up a measure of security that you may have if you were
to redeem or exchange your shares in writing. If an investor desires to redeem
his shares by mail, a written request for redemption should be sent to Warburg
Pincus Funds at the address indicated above under 'How to Open an Account.' An
investor should be sure that the redemption request identifies the Fund, the
number of shares to be redeemed and the investor's account number. In order to
change the bank account or address designated to receive the redemption
proceeds, the investor must send a written request (with signature guarantee of
all investors listed on the account when such a change is made in conjunction
with a redemption request) to Warburg Pincus Funds. Each mail redemption request
must be signed by the registered owner(s) (or his legal representative(s))
exactly as the shares are registered. If an investor has applied for the
telephone redemption feature on his account application, he may redeem his
shares by calling Warburg Pincus Funds at (800) 888-6878 between 9:00 a.m. and
4:00 p.m. (Eastern time) on any business day. An investor making a telephone
withdrawal should state (i) the name of the Fund, (ii) the account number of the
Fund, (iii) the name of the investor(s) appearing on the Fund's records, (iv)
the amount to be withdrawn and (v) the name of the person requesting the
redemption.
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After receipt of the redemption request by mail or by telephone, the
redemption proceeds will, at the option of the investor, be paid by check and
mailed to the investor of record or be wired to the investor's bank as indicated
in the account application previously filled out by the investor. No Fund
currently imposes a service charge for effecting wire transfers but each Fund
reserves the right to do so in the future. During periods of significant
economic or market change, telephone redemptions may be difficult to implement.
If an investor is unable to contact Warburg Pincus Funds by telephone, an
investor may deliver the redemption request to Warburg Pincus Funds by mail at
the address shown above under 'How to Open an Account.' Although each Fund will
redeem shares purchased by check before the check clears, payments of the
redemption proceeds will be delayed until such check has cleared, which may take
up to 15 days from the purchase date. Investors should consider purchasing
shares using a certified or bank check or money order if they anticipate an
immediate need for a redemption.
If a redemption order is received prior to the close of regular trading on
the NYSE, the redemption order will be effected at the net asset value per share
as determined on that day. If a redemption order is received after the close of
regular trading on the NYSE, the redemption order will be effected at the net
asset value as next determined. Redemption proceeds will normally be mailed or
wired to an investor on the next business day following the date a redemption
order is effected. If, however, in the judgment of Counsellors, immediate
payment would adversely affect a Fund, each Fund reserves the right to pay the
redemption proceeds within seven days after the redemption order is effected.
Furthermore, each Fund may suspend the right of redemption or postpone the date
of payment upon redemption (as well as suspend or postpone the recordation of an
exchange of shares) for such periods as are permitted under the 1940 Act.
The proceeds paid upon redemption may be more or less than the amount
invested depending upon a share's net asset value at the time of redemption. If
an investor redeems all the shares in his account, all dividends and
distributions declared up to and including the date of redemption are paid along
with the proceeds of the redemption.
If, due to redemptions, the value of an investor's account drops to less
than $2,000 ($250 in the case of an IRA or UGMA account), each Fund reserves the
right to redeem the shares in that account at net asset value. Prior to any
redemption, the Fund will notify an investor in writing that this account has a
value of less than the minimum. The investor will then have 60 days to make an
additional investment before a redemption will be processed by the Fund.
The Japan OTC Fund imposes a redemption charge on any redemption of shares
(which includes an exchange of shares of the Japan OTC Fund into another Warburg
Pincus Fund) made within six months from the date of purchase. The charge, which
is deducted from the redemption proceeds and retained by the Fund, is equal to
1.00% of the current value of shares redeemed that were held for less than six
months, including any appreciation in value of the redeemed shares. If shares
being redeemed were not all held for the same length of time, those shares held
longest will be redeemed first for purposes of determining whether the charge
applies. The redemption charge will not be imposed on redemptions (or exchanges)
of shares acquired through the reinvestment of dividends, and these shares will
be redeemed before any shares to which the redemption charge applies. The
redemption fee is currently being waived until such later date as the Fund may
determine.
TELEPHONE TRANSACTIONS. In order to request redemptions by telephone, investors
must have completed and returned to Warburg Pincus Funds an account application
containing a telephone election. Unless contrary instructions are elected, an
investor will be entitled to make
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<PAGE>
exchanges by telephone. Neither a Fund nor its agents will be liable for
following instructions communicated by telephone that it reasonably believes to
be genuine. Reasonable procedures will be employed on behalf of each Fund to
confirm that instructions communicated by telephone are genuine. Such procedures
include providing written confirmation of telephone transactions, tape recording
telephone instructions and requiring specific personal information prior to
acting upon telephone instructions.
AUTOMATIC CASH WITHDRAWAL PLAN. Each Fund offers investors an automatic cash
withdrawal plan under which investors may elect to receive periodic cash
payments of at least $250 monthly or quarterly. To establish this service,
complete the 'Automatic Withdrawal Plan' section of the account application and
attach a voided check from the bank account to be credited. For further
information regarding the automatic cash withdrawal plan or to modify or
terminate the Plan, investors should contact Warburg Pincus Funds at (800)
888-6878.
EXCHANGE OF SHARES. An investor may exchange Common Shares of a Fund for Common
Shares of another Fund or for Common Shares of the other mutual funds advised by
Counsellors at their respective net asset values. Exchanges may be effected by
mail or by telephone in the manner described under 'Redemption of Shares' above.
If an exchange request is received by Warburg Pincus Funds prior to 4:00 p.m.
(Eastern time), the exchange will be made at each Fund's net asset value
determined at the end of that business day. Exchanges may be effected without a
sales charge but must satisfy the minimum dollar amount necessary for new
purchases and may, in the case of exchanges from the Japan OTC Fund, be subject
to a redemption fee. Due to the costs involved in effecting exchanges, each Fund
reserves the right to refuse to honor more than three exchange requests by a
shareholder in any 30-day period. The exchange privilege may be modified or
terminated at any time upon 60 days' notice to shareholders. Currently,
exchanges may be made among the Funds and with the following other funds:
WARBURG PINCUS CASH RESERVE FUND -- a money market fund investing in
short-term, high quality money market instruments;
WARBURG PINCUS NEW YORK TAX EXEMPT FUND -- a money market fund investing
in short-term, high quality municipal obligations designed for New York
investors seeking income exempt from federal, New York State and New York
City income tax;
WARBURG PINCUS NEW YORK INTERMEDIATE MUNICIPAL FUND -- an
intermediate-term municipal bond fund designed for New York investors
seeking income exempt from federal, New York State and New York City
income tax;
WARBURG PINCUS TAX FREE FUND -- a bond fund seeking maximum current income
exempt from federal income taxes, consistent with preservation of capital;
WARBURG PINCUS INTERMEDIATE MATURITY GOVERNMENT FUND -- an
intermediate-term bond fund investing in obligations issued or guaranteed
by the U.S. government, its agencies or instrumentalities;
WARBURG PINCUS FIXED INCOME FUND -- a bond fund seeking current income
and, secondarily, capital appreciation by investing in a diversified
portfolio of fixed-income securities;
WARBURG PINCUS SHORT-TERM TAX-ADVANTAGED BOND FUND -- a bond fund seeking
maximum income after the effect of federal income taxes as a primary
objective and capital appreciation as a secondary objective through
investments in taxable and tax-exempt debt instruments;
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WARBURG PINCUS GLOBAL FIXED INCOME FUND -- a bond fund investing in a
portfolio consisting of investment grade fixed-income securities of
governmental and corporate issuers denominated in various currencies,
including U.S. dollars;
WARBURG PINCUS BALANCED FUND -- a fund seeking maximum total return
through a combination of long-term growth of capital and current income
consistent with preservation of capital through diversified investments in
equity and debt securities;
WARBURG PINCUS GROWTH & INCOME FUND -- an equity fund seeking long-term
growth of capital and income and a reasonable current return; and
WARBURG PINCUS EMERGING MARKETS FUND -- an equity fund seeking growth of
capital by investing primarily in securities of non-United States issuers
consisting of companies in emerging securities markets.
The exchange privilege is available to shareholders residing in any state
in which the Common Shares being acquired may legally be sold. When an investor
effects an exchange of shares, the exchange is treated for federal income tax
purposes as a redemption. Therefore, the investor may realize a taxable gain or
loss in connection with the exchange. Investors wishing to exchange Common
Shares of a Fund for Common Shares in another Warburg Pincus Fund should review
the prospectus of the other fund prior to making an exchange. For further
information regarding the exchange privilege or to obtain a current prospectus
for another Warburg Pincus Fund, an investor should contact Warburg Pincus Funds
at (800) 257-5614.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. Each Fund calculates its dividends from net
investment income. Net investment income includes interest accrued and dividends
earned on the Fund's portfolio securities for the applicable period less
applicable expenses. Each Fund declares dividends from its net investment income
semiannually and pays them in the calendar year in which they are declared. Net
investment income earned on weekends and when the NYSE is not open will be
computed as of the next business day. Distributions of net realized long-term
and short-term capital gains are declared annually and, as a general rule, will
be distributed or paid in November or December of each calendar year. Unless an
investor instructs a Fund to pay dividends or distributions in cash, dividends
and distributions will automatically be reinvested in additional Common Shares
of the relevant Fund at net asset value. The election to receive dividends in
cash may be made on the account application or, subsequently, by writing to
Warburg Pincus Funds at the address set forth under 'How to Open an Account' or
by calling Warburg Pincus Funds at (800) 888-6878.
A Fund may be required to withhold for U.S. federal income taxes 31% of all
distributions payable to shareholders who fail to provide the Fund with their
correct taxpayer identification number or to make required certifications, or
who have been notified by the U.S. Internal Revenue Service that they are
subject to backup withholding.
TAXES. Each Fund intends to qualify each year as a 'regulated investment
company' within the meaning of the Code. Each Fund, if it qualifies as a
regulated investment company, will be subject to a 4% non-deductible excise tax
measured with respect to certain undistributed amounts of ordinary income and
capital gain. Each Fund expects to pay such additional dividends and to make
such additional distributions as are necessary to avoid the application of this
tax.
Dividends paid from net investment income and distributions of net realized
short-term capital gains are taxable to investors as ordinary income, and
distributions derived from net realized long-term capital gains are taxable to
investors as long-term capital gains, in each case regardless of how long the
shareholder has held
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Fund shares and whether received in cash or reinvested in additional Fund
shares. As a general rule, an investor's gain or loss on a sale or redemption of
his Fund shares will be a long-term capital gain or loss if he has held his
shares for more than one year and will be a short-term capital gain or loss if
he has held his shares for one year or less. However, any loss realized upon the
sale or redemption of shares within six months from the date of their purchase
will be treated as a long-term capital loss to the extent of any amounts treated
as distributions of long-term capital gain during such six-month period with
respect to such shares. Investors may be proportionately liable for taxes on
income and gains of the Funds, but investors not subject to tax on their income
will not be required to pay tax on amounts distributed to them. The Fund's
investment activities, including short sales of securities, will not result in
unrelated business taxable income to a tax-exempt investor. A Fund's dividends,
to the extent not derived from dividends attributable to certain types of stock
issued by U.S. domestic corporations, will not qualify for the dividends
received deduction for corporations.
Special Tax Matters Relating to the International Equity Fund and the Japan
OTC Fund. Dividends and interest received by the International Equity Fund and
the Japan OTC Fund may be subject to withholding and other taxes imposed by
foreign countries. However, tax conventions between certain countries and the
United States may reduce or eliminate such taxes. If the International Equity
Fund or the Japan OTC Fund qualifies as a regulated investment company, if
certain asset and distribution requirements are satisfied and if more than 50%
of the Fund's total assets at the close of its fiscal year consist of stock or
securities of foreign corporations, the International Equity Fund or the Japan
OTC Fund, as the case may be, may elect for U.S. income tax purposes to treat
foreign income taxes paid by it as paid by its shareholders. A Fund may qualify
for and make this election in some, but not necessarily all, of its taxable
years. If a Fund were to make an election, shareholders of the Fund would be
required to take into account an amount equal to their pro rata portions of such
foreign taxes in computing their taxable income and then treat an amount equal
to those foreign taxes as a U.S. federal income tax deduction or as a foreign
tax credit against their U.S. federal income taxes. Shortly after any year for
which it makes such an election, the International Equity Fund or the Japan OTC
Fund will report to its shareholders the amount per share of such foreign income
tax that must be included in each shareholder's gross income and the amount
which will be available for the deduction or credit. No deduction for foreign
taxes may be claimed by a shareholder who does not itemize deductions. Certain
limitations will be imposed on the extent to which the credit (but not the
deduction) for foreign taxes may be claimed.
Special Tax Matters Relating to the Japan OTC Fund. In the opinion of
Japanese counsel for the Fund, the operations of the Fund will not subject the
Fund to any Japanese income, capital gains or other taxes except for withholding
taxes on interest and dividends paid to the Fund by Japanese corporations and
securities transaction taxes payable in the event of sales of portfolio
securities in Japan. In the opinion of such counsel, under the tax convention
between the United States and Japan (the 'Convention') as currently in force, a
Japanese withholding tax at a rate of 15% is, with certain exceptions, imposed
upon dividends paid by Japanese corporations to the Fund. Pursuant to the
present terms of the Convention, interest received by the Fund from sources
within Japan is subject to a Japanese withholding tax at a rate of 10%.
Special Tax Matters Relating to the Post-Venture Capital Fund. Certain
provisions of the Code may require that a gain recognized by the Fund upon the
closing of a short sale be treated as a short-term capital gain, and that a loss
recognized by the Fund upon the closing of a short sale be treated as a
long-term capital loss, regardless of the amount of time that the Fund
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<PAGE>
held the securities used to close the short sale. The Fund's use of short sales
may also affect the holding periods of certain securities held by the Fund if
such securities are 'substantially identical' to securities used by the Fund to
close the short sale. The Fund's short selling activities will not result in
unrelated business taxable income to a tax-exempt investor.
GENERAL. Statements as to the tax status of each investor's dividends and
distributions are mailed annually. Each investor will also receive, if
applicable, various written notices after the close of a Fund's prior taxable
year with respect to certain dividends and distributions which were received
from the Fund during the Fund's prior taxable year. Investors should consult
their own tax advisers with specific reference to their own tax situations,
including their state and local tax liabilities.
NET ASSET VALUE
Each Fund's net asset value per share is calculated as of the close of
regular trading on the NYSE (currently 4:00 p.m., Eastern time) on each business
day, Monday through Friday, except on days when the NYSE is closed. The NYSE is
currently scheduled to be closed on New Year's Day, Washington's Birthday, Good
Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day
and Christmas Day, and on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday, respectively. The net asset value
per share of each Fund generally changes each day.
The net asset value per Common Share of each Fund is computed by adding the
Common Shares' pro rata share of the value of the Fund's assets, deducting the
Common Shares' pro rata share of the Fund's liabilities and the liabilities
specifically allocated to Common Shares and then dividing the result by the
total number of outstanding Common Shares. Generally, the Funds' investments are
valued at market value or, in the absence of a quoted market value with respect
to any portfolio securities, at fair value as determined by or under the
direction of the governing Board.
Portfolio securities that are primarily traded on foreign exchanges are
generally valued at the closing values of such securities on their respective
exchanges preceding the calculation of a Fund's net asset value, except that
when an occurrence subsequent to the time a value was so established is likely
to have changed such value, then the fair market value of those securities will
be determined by consideration of other factors by or under the direction of the
governing Board or its delegates.
Securities listed on a U.S. securities exchange (including securities
traded through the NASDAQ National Market System) or foreign securities exchange
will be valued on the basis of the closing value on the date on which the
valuation is made. Other U.S. over-the-counter securities, foreign
over-the-counter securities and securities listed or traded on certain foreign
stock exchanges whose operations are similar to the U.S. over-the-counter market
are valued on the basis of the bid price at the close of business on each day.
Option or futures contracts will be valued at the last sale price at 4:00 p.m.
(Eastern time) on the date on which the valuation is made, as quoted on the
primary exchange or board of trade on which the option or futures contract is
traded or, in the absence of sales, at the mean between the last bid and asked
prices. Unless the governing Board determines that using this valuation method
would not reflect the investments' value, short-term investments that mature in
60 days or less are valued on the basis of amortized cost, which involves
valuing a portfolio instrument at its cost initially 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
valuation of short sales of securities, which are not traded on a national
exchange, will be at the mean of bid and asked prices. Any assets and
liabilities initially expressed in non-U.S. dollar currencies
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<PAGE>
are translated into U.S. dollars at the prevailing rate as quoted by an
independent pricing service on the date of valuation. Further information
regarding valuation policies is contained in each Fund's Statement of Additional
Information.
PERFORMANCE
The Funds quote the performance of Common Shares separately from Advisor
Shares. The net asset value of Common Shares is listed in The Wall Street
Journal each business day under the heading 'Warburg Pincus Funds.' From time to
time, each Fund may advertise the average annual total return of its Common
Shares over various periods of time. These total return figures show the average
percentage change in value of an investment in the Common Shares from the
beginning of the measuring period to the end of the measuring period. The
figures reflect changes in the price of the Common Shares assuming that any
income dividends and/or capital gain distributions made by the Fund during the
period were reinvested in Common Shares of the Fund. Total return will be shown
for recent one-, five- and ten-year periods, and may be shown for other periods
as well (such as from commencement of the Fund's operations or on a
year-by-year, quarterly or current year-to-date basis).
When considering average total return figures for periods longer than one
year, it is important to note that the annual total return for one year in the
period might have been greater or less than the average for the entire period.
When considering total return figures for periods shorter than one year,
investors should bear in mind that each Fund seeks long-term appreciation and
that such return may not be representative of any Fund's return over a longer
market cycle. Each Fund may also advertise aggregate total return figures of its
Common Shares for various periods, representing the cumulative change in value
of an investment in the Common Shares for the specific period (again reflecting
changes in share prices and assuming reinvestment of dividends and
distributions). Aggregate and average total returns may be shown by means of
schedules, charts or graphs and may indicate various components of total return
(i.e., change in value of initial investment, income dividends and capital gain
distributions).
Investors should note that total return figures are based on historical
earnings and are not intended to indicate future performance. Each Fund's
Statement of Additional Information describes the method used to determine the
total return. Current total return figures may be obtained by calling Warburg
Pincus Funds at (800) 257-5614.
In reports or other communications to investors or in advertising material,
a Fund may describe general economic and market conditions affecting the Fund.
The Fund may compare its performance with (i) that of other mutual funds as
listed in the rankings prepared by Lipper Analytical Services, Inc. or similar
investment services that monitor the performance of mutual funds or as set forth
in the publications listed below; (ii) in the case of the Capital Appreciation
Fund, with the Russell Midcap Index, the S&P Midcap 400 Index and the S&P 500
Index; in the case of the Emerging Growth Fund, with the Russell 2000 Small
Stock Index, the T. Rowe Price New Horizons Fund Index and the S&P 500 Index; in
the case of the International Equity Fund, the Morgan Stanley Capital
International Europe, Australia and Far East ('EAFE') Index, the Salomon Russell
Global Equity Index, the FT-Actuaries World Indices (jointly compiled by The
Financial Times, Ltd., Goldman, Sachs & Co. and NatWest Securities Ltd.) and the
S&P 500 Index; in the case of the Japan OTC Fund, the indexes noted above for
the International Equity Fund, as well as the Nikkei over-the-counter average,
the JASDAQ Index, the Nikkei 225 and 300 Stock Indexes and the Topix Index; in
the case of the Post-Venture Capital Fund, with the Venture Capital 100 Index
(compiled by Venture Capital Journal), the Russell 2000 Small Stock Index and
the S&P 500 Index; all of which are unmanaged indexes of common stocks; or (iii)
other appro-
34
<PAGE>
priate indexes of investment securities or with data developed by Counsellors
derived from such indexes. The Post-Venture Capital Fund may also make
comparisons using data and indexes compiled by the National Venture Capital
Association, VentureOne and Private Equity Analysts Newsletter and similar
organizations and publications. A Fund may include evaluations of the Fund
published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as The Wall Street Journal,
Investor's Daily, Money, Inc., Institutional Investor, Barron's, Fortune,
Forbes, Business Week, Mutual Fund Magazine, Morningstar, Inc. and
Financial Times.
In reports or other communications to investors or in advertising, each
Fund may also describe the general biography or work experience of the portfolio
managers of the Fund and may include quotations attributable to the portfolio
managers describing approaches taken in managing the Fund's investments,
research methodology underlying stock selection or the Fund's investment
objective. The Post-Venture Capital Fund may discuss characteristics of venture
capital financed companies and the benefits expected to be achieved from
investing in these companies. Each Fund may also discuss the continuum of risk
and return relating to different investments and the potential impact of foreign
stocks on a portfolio otherwise composed of domestic securities. In addition,
each Fund may from time to time compare the expense ratio of its Common Shares
to that of investment companies with similar objectives and policies, based on
data generated by Lipper Analytical Services, Inc. or similar investment
services that monitor mutual funds.
GENERAL INFORMATION
ORGANIZATION. The International Equity Fund was incorporated on February 9, 1989
under the laws of the State of Maryland. Although the Fund's name as set forth
in its charter is 'Counsellors International Equity Fund, Inc.,' it does
business under the name 'Warburg, Pincus International Equity Fund.' The
Emerging Growth Fund was incorporated on November 12, 1987 under the laws of the
State of Maryland. Although the Fund's name as set forth in its charter is
'Counsellors Emerging Growth Fund, Inc.,' it does business under the name
'Warburg, Pincus Emerging Growth Fund.' The Capital Appreciation Fund was
organized on January 20, 1987 under the laws of The Commonwealth of
Massachusetts and is a business entity commonly known as 'Massachusetts business
trust.' On February 26, 1992, the Fund amended the Agreement and Declaration of
Trust to change the name of the Fund from 'Counsellors Capital Appreciation
Fund' to 'Warburg, Pincus Capital Appreciation Fund.' The Japan OTC Fund and the
Post-Venture Capital Fund were incorporated on July 26, 1994 and July 12, 1995,
respectively, under the laws of the State of Maryland.
The charter of each of the Emerging Growth Fund, the International Equity
Fund, the Japan OTC Fund and the Post-Venture Capital Fund 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 Series 2 Shares (the
Advisor Shares). The Capital Appreciation Fund's Agreement and Declaration of
Trust authorizes the Board to issue an unlimited number of full and fractional
shares of beneficial interest, $.001 par value per share, of which one billion
shares are classified as Series 2 Shares (the Advisor Shares). Under each Fund's
charter documents, the governing Board has the power to classify or reclassify
any unissued shares of the Fund into one or more additional classes by setting
or changing in any one or more respects their relative rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption. The governing Board of a Fund may similarly classify
or reclassify any class of its shares into one or more series and, without
shareholder approval, may increase the number of authorized shares of the Fund.
MULTI-CLASS STRUCTURE. Each Fund offers a separate class of shares, the Advisor
Shares, pursuant
35
<PAGE>
to a separate prospectus. Advisor Shares may not be purchased by individuals
directly but institutions and retirement plans may purchase Advisor Shares for
individuals. Advisor Shares of each class represent equal pro rata interests in
the respective Fund and accrue dividends and calculate net asset value and
performance quotations in the same manner, as described elsewhere in this
Prospectus. Because of the higher fees borne by the Advisor Shares, the total
return on such shares can be expected to be lower than the total return on
Common Shares. Investors may obtain information concerning the Advisor Shares by
calling Counsellors Securities at (800) 888-6878.
VOTING RIGHTS. Investors in a Fund are entitled to one vote for each full share
held and fractional votes for fractional shares held. Shareholders of a 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 governing Board
unless and until such time as less than a majority of the members holding office
have been elected by investors. Any Director of the International Equity Fund,
the Emerging Growth Fund, the Japan OTC Fund or the Post-Venture Capital 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. Investors of record of no less than two-thirds of the outstanding
shares of the Capital Appreciation Fund may remove a Trustee through a
declaration in writing or by vote cast in person or by proxy 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. John L. Furth, a Director and Trustee of the
Funds, and Lionel I. Pincus, Chairman of the Board and Chief Executive Officer
of EMW, may be deemed to be controlling persons of each Fund other than the
Post-Venture Capital Fund as of August 31, 1995 because they may be deemed to
possess or share investment power over shares owned by clients of Counsellors
and certain other entities.
SHAREHOLDER COMMUNICATIONS. Each investor will receive a quarterly statement of
his account, as well as a statement of his account after any transaction that
affects his share balance or share registration (other than the reinvestment of
dividends or distributions). Each Fund will also send to its investors a
semiannual report and an audited annual report, each of which includes a list of
the investment securities held by the Fund and a statement of the performance of
the Fund.
The prospectuses of the Funds are combined in this Prospectus. Each Fund
offers only its own shares, yet it is possible that a Fund might become liable
for a misstatement, inaccuracy or omission in this Prospectus with regard to
another Fund.
SHAREHOLDER SERVICING
Common Shares may be sold to or through institutions, including insurance
companies, that will not be paid a distribution fee by the Fund pursuant to Rule
12b-1 under the 1940 Act for services to their clients or customers who may be
deemed to be beneficial owners of Common Shares. These institutions may be paid
a fee by the Fund for transfer agency, administrative or other services provided
to their customers that invest in the Funds' Common Shares. These services
include maintaining account records, processing orders to purchase, redeem and
exchange Common Shares and responding to certain customer inquiries.
Organizations that provide recordkeeping or other services to certain employee
benefit plans and qualified and other retirement plans that include a Fund as an
investment alternative may also be paid a fee by the Fund for these services.
Each Fund is authorized to offer Advisor Shares exclusively to institutions
that enter into account servicing agreements ('Agreements') with the Fund
pursuant to a distribution plan approved by each Fund's governing Board
pursu-
36
<PAGE>
ant to Rule 12b-1 under the 1940 Act. Pursuant to the terms of an Agreement, the
institution will provide certain distribution, shareholder servicing,
administrative and/or accounting services for its clients and customers who may
be deemed to be beneficial owners of Advisor Shares.
Counsellors and Counsellors Securities may, from time to time, at their own
expense, also provide compensation to these institutions and organizations. To
the extent they do so, such compensation does not represent an additional
expense to a Fund or its shareholders, since it will be paid from the assets of
Counsellors, Counsellors Securities or their affiliates. Counsellors Securities
currently receives a fee equal to an annual rate of .25% of the average daily
net assets of each of the Japan OTC and Post-Venture Capital Fund's Common
Shares. See 'Management of the Funds -- Distributor.'
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, EACH FUNDS'
STATEMENT OF ADDITIONAL INFORMATION OR THE FUNDS' OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF SHARES OF THE FUNDS, AND IF GIVEN OR MADE, SUCH
OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY EACH FUND. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF THE
COMMON SHARES OF THE FUNDS IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH
OFFER MAY NOT LAWFULLY BE MADE.
37
<PAGE>
TABLE OF CONTENTS
THE FUNDS' EXPENSES ...................................................... 2
FINANCIAL HIGHLIGHTS ..................................................... 3
INVESTMENT OBJECTIVES AND POLICIES ....................................... 6
PORTFOLIO INVESTMENTS .................................................... 9
RISK FACTORS AND SPECIAL
CONSIDERATIONS ....................................................... 11
PORTFOLIO TRANSACTIONS AND TURNOVER
RATE ................................................................. 14
CERTAIN INVESTMENT STRATEGIES ........................................... 14
INVESTMENT GUIDELINES ................................................... 21
MANAGEMENT OF THE FUNDS ................................................. 22
HOW TO OPEN AN ACCOUNT .................................................. 26
HOW TO PURCHASE SHARES .................................................. 26
HOW TO REDEEM AND EXCHANGE
SHARES ............................................................... 28
DIVIDENDS, DISTRIBUTIONS AND TAXES ...................................... 31
NET ASSET VALUE ......................................................... 33
PERFORMANCE ............................................................. 34
GENERAL INFORMATION ..................................................... 35
SHAREHOLDER SERVICING ................................................... 36
[LOGO]
[ ] WARBURG PINCUS
CAPITAL APPRECIATION FUND
[ ] WARBURG PINCUS
EMERGING GROWTH FUND
[ ] WARBURG PINCUS
POST-VENTURE CAPITAL FUND
[ ] WARBURG PINCUS
INTERNATIONAL EQUITY FUND
[ ] WARBURG PINCUS
JAPAN OTC FUND
PROSPECTUS
SEPTEMBER 29, 1995
WPEQF-1-0995
STATEMENT OF DIFFERENCES
<TABLE>
<S> <C>
The dagger symbol shall be expressed as ................ 'D'
</TABLE>
<PAGE>
Rule 497(c)
Securities Act File No. 33-18632
Investment Co. Act File No. 811-5396
WARBURG PINCUS ADVISOR FUNDS
P.O. BOX 9030
BOSTON, MASSACHUSETTS 02205-9030
TELEPHONE NUMBER: (800) 888-6878
September 29, 1995
PROSPECTUS
Warburg Pincus Advisor Funds are a family of open-end mutual funds that are
offered to financial institutions investing on behalf of their customers and to
retirement plans that elect to make one or more Advisor Funds an investment
option for participants in the plans. One Advisor Fund is described in this
Prospectus:
WARBURG, PINCUS EMERGING GROWTH FUND seeks maximum capital appreciation by
investing in equity securities of small- to medium-sized companies in the United
States with emerging or renewed growth potential.
The Fund currently offers two classes of shares, one of which, the Series 2
Shares (referred to as the Advisor Shares), is offered pursuant to this
Prospectus. The Advisor Shares of the Fund, as well as Advisor (Series 2) Shares
of certain other Warburg Pincus-advised funds, are sold under the name 'Warburg
Pincus Advisor Funds.' The Advisor Shares may not be purchased by individuals
directly but institutions and retirement plans ('Institutions') may purchase
Advisor Shares for individuals. The Advisor Shares impose a 12b-1 fee of up to
.75% per annum, which is the economic equivalent of a sales charge. Common
Shares are available for purchase by individuals directly and are offered by a
separate prospectus.
NO MINIMUM INVESTMENT
There is no minimum amount of initial or subsequent purchases of shares imposed
on Institutions. See 'How to Purchase Shares.'
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Fund, contained in a Statement of Additional Information, has been filed with
the Securities and Exchange Commission (the 'SEC') and is available to investors
without charge by calling Warburg Pincus Advisor Funds at (800) 888-6878.
Information regarding the status of shareholder accounts may also be obtained by
calling Warburg Pincus Advisor Funds at (800) 888-6878. The Statement of
Additional Information bears the same date as this Prospectus and is
incorporated by reference in its entirety into this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY ANY BANK AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
INVESTMENTS IN SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE>
THE FUND'S EXPENSES
The Fund currently offers two separate classes of shares: Common Shares and
Advisor Shares. See 'General Information' and 'Shareholder Servicing.' Because
of the higher fees borne by Advisor Shares, the total return on such shares can
be expected to be lower than the total return on Common Shares.
<TABLE>
<S> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage of offering price).......................... 0
Annual Fund Operating Expenses (as a percentage of average net assets) (after fee waivers)
Management Fees...................................................................................... .86%
12b-1 Fees........................................................................................... .75%*
Other Expenses....................................................................................... .36%
-----
Total Fund Operating Expenses........................................................................ 1.97%
EXAMPLE
You would pay the following expenses
on a $1,000 investment, assuming (1) 5% annual return
and (2) redemption at the end of each time period:
1 year............................................................................................... $20
3 years.............................................................................................. $62
5 years.............................................................................................. $106
10 years............................................................................................. $230
</TABLE>
- ------------
* Current 12b-1 fees are .50% out of a maximum .75% authorized under the
Advisor Shares' Distribution Plan. At least a portion of these fees should be
considered by the investor to be the economic equivalent of a sales charge.
------------------------
The expense table shows the costs and expenses that an investor will bear
directly or indirectly as an Advisor Shareholder of the Fund. Institutions also
may charge their clients fees in connection with investments in the Advisor
Shares, which fees are not reflected in the table. Absent the voluntary waiver
of a portion of the fees payable to the Fund's investment adviser, Management
Fees would have been .90% and the Total Fund Operating Expenses would have
been 2.01%. The Example should not be considered a representation of past or
future expenses; actual Fund expenses may be greater or less than those shown.
Moreover, while the Example assumes a 5% annual return, the Fund's actual
performance will vary and may result in a return greater or less than 5%.
Long-term shareholders of Advisor Shares may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the National
Association of Securities Dealers, Inc. (the 'NASD').
2
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR AN ADVISOR SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The information regarding the Fund for the two fiscal years ending October
31, 1994 has been derived from information audited by Coopers & Lybrand L.L.P.,
independent auditors, whose report dated December 12, 1994 appears in the Fund's
Statement of Additional Information. The information for the prior fiscal
year/period ending October 31, 1992 has been audited by Ernst & Young LLP, whose
report was unqualified. The information for the six months ended April 30, 1995
is unaudited. Further information about the performance of the Fund is contained
in the annual report, dated October 31, 1994, copies of which may be obtained
without charge by calling Warburg Pincus Advisor Funds at (800) 888-6878.
<TABLE>
<CAPTION>
FOR THE SIX FOR THE PERIOD
MONTHS APRIL 4, 1991
ENDED (INITIAL ISSUANCE)
APRIL 30, FOR THE YEAR ENDED OCTOBER 31, THROUGH
1995 -------------------------------- OCTOBER 31,
(UNAUDITED) 1994 1993 1992 1991
----------- ------- ------- ------ -------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period...... $ 22.05 $ 23.51 $ 18.19 $16.99 $ 15.18
----------- ------- ------- ------ -------
Income from Investment Operations
Net Investment Income (Loss)............ (.09) .00 (.08) (.06) .00
Net Gains (Loss) from Securities (both
realized and unrealized)............. 1.67 (.10) 5.77 1.62 1.82
----------- ------- ------- ------ -------
Total from Investment Operations........ 1.58 (.10) 5.69 1.56 1.82
----------- ------- ------- ------ -------
Less Distributions
Dividends (from net investment
income).............................. .00 .00 .00 .00 (.01)
Distributions (from capital gains)...... .00 (1.36) (.37) (.36) .00
----------- ------- ------- ------ -------
Total Distributions..................... .00 (1.36) (.37) (.36) (.01)
----------- ------- ------- ------ -------
Net Asset Value, End of Period............ $ 23.63 $ 22.05 $ 23.51 $18.19 $ 16.99
----------- ------- ------- ------ -------
----------- ------- ------- ------ -------
Total Return.............................. 14.97%* (.29%) 31.67% 9.02% 23.43%*
Ratios/Supplemental Data
Net Assets, End of Period (000s).......... $97,725 $64,009 $26,029 $5,398 $275
Ratios to Average Daily Net Assets:
Operating expenses...................... 1.75%* 1.72% 1.73% 1.74% 1.74%*
Net investment income (loss)............ (1.01%)* (1.08%) (1.09%) (.87%) (.49%)*
Decrease reflected in above expense
ratios due to
waivers/reimbursements............... .00% .04% .00% .06% .42%*
Portfolio Turnover Rate................... 97.48%* 60.38% 68.35% 63.38% 97.69%
</TABLE>
- ------------
* Annualized.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks maximum capital appreciation. This objective is a
fundamental policy and may not be amended without first obtaining the approval
of a majority of the outstanding shares of the Fund. Any investment involves
risk and, therefore, there can be no assurance that the Fund will achieve its
investment objective. See 'Certain Investment Strategies' for descriptions of
certain types of investments the Fund may make.
The Fund is a non-diversified management investment company that pursues
its investment objective by investing in a portfolio of equity securities of
domestic companies. The Fund ordinarily will invest at least 65% of its total
assets in common stocks or warrants of emerging growth companies that represent
attractive opportunities for maximum capital appreciation. Emerging growth
companies are small- or medium-sized companies that have passed their start-up
phase and that show positive earnings and prospects of achieving significant
profit and gain in a relatively short period of time.
Although under current market conditions the Fund expects to invest in
companies having stock market capitalizations of up to approximately $500
million, the Fund may invest in emerging growth companies without regard to
their market capitalization. Emerging growth companies generally stand to
benefit from new products or services, technological developments or changes in
management and other factors and include smaller companies experiencing unusual
developments affecting their market value. These 'special situation companies'
include companies that are involved in the following: an acquisition or
consolidation; a reorganization; a recapitalization; a merger, liquidation, or
distribution of cash, securities or other assets; a tender or exchange offer; a
breakup or workout of a holding company; litigation which, if resolved
favorably, would improve the value of the company's stock; or a change in
corporate control.
PORTFOLIO INVESTMENTS
INVESTMENT GRADE DEBT. The Fund may invest up to 20% of its total assets in
investment grade debt securities (other than money market instruments) and
preferred stocks that are not convertible into common stock for the purpose of
seeking capital appreciation. The interest income to be derived may be
considered as one factor in selecting debt securities for investment by Warburg,
Pincus Counsellors, Inc., the Fund's investment adviser ('Counsellors'). Because
the market value of debt obligations can be expected to vary inversely to
changes in prevailing interest rates, investing in debt obligations may provide
an opportunity for capital appreciation when interest rates are expected to
decline. The success of such a strategy is dependent upon Counsellors' ability
to accurately forecast changes in interest rates. The market value of debt
obligations may also be expected to vary depending upon, among other factors,
the ability of the issuer to repay principal and interest, any change in
investment rating and general economic conditions. A security will be deemed to
be investment grade if it is rated within the four highest grades by Moody's
Investors Service, Inc. ('Moody's') or Standard & Poor's Ratings Group ('S&P')
or, if unrated, is determined to be of comparable quality by Counsellors. Bonds
rated in the fourth highest grade may have speculative characteristics and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than is the case
with higher grade bonds. Subsequent to its purchase by the Fund, an issue of
securities may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Fund. Neither event will require sale of such
securities. Counsellors will consider such event in its determination of whether
the Fund should continue to hold the securities.
When Counsellors believes that a defensive posture is warranted, the Fund
may invest temporarily without limit in investment grade
4
<PAGE>
debt obligations and in domestic and foreign money market obligations, including
repurchase agreements as discussed below.
MONEY MARKET OBLIGATIONS. The Fund is authorized to invest, under normal
circumstances, up to 20% of its total assets in domestic and foreign money
market obligations having a maturity of one year or less at the time of purchase
and for temporary defensive purposes may invest in these securities without
limit. These short-term instruments consist of obligations issued or guaranteed
by the United States government, its agencies or instrumentalities ('U.S.
government securities') (including repurchase agreements with respect to such
securities); bank obligations (including certificates of deposit, time deposits
and bankers' acceptances of domestic or foreign banks, domestic savings and
loans and similar institutions) that are high quality investments or, if
unrated, deemed by Counsellors to be high quality investments; and commercial
paper rated no lower than A-2 by S&P or Prime-2 by Moody's or the equivalent
from another major rating service or, if unrated, of an issuer having an
outstanding, unsecured debt issue then rated within the three highest rating
categories.
Repurchase Agreements. The Fund may enter into repurchase agreement
transactions on portfolio securities with member banks of the Federal Reserve
System and certain non-bank dealers. Repurchase agreements are contracts under
which the buyer of a security simultaneously commits to resell the security to
the seller at an agreed-upon price and date. Under the terms of a typical
repurchase agreement, the Fund would acquire any underlying security for a
relatively short period (usually not more than one week) subject to an
obligation of the seller to repurchase, and the Fund to resell, the obligation
at an agreed-upon price and time, thereby determining the yield during the
Fund's holding period. This arrangement results in a fixed rate of return that
is not subject to market fluctuations during the Fund's holding period. The
value of the underlying securities will at all times be at least equal to the
total amount of the purchase obligation, including interest. The Fund bears a
risk of loss in the event that the other party to a repurchase agreement
defaults on its obligations or becomes bankrupt and the Fund is delayed or
prevented from exercising its right to dispose of the collateral securities,
including the risk of a possible decline in the value of the underlying
securities during the period while the Fund seeks to assert this right.
Counsellors, acting under the supervision of the Fund's Board of Directors (the
'Board'), monitors the creditworthiness of those bank and non-bank dealers with
which the Fund enters into repurchase agreements to evaluate this risk. A
repurchase agreement is considered to be a loan under the Investment Company Act
of 1940, as amended (the '1940 Act').
Money Market Mutual Funds. Where Counsellors believes that it would be
beneficial to the Fund and appropriate considering the factors of return and
liquidity, the Fund may invest up to 5% of its assets in securities of money
market mutual funds that are unaffiliated with the Fund or Counsellors. As a
shareholder in any mutual fund, the Fund will bear its ratable share of the
mutual fund's expenses, including management fees, and will remain subject to
payment of the Fund's administration fees and other expenses with respect to
assets so invested.
U.S. GOVERNMENT SECURITIES. U.S. government securities in which the Fund may
invest include: direct obligations of the U.S. Treasury and obligations issued
by U.S. government agencies and instrumentalities, including instruments that
are supported by the full faith and credit of the United States, instruments
that are supported by the right of the issuer to borrow from the U.S. Treasury
and instruments that are supported by the credit of the instrumentality.
CONVERTIBLE SECURITIES. Convertible securities in which the Fund may invest,
including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common
5
<PAGE>
stock. Because of this feature, convertible securities enable an investor to
benefit from increases in the market price of the underlying common stock.
Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. The value of convertible securities fluctuates in relation to
changes in interest rates like bonds and, in addition, fluctuates in relation to
the underlying common stock.
RISK FACTORS AND SPECIAL
CONSIDERATIONS
EMERGING GROWTH AND SMALL COMPANIES. Investing in common stocks and securities
convertible into common stocks is subject to the inherent risk of fluctuations
in the prices of such securities. Investing in securities of emerging growth
companies may involve greater risks since these securities may have limited
marketability and, thus, may be more volatile. In addition, small-and
medium-sized companies are typically subject to a greater degree of changes in
earnings and business prospects than are larger, more established companies.
Because smaller companies normally have fewer shares outstanding than larger
companies, it may be more difficult for the Fund to buy or sell significant
amounts of such shares without an unfavorable impact on prevailing prices. There
is typically less publicly available information concerning smaller companies
than for larger, more established ones. Securities of issuers in 'special
situations' also may be more volatile, since the market value of these
securities may decline in value if the anticipated benefits do not materialize.
Companies in 'special situations' include, but are not limited to, companies
involved in acquisition or consolidation; reorganization; recapitalization;
merger, liquidation or distribution of cash, securities or other assets; a
tender or exchange offer; a breakup or workout of a holding company; or
litigation which, if resolved favorably, would improve the value of the
companies' securities. Although investing in securities of emerging growth
companies or 'special situations' offers potential for above-average returns if
the companies are successful, the risk exists that the companies will not
succeed and the prices of the companies' shares could significantly decline in
value. Therefore, an investment in the Fund may involve a greater degree of risk
than an investment in other mutual funds that seek capital appreciation by
investing in better-known, larger companies. For certain additional risks
relating to the Fund's investments, see 'Portfolio Investments' beginning at
page 4 and 'Certain Investment Strategies' beginning at page 7.
INVESTMENTS IN NON-PUBLICLY TRADED SECURITIES. Although the Fund expects to
invest primarily in publicly traded equity securities, it may invest up to 10%
of its assets in non-publicly traded equity securities, which may involve a high
degree of business and financial risk and may result in substantial losses.
Because of the absence of any liquid trading market currently for these
investments, the Fund may take longer to liquidate these positions than would be
the case for publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized on such sales could be
less than those originally paid by the Fund. Further, companies whose securities
are not publicly traded may not be subject to the disclosure and other investor
protection requirements applicable to companies whose securities are publicly
traded. The Fund's investment in illiquid securities is subject to the risk that
should the Fund desire to sell any of these securities when a ready buyer is not
available at a price that is deemed to be representative of their value, the
value of the Fund's net assets could be adversely affected. The Fund's
limitation on illiquid securities excludes Rule 144A Securities determined by
the Board to be liquid.
NON-DIVERSIFIED STATUS. The Fund is classified as a non-diversified investment
company under the 1940 Act, which means that the Fund is not limited by the 1940
Act in the proportion of its assets that it may invest in the obligations of a
6
<PAGE>
single issuer. The Fund will, however, comply with diversification requirements
imposed by the Internal Revenue Code of 1986, as amended (the 'Code') for
qualification as a regulated investment company. As a non-diversified investment
company, the Fund may invest a greater proportion of its assets in the
obligations of a small number of issuers and, as a result, may be subject to
greater risk with respect to portfolio securities. To the extent that the Fund
assumes large positions in the securities of a small number of issuers, its
return may fluctuate to a greater extent than that of a diversified company as a
result of changes in the financial condition or in the market's assessment of
the issuers.
PORTFOLIO TRANSACTIONS AND
TURNOVER RATE
The Fund will attempt to purchase securities with the intent of holding
them for investment but may purchase and sell portfolio securities whenever
Counsellors believes it to be in the best interests of the Fund. The Fund will
not consider portfolio turnover rate a limiting factor in making investment
decisions consistent with its investment objective and policies. High portfolio
turnover rates (100% or more) may result in dealer mark ups or underwriting
commissions as well as other transaction costs, including correspondingly higher
brokerage commissions. In addition, short-term gains realized from portfolio
turnover may be taxable to shareholders as ordinary income. See 'Dividends,
Distributions and Taxes -- Taxes' below and 'Investment Policies -- Portfolio
Transactions' in the Statement of Additional Information.
All orders for transactions in securities or options on behalf of the Fund
are placed by Counsellors with broker-dealers that it selects, including
Counsellors Securities Inc., the Fund's distributor ('Counsellors Securities').
The Fund may utilize Counsellors Securities in connection with a purchase or
sale of securities when Counsellors believes that the charge for the transaction
does not exceed usual and customary levels and when doing so is consistent with
guidelines adopted by the Board.
CERTAIN INVESTMENT STRATEGIES
Although there is no intention of doing so during the coming year, the Fund
is authorized to engage in the following investment strategies: (i) purchasing
securities on a when-issued basis and purchasing or selling securities for
delayed delivery and (ii) lending portfolio securities. As described below, the
Fund may invest in instruments commonly referred to as 'derivative securities,'
such as options on securities and stock indexes and futures conracts and options
on futures contracts. These strategies may be used for the purpose of hedging
against a decline in value of its portfolio holdings or to generate income to
offset expenses or increase return. SUCH TRANSACTIONS THAT ARE NOT CONSIDERED
HEDGING SHOULD BE CONSIDERED SPECULATIVE AND MAY SERVE TO INCREASE THE FUND'S
INVESTMENT RISK. Detailed information concerning these and other strategies and
their related risks is contained below and in the Fund's Statement of Additional
Information.
FOREIGN SECURITIES. The Fund may invest up to 10% of its total assets in the
securities of foreign issuers. There are certain risks involved in investing in
securities of companies and governments of foreign nations which are in addition
to the usual risks inherent in domestic investments. These risks include those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, future adverse political and economic developments and the possible
imposition of currency exchange blockages or other foreign governmental laws or
restrictions, reduced availability of public information concerning issuers, the
lack of uniform accounting, auditing and financial reporting standards and other
regulatory practices and requirements that are often generally less rigorous
than those applied in the United States. Moreover, securities of many foreign
companies may be less liquid and their prices more volatile than those of
securities of
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<PAGE>
comparable U.S. companies. Certain foreign countries are known to experience
long delays between the trade and settlement dates of securities purchased
or sold. In addition, with respect to certain foreign countries, there is the
possibility of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of funds or other assets of the Fund,
including the withholding of dividends. Foreign securities may be subject to
foreign government taxes that would reduce the net yield on such securities.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments positions. Investment in foreign securities will also result in higher
operating expenses due to the cost of converting foreign currency into U.S.
dollars, the payment of fixed brokerage commissions on foreign exchanges, which
generally are higher than commissions on U.S. exchanges, higher valuation and
communications costs and the expense of maintaining securities with foreign
custodians.
RULE 144A SECURITIES. The Fund may purchase securities that are not registered
under the Securities Act of 1933, as amended (the '1933 Act'), but that can be
sold to 'qualified institutional buyers' in accordance with Rule 144A under the
1933 Act ('Rule 144A Securities'). An investment in Rule 144A Securities will be
considered illiquid and therefore subject to the Fund's limitation on the
purchase of illiquid securities, unless the Board determines on an ongoing basis
that an adequate trading market exists for the security. In addition to an
adequate trading market, the Board will also consider factors such as trading
activity, availability of reliable price information and other relevant
information in determining whether a Rule 144A Security is liquid. This
investment practice could have the effect of increasing the level of illiquidity
in the Fund to the extent that qualified institutional buyers become
uninterested for a time in purchasing Rule 144A Securities. The Board will
carefully monitor any investments by the Fund in Rule 144A Securities. The Board
may adopt guidelines and delegate to Counsellors the daily function of
determining and monitoring the liquidity of Rule 144A Securities, although the
Board will retain ultimate responsibility for any determination regarding
liquidity.
WRITING OPTIONS ON SECURITIES. The Fund may write covered call options on up to
25% of the net asset value of the stock and debt securities in its portfolio and
will realize fees (referred to as 'premiums') for granting the rights evidenced
by the options. 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. Thus, the
purchaser of a call option written by the Fund has the right to purchase from
the Fund the underlying security owned by the Fund at the agreed-upon price for
a specified time period or at a specified time. Upon the exercise of a call
option written by the Fund, the Fund may suffer an economic loss equal to the
excess of the security's market value at the time of the option exercise over
the Fund's acquisition cost of the security, less the premium received for
writing the option.
The Fund will write only covered call options. Accordingly, whenever the
Fund writes a call option it will continue to own or have the present right to
acquire the underlying security for as long as it remains obligated as the
writer of the option.
The Fund may engage in a closing purchase transaction to realize a profit,
to prevent an underlying security from being called or 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). To effect a closing
purchase transaction, the Fund would purchase, prior to the holder's exercise of
an option that the Fund has written, an option of the same series as that on
which the
8
<PAGE>
Fund desires to terminate its obligation. The obligation of the Fund under an
option that it has written would be terminated by a closing purchase
transaction, but the Fund would not be deemed to own an option as the result of
the transaction. The ability of the Fund to engage in closing transactions with
respect to options depends on the existence of a liquid secondary market. While
the Fund generally will purchase or write options only if there appears to be a
liquid secondary market for the options purchased or sold, for some options, no
such secondary market may exist or the market may cease to exist, particularly
with respect to options that trade over-the-counter ('OTC options').
Option writing for the Fund may be limited by position and exercise limits
established by securities exchanges and the NASD. Furthermore, a Fund may, at
times, have to limit its option writing in order to qualify as a regulated
investment company under the Code.
In addition to writing covered options to generate income, the Fund may
enter into options 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 on a portfolio position
with a gain on the hedge position; at the same time, however, a properly
correlated hedge will result in a gain on the portfolio position being offset by
a loss on the hedge position. The Fund bears the risk that the prices of the
securities being hedged will not move in the same amount as the hedge. The Fund
will engage in hedging transactions only when deemed advisable by Counsellors.
Successful use by the Fund of options for hedging purposes will depend on
Counsellors' ability to correctly predict movements in the direction of the
security underlying the option or, in the case of stock index options (described
below), the underlying securities market, which could prove to be inaccurate.
Losses incurred in options transactions and the costs of these transactions will
affect the Fund's performance. Even if Counsellors' expectations are correct,
where options are used as a hedge there may be an imperfect correlation between
the value of the options and of the portfolio securities hedged. Therefore, an
investment in the Fund may involve a greater risk than an investment in other
mutual funds that seek capital appreciation.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES. The Fund may utilize up to 2% of
its assets to purchase U.S. exchange-traded and OTC put and call options on
stocks and debt securities.
By buying a put, the Fund limits its risk of loss from a decline in the
market value of the underlying security until the put expires. Any appreciation
in the value of and yield otherwise available from the underlying security,
however, will be partially offset by the amount of the premium paid for the put
option and any related transaction costs. Call options may be purchased by the
Fund in order to acquire the underlying securities for the Fund at a price that
avoids any additional cost that would result from a substantial increase in the
market value of a security. The Fund also may purchase call options to increase
its return to investors at a time when the option is expected to increase in
value due to anticipated appreciation of the underlying security.
Prior to their expirations, put and call options may be sold in closing
sale transactions (sales by the Fund, prior to the exercise of options that it
has purchased, of options of the same series), and profit or loss from the sale
will depend on whether the amount received is more or less than the premium paid
for the option plus the related transaction costs.
STOCK INDEX OPTIONS. In addition to purchasing and writing options on
securities, the Fund may utilize up to 10% of its total assets to purchase
exchange-listed put and call options on stock indexes, and may write put and
call options on such indexes. A stock index measures the movement of a certain
group of stocks by assigning relative values to the common stocks included in
9
<PAGE>
the index. Options on stock indexes are similar to options on stock except that
(i) the expiration cycles of stock index options are monthly, while those of
stock options are currently quarterly, and (ii) the delivery requirements are
different. Instead of giving the right to take or make delivery of stock at a
specified price, an option on a stock index gives the holder the right to
receive a cash 'exercise settlement amount' equal to (a) the amount, if any, by
which the fixed exercise price of the option exceeds (in the case of a put) or
is less 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.' The
discussion of options on securities above, and the related risks, is applicable
to options on securities indexes.
FUTURES CONTRACTS AND OPTIONS. The Fund may enter into interest rate and stock
index futures contracts and purchase and write (sell) related options that are
traded on an exchange designated by the Commodity Futures Trading Commission
(the 'CFTC') or consistent with CFTC regulations on foreign exchanges. These
transactions may be entered into for 'bona fide hedging' as defined in CFTC
regulations and other permissible purposes including (i) protecting against
anticipated changes in the value of portfolio securities the Fund intends to
purchase and (ii) increasing return.
An interest rate futures contract is a standardized contract for the future
delivery of a specified interest rate sensitive security (such as a U.S.
Treasury Bond or U.S. Treasury Note or its equivalent) at a future date at a
price set at the time of the contract. Stock indexes are capitalization weighted
indexes which reflect the market value of the stock listed on the indexes. A
stock index futures contract is an agreement to be settled by delivery of an
amount of cash equal to a specified multiplier times the difference between the
value of the index at the beginning and at the end of the contract period. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract at a specified exercise
price at any time prior to the expiration date of the option.
Parties to a futures contract must make 'initial margin' deposits to secure
performance of the contract. There are also requirements to make 'variation
margin' deposits from time to time as the value of the futures contract
fluctuates. The Fund is not a commodity pool and, in compliance with CFTC
regulations currently in effect, may enter into any futures contracts and
related options for 'bona fide hedging' purposes and, in addition, for other
purposes, provided that aggregate initial margin and premiums required to
establish positions other than those considered by the CFTC to be 'bona fide
hedging' will not exceed 5% of the Fund's net asset value, after taking into
account unrealized profits and unrealized losses on any such contracts. The Fund
reserves the right to engage in transactions involving futures and options
thereon to the extent allowed by CFTC regulations in effect from time to time
and in accordance with the Fund's policies. Certain provisions of the Code may
limit the extent to which the Fund may enter into futures contracts or engage in
options transactions.
There are several risks in connection with the use of futures contracts.
Successful use of futures contracts is subject to the ability of Counsellors to
predict correctly movements in the direction of the interest rate or stock index
underlying the particular futures contract or related option. These predictions
and, thus, the use of futures contracts involve skills and techniques that are
different from those involved in the management of portfolio securities. In
addition, there can be no assurance that there will be a correlation between
movements in the interest rate or index underlying the futures contract and
movements in the price of the portfolio securities which are the subject of a
hedge. A decision concerning whether, when and how to utilize futures involves
the exercise of skill and judgment, and even a well-conceived hedge may be
10
<PAGE>
unsuccessful to some degree because of unexpected market behavior or trends in
interest rates or stock indexes. Losses incurred in futures transactions and the
costs of these transactions will affect the Fund's performance.
A further risk involves the lack of a liquid secondary market for a futures
contract and the resulting inability to close out a futures contract. Futures
and options contracts may only be closed out by entering into offsetting
transactions on the exchange where the position was entered into (or a linked
exchange), and as a result of daily price fluctuation limits there can be no
assurance that an offsetting transaction could be entered into at an
advantageous price at any particular time. Consequently, the Fund may realize a
loss on a futures contract or option that is not offset by an increase in the
value of the Fund's securities that are being hedged or the Fund may not be able
to close a futures or options position without incurring a loss in the event of
adverse price movements.
ASSET COVERAGE FOR OPTIONS, FUTURES AND OPTIONS ON FUTURES. The Fund will comply
with guidelines established by the SEC designed to eliminate any potential for
leverage with respect to options written by the Fund on securities and indexes
and interest rate and stock index futures contracts and options on these
contracts. The use of these strategies may require that the Fund maintain cash
or certain liquid high-grade debt securities or other assets that are acceptable
as collateral to the appropriate regulatory authority in a segregated account
with its custodian or a designated sub-custodian to the extent the Fund's
obligations with respect to these strategies are not otherwise 'covered' through
ownership of the underlying security or financial instrument or by other
portfolio positions or by other means consistent with applicable regulatory
policies. Segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. As a result, there is a possibility that segregation of a large percentage
of the Fund's assets could impede portfolio management or the Fund's ability to
meet redemption requests or other current obligations.
INVESTMENT GUIDELINES
The Fund may invest up to 10% of its total assets in securities with
contractual or other restrictions on resale and other investments that are not
readily marketable, including (i) securities issued as part of a privately
negotiated transaction between an issuer and one or more
purchasers; (ii) repurchase agreements with maturities greater than seven days;
and (iii) time deposits maturing in more than seven calendar days. In addition,
up to 5% of the Fund's total assets may be invested in the securities of issuers
which have been in continuous operation for less than three years and up to an
additional 5% of its total assets may be invested in warrants. The Fund may
borrow from banks for temporary or emergency purposes, such as meeting
anticipated redemption requests, provided that borrowings by the Fund may not
exceed 10% of its total assets, and may pledge up to 10% of its assets in
connection with borrowings. Whenever borrowings exceed 5% of the value of the
Fund's total assets, the Fund will not make any investments (including
roll-overs). Except for the limitations on borrowing, the investment guidelines
set forth in this paragraph may be changed at any time without shareholder
consent by vote of the governing Board, subject to the limitations contained in
the 1940 Act. A complete list of investment restrictions that the Fund has
adopted identifying additional restrictions that cannot be changed without the
approval of the majority of the Fund's outstanding shares is contained in the
Statement of Additional Information.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER. The Fund employs Counsellors as investment adviser to the
Fund. Counsellors, subject to the control of the Fund's officers
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<PAGE>
and the Board, manages the investment and reinvestment of the assets of the
Funds in accordance with the Fund's investment objective and stated investment
policies. Counsellors makes investment decisions for the Fund and places orders
to purchase or sell securities on behalf of the Fund. Counsellors also employs
a support staff of management personnel to provide services to the Fund and
furnishes the Fund with office space, furnishings and equipment.
For the services provided by Counsellors, the Fund pays Counsellors a fee
calculated at an annual rate of .90% of the Fund's average daily net assets.
Although this advisory fee is higher than that paid by most other investment
companies, including money market and fixed income funds, Counsellors believes
that it is comparable to fees charged by other mutual funds with similar
policies and strategies. The advisory agreement between the Fund and Counsellors
provides that Counsellors will reimburse the Fund to the extent certain expenses
that are described in the Statement of Additional Information exceed applicable
state expense limitations. Counsellors and the Fund's co-administrators may
voluntarily waive a portion of their fees from time to time and temporarily
limit the expenses to be borne by the Fund.
Counsellors is a professional investment counselling firm which provides
investment services to investment companies, employee benefit plans, endowment
funds, foundations and other institutions and individuals. As of August 31,
1995, Counsellors managed approximately $11.4 billion of assets, including
approximately $5.8 billion of assets of twenty investment companies or
portfolios. Incorporated in 1970, Counsellors is a wholly owned subsidiary of
Warburg, Pincus Counsellors G.P. ('Counsellors G.P.'), a New York general
partnership. E.M. Warburg, Pincus & Co., Inc. ('EMW') controls Counsellors
through its ownership of a class of voting preferred stock of Counsellors.
Counsellors G.P. has no business other than being a holding company of
Counsellors and its subsidiaries. Counsellors' address is 466 Lexington Avenue,
New York, New York 10017-3147.
PORTFOLIO MANAGERS. The co-portfolio managers of the Fund are Elizabeth B. Dater
and Stephen J. Lurito, co-presidents of the Fund. Ms. Dater, a managing director
of EMW, has been portfolio manager of the Fund since its inception on January
21, 1988 and has been a portfolio manager of Counsellors since 1978. Mr. Lurito,
a managing director of EMW, has been a portfolio manager of the Fund since 1990
and has been with Counsellors since 1987, before which time he was a research
analyst at Sanford C. Bernstein & Company, Inc.
CO-ADMINISTRATORS. The Fund employs Counsellors Funds Service, Inc.
('Counsellors Service'), a wholly owned subsidiary of Counsellors, as a
co-administrator. As co-administrator, Counsellors Service provides shareholder
liaison services to the Fund including responding to shareholder inquiries and
providing information on shareholder investments. Counsellors Service also
performs a variety of other services, including furnishing certain executive and
administrative services, acting as liaison between the Fund and its various
service providers, furnishing corporate secretarial services, which include
preparing materials for meetings of the governing Board, preparing proxy
statements and annual, semiannual and quarterly reports, assisting in other
regulatory filings as necessary and monitoring and developing compliance
procedures for the Fund. As compensation, the Fund pays Counsellors Service a
fee calculated at an annual rate of .10% of its average daily net assets.
Counsellors may, at its own expense, provide promotional incentives to
qualified recipients who support the sale of shares of the Funds. Qualified
recipients are securities dealers who have sold Fund shares or others, including
banks and other financial institutions, under special arrangements. In some
instances, these incentives may be offered only to certain institutions whose
representatives provide services in con-
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<PAGE>
nection with the sale or expected sale of significant amounts of Fund shares.
The Fund employs PFPC Inc. ('PFPC'), an indirect, wholly owned subsidiary
of PNC Bank Corp., as a co-administrator. As a co-administrator, PFPC calculates
the Fund's net asset value, provides all accounting services for the Fund and
assists in related aspects of the Fund's operations. As compensation, the Fund
pays to PFPC a fee calculated at an annual rate of .10% of the Fund's average
daily net assets, subject to a minimum annual fee and exclusive of out-of-pocket
expenses. PFPC has its principal offices at 400 Bellevue Parkway, Wilmington,
Delaware 19809.
CUSTODIAN. PNC Bank, National Association ('PNC') serves as custodian of the
assets of the Fund. PNC is a subsidiary of PNC Bank Corp. and its principal
business address is Broad and Chestnut Streets, Philadelphia, Pennsylvania
19101.
TRANSFER AGENT. State Street Bank and Trust Company ('State Street') acts as
shareholder servicing agent, transfer agent and dividend disbursing agent for
the Fund. It has delegated to Boston Financial Data Services, Inc., a 50% owned
subsidiary ('BFDS'), responsibility for most shareholder servicing functions.
State Street's principal business address is 225 Franklin Street, Boston,
Massachusetts 02110. BFDS's principal business address is 2 Heritage Drive North
Quincy, Massachusetts 02171.
DISTRIBUTOR. Counsellors Securities serves as distributor of the shares of the
Fund. Counsellors Securities is a wholly owned subsidiary of Counsellors and is
located at 466 Lexington Avenue, New York, New York 10017-3147. No compensation
is payable by the Fund to Counsellors Securities for distribution services.
DIRECTORS AND OFFICERS. The officers of the Fund manage its day-to-day
operations and are directly responsible to the Board. The Board sets broad
policies for the Fund and chooses its officers. A list of the Directors and
officers of the Fund and a brief statement of their present positions and
principal occupations during the past five years is set forth in the Statement
of Additional Information.
HOW TO PURCHASE SHARES
Warburg Pincus Advisor Fund shares are only available for investment by
Institutions on behalf of their customers and through retirement plans that
elect to make one or more Advisor Funds an option for participants in the plans.
Individuals, including participants in retirement plans, cannot invest directly
in Advisor Shares of the Fund, but may do so only through a participating
Institution. The Fund reserves the right to make Advisor Shares available to
other investors in the future. References in this Prospectus to shareholders or
investors are generally to Institutions as the record holders of the Advisor
Shares.
Each Institution separately determines the rules applicable to its
customers investing in the Fund, including minimum initial and subsequent
investment requirements and the procedures to be followed to effect purchases,
redemptions and exchanges of Advisor Shares. There is no minimum amount of
initial or subsequent purchases of Advisor Shares imposed on Institutions,
although the Fund reserves the right to impose minimums in the future.
Orders for the purchase of Advisor Shares are placed with an Institution by
its customers. The Institution is responsible for the prompt transmission of the
order to the Fund or its agent.
Institutions may purchase Advisor Shares by telephoning the Fund and
sending payment by wire. After telephoning (800) 888-6878 for instructions, an
Institution should then wire federal funds to Counsellors Securities Inc. using
the following wire address:
State Street Bank and Trust Co.
225 Franklin St.
Boston, MA 02101
13
<PAGE>
ABA# 0110 000 28
Attn: Mutual Funds/Custody Dept.
Warburg Pincus Advisor Emerging Growth
Fund
DDA# 9904-649-2
[Shareowner name]
[Shareowner account number]
Orders by wire will not be accepted until a completed account application
has been received in proper form, and an account number has been established. If
a telephone order is received by the close of regular trading on the New York
Stock Exchange (the 'NYSE') (currently 4:00 p.m., Eastern time) and payment by
wire is received on the same day in proper form in accordance with instructions
set forth above, the shares will be priced according to the net asset value of
the Fund on that day and are entitled to dividends and distributions beginning
on that day. If payment by wire is received in proper form by the close of the
NYSE without a prior telephone order, the purchase will be priced according to
the net asset value of the Fund on that day and is entitled to dividends and
distributions beginning on that day. However, if a wire in proper form that is
not preceded by a telephone order is received after the close of regular trading
on the NYSE, the payment will be held uninvested until the order is effected at
the close of business on the next business day. Payment for orders that are not
accepted will be returned after prompt inquiry. Certain organizations that have
entered into agreements with the Fund or its agent may enter confirmed purchase
orders on behalf of customers, with payment to follow no later than the Fund's
pricing on the following business day. If payment is not received by such time,
the organization could be held liable for resulting fees or losses.
After an investor has made his initial investment, additional shares may be
purchased at any time by mail or by wire in the manner outlined above. Wire
payments for initial and subsequent investments should be preceded by an order
placed with the Fund or its agent and should clearly indicate the investor's
account number. In the interest of economy and convenience, physical
certificates representing shares in the Fund are not normally issued.
The Fund understands that some broker-dealers (other than Counsellors
Securities), financial institutions, securities dealers and other industry
professionals may impose certain conditions on their clients that invest in the
Fund, which are in addition to or different than those described in this
Prospectus, and, to the extent permitted by applicable regulatory authority, may
charge their clients direct fees. Certain features of the Fund, such as the
initial and subsequent investment minimums, may be modified in these programs,
and administrative charges may be imposed for the services rendered. Therefore,
a client or customer should contact the organization acting on his behalf
concerning the fees (if any) charged in connection with a purchase or redemption
of Fund shares and should read this Prospectus in light of the terms governing
his account with the organization.
HOW TO REDEEM AND EXCHANGE
SHARES
REDEMPTION OF SHARES. An investor may redeem (sell) shares on any day that the
Fund's net asset value is calculated (see 'Net Asset Value' below). Requests for
the redemption (or exchange) of Advisor Shares are placed with an Institution by
its customers, which is then responsible for the prompt transmission of the
request to the Fund or its agent.
Institutions may redeem Advisor Shares by calling Warburg Pincus Advisor
Funds at (800) 888-6878 between 9:00 a.m. and 4:00 p.m. (Eastern time) on any
day on which the Fund's net asset value is calculated. An investor making a
telephone withdrawal should state (i) the name of the Fund, (ii) the account
number of the Fund, (iii) the name of the investor(s) appearing on the Fund's
records, (iv) the amount to be
14
<PAGE>
withdrawn and (v) the name of the person requesting the redemption.
After receipt of the redemption request, the redemption proceeds will be
wired to the investor's bank as indicated in the account application previously
filled out by the investor. The Fund does not currently impose a service charge
for effecting wire transfers but reserves the right to do so in the future.
During periods of significant economic or market change, telephone redemptions
may be difficult to implement. If an investor is unable to contact Warburg
Pincus Advisor Funds by telephone, an investor may deliver the redemption
request to Warburg Pincus Advisor Funds by mail at Warburg Pincus Advisor Funds,
P.O. Box 9030, Boston, Massachusetts 02205-9030.
If a redemption order is received prior to the close of regular trading on
the NYSE, the redemption order will be effected at the net asset value per share
as determined on that day. If a redemption order is received after the close of
regular trading on the NYSE, the redemption order will be effected at the net
asset value as next determined. Redemption proceeds will normally be wired to an
investor on the next business day following the date a redemption order is
effected. If, however, in the judgment of Counsellors, immediate payment would
adversely affect the Fund, the Fund reserves the right to pay the redemption
proceeds within seven days after the redemption order is effected. Furthermore,
the Fund may suspend the right of redemption or postpone the date of payment
upon redemption (as well as suspend or postpone the recordation of an exchange
of shares) for such periods as are permitted under the 1940 Act.
The proceeds paid upon redemption may be more or less than the amount
invested depending upon a share's net asset value at the time of redemption. If
an investor redeems all the shares in his account, all dividends and
distributions declared up to and including the date of redemption are paid along
with the proceeds of the redemption.
EXCHANGE OF SHARES. An Institution may exchange Advisor Shares of the Fund for
Advisor Shares of the other Warburg Pincus Advisor Funds at their respective net
asset values. Exchanges may be effected in the manner described under
'Redemption of Shares' above. If an exchange request is received by Warburg
Pincus Advisor Funds prior to 4:00 p.m. (Eastern time), the exchange will be
made at each fund's net asset value determined at the end of that business day.
Exchanges may be effected without a sales charge. The exchange privilege may be
modified or terminated at any time upon 60 days' notice to shareholders.
The exchange privilege is available to shareholders residing in any state
in which the Advisor Shares being acquired may legally be sold. When an investor
effects an exchange of shares, the exchange is treated for federal income tax
purposes as a redemption. Therefore, the investor may realize a taxable gain or
loss in connection with the exchange. Investors wishing to exchange Advisor
Shares of the Fund for shares in another Warburg Pincus Advisor Fund should
review the prospectus of the other fund prior to making an exchange. For further
information regarding the exchange privilege or to obtain a current prospectus
for another Warburg Pincus Advisor Fund, an investor should contact Warburg
Pincus Advisor Funds at (800) 888-6878.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. The Fund calculates its dividends from net
investment income. Net investment income includes interest accrued and dividends
earned on the Fund's portfolio securities for the applicable period less
applicable expenses. The Fund declares dividends from its net investment income
semiannually and pays them in the calendar year in which they are declared.
Net investment income earned on weekends and when the NYSE is not open will
15
<PAGE>
be computed as of the next business day. Distributions of net realized
long-term and short-term capital gains are declared annually and, as a general
rule, will be distributed or paid in November or December of each calendar year.
Unless an investor instructs the Fund to pay dividends or distributions in
cash, dividends and distributions will automatically be reinvested in
additional Advisor Shares of the relevant Fund at net asset value. The election
to receive dividends in cash may be made on the account application or,
subsequently, by writing to Warburg Pincus Advisor Funds at the address set
forth under 'How to Redeem and Exchange Shares' or by calling Warburg Pincus
Advisor Funds at (800) 888-6878.
The Fund may be required to withhold for U.S. federal income taxes 31% of
all distributions payable to shareholders who fail to provide the Fund with
their correct taxpayer identification number or to make required certifications,
or who have been notified by the U.S. Internal Revenue Service that they are
subject to backup withholding.
TAXES. The Fund intends to continue to qualify each year as a 'regulated
investment company' within the meaning of the Code. The Fund, if it qualifies as
a regulated investment company, will be subject to a 4% non-deductible excise
tax measured with respect to certain undistributed amounts of ordinary income
and capital gain. The Fund expects to pay such additional dividends and to make
such additional distributions as are necessary to avoid the application of this
tax.
Dividends paid from net investment income and distributions of net realized
short-term capital gains are taxable to investors as ordinary income, and
distributions derived from net realized long-term capital gains will be taxable
to investors as long-term capital gains, in each case regardless of how long
investors have held Advisor Shares or whether received in cash or reinvested in
additional Advisor Shares. As a general rule, an investor's gain or loss on a
sale or redemption of its Fund shares will be a long-term capital gain or loss
if it has held its shares for more than one year and will be a short-term
capital gain or loss if it has held its shares for one year or less. However,
any loss realized upon the sale or redemption of shares within six months from
the date of their purchase will be treated as a long-term capital loss to the
extent of any amounts treated as distributions of long-term capital gain during
such six-month period with respect to such shares. Investors may be
proportionately liable for taxes on income and gains of the Fund, but investors
not subject to tax on their income will not be required to pay tax on amounts
distributed to them. The Fund's investment activities will not result in
unrelated business taxable income to a tax-exempt investor. The Fund's
dividends, to the extent not derived from dividends attributable to certain
types of stock issued by U.S. domestic corporations, will not qualify for the
dividends received deduction for corporations.
GENERAL. Statements as to the tax status of each investor's dividends and
distributions are mailed annually. Each investor will also receive, if
applicable, various written notices after the close of the Fund's prior taxable
year with respect to certain dividends and distributions which were received
from the Fund during the Fund's prior taxable year. Investors should consult
their own tax advisers with specific reference to their own tax situations,
including their state and local tax liabilities. Individuals investing in the
Fund through Institutions should consult those Institutions or their own tax
advisers regarding the tax consequences of investing in the Fund.
NET ASSET VALUE
The Fund's net asset value per share is calculated as of the close of
regular trading on the NYSE (currently 4:00 p.m., Eastern time) on
each business day, Monday through Friday, except on days when the NYSE is
closed. The NYSE is currently scheduled to be closed on New Year's Day,
Washington's Birthday, Good
16
<PAGE>
Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day
and Christmas Day, and on the preceding Friday or subsequent Monday when one
of these holidays falls on a Saturday or Sunday, respectively. The net asset
value per share of the Fund generally changes each day.
The net asset value per Advisor Share of the Fund is computed by adding the
Advisor Shares' pro rata share of the value of the Fund's assets, deducting the
Advisor Shares' pro rata share of the Fund's liabilities and the liabilities
specifically allocated to Advisor Shares and then dividing the result by the
total number of outstanding Advisor Shares. Generally, the Fund's investments
are valued at market value or, in the absence of a quoted market value with
respect to any portfolio securities, at fair value as determined by or under the
direction of the Board.
Portfolio securities that are primarily traded on foreign exchanges are
generally valued at the closing values of such securities on their respective
exchanges preceding the calculation of the Fund's net asset value, except that
when an occurrence subsequent to the time a value was so established is likely
to have changed such value, then the fair market value of those securities will
be determined by consideration of other factors by or under the direction of the
Board.
Securities listed on a U.S. securities exchange (including securities
traded through the NASDAQ National Market System) or foreign securities exchange
will be valued on the basis of the closing value on the date on which the
valuation is made. Other U.S. over-the-counter securities, foreign
over-the-counter securities and securities listed or traded on certain foreign
stock exchanges whose operations are similar to the U.S. over-the-counter market
are valued on the basis of the bid price at the close of business on each day.
Option or futures contracts will be valued at the last sale price at 4:00 p.m.
(Eastern time) on the date on which the valuation is made, as quoted on the
primary exchange or board of trade on which the option or futures contract is
traded, or in absence of sales, at the mean between the last bid and asked
prices. Unless the Board determines that using this valuation method would not
reflect the investments' value, short-term investments that mature in 60 days or
less are valued on the basis of amortized cost, which involves valuing a
portfolio instrument at its cost initially 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. Any assets and
liabilities initially expressed in non-U.S. dollar currencies are translated
into U.S. dollars at the prevailing rate as quoted by an independent pricing
service on the date of valuation. Further information regarding valuation
policies is contained in the Statement of Additional Information.
PERFORMANCE
The Fund quotes the performance of Advisor Shares separately from Common
Shares. The net asset value of the Advisor Shares is listed in The Wall Street
Journal each business day under the heading Warburg Pincus Advisor Funds. From
time to time, the Fund may advertise the average annual total return of Advisor
Shares over various periods of time. These total return figures show the average
percentage change in value of an investment in the Advisor Shares from the
beginning of the measuring period to the end of the measuring period. The
figures reflect changes in the price of the Advisor Shares assuming that any
income dividends and/or capital gain distributions made by the Fund during the
period were reinvested in Advisor Shares. Total return will be shown for recent
one-, five- and ten-year periods, and may be shown for other periods as well
(such as on a year-by-year, quarterly or current year-to-date basis).
When considering average total return figures for periods longer than one
year, it is important to note that the annual total return for one year in the
period might have been greater
17
<PAGE>
or less than the average for the entire period. When considering total return
figures for periods shorter than one year, investors should bear in mind that
the Fund seeks long-term appreciation and that such return may not be
representative of the Fund's return over a longer market cycle. The Fund may
also advertise aggregate total return figures of Advisor Shares for various
periods, representing the cumulative change in value of an investment in the
Advisor Shares for the specific period (again reflecting changes in share prices
and assuming reinvestment of dividends and distributions). Aggregate and
average total returns may be shown by means of schedules, charts or graphs and
may indicate various components of total return (i.e., change in value of
initial investment, income dividends and capital gain distributions).
Investors should note that total return figures are based on historical
earnings and are not intended to indicate future performance. The Statement of
Additional Information describes the method used to determine the total return.
Current total return figures may be obtained by calling Warburg Pincus Advisor
Funds at (800) 888-6878.
In reports or other communications to investors or in advertising material,
the Fund may describe general economic and market conditions affecting the Fund.
The Fund may compare its performance with (i) that of other mutual funds as
listed in the rankings prepared by Lipper Analytical Services, Inc. or similar
investment services that monitor the performance of mutual funds or as set forth
in the publications listed below; (ii) the Russell 2000 Small Stock Index, the
T. Rowe Price New Horizons Fund Index and the S&P 500 Index, which are unmanaged
indexes; or (iii) other appropriate indexes of investment securities or with
data developed by Counsellors derived from such indexes. The Fund may also
include evaluations of the Fund published by nationally recognized ranking
services and by financial publications that are nationally recognized, such as
The Wall Street Journal, Investor's Daily, Money, Inc., Institutional Investor,
Barron's, Fortune, Forbes, Business Week, Mutual Fund Magazine, Morningstar,
Inc. and Financial Times.
In reports or other communications to investors or in advertising, the Fund
may also describe the general biography or work experience of the portfolio
managers of the Fund and may include quotations attributable to the portfolio
managers describing approaches taken in managing the Fund's investments,
research methodology underlying stock selection or the Fund's investment
objective. The Fund may also discuss the continuum of risk and return relating
to different investments and the potential impact of foreign stocks on a
portfolio otherwise composed of domestic securities. In addition, the Fund may
from time to time compare the expense ratio of Advisor Shares to that of
investment companies with similar objectives and policies, based on data
generated by Lipper Analytical Services, Inc. or similar investment services
that monitor mutual funds.
GENERAL INFORMATION
ORGANIZATION. The Fund was incorporated on November 12, 1987 under the laws of
the State of Maryland. Although the Fund's name as set forth in its charter is
'Counsellors Emerging Growth Fund, Inc.,' it does business under the name
'Warburg, Pincus Emerging Growth Fund.' The charter of the Fund authorizes the
governing Board to issue three billion full and fractional shares of capital
stock, $.001 par value per share, of which one billion shares are designated
Series 2 Shares (the Advisor Shares). Under the Fund's charter documents, the
Board has the power to classify or reclassify any unissued shares of the Fund
into one or more additional classes by setting or changing in any
one or more respects their relative rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption. The Board may similarly classify or
18
<PAGE>
reclassify any class of its shares into one or more series and, without
shareholder approval, may increase the number of authorized shares of the Fund.
MULTI-CLASS STRUCTURE. The Fund offers a separate class of shares, the Common
Shares, directly to individuals pursuant to a separate prospectus. Shares of
each class represent equal pro rata interests in the Fund and accrue dividends
and calculate net asset value and performance quotations in the same manner, as
described elsewhere in this Prospectus, except that Advisor Shares bear fees
payable by the Fund to service organizations for services they provide to the
beneficial owners of such shares and enjoy certain exclusive voting rights on
matters relating to these fees. Because of the higher fees borne by the Advisor
Shares, the total return on such shares can be expected to be lower than the
total return on Common Shares. Investors may obtain information concerning the
Common Shares by calling Counsellors Securities at (800) 888-6878.
VOTING RIGHTS. Investors in the Fund are entitled to one vote for each full
share held and fractional votes for fractional shares held. Shareholders of the
Fund will vote in the aggregate except where otherwise required by law and
except that each class will vote separately on certain matters pertaining to its
distribution and shareholder servicing arrangements. There will normally be no
meetings of investors for the purpose of electing members of the Board unless
and until such time as less than a majority of the members holding office have
been elected by investors. Any member of the Board may be removed from office
upon the vote of shareholders holding at least a majority of the Fund's
outstanding shares, at a meeting called for that purpose. A meeting will be
called for the purpose of voting on the removal of a Board member at the written
request of holders of 10% of the outstanding shares of the Fund. John L. Furth,
a Director of the Fund, and Lionel I. Pincus, Chairman of the Board and Chief
Executive Officer of EMW, may be deemed to be controlling persons of the Fund as
of August 31, 1995 because they may be deemed to possess or share investment
power over shares owned by clients of Counsellors and certain other entities.
SHAREHOLDER COMMUNICATIONS. Each investor will receive a quarterly statement of
its account, as well as a statement of its account after any transaction that
affects his share balance or share registration (other than the reinvestment of
dividends or distributions). The Fund will also send to its investors a
semiannual report and an audited annual report, each of which includes a list of
the investment securities held by the Fund and a statement of the performance of
the Fund. Each Institution that is the record owner of Advisor Shares on behalf
of its customers will send a statement to those customers periodically showing
their indirect interest in Advisor Shares, as well as providing other
information about the Fund. See 'Shareholder Servicing.'
SHAREHOLDER SERVICING
The Fund is authorized to offer Advisor Shares exclusively to Institutions
whose clients or customers (or participants in the case of retirement plans)
('Customers') are beneficial owners of Advisor Shares. Either those Institutions
or companies providing certain services to Customers (together, 'Service
Organizations') will enter into account servicing agreements ('Agreements') with
the Fund pursuant to a Distribution Plan as described below. Pursuant to the
terms of an Agreement, the Service Organization agrees to provide certain
distribution, shareholder servicing, administrative and/or accounting services
for its Customers. Distribution services would be marketing or other services in
connection with the promotion and sale of Advisor Shares. Shareholder services
that may be provided include responding to Customer inquiries, providing
information on Customer investments and providing other shareholder liaison
services. Administrative and accounting services related to the sale of Advisor
Shares may include (i) aggregating and processing purchase and
19
<PAGE>
redemption requests from Customers and placing net purchase and redemption
orders with the Fund's transfer agent, (ii) processing dividend payments
from the Fund on behalf of Customers and (iii) providing sub-accounting related
to the sale of Advisor Shares beneficially owned by Customers or the
information to the Fund necessary for sub-accounting. The Board has approved a
Distribution Plan (the 'Plan') pursuant to Rule 12b-1 under the 1940 Act under
which the Fund will pay each participating Service Organization a negotiated fee
on an annual basis not to exceed .75% (up to a .25% annual service fee and a
.50% annual distribution fee) of the value of the average daily net assets of
its Customers invested in Advisor Shares. The Board evaluates the
appropriateness of the Plan on a continuing basis and in doing so considers all
relevant factors.
Counsellors and Counsellors Securities may, from time to time, at their own
expense, provide compensation to these institutions. To the extent they do so,
such compensation does not represent an additional expense to the Fund or its
shareholders since it will be paid from the assets of Counsellors, Counsellors
Securities or their affiliates.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE FUND'S
STATEMENT OF ADDITIONAL INFORMATION OR THE FUND'S OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF SHARES OF THE FUND, AND IF GIVEN OR MADE, SUCH
OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF THE
ADVISOR SHARES IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER MAY
NOT LAWFULLY BE MADE.
20
<PAGE>
ADEMG-1-1095
Warburg Pincus Advisor Funds
Counsellors Securities Inc., distributor
TABLE OF CONTENTS
THE FUND'S EXPENSES ...................................................... 2
FINANCIAL HIGHLIGHTS ..................................................... 3
INVESTMENT OBJECTIVE AND POLICIES ........................................ 4
PORTFOLIO INVESTMENTS .................................................... 4
RISK FACTORS AND SPECIAL
CONSIDERATIONS ........................................................ 6
PORTFOLIO TRANSACTIONS AND TURNOVER
RATE .................................................................. 7
CERTAIN INVESTMENT STRATEGIES ............................................ 7
INVESTMENT GUIDELINES ................................................... 11
MANAGEMENT OF THE FUND .................................................. 11
HOW TO PURCHASE SHARES .................................................. 13
HOW TO REDEEM AND EXCHANGE
SHARES ............................................................... 14
DIVIDENDS, DISTRIBUTIONS AND TAXES ...................................... 15
NET ASSET VALUE ......................................................... 16
PERFORMANCE ............................................................. 17
GENERAL INFORMATION ..................................................... 18
SHAREHOLDER SERVICING ................................................... 19
[LOGO]
<PAGE>1
Rule 497(c)
Securities Act File No. 33-18632
Investment Co. Act File No. 811-5396
STATEMENT OF ADDITIONAL INFORMATION
September 29, 1995
WARBURG PINCUS EMERGING GROWTH FUND
P.O. Box 9030, Boston, Massachusetts 02205-9030
For information, call (800) 888-6878
Contents
Page
Investment Objective . . . . . . . . . . . . . . . . 2
Investment Policies . . . . . . . . . . . . . . . . . 2
Management of the Fund . . . . . . . . . . . . . . . 21
Additional Purchase and Redemption Information . . . 29
Exchange Privilege . . . . . . . . . . . . . . . . . 30
Additional Information Concerning Taxes . . . . . . . 31
Determination of Performance . . . . . . . . . . . . 34
Auditors and Counsel . . . . . . . . . . . . . . . . 35
Miscellaneous . . . . . . . . . . . . . . . . . . . . 35
Financial Statements . . . . . . . . . . . . . . . . 36
Appendix -- Description of Ratings . . . . . . . . . A-1
Report of Coopers & Lybrand L.L.P.,
Independent Auditors . . . . . . . . . . . . . . . A-3
This Statement of Additional Information is meant to be read in
conjunction with the combined Prospectus for the Common Shares of Warburg
Pincus Emerging Growth Fund (the "Fund"), Warburg Pincus Capital Appreciation
Fund, Warburg Pincus Post-Venture Capital Fund, Warburg Pincus International
Equity Fund and Warburg Pincus Japan OTC Fund, and with the Prospectus for the
Advisor Shares of the Fund, each dated September 29, 1995, and is incorporated
by reference in its entirety into those Prospectuses. Because this Statement
of Additional Information is not itself a prospectus, no investment in shares
of the Fund should be made solely upon the information contained herein.
Copies of the Fund's Prospectuses and information regarding the Fund's current
performance may be obtained by calling the Fund at (800) 257-5614.
Information regarding the status of shareholder accounts may be obtained by
calling the Fund at (800) 888-6878 or by writing to the Fund, P.O. Box 9030,
Boston, Massachusetts 02205-9030.
<PAGE>2
INVESTMENT OBJECTIVE
The investment objective of the Fund is maximum capital
appreciation; the production of current income is incidental to this
objective.
INVESTMENT POLICIES
The following policies supplement the descriptions of the Fund's
investment objectives and policies in the Prospectuses.
Additional Information on Investment Practices
Special Situation Companies. The Fund may invest in the securities
of "special situation companies" involved in an actual or prospective
acquisition or consolidation; reorganization; recapitalization; merger,
liquidation or distribution of cash, securities or other assets; a tender or
exchange offer; a breakup or workout of a holding company; or litigation
which, if resolved favorably, would improve the value of the company's stock.
If the actual or prospective situation does not materialize as anticipated,
the market price of the securities of a "special situation company" may
decline significantly. The Fund believes, however, that if Warburg, Pincus
Counsellors, Inc., the Fund's investment adviser ("Counsellors"), analyzes
"special situation companies" carefully and invests in the securities of these
companies at the appropriate time, the Fund may achieve maximum capital
appreciation. There can be no assurance, however, that a special situation
that exists at the time the Fund makes its investment will be consummated
under the terms and within the time period contemplated.
U.S. Government Securities. The Fund may invest in debt obligations
of varying maturities issued or guaranteed by the United States government,
its agencies or instrumentalities ("U.S. government securities"). Direct
obligations of the U.S. Treasury include a variety of securities that differ
in their interest rates, maturities and dates of issuance. U.S. government
securities also include securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Loan Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association ("GNMA"), General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home
Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit Banks,
Federal Land Banks, Federal National Mortgage Association ("FNMA"), Maritime
Administration, Tennessee Valley Authority, District of Columbia Armory Board
and Student Loan Marketing Association. The Fund may also invest in
instruments that are supported by the right of the issuer to borrow from the
U.S. Treasury and instruments that are supported by the credit of the
instrumentality. Because the U.S. government is not obligated by law to
provide support to an instrumentality it sponsors, the Fund will invest in
obligations issued by such an
<PAGE>3
instrumentality only if Counsellors determines that the credit risk with
respect to the instrumentality does not make its securities unsuitable for
investment by the Fund.
Securities of Other Investment Companies. The Fund may invest in
securities of other investment companies to the extent permitted under the
Investment Company Act of 1940, as amended (the "1940 Act"). Presently, under
the 1940 Act, the Fund may hold securities of another investment company in
amounts which (i) do not exceed 3% of the total outstanding voting stock of
such company, (ii) do not exceed 5% of the value of the Fund's total assets
and (iii) when added to all other investment company securities held by the
Fund, do not exceed 10% of the value of the Fund's total assets.
Lending of Portfolio Securities. The Fund may lend portfolio
securities to brokers, dealers and other financial organizations that meet
capital and other credit requirements or other criteria established by the
Fund's Board of Directors (the "Board"). These loans, if and when made, may
not exceed 20% of the Fund's total assets taken at value. The Fund will not
lend portfolio securities to E.M. Warburg, Pincus & Co., Inc. ("EMW") or its
affiliates unless it has applied for and received specific authority to do so
from the U.S. Securities and Exchange Commission (the "SEC"). Loans of
portfolio securities will be collateralized by cash, letters of credit or U.S.
government securities, which are maintained at all times in an amount equal to
at least 100% of the current market value of the loaned securities. Any gain
or loss in the market price of the securities loaned that might occur during
the term of the loan would be for the account of the Fund. From time to time,
the Fund may return a part of the interest earned from the investment of
collateral received for securities loaned to the borrower and/or a third party
that is unaffiliated with the Fund and that is acting as a "finder."
By lending its securities, the Fund can increase its income by
continuing to receive interest and any dividends on the loaned securities as
well as by either investing the collateral received for securities loaned
in short-term instruments or obtaining yield in the form of interest paid by
the borrower when U.S. government securities are used as collateral. Although
the generation of income is not an investment objective of the Fund, income
received could be used to pay the Fund's expenses and would increase an
investor's total return. The Fund will adhere to the following conditions
whenever its portfolio securities are loaned: (i) the Fund must receive at
least 100% cash collateral or equivalent securities of the type discussed in
the preceding paragraph from the borrower; (ii) the borrower must increase
such collateral whenever the market value of the securities rises above the
level of such collateral; (iii) the Fund must be able to terminate the loan at
any time; (iv) the Fund must receive reasonable interest on the loan, as well
as any dividends, interest or other distributions on the loaned securities and
any increase in market value; (v) the Fund may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower, provided, however, that if a material
event adversely affecting the investment occurs, the Board must terminate the
loan and regain the right to vote the securities. Loan agreements involve
certain risks in the event
<PAGE>4
of default or insolvency of the other party including possible delays or
restrictions upon the Fund's ability to recover the loaned securities or
dispose of the collateral for the loan.
Foreign Investments. The Fund may not invest more than 10% of its
total assets in the securities of foreign issuers. Investors should recognize
that investing in foreign companies involves certain risks, including those
discussed below, which are not typically associated with investing in U.S.
issuers. Since the Fund may invest in securities denominated in currencies
other than the U.S. dollar, and since the Fund may temporarily hold funds in
bank deposits or other money market investments denominated in foreign
currencies, the Fund may be affected favorably or unfavorably by exchange
control regulations or changes in the exchange rate between such currencies
and the dollar. A change in the value of a foreign currency relative to the
U.S. dollar will result in a corresponding change in the dollar value of the
Fund assets denominated in that foreign currency. Changes in foreign currency
exchange rates may also affect the value of dividends and interest earned,
gains and losses realized on the sale of securities and net investment income
and gains, if any, to be distributed to shareholders by the Fund.
The rate of exchange between the U.S. dollar and other currencies is
determined by the forces of supply and demand in the foreign exchange markets.
Changes in the exchange rate may result over time from the interaction of many
factors directly or indirectly affecting economic and political conditions in
the United States and a particular foreign country, including economic and
political developments in other countries. Of particular importance are rates
of inflation, interest rate levels, the balance of payments and the extent of
government surpluses or deficits in the United States and the particular
foreign country, all of which are in turn sensitive to the monetary, fiscal
and trade policies pursued by the governments of the United States and foreign
countries important to international trade and finance. Governmental
intervention may also play a significant role. National governments rarely
voluntarily allow their currencies to float freely in response to economic
forces. Sovereign governments use a variety of techniques, such as
intervention by a country's central bank or imposition of regulatory controls
or taxes, to affect the exchange rates of their currencies.
Many of the foreign securities held by the Fund will not be
registered with, nor the issuers thereof be subject to reporting requirements
of, the SEC. Accordingly, there may be less publicly available information
about the securities and about the foreign company or government issuing them
than is available about a domestic company or government entity. Foreign
companies are generally not subject to uniform financial reporting standards,
practices and requirements comparable to those applicable to U.S. companies.
In addition, with respect to some foreign countries, there is the possibility
of expropriation or confiscatory taxation, limitations on the removal of funds
or other assets of the Fund, political or social instability, or domestic
developments which could affect U.S. investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably
from the U.S. economy in such respects as growth of gross national product,
rate of inflation, capital reinvestment, resource self-sufficiency, and
balance of payments positions. The Fund may invest in securities of foreign
governments (or agencies or
<PAGE>5
instrumentalities thereof), and many, if not all, of the foregoing
considerations apply to such investments as well.
Securities of some foreign companies are less liquid and their
prices are more volatile than securities of comparable U.S. companies.
Certain foreign countries are known to experience long delays between the
trade and settlement dates of securities purchased or sold. Due to the
increased exposure of the Fund to market and foreign exchange fluctuations
brought about by such delays, and due to the corresponding negative impact on
Fund liquidity, the Fund will avoid investing in countries which are known to
experience settlement delays which may expose the Fund to unreasonable risk of
loss.
Futures Activities. The Fund may enter into interest rate and stock
index futures contracts and purchase and write (sell) related options traded
on exchanges designated by the Commodity Futures Trading Commission (the
"CFTC") or consistent with CFTC regulations on foreign exchanges. These
transactions may be entered into for "bona fide hedging" purposes as defined
in CFTC regulations and other permissible purposes including hedging against
changes in the value of portfolio securities due to anticipated changes in
interest rates and/or market conditions and increasing return. The ability of
the Fund to trade in futures contracts may be limited by the requirements of
the Internal Revenue Code of 1986, as amended (the "Code"), applicable to a
regulated investment company.
The Fund will not enter into futures contracts and related options
for which the aggregate initial margin and premiums required to establish
positions other than those considered to be "bona fide hedging" by the CFTC
exceed 5% of the Fund's net asset value after taking into account unrealized
profits and unrealized losses on any such contracts it has entered into.
There is no overall limit on the percentage of Fund assets that may be at risk
with respect to futures activities.
Futures Contracts. 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 financial instrument (debt security) at a specified
price, date, time and place. Stock indexes are capitalization weighted
indexes which reflect the market value of the stock listed on the indexes. A
stock index futures contract is an agreement to be settled by delivery of an
amount of cash equal to a specified multiplier times the difference between
the value of the index at the beginning and at the end of the contract period.
In entering into these contracts, the Fund will incur brokerage costs and be
required to make and maintain certain "margin" deposits on a mark-to-market
basis, as described below.
One of the purposes of entering into a futures contract may be to
protect the Fund from fluctuations in value of its portfolio securities
without its necessarily buying or selling the securities. Since the value of
portfolio securities will far exceed the value of the futures contracts sold
by the Fund, an increase in the value of the futures contracts could only
mitigate, but not totally offset, the decline in the value of the Fund's
assets. No consideration is paid or received by the Fund upon entering into a
futures contract. Instead,
<PAGE>6
the Fund will be required to deposit in a segregated account with its
custodian an amount of cash or cash equivalents, such as U.S. government
securities or other liquid high-grade debt obligations, equal to approximately
1% to 10% of the contract amount (this amount is subject to change by the
exchange on which the contract is traded, and brokers may charge a higher
amount). This amount is known as "initial margin" and is in the nature of a
performance bond or good faith deposit on the contract which is returned to
the Fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied. The broker will have access to amounts in
the margin account if the Fund fails to meet its contractual obligations.
Subsequent payments, known as "variation margin," to and from the broker, will
be made daily as the financial instrument or stock index underlying the
futures contract fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as
"marking-to-market." At any time prior to the expiration of a futures
contract, the Fund may elect to close the position by taking an opposite
position, which will operate to terminate the Fund's existing position in the
contract.
Positions in futures contracts and options on futures contracts may
be closed out only on the exchange on which they were entered into (or through
a linked exchange). No secondary market for such contracts exists. Although
the Fund intends to enter into futures contracts only if there is an active
market for such contracts, there is no assurance that an active market will
exist for the contracts 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. 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 and subjecting the Fund to substantial
losses. In such event, and in the event of adverse price movements, the Fund
would be required to make daily cash payments of variation margin. In such
circumstances, an increase in the value of the portion of the Fund's
securities being hedged, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the
price movements in a futures contract and thus provide an offset to losses on
the futures contract.
If the Fund has hedged against the possibility of an event adversely
affecting the value of securities held in its portfolio and that event does
not occur, the Fund will lose part or all of the benefit of the increased
value of securities which it has hedged because it will have offsetting losses
in its futures positions. Losses incurred in futures transactions and the
costs of these transactions will affect the Fund's performance. In addition,
in such situations, if the Fund had insufficient cash, it might have to sell
securities to meet daily variation margin requirements at a time when it would
be disadvantageous to do so. These sales of securities could, but will not
necessarily, be at increased prices which reflect the change in interest rates
or stock indexes, as the case may be.
<PAGE>7
Options on Futures Contracts. The Fund may purchase and write put
and call options on 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.
An option on an interest rate or stock index futures contract, as
contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in an interest
rate or stock index futures contract at a specified exercise price at any time
prior to the expiration date of the option. Upon exercise of an option, the
delivery of the futures position by the writer of the option to the holder of
the option will be accompanied by delivery of the accumulated balance in the
writer's futures margin account, which represents the amount by which the
market price of the futures contract exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option on the
futures contract. The potential loss related to the purchase of an option on
futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the point of
sale, there are no daily cash payments by the purchaser to reflect changes in
the value of the underlying contract; however, the value of the option does
change daily and that change would be reflected in the net asset value of the
Fund.
There are several risks relating to options on futures contracts.
The ability to establish and close out positions on such options will be
subject to the existence of a liquid market. In addition, the purchase of put
or call options will be based upon predictions as to anticipated trends in
interest rates and securities markets by Counsellors. 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 portfolio
strategies will be successful. Even if Counsellors' expectations are correct,
where options on futures are used for hedging purposes there may be an
imperfect correlation between the change in the value of the options and of
the portfolio securities hedged.
When-Issued Securities and Delayed-Delivery Transactions. The Fund
may utilize up to 20% of its total assets to purchase securities on a
"when-issued" basis or purchase or sell securities for delayed delivery (i.e.,
payment or delivery occur beyond the normal settlement date at a stated price
and yield). When-issued transactions normally settle within 30-45 days. The
Fund will enter into a when-issued transaction for the purpose of acquiring
portfolio securities and not for the purpose of leverage, but may sell the
securities before the settlement date if Counsellors deems it advantageous to
do so. The payment obligation and the interest rate that will be received on
when-issued securities are fixed at the time the buyer enters into the
commitment. Due to fluctuations in the value of securities purchased or sold
on a when-issued or delayed-delivery basis, the yields obtained on such
securities may be higher or lower than the yields available in the market on
the dates when the investments are actually delivered to the buyers.
<PAGE>8
When the Fund agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash, U.S. government securities or
other liquid high-grade debt obligations or other assets that are acceptable
as collateral to the appropriate regulatory authority equal to the amount of
the commitment in a segregated account. Normally, the custodian will set
aside portfolio securities to satisfy a purchase commitment, and in such a
case the Fund may be required subsequently to place additional assets in the
segregated account in order to ensure that the value of the account remains
equal to the amount of the Fund's commitment. It may be expected that the
Fund's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets
aside cash. When the Fund engages in when-issued or delayed-delivery
transactions, it relies on the other party to consummate the trade. Failure
of the seller to do so may result in the Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
Options on Securities. In order to hedge against adverse market
shifts, the Fund may utilize up to 2% of its total assets to purchase put and
call options on stock and debt securities that are traded on U.S. exchanges,
as well as over-the-counter ("OTC") options. In addition, the Fund may write
covered call options on up to 25% of the stock and debt securities in its
portfolio.
The Fund realizes fees (referred to as "premiums") for granting the
rights evidenced by the call 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
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 period or
at a specified time.
The principal reason for writing covered call options on a security
is to attempt to realize, through the receipt of premiums, a greater return
than would be realized on the securities alone. In return for a premium, the
Fund, as the writer of a covered call option, forfeits the right to any
appreciation in the value of the underlying security above the strike price
for the life of the option (or until a closing purchase transaction can be
effected). Nevertheless, the Fund as the call writer retains the risk of a
decline in the price of the underlying security. The size of the premiums
that the Fund may receive may be adversely affected as new or existing
institutions, including other investment companies, engage in or increase
their option-writing activities.
Options written by the Fund will normally have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. The Fund may write (i) in-the-money call
options when Counsellors 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
<PAGE>9
Counsellors 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 Counsellors 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. To secure its obligation to deliver the
underlying security when it writes a call option, the Fund will be required to
deposit in escrow the underlying security or other assets in accordance with
the rules of the Options Clearing Corporation (the "Clearing Corporation") and
of the securities exchange on which the option is written.
In the case of options written by the Fund that are deemed covered
by virtue of the Fund's holding convertible or exchangeable preferred stock or
debt securities, the time required to convert or exchange and obtain physical
delivery of the underlying common stock with respect to which the Fund has
written options may exceed the time within which the Fund must make delivery
in accordance with an exercise notice. In these instances, the Fund may
purchase or temporarily borrow the underlying securities for purposes of
physical delivery. By so doing, the Fund will not bear any market risk, since
the Fund will have the absolute right to receive from the issuer of the
underlying security an equal number of shares to replace the borrowed stock,
but the Fund may incur additional transaction costs or interest expenses in
connection with any such purchase or borrowing.
Additional risks exist with respect to certain of the securities for
which the Fund may write covered call options. If the Fund writes covered
call options on mortgage-backed securities, the mortgage-backed securities
that it holds as cover may, because of scheduled amortization or unscheduled
prepayments, cease to be sufficient cover. If this occurs, the Fund will
compensate for the decline in the value of the cover by purchasing an
appropriate additional amount of mortgage-backed securities.
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class which may be held
or written, or exercised within certain time periods by an investor or group
of investors acting in concert (regardless of whether the options are written
on the same or different securities exchanges or are held, written or
exercised in one or more accounts or through one or more brokers). It is
possible that the Fund and other clients of Counsellors and certain of its
affiliates may be considered to be such a group. A securities exchange may
order the liquidation of positions found to be in violation of these limits
and it may impose certain other sanctions. These limits may restrict the
number of options the Fund will be able to purchase on a particular security.
Prior to their expirations, put and call options may be sold in
closing sale transactions (sales by the Fund, prior to the exercise of options
that it has purchased, of options of the same series) in which the Fund may
realize a profit or loss from the sale. An option position may be closed out
only where there exists a secondary market for an option
<PAGE>10
of the same series on a recognized securities exchange or in the
over-the-counter market. In cases where the Fund has written an option, it
will realize a profit if the cost of the closing purchase transaction is less
than the premium received upon writing the original option and will incur a
loss if the cost of the closing purchase transaction exceeds the premium
received upon writing the original option. Similarly, when the Fund has
purchased an option and engages in a closing sale transaction, whether the
Fund realizes a profit or loss will depend upon whether the amount received in
the closing sale transaction is more or less than the premium the Fund
initially paid for the original option plus the related transaction costs. So
long as the obligation of the Fund as the writer of an option continues, the
Fund may be assigned an exercise notice by the broker-dealer through which the
option was sold, requiring the Fund to deliver the underlying security against
payment of the exercise price. This obligation terminates when the option
expires or the Fund effects a closing purchase transaction. The Fund can no
longer effect a closing purchase transaction with respect to an option once it
has been assigned an exercise notice.
Although the Fund will generally purchase or write only those
options for which Counsellors believes there is an active secondary market so
as to facilitate closing transactions, there is no assurance that sufficient
trading interest will exist to create a liquid secondary market on a
securities exchange for any particular option or at any particular time, and
for some options no such secondary market may exist. A liquid secondary
market in an option may cease to exist for a variety of reasons. In the past,
for example, higher than anticipated trading activity or order flow or other
unforeseen events have at times rendered certain of the facilities of the
Clearing Corporation and various securities exchanges inadequate and resulted
in the institution of special procedures, such as trading rotations,
restrictions on certain types of orders or trading halts or suspensions in one
or more options. There can be no assurance that similar events, or events
that may otherwise interfere with the timely execution of customers' orders,
will not recur. In such event, it might not be possible to effect closing
transactions in particular options. Moreover, the Fund's ability to terminate
options positions established in the over-the-counter market may be more
limited than for exchange-traded options and may also involve the risk that
securities dealers participating in over-the-counter transactions would fail
to meet their obligations to the Fund. The Fund, however, intends to purchase
over-the-counter options only from dealers whose debt securities, as
determined by Counsellors, are considered to be investment grade. If, as a
covered call option writer, the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. In either case, the Fund would continue to be at market risk on the
security and could face higher transaction costs, including brokerage
commissions.
Options as a Hedge. In addition to writing covered options for
other purposes, the Fund may enter into options 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 on a portfolio position with a gain on the hedged position; at the same
time, however, a properly correlated hedge will result in a gain
<PAGE>11
on the portfolio position being offset by a loss on the hedged position. The
Fund bears the risk that the prices of the securities being hedged will not
move in the same amount as the hedge. The Fund will engage in hedging
transactions only when deemed advisable by Counsellors. Successful use by the
Fund of options will be subject to Counsellors' ability to predict correctly
movements in the direction of the stock underlying the option used as a hedge.
Losses incurred in hedging transactions and the costs of these transactions
will affect the Fund's performance.
OTC Options. The Fund may purchase OTC or dealer options or sell
covered OTC options. Unlike exchange-listed options where an intermediary or
clearing corporation, such as the Clearing Corporation, assures that all
transactions in such options are properly executed, the responsibility for
performing all transactions with respect to OTC options rests solely with the
writer and the holder of those options. A listed call option writer, for
example, is obligated to deliver the underlying stock to the clearing
organization if the option is exercised, and the clearing corporation is then
obligated to pay the writer the exercise price of the option. If the Fund
were to purchase a dealer option, however, it would rely on the dealer from
whom it purchased the option to perform if the option were exercised. If the
dealer fails to honor the exercise of the option by the Fund, the Fund would
lose the premium it paid for the option and the expected benefit of the
transaction.
Listed options generally have a continuous liquid market while
dealer options have none. Consequently, the Fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when the Fund writes a
dealer option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the
dealer to which the Fund originally wrote the option. Although the Fund will
seek to enter into dealer options only with dealers who will agree to and that
are expected to be capable of entering into closing transactions with the
Fund, there can be no assurance that the Fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. The
inability to enter into a closing transaction may result in material losses to
the Fund. Until the Fund, as a covered dealer call option writer, is able to
effect a closing purchase transaction, it will not be able to liquidate
securities (or other assets) used to cover the written option until the option
expires or is exercised. This requirement may impair the Fund's ability to
sell portfolio securities or currencies at a time when such sale might be
advantageous. In the event of insolvency of the other party, the Fund may be
unable to liquidate a dealer option.
Stock Index Options. The Fund may utilize up to 10% of its total
assets to purchase exchange-listed put and call options on stock indexes and
may write options on such indexes to hedge against the effects of market-wide
price movements. A stock index measures the movement of a certain group of
stocks by assigning relative values to the common stocks included in the
index, fluctuating with changes in the market values of the stocks included in
the index. Some stock index options are based on a broad market index such as
the New York Stock Exchange ("NYSE") Composite index, or a narrower market
<PAGE>12
index such as the Standard & Poor's 100. Indexes may also be based on
particular industry or market segment.
Options on stock indexes are similar to options on stock except that
(i) the expiration cycles of stock index options are monthly, while those of
stock options are currently quarterly, and (ii) the delivery requirements are
different. Instead of giving the right to take or make delivery of stock at a
specified price, an option on a stock index gives the holder the right to
receive a cash "exercise settlement amount" equal to (a) the amount, if any,
by which the fixed exercise price of the option exceeds (in the case of a put)
or is less than (in the case of a call) the closing value of the underlying
index on the date of exercise, multiplied by (b) a fixed "index multiplier."
Receipt of this cash amount will depend upon the closing level of the stock
index upon which the option is based being greater than, in the case of a
call, or less than, in the case of a put, the exercise price of the index and
the exercise price of the option expressed in dollars times a specified
multiple. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. The writer may offset its position
in stock index options prior to expiration by entering into a closing
transaction on an exchange or it may let the option expire unexercised. The
aggregate value of the securities underlying the calls or puts on stock
indexes written by the Fund, determined as of the date the options are sold,
when added to the securities underlying the calls on securities written by the
Fund, may not exceed 25% of the Fund's net assets. The Fund will limit the
aggregate premiums paid on all stock index options and options on futures
contracts to 20% of the Fund's net assets.
Stock Index Options as a Hedge. The effectiveness of purchasing or
writing stock index options as a hedging technique will depend upon the extent
to which price movements in the portion of a securities portfolio being hedged
correlate with price movements of the stock index selected. Because the value
of an index option depends upon movements in the level of the index rather
than the price of a particular stock, whether the Fund will realize a gain or
loss from the purchase or writing of options on an index depends upon
movements in the level of stock prices in the stock market generally or, in
the case of certain indexes, in an industry or market segment, rather than
movements in the price of a particular stock. Accordingly, successful use by
the Fund of options on stock indexes will be subject to Counsellors' ability
to predict correctly movements in the direction of the stock market generally
or of a particular industry. This requires different skills and techniques
than predicting changes in the price of individual stocks, and there can be no
assurance that the use of any of these portfolio strategies will be
successful.
Asset Coverage for Forward Contracts, Options, Futures and Options
on Futures. As described in the Prospectuses, the Fund will comply with
guidelines established by the SEC with respect to coverage of options written
by the Fund on securities and indexes and interest rate and index futures
contracts and options on these futures contracts. These guidelines may, in
certain instances, require segregation by the Fund of cash or liquid high-
grade debt securities or other securities that are acceptable as collateral to
the appropriate regulatory authority.
<PAGE>13
For example, a call option written by the Fund on securities may
require the Fund to hold the securities subject to the call (or securities
convertible into the securities without additional consideration) or to
segregate assets (as described above) sufficient to purchase and deliver the
securities if the call is exercised. A call option written by the Fund on an
index may require the Fund to own portfolio securities that correlate with the
index or to segregate assets (as described above) equal to the excess of the
index value over the exercise price on a current basis. The Fund could
purchase a put option if the strike price of that option is the same or higher
than the strike price of a put option sold by the Fund. If the Fund holds a
futures contract, the Fund could purchase a put option on the same futures
contract with a strike price as high or higher than the price of the contract
held. The Fund may enter into fully or partially offsetting transactions so
that its net position, coupled with any segregated assets (equal to any
remaining obligation), equals its net obligation. Asset coverage may be
achieved by other means when consistent with applicable regulatory policies.
American, European and Continental Depositary Receipts. The assets
of the Fund may be invested in the securities of foreign issuers in the form
of American Depositary Receipts ("ADRs") and European Depositary Receipts
("EDRs"). These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted. ADRs are
receipts typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. EDRs,
which are sometimes referred to as Continental Depositary Receipts ("CDRs"),
are receipts issued in Europe typically by non-U.S. banks and trust companies
that evidence ownership of either foreign or domestic securities. Generally,
ADRs in registered form are designed for use in U.S. securities markets and
EDRs and CDRs in bearer form are designed for use in European securities
markets.
Convertible Securities. Convertible securities in which the Fund
may invest, including both convertible debt and convertible preferred stock,
may be converted at either a stated price or stated rate into underlying
shares of common stock. Because of this feature, convertible securities
enable an investor to benefit from increases in the market price of the
underlying common stock. Convertible securities provide higher yields than
the underlying equity securities, but generally offer lower yields than
non-convertible securities of similar quality. Like bonds, the value of
convertible securities fluctuates in relation to changes in interest rates
and, in addition, also fluctuates in relation to the underlying common stock.
Warrants. The Fund may invest up to 5% of net assets in warrants
(valued at the lower of cost or market) (other than warrants acquired by the
Fund as part of a unit or attached to securities at the time of purchase),
provided that, not more than 2% of net assets may be invested in warrants not
listed on a recognized U.S. or foreign stock exchange to the extent permitted
by applicable state securities laws. Because a warrant does not carry with it
the right to dividends or voting rights with respect to the securities which
it entitles a holder to purchase, and because it does not represent any rights
in the assets of the issuer, warrants may be considered more speculative than
certain other types of investments. Also, the value
<PAGE>14
of a warrant does not necessarily change with the value of the underlying
securities and a warrant ceases to have value if it is not exercised prior to
its expiration date.
Non-Publicly Traded and Illiquid Securities. The Fund may not
invest more than 10% of its total assets in securities that are illiquid by
virtue of the absence of a readily available market or legal or contractual
restrictions on resale, repurchase agreements which have a maturity of longer
than seven days and time deposits maturing in more than seven days.
Securities that have legal or contractual restrictions on resale but have a
readily available market are not considered illiquid for purposes of this
limitation. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
Historically, illiquid securities have included securities subject
to contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which have
not been registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market. Mutual funds do not typically hold a significant
amount of these restricted or other illiquid securities because of the
potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on
resale to the general public or to certain institutions may not be indicative
of the liquidity of such investments.
Rule 144A Securities. Rule 144A under the Securities Act adopted by
the SEC allows for a broader institutional trading market for securities
otherwise subject to restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the
Securities Act for resales of certain securities to qualified institutional
buyers. Counsellors 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.
<PAGE>15
An investment in Rule 144A Securities will be considered illiquid
and therefore subject to the Fund's 10% limit on the purchase of illiquid
securities unless the Board or its delegates determines the Rule 144A
Securities to be liquid. In reaching liquidity decisions, the Board and its
delegates may consider, inter alia, the following factors: (i) the
unregistered nature of the security; (ii) the frequency of trades and quotes
for the security; (iii) the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; (iv) dealer
undertakings to make a market in the security and (v) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer).
Borrowing. The Fund may borrow up to 10% of its total assets for
temporary or emergency purposes to meet portfolio redemption requests so as to
permit the orderly disposition of portfolio securities or to facilitate
settlement transactions on portfolio securities. Investments (including roll-
overs) will not be made when borrowings exceed 5% of the Fund's total assets.
Although the principal of such borrowings will be fixed, the Fund's assets may
change in value during the time the borrowing is outstanding. The Fund
expects that some of its borrowings may be made on a secured basis. In such
situations, either the custodian will segregate the pledged assets for the
benefit of the lender or arrangements will be made with a suitable
subcustodian, which may include the lender.
Other Investment Policies and Practices of the Fund
Non-Diversified Status. The Fund is classified as non-diversified
within the meaning of the 1940 Act, which means that it is not limited by such
Act in the proportion of its assets that it may invest in securities of a
single issuer. The Fund's investments will be limited, however, in order to
qualify as a "regulated investment company" for purposes of the Code. See
"Additional Information Concerning Taxes." To qualify, the Fund will comply
with certain requirements, including limiting its investments so that at the
close of each quarter of the taxable year (a) not more than 25% of the market
value of its total assets will be invested in the securities of a single
issuer, and (b) with respect to 50% of the market value of its total assets,
not more than 5% of the market value of its total assets will be invested in
the securities of a single issuer and the will not own more than 10% of the
outstanding voting securities of a single issuer.
Other Investment Limitations
The investment limitations numbered 1 through 9 may not be changed
without the affirmative vote of the holders of a majority of the Fund's
outstanding shares. Such majority is defined as the lesser of (i) 67% or more
of the shares present at the meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy, or (ii)
more than 50% of the outstanding shares. Investment limitations 10 through 15
may be changed by a vote of the Board at any time.
<PAGE>16
The Fund may not:
1. Borrow money or issue senior securities except that the Fund may
(a) borrow from banks for temporary or emergency purposes, and not for
leveraging, and then in amounts not in excess of 10% of the value of the
Fund's total assets at the time of such borrowing and (b) enter into futures
contracts; or mortgage, pledge or hypothecate any assets except in connection
with any bank borrowing and in amounts not in excess of the lesser of the
dollar amounts borrowed or 10% of the value of the Fund's total assets at the
time of such borrowing. Whenever borrowings described in (a) exceed 5% of the
value of the Fund's total assets, the Fund will not make any additional
investments (including roll-overs). For purposes of this restriction, (a) the
deposit of assets in escrow in connection with the purchase of securities on a
when-issued or delayed-delivery basis and (b) collateral arrangements with
respect to initial or variation margin for futures contracts will not be
deemed to be pledges of the Fund's assets.
2. Purchase any securities which would cause 25% or more of the
value of the Fund's total assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the
same industry; provided that there shall be no limit on the purchase of U.S.
government securities.
3. Make loans, except that the Fund may purchase or hold publicly
distributed fixed-income securities, lend portfolio securities and enter into
repurchase agreements.
4. Underwrite any issue of securities except to the extent that the
investment in restricted securities and the purchase of fixed-income
securities directly from the issuer thereof in accordance with the Fund's
investment objective, policies and limitations may be deemed to be
underwriting.
5. Purchase or sell real estate, real estate investment trust
securities, real estate limited partnerships, commodities or commodity
contracts, or invest in oil, gas or mineral exploration or development
programs, except that the Fund may invest in (a) fixed-income securities
secured by real estate, mortgages or interests therein, (b) securities of
companies that invest in or sponsor oil, gas or mineral exploration or
development programs and (c) futures contracts and related options.
6. Make short sales of securities or maintain a short position.
7. Purchase, write or sell puts, calls, straddles, spreads or
combinations thereof, except that the Fund may (a) purchase put and call
options on securities, (b) write covered call options on securities, (c)
purchase and write put and call options on stock indices and (d) enter into
options on futures contracts.
<PAGE>17
8. 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.
9. 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 futures contracts or related
options will not be deemed to be a purchase of securities on margin.
10. Invest more than 10% of the value of the Fund's total 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.
11. Invest more than 10% of the value of the Fund's total assets in
time deposits maturing in more than seven calendar days.
12. Purchase any security if as a result the Fund would then have
more than 5% of its total assets invested in securities of companies
(including predecessors) that have been in continuous operation for fewer than
three years.
13. Purchase or retain securities of any company if, to the
knowledge of the Fund, any of the Fund's officers or Directors or any officer
or director of Counsellors individually owns more than 1/2 of 1% of the
outstanding securities of such company and together they own beneficially more
than 5% of the securities.
14. Invest in warrants (other than warrants acquired by the Fund as
part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would exceed
5% of the value of the Fund's net assets of which not more than 2% of the
Fund's net assets may be invested in warrants not listed on a recognized U.S.
or foreign stock exchange to the extent permitted by applicable state
securities laws.
15. Invest in oil, gas or mineral leases.
The Fund may make commitments more restrictive than the restrictions
listed above so as to permit the sale of Fund shares in certain states.
Should the Fund determine that any such commitment is no longer in the best
interest of the Fund and its shareholders, the Fund will revoke the commitment
by terminating the sale of Fund shares in the state involved. If a percentage
restriction 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
<PAGE>18
portfolio securities or in the amount of the Fund's assets will not constitute
a violation of such restriction.
Portfolio Valuation
The Prospectuses discuss the time at which the net asset value of
the Fund is determined for purposes of sales and redemptions. The following
is a description of the procedures used by the Fund in valuing its assets.
Securities listed on a U.S. securities exchange (including
securities traded through the NASDAQ National Market System) or on a foreign
securities exchange will be valued on the basis of the closing value on the
date on which the valuation is made or, in the absence of sales, at the mean
between the closing bid and asked prices. Other U.S. over-the-counter
securities, foreign over-the-counter securities and securities listed or
traded on certain foreign stock exchanges whose operations are similar to the
U.S. over-the-counter market will be valued on the basis of the bid price at
the close of business on each day, or, if market quotations for those
securities are not readily available, at fair value, as determined in good
faith pursuant to consistently applied procedures established by the Board. 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. In determining the market value of portfolio investments, the Fund
may employ outside organizations (a "Pricing Service") which may use a matrix
or formula method that takes into consideration market indexes, matrices,
yield curves and other specific adjustments. The procedures of Pricing
Services are reviewed periodically by the officers of the Fund under the
general supervision and responsibility of the Board, which may replace any
such Pricing Service at any time. Short-term obligations with maturities of
60 days or less are valued at amortized cost, which constitutes fair value as
determined by the Board. The amortized cost method of valuation may also be
used with respect to debt obligations with 60 days or less remaining to
maturity. All other securities and other assets of the Fund will be valued at
their fair value as determined in good faith pursuant to consistently applied
procedures established by the Board. In addition, the Board or its delegates
may value a security at fair value if it determines that such security's value
determined by the methodology set forth above does not reflect its fair value.
Trading in securities in certain foreign countries is completed at
various times prior to the close of business on each business day in New York
(i.e., a day on which the New York Stock Exchange (the "NYSE") is open for
trading). In addition, securities trading in a particular country or
countries may not take place on all business days in New York. Furthermore,
trading takes place in various foreign markets on days which are not business
days in New York and days on which the Fund's net asset value is not
calculated. Calculation of the Fund's net asset value may not take place
contemporaneously with the determination of the prices of certain foreign
portfolio securities used in such calculation. All assets and liabilities
initially expressed in foreign currency values will be converted into U.S.
dollar values at the prevailing rate as quoted by a Pricing Service. If such
quotations
<PAGE>19
are not available, the rate of exchange will be determined in good faith
pursuant to consistently applied procedures established by the Board. Events
affecting the values of portfolio securities that occur between the time their
prices are determined and the close of regular trading on the NYSE will not be
reflected in the Fund's calculation of net asset value unless the Board or its
delegates deems that the particular event would materially affect net asset
value, in which case an adjustment may be made.
Portfolio Transactions
Counsellors is responsible for establishing, reviewing and, where
necessary, modifying the Fund's investment program to achieve its investment
objective. Purchases and sales of newly issued portfolio securities are
usually principal transactions without brokerage commissions effected directly
with the issuer or with an underwriter acting as principal. Other purchases
and sales may be effected on a securities exchange or over-the-counter,
depending on where it appears that the best price or execution will be
obtained. The purchase price paid by the Fund to underwriters of newly issued
securities usually includes a concession paid by the issuer to the
underwriter, and purchases of securities from dealers, acting as either
principals or agents in the after market, are normally executed at a price
between the bid and asked price, which includes a dealer's mark-up or
mark-down. Transactions on U.S. stock exchanges and some foreign stock
exchanges involve the payment of negotiated brokerage commissions. On
exchanges on which commissions are negotiated, the cost of transactions may
vary among different brokers. On most foreign exchanges, commissions are
generally fixed. There is generally no stated commission in the case of
securities traded in domestic or foreign over-the-counter markets, but the
price of securities traded in over-the-counter markets includes an undisclosed
commission or mark-up. U.S. government securities are generally purchased
from underwriters or dealers, although certain newly issued U.S. government
securities may be purchased directly from the U.S. Treasury or from the
issuing agency or instrumentality.
Counsellors will select specific portfolio investments and effect
transactions for the Fund. Counsellors seeks to obtain the best net price and
the most favorable execution of orders. In evaluating prices and executions,
Counsellors 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. In addition, to the extent that the execution and price
offered by more than one broker or dealer are comparable, Counsellors may, in
its discretion, effect transactions in portfolio securities with dealers who
provide brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934, as amended) to the Fund and/or
other accounts over which Counsellors exercises investment discretion.
Research and other services received may be useful to Counsellors in serving
both the Fund and its other clients and, conversely, research or other
services obtained by the placement of business of other clients may be useful
to Counsellors in carrying out its obligations to the Fund. The
<PAGE>20
fee to Counsellors under its advisory agreement with the Fund is not reduced
by reason of its receiving any brokerage and research services.
Investment decisions for the Fund concerning specific portfolio
securities are made independently from those for other clients advised by
Counsellors. Such other investment clients may invest in the same securities
as the Fund. When purchases or sales of the same security are made at
substantially the same time on behalf of such other clients, transactions are
averaged as to price and available investments allocated as to amount, in a
manner which Counsellors believes to be equitable to each client, including
the Fund. In some instances, this investment procedure may adversely affect
the price paid or received by the Fund or the size of the position obtained or
sold for the Fund. To the extent permitted by law, Counsellors may aggregate
the securities to be sold or purchased for the Fund with those to be sold or
purchased for such other investment clients in order to obtain best execution.
Any portfolio transaction for the Fund may be executed through
Counsellors Securities Inc., the Fund's distributor ("Counsellors
Securities"), if, in Counsellors' judgment, the use of Counsellors Securities
is likely to result in price and execution at least as favorable as those of
other qualified brokers, and if, in the transaction, Counsellors Securities
charges the Fund a commission rate consistent with those charged by
Counsellors Securities to comparable unaffiliated customers in similar
transactions. All transactions with affiliated brokers will comply with Rule
17e-1 under the 1940 Act.
During the fiscal years ending October 31, 1992, October 31, 1993
and October 31, 1994, the Fund paid an aggregate of approximately $184,616,
$237,078 and $390,241, respectively, in commissions to broker-dealers for
execution of portfolio transactions. Increased brokerage costs in recent
fiscal years is attributable to the increased size of the Fund. No portfolio
transactions have been executed through Counsellors Securities since the
commencement of the Fund's operation.
In no instance will portfolio securities be purchased from or sold
to Counsellors or Counsellors Securities or any affiliated person of such
companies. In addition, the Fund will not give preference to any institutions
with whom the Fund enters into distribution or shareholder servicing
agreements ("Agreements") concerning the provision of distribution services or
support services to customers ("Customers") who beneficially own the Fund's
Common Stock, par value $.001 per share, designated Common Stock - Series 1
(the "Series 1 Shares") or Common Stock - Series 2 (the "Advisor Shares").
See the Prospectuses, "Shareholder Servicing."
The Fund's transactions in foreign securities may be effected on
foreign securities exchanges. In transactions for securities not actively
traded on a foreign securities exchange, the Fund will deal directly with the
dealers who make a market in the securities involved, except in those
circumstances where better prices and execution are available elsewhere. Such
dealers usually are acting as principal for their own account. On occasion,
<PAGE>21
securities may be purchased directly from the issuer. Such portfolio
securities are generally traded on a net basis and do not normally involve
brokerage commissions. Securities firms may receive brokerage commissions on
certain portfolio transactions, including options, futures and options on
futures transactions and the purchase and sale of underlying securities upon
exercise of options.
The Fund may participate, if and when practicable, in bidding for
the purchase of securities for the Fund's portfolio directly from an issuer in
order to take advantage of the lower purchase price available to members of
such a group. The Fund will engage in this practice, however, only when
Counsellors, in its sole discretion, believes such practice to be otherwise in
the Fund's interest.
Portfolio Turnover
The Fund does not intend to seek profits through short-term trading,
but the rate of turnover will not be a limiting factor when the Fund deems it
desirable to sell or purchase securities. The Fund's portfolio turnover rate
is calculated by dividing the lesser of purchases or sales of its portfolio
securities for the year by the monthly average value of the portfolio
securities. Securities with remaining maturities of one year or less at the
date of acquisition are excluded from the calculation.
The Fund's investment in special situation companies could result in
high portfolio turnover. To the extent that its portfolio is traded for the
short-term, the Fund will be engaged essentially in trading activities based
on short-term considerations affecting the value of an issuer's stock instead
of long-term investments based on fundamental valuation of securities.
Because of this policy, portfolio securities may be sold without regard to the
length of time for which they have been held. Consequently, the annual
portfolio turnover rate of the Fund may be higher than mutual funds having a
similar objective that do not invest in special situation companies.
MANAGEMENT OF THE FUND
Officers and Board of Directors
The names (and ages) of the Fund's Directors and officers, their
addresses, present positions and principal occupations during the past five
years and other affiliations are set forth below.
<PAGE>22
Richard N. Cooper (61). . . Director
Room 7E47OHB National Intelligence Counsel;
Central Intelligence Agency Professor at Harvard University; Director or
930 Dolly Madison Blvd. Trustee of Circuit City Stores, Inc. (retail
McClain, Virginia 22107 electronics and appliances) and Phoenix Home
Life Insurance Co.
Donald J. Donahue (71). . . Director
99 Indian Field Road Chairman of Magma Copper Company
Greenwich, Connecticut 06830 since January 1987; Director or Trustee of GEV
Corporation and Signet Star Reinsurance
Company; Chairman and Director of NAC Holdings
from September 1990-June 1993.
Jack W. Fritz (68) . . . Director
2425 North Fish Creek Road Private investor; Consultant and
P.O. Box 483 Director of Fritz Broadcasting, Inc. and
Wilson, Wyoming 83014 Fritz Communications (developers and operators
of radio stations); Director of Advo, Inc.
(direct mail advertising).
John L. Furth* (64) . . . Chairman of the Board
466 Lexington Avenue Vice Chairman and Director of EMW;
New York, New York 10017-3147 Associated with EMW since 1970; Chairman of
the Board or Chief Executive Officer of 15
other investment companies advised by
Counsellors; President of one other investment
company advised by Counsellors.
Thomas A. Melfe (63) . . Director
30 Rockefeller Plaza Partner in the law firm of Donovan Leisure
New York, New York 10112 Newton & Irvine; Director of Municipal Fund
for New York Investors, Inc.
Alexander B. Trowbridge (66) Director
1155 Connecticut Avenue, N.W. President of Trowbridge Partners, Inc.
Suite 700 (business consulting) from January 1990-
Washington, DC 20036 January 1994; President of the National
Association of Manufacturers from 1980-1990;
Director or Trustee of New England Mutual
- ------------------------
* Indicates a Director who is an "interested person" of the Fund as defined
in the 1940 Act.
<PAGE>23
Life Insurance Co., ICOS Corporation
(biopharmaceuticals), P.H.H. Corporation
(fleet auto management; housing and plant
relocation service), WMX Technologies Inc.
(solid and hazardous waste collection and
disposal), The Rouse Company (real estate
development), SunResorts International Ltd.
(hotel and real estate management), Harris
Corp. (electronics and communications
equipment), The Gillette Co. (personal care
products) and Sun Company Inc. (petroleum
refining and marketing).
Elizabeth B. Dater (50) . . . Co-President and Co-Portfolio Manager
466 Lexington Avenue of the Fund
New York, New York 10017-3147 Managing Director of EMW;
Associated with EMW since 1978.
Stephen J. Lurito (33). . . . Co-President and Co-Portfolio Manager of the
466 Lexington Avenue Fund
New York, New York 10017-3147 Managing Director of Counsellors since 1993;
Associated with EMW since 1987; Investment
Management Research Analyst at Sanford C.
Bernstein & Company, Inc. from 1985-1987.
Arnold M. Reichman (47) . . . Executive Vice President
466 Lexington Avenue Managing Director and Assistant Secretary
New York, New York 10017-3147 of EMW; Associated with EMW since 1984; Senior
Vice President, Secretary and Chief Operating
Officer of Counsellors Securities; President
or Executive Vice President of 15 other
investment companies advised by Counsellors.
Eugene L. Podsiadlo (38). . . Senior Vice President
466 Lexington Avenue Managing Director of EMW;
New York, New York 10017-3147 Associated with EMW since 1991; Vice President
of Citibank, N.A. from 1987-1991; Senior Vice
President of Counsellors Securities and 15
other investment companies advised by
Counsellors.
<PAGE>24
Eugene P. Grace (44) . . Vice President and Secretary
466 Lexington Avenue Associated with EMW since April 1994;
New York, New York 10017-3147 Attorney-at-law from September 1989-April
1994; life insurance agent, New York Life
Insurance Company from 1993-1994; General
Counsel and Secretary, Home Unity Savings Bank
from 1991-1992; Vice President and Chief
Compliance Officer of Counsellors Securities;
Vice President and Secretary of 15 other
investment companies advised by Counsellors.
Stephen Distler (42) . . Vice President and Chief
466 Lexington Avenue Financial Officer
New York, New York 10017-3147 Managing Director, Controller and Assistant
Secretary of EMW; Associated with EMW since
1984; Treasurer of Counsellors Securities;
Vice President, Treasurer and Chief Accounting
Officer or Vice President and Chief Financial
Officer of 15 other investment companies
advised by Counsellors.
Howard Conroy (41) . . . Vice President, Treasurer
466 Lexington Avenue and Chief Accounting Officer
New York, New York 10017-3147 Associated with EMW since 1992; Associated
with Martin Geller, C.P.A. from 1990-1992;
Vice President, Finance with Gabelli/Rosenthal
& Partners, L.P. until 1990; Vice President,
Treasurer and Chief Accounting Officer of 14
other investment companies advised by
Counsellors.
Karen Amato (31) . . . . Assistant Secretary
466 Lexington Avenue Associated with EMW since 1987;
New York, New York 10017-3147 Assistant Secretary of 15 other investment
companies advised by Counsellors.
No employee of Counsellors or PFPC Inc., the Fund's co-administrator
("PFPC"), or any of their affiliates receives any compensation from the Fund
for acting as an officer or director of the Fund. Each Director who is not a
director, trustee, officer or employee of Counsellors, PFPC or any of their
affiliates receives an annual fee of $1,000, and $250 for each meeting of the
Board attended by him for his services as Director and is reimbursed for
expenses incurred in connection with his attendance at Board meetings.
<PAGE>25
Directors' Compensation
(for the fiscal year ended October 31, 1994)
<TABLE>
<CAPTION>
Total Total Compensation from
Compensation from all Investment Companies
Name of Director Fund Managed by Counsellors*
---------------- ----------------- ------------------------
<S> <C> <C>
John L. Furth None** None**
Richard N. Cooper $2,000 $36,500
Donald J. Donahue $2,000 $36,500
Jack W. Fritz $2,000 $36,500
Thomas A. Melfe $2,000 $36,500
Alexander B. Trowbridge $2,000 $36,500
</TABLE>
________________________
* Each Director also serves as a Director or Trustee of 15 other investment
companies advised by Counsellors.
** Mr. Furth is considered to be an interested person of the Fund and
Counsellors, as defined under Section 2(a)(19) of the 1940 Act, and,
accordingly, receives no compensation from the Fund or any other
investment company managed by Counsellors.
Ms. Elizabeth B. Dater, co-president and co-portfolio manager of the
Fund, is also co-portfolio manager of Warburg Pincus Post-Venture Capital Fund
and the Small Company Growth Portfolio of Warburg Pincus Trust. Ms. Dater has
been with the Fund since its inception and she manages an institutional
post-venture capital fund. Ms. Dater is the former director of research for
Counsellors' investment management activities. Prior to joining Counsellors
in 1978, she was a vice president of research at Fiduciary Trust Company of
New York and an institutional sales assistant at Lehman Brothers. Ms. Dater
has been a regular panelist on Maryland Public Television's Wall Street Week
with Louis Rukeyser since 1976. Ms. Dater earned a B.A. degree from Boston
University in Massachusetts.
Mr. Stephen J. Lurito, co-president and co-portfolio manager of the
Fund, is also co-portfolio manager of Warburg Pincus Post-Venture Capital Fund
and the Small Company Growth Portfolio of Warburg Pincus Trust. Mr. Lurito,
also the research coordinator and a portfolio manager for micro-cap equity and
post-venture products, has been with EMW since 1987 and has been with the Fund
since 1990. Prior to that he was a research analyst at Sanford C. Bernstein &
Company, Inc. Mr. Lurito earned a B.A. degree
<PAGE>26
from the University of Virginia and an M.B.A. from The Wharton School,
University of Pennsylvania.
As of August 31, 1995, directors and officers of the Fund as a group
owned of record 32,275 of the Fund's outstanding Common Shares. As of the
same date, Mr. Furth may be deemed to have beneficially owned 55.83% of the
Fund's outstanding Common Shares, including shares owned by clients for which
Counsellors has investment discretion. Mr. Furth disclaims ownership of these
shares and does not intend to exercise voting rights with respect to these
shares. No Director or officer owned of record any Advisor Shares.
Investment Adviser and Co-Administrators
Counsellors serves as investment adviser to the Fund, Counsellors
Funds Service, Inc. ("Counsellors Service") serves as a co-administrator to
the Fund and PFPC serves as a co-administrator to the Fund pursuant to
separate written agreements (the "Advisory Agreement," the "Counsellors
Service Co-Administration Agreement" and the "PFPC Co-Administration
Agreement," respectively). The services provided by, and the fees payable by
the Fund to, Counsellors under the Advisory Agreement, Counsellors Service
under the Counsellors Service Co-Administration Agreement and PFPC under the
PFPC Co-Administration Agreement are described in the Prospectuses. Each
class of shares of the Fund bears its proportionate share of fees payable to
Counsellors, Counsellors Service and PFPC in the proportion that its assets
bear to the aggregate assets of the Fund at the time of calculation. Prior to
March 1, 1994, PFPC served as administrator to the Fund and Counsellors
Service served as administrative services agent to the Fund pursuant to
separate written agreements.
Counsellors agrees that if, in any fiscal year, the expenses borne
by the Fund exceed the applicable expense limitations imposed by the
securities regulations of any state in which shares of the Fund are registered
or qualified for sale to the public, it will reimburse the Fund to the extent
required by such regulations. Unless otherwise required by law, such
reimbursement would be accrued and paid on a monthly basis. At the date of
this Statement of Additional Information, the most restrictive annual expense
limitation applicable to the Fund is 2.5% of the first $30 million of the
average net assets of the Fund, 2% of the next $70 million of the average net
assets of the Fund and 1.5% of the remaining average net assets of the Fund.
The advisory fee payable by the Fund is calculated at an annual rate
based on a percentage of the Fund's average daily net assets. See the
Prospectuses, "Management of the Fund." During the fiscal year ending
October 31, 1992, Counsellors voluntarily waived $65,349 of the $776,654,
earned by it under the Advisory Agreement. For the year ending October 31,
1993, Counsellors earned $1,248,820 in investment advisory fees. For the year
ending October 31, 1994 Counsellors voluntarily waived $100,408 of the
$2,234,376 earned by it under the Advisory Agreement. During the fiscal year
ending October 31, 1992, PFPC voluntarily waived $3,489 of the $89,784 in
administration fees earned. During the fiscal
<PAGE>27
year ending October 31, 1993 PFPC earned $138,760 in administration fees and
during the fiscal year ending October 31, 1994 received $248,264 under the
PFPC Co-Administration Agreement. During the fiscal years ending October 31,
1992, October 31, 1993 and October 31, 1994 Counsellors Service earned
$45,808, $75,824 and $202,895, respectively, in administrative services fees
or co-administration fees.
Organization of the Fund
The Fund was incorporated on November 12, 1987 under the laws of the
State of Maryland under the name "Counsellors Emerging Growth Fund, Inc." As
of approximately February 11, 1992, the Fund began doing business under the
name "Warburg, Pincus Emerging Growth Fund". The Fund's charter authorizes
the Board to issue three billion full and fractional shares of common stock,
$.001 par value per share. Common Stock ("Common Shares"), Common Stock -
Series 1 and Advisor Shares have been authorized by the Fund's charter,
although only Common Shares and Advisor Shares have been issued by the Fund.
When matters are submitted for shareholder vote, each shareholder will have
one vote for each share owned and proportionate, fractional votes for
fractional shares held. Shareholders generally vote in the aggregate, except
with respect to (i) matters affecting only the shares of a particular class,
in which case only the shares of the affected class would be entitled to vote,
or (ii) when the 1940 Act requires that shares of the classes be voted
separately. There will normally be no meetings of shareholders for the
purpose of electing Directors unless and until such time as less than a
majority of the Directors holding office have been elected by shareholders.
The Directors will call a meeting for any purpose when requested to do so in
writing by shareholders of record of not less than 25% (10% for the purpose of
removing a Director) of the Fund's outstanding shares.
All shareholders of the Fund in each class, upon liquidation, will
participate ratably in the Fund's net assets. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Directors can elect all Directors. Shares are
transferable but have no preemptive, conversion or subscription rights.
Custodian and Transfer Agent
PNC Bank, National Association ("PNC") is custodian of the Fund's
assets pursuant to a custodian agreement (the "Custodian Agreement"). Under
the Custodian Agreement, PNC (i) maintains a separate account or accounts in
the name of the Fund, (ii) holds and transfers portfolio securities on account
of the Fund, (iii) makes receipts and disbursements of money on behalf of
the Fund, (iv) collects and receives all income and other payments and
distributions on account of the Fund's portfolio securities and (v) makes
periodic reports to the Board concerning the Fund's custodial arrangements.
PNC is authorized to select one or more banks or trust companies to serve as
sub-custodian on behalf of the Fund, provided that PNC remains responsible for
the performance of all its duties under the Custodian Agreement and holds the
Fund harmless from the acts and omissions of
<PAGE>28
any sub-custodian. PNC is an indirect wholly owned subsidiary of PNC Bank
Corp., and its principal business address is Broad and Chestnut Streets,
Philadelphia, Pennsylvania 19101.
State Street Bank and Trust Company ("State Street") serves as the
shareholder servicing, transfer and dividend disbursing agent of the Fund
pursuant to a Transfer Agency and Service Agreement, under which State Street
(i) issues and redeems shares of the Fund, (ii) addresses and mails all
communications by the Fund to record owners of Fund shares, including reports
to shareholders, dividend and distribution notices and proxy material for its
meetings of shareholders, (iii) maintains shareholder accounts and, if
requested, sub-accounts and (iv) makes periodic reports to the Fund's Board of
Directors concerning the transfer agent's operations with respect to the Fund.
State Street has delegated to Boston Financial Data Services, Inc., a 50%
owned subsidiary ("BFDS"), responsibility for most shareholder servicing
functions. BFDS's principal business address is 2 Heritage Drive, Boston,
Massachusetts 02171.
Distribution and Shareholder Servicing
The Fund has entered into a distribution agreement with an
institution (the "Service Organization") pursuant to which support services
are provided to the holders of Advisor Shares in consideration of the Fund's
payment, out of the assets attributable to the Advisor Shares, of .50%, on an
annualized basis (a .25% annual service fee and a .25% distribution fee), of
the average daily net assets of the Advisor Shares held of record. See the
Advisor Shares Prospectus, "Shareholder Servicing." The Fund's Advisor Shares
paid the Service Organization $226,626 in such fees for the year ending
October 31, 1994. The Fund may, in the future, enter into additional
Agreements with institutions ("Institutions") to perform certain distribution,
shareholder servicing, administrative and accounting services for their
Customers who are beneficial owners of Advisor Shares. See the Prospectuses,
"Shareholder Servicing." The Fund's Agreements with Institutions with respect
to Advisor Shares will be governed by a distribution plan (the "Distribution
Plan"). The Distribution Plan requires the Board, at least quarterly, to
receive and review written reports of amounts expended under the Distribution
Plan and the purposes for which such expenditures were made.
An Institution with which the Fund has entered into an Agreement
with respect to its Advisor Shares may charge a Customer one or more of the
following types of fees, as agreed upon by the Institution and Customer, with
respect to the cash management or other services provided by the Institution:
(i) account fees (a fixed amount per month or per year); (ii) transaction fees
(a fixed amount per transaction processed); (iii) compensation balance
requirements (a minimum dollar amount a Customer must maintain in order to
obtain the services offered); or (iv) account maintenance fees (a periodic
charge based upon the percentage of assets in the account or of the dividend
paid on those assets). Services provided by an Institution to Customers are
in addition to, and not duplicative of, the services to be provided under the
Fund's co-administration and distribution. A Customer of an Institution
should read the relevant Prospectus and Statement of Additional Information in
<PAGE>29
conjunction with the Agreement and other literature describing the services
and related fees that would be provided by the Institution to its Customers
prior to any purchase of Fund shares. Prospectuses are available from the
Fund's distributor upon request. No preference will be shown in the selection
of Fund portfolio investments for the instruments of Institutions.
The Distribution Plan will continue in effect for so long as its
continuance is specifically approved at least annually by the Board including
a majority of the Directors who are not interested persons of the Fund and who
have no direct or indirect financial interest in the operation of the
Distribution Plan ("Independent Directors"). Any material amendment of the
Distribution Plan would require the approval of the Board in the manner
described above. The Distribution Plan may not be amended to increase
materially the amount to be spent under it without shareholder approval of the
Advisor Shares. The Distribution Plan may be terminated at any time, without
penalty, by vote of a majority of the Independent Directors or by a vote of a
majority of the outstanding voting securities of the Advisor Shares of the
Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of the Fund's shares is equal to the per share
net asset value of the relevant class of shares of the Fund. Information on
how to purchase and redeem Fund shares and how such shares are priced is
included in the Prospectuses under "Net Asset Value."
Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
NYSE is closed, other than customary weekend and holiday closings, or during
which trading on the NYSE is restricted, or during which (as determined by the
SEC) an emergency exists as a result of which disposal or fair valuation of
portfolio securities is not reasonably practicable, or for such other periods
as the SEC may permit. (The Fund may also suspend or postpone the recordation
of an exchange of its shares upon the occurrence of any of the foregoing
conditions.)
If the Board determines that conditions exist which make payment of
redemption proceeds wholly in cash unwise or undesirable, the Fund may make
payment wholly or partly in securities or other property. If a redemption is
paid wholly or partly in securities or other property, a shareholder would
incur transaction costs in disposing of the redemption proceeds. The Fund
intends to comply with Rule 18f-1 promulgated under the 1940 Act with respect
to redemptions in kind.
Automatic Cash Withdrawal Plan. An automatic cash withdrawal plan
(the "Plan") is available to shareholders who wish to receive specific amounts
of cash periodically. Withdrawals may be made under the Plan by redeeming as
many shares of the
<PAGE>30
Fund as may be necessary to cover the stipulated withdrawal payment. To the
extent that withdrawals exceed dividends, distributions and appreciation of a
shareholder's investment in the Fund, there will be a reduction in the value
of the shareholder's investment and continued withdrawal payments may reduce
the shareholder's investment and ultimately exhaust it. Withdrawal payments
should not be considered as income from investment in the Fund. All dividends
and distributions on shares in the Plan are automatically reinvested at net
asset value in additional shares of the Fund.
EXCHANGE PRIVILEGE
An exchange privilege with certain other funds advised by
Counsellors is available to investors in the Fund. The funds into which
exchanges can be made by holders of Common Shares currently are the Common
Shares of Warburg Pincus Cash Reserve Fund, Warburg Pincus New York Tax Exempt
Fund, Warburg Pincus New York Intermediate Municipal Fund, Warburg Pincus Tax
Free Fund, Warburg Pincus Intermediate Maturity Government Fund, Warburg
Pincus Fixed Income Fund, Warburg Pincus Short-Term Tax-Advantaged Bond Fund,
Warburg Pincus Global Fixed Income Fund, Warburg Pincus Balanced Fund, Warburg
Pincus Growth & Income Fund, Warburg Pincus Capital Appreciation Fund, Warburg
Pincus Post-Venture Capital Fund, Warburg Pincus International Equity Fund,
Warburg Pincus Emerging Markets Fund and Warburg Pincus Japan OTC Fund.
Common Shareholders of the Fund may exchange all or part of their shares for
Common Shares of these or other mutual funds organized by Counsellors in the
future on the basis of their relative net asset values per share at the time
of exchange. Exchanges of Advisor Shares may currently be made with Advisor
Shares of Warburg Pincus Balanced Fund, Warburg Pincus Capital Appreciation
Fund, Warburg Pincus International Equity Fund and Warburg Pincus Growth &
Income Fund at their relative net asset values at the time of the exchange.
The exchange privilege enables shareholders to acquire shares in a
fund with a different investment objective when they believe that a shift
between funds is an appropriate investment decision. This privilege is
available to shareholders residing in any state in which the Common Shares or
Advisor Shares being acquired, as relevant, may legally be sold. Prior to any
exchange, the investor should obtain and review a copy of the current
prospectus of the relevant class of each fund into which an exchange is being
considered. Shareholders may obtain a prospectus of the relevant class of the
fund into which they are contemplating an exchange from Counsellors
Securities.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-current net
asset value of the relevant class and the proceeds are invested on the same
day, at a price as described above, in shares of the relevant class of the
fund being acquired. Counsellors reserves the right to reject more than three
exchange requests by a shareholder in any 30-day period. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
<PAGE>31
ADDITIONAL INFORMATION CONCERNING TAXES
The discussion set out below of tax considerations generally
affecting the Fund and its shareholders is intended to be only a summary and
is not intended as a substitute for careful tax planning by prospective
shareholders. Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Fund.
The Fund has qualified and intends to continue to qualify each year
as a "regulated investment company" under Subchapter M of the Code. If it
qualifies as a regulated investment company, the Fund will pay no federal
income taxes on its taxable net investment income (that is, taxable income
other than net realized capital gains) and its net realized capital gains that
are distributed to shareholders. To qualify under Subchapter M, the Fund
must, among other things: (i) distribute to its shareholders at least 90% of
its taxable net investment income (for this purpose consisting of taxable net
investment income and net realized short-term capital gains); (ii) derive at
least 90% of its gross income from dividends, interest, payments with respect
to loans of securities, gains from the sale or other disposition of
securities, or other income (including, but not limited to, gains from
options, futures, and forward contracts) derived with respect to the Fund's
business of investing in securities; (iii) derive less than 30% of its annual
gross income from the sale or other disposition of securities, options,
futures or forward contracts held for less than three months; and (iv)
diversify its holdings so that, at the end of each fiscal quarter of the Fund
(a) at least 50% of the market value of the Fund's assets is represented by
cash, U.S. government securities and other securities, with those other
securities limited, with respect to any one issuer, to an amount no greater in
value than 5% of the Fund's total assets and to not more than 10% of the
outstanding voting securities of the issuer, and (b) not more than 25% of the
market value of the Fund's assets is invested in the securities of any one
issuer (other than U.S. government securities or securities of other regulated
investment companies) or of two or more issuers that the Fund controls and
that are determined to be in the same or similar trades or businesses or
related trades or businesses. In meeting these requirements, the Fund may be
restricted in the selling of securities held by the Fund for less than three
months and in the utilization of certain of the investment techniques
described above and in the Fund's Prospectuses. As a regulated investment
company, the Fund will be subject to a 4% non-deductible excise tax measured
with respect to certain undistributed amounts of ordinary income and capital
gain required to be but not distributed under a prescribed formula. The
formula requires payment to shareholders during a calendar year of
distributions representing at least 98% of the Fund's taxable ordinary income
for the calendar year and at least 98% of the excess of its capital gains over
capital losses realized during the one-year period ending October 31 during
such year, together with any undistributed, untaxed amounts of ordinary income
and capital gains from the previous calendar year. The Fund expects to pay
the dividends and make the distributions necessary to avoid the application of
this excise tax.
<PAGE>32
The Fund's transactions, if any, in foreign currencies, forward
contracts, options and futures contracts (including options and forward
contracts on foreign currencies) will be subject to special provisions of the
Code that, among other things, may affect the character of gains and losses
recognized by the Fund (i.e., may affect whether gains or losses are ordinary
or capital), accelerate recognition of income to the Fund, defer Fund losses
and cause the Fund to be subject to hyperinflationary currency rules. These
rules could therefore affect the character, amount and timing of distributions
to shareholders. These provisions also (i) will require the Fund to
mark-to-market certain types of its positions (i.e., treat them as if they
were closed out) and (ii) may cause the Fund to recognize income without
receiving cash with which to pay dividends or make distributions in amounts
necessary to satisfy the distribution requirements for avoiding income and
excise taxes. The Fund will monitor its transactions, will make the
appropriate tax elections and will make the appropriate entries in its books
and records when it acquires any foreign currency, forward contract, option,
futures contract or hedged investment so that (a) neither the Fund nor its
shareholders will be treated as receiving a materially greater amount of
capital gains or distributions than actually realized or received, (b) the
Fund will be able to use substantially all of its losses for the fiscal years
in which the losses actually occur and (c) the Fund will continue to qualify
as a regulated investment company.
A shareholder of the Fund receiving dividends or distributions in
additional shares should be treated for federal income tax purposes as
receiving a distribution in an amount equal to the amount of money that a
shareholder receiving cash dividends or distributions receives, and should
have a cost basis in the shares received equal to that amount.
Investors considering buying shares just prior to a dividend or
capital gain distribution should be aware that, although the price of shares
purchased at that time may reflect the amount of the forthcoming distribution,
those who purchase just prior to a distribution will receive a distribution
that will nevertheless be taxable to them. Upon the sale or exchange of
shares, a shareholder will realize a taxable gain or loss depending upon the
amount realized and the basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands, and, as described in the Prospectuses, will be long-term
or short-term depending upon the shareholder's holding period for the shares.
Any loss realized on a sale or exchange will be disallowed to the extent the
shares disposed of are replaced, including replacement through the
reinvestment of dividends and capital gains distributions in the Fund, within
a period of 61 days beginning 30 days before and ending 30 days after the
disposition of the shares. In such a case, the basis of the shares acquired
will be increased to reflect the disallowed loss.
Each shareholder will receive an annual statement as to the federal
income tax status of his dividends and distributions from the Fund for the
prior calendar year. Furthermore, shareholders will also receive, if
appropriate, various written notices after the close of the Fund's taxable
year regarding the federal income tax status of certain dividends
<PAGE>33
and distributions that were paid (or that are treated as having been paid) by
the Fund to its shareholders during the preceding year.
If a shareholder fails to furnish a correct taxpayer identification
number, fails to report fully dividend or interest income, or fails to certify
that he has provided a correct taxpayer identification number and that he is
not subject to "backup withholding," the shareholder may be subject to a 31%
"backup withholding" tax with respect to (i) taxable dividends and
distributions and (ii) the proceeds of any sales or repurchases of shares of
the Fund. An individual's taxpayer identification number is his social
security number. Corporate shareholders and other shareholders specified in
the Code are or may be exempt from backup withholding. The backup withholding
tax is not an additional tax and may be credited against a taxpayer's federal
income tax liability. Dividends and distributions also may be subject to
state and local taxes depending on each shareholder's particular situation.
Investment in Passive Foreign Investment Companies
If the Fund purchases shares in certain foreign entities classified
under the Code as "passive foreign investment companies" ("PFICs"), the Fund
may be subject to federal income tax on a portion of an "excess distribution"
or gain from the disposition of the shares, even though the income may have to
be distributed as a taxable dividend by the Fund to its shareholders. In
addition, gain on the disposition of shares in a PFIC generally is treated as
ordinary income even though the shares are capital assets in the hands of the
Fund. Certain interest charges may be imposed on either the Fund or its
shareholders with respect to any taxes arising from excess distributions or
gains on the disposition of shares in a PFIC.
The Fund may be eligible to elect to include in its gross income its
share of earnings of a PFIC on a current basis. Generally, the election would
eliminate the interest charge and the ordinary income treatment on the
disposition of stock, but such an election may have the effect of accelerating
the recognition of income and gains by the Fund compared to a fund that did
not make the election. In addition, information required to make such an
election may not be available to the Fund.
On April 1, 1992 proposed regulations of the Internal Revenue
Service (the "IRS") were published providing a mark-to-market election for
regulated investment companies. The IRS subsequently issued a notice
indicating that final regulations will provide that regulated investment
companies may elect the mark-to-market election for tax years ending after
March 31, 1992 and before April 1, 1993. Whether and to what extent the
notice will apply to taxable years of the Fund is unclear. If the Fund is not
able to make the foregoing election, it may be able to avoid the interest
charge (but not the ordinary income treatment) on disposition of the stock by
electing, under proposed regulations, each year to mark-to-market the stock
(that is, treat it as if it were sold for fair market value). Such an
election could result in acceleration of income to the Fund.
<PAGE>34
DETERMINATION OF PERFORMANCE
From time to time, the Fund may quote the total return of its Common
Shares and/or Advisor Shares in advertisements or in reports and other
communications to shareholders. With respect to the Fund's Common Shares, the
Fund's average annual total return for the six-month period ended April 30,
1995 was 15.62%, the average annual total return for the one-year period ended
October 31, 1994 was .16% (.12% without waivers), the average annual total
return for the five-year period ending October 31, 1994 was 13.76% (13.60%
without waivers) and the average annual total return for the period commencing
January 21, 1988 (commencement of operations) and ending October 31, 1994 was
15.53% (15.20% without waivers). These figures are calculated by finding the
average compounded rates of return for the one-, five- and ten- (or such
shorter period as the relevant class of shares has been offered) year periods
that would equate the initial amount invested to the ending redeemable value
according to the following formula: P (1 + T)[*GRAPHIC OMITTED-SEE FOOTNOTE
BELOW] = ERV. For purposes of this formula, "P" is a hypothetical investment
of $1,000; "T" is average annual total return; "n" is number of years; and
"ERV" is the ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the one-, five- or ten-year periods (or fractional portion
thereof). Total return or "T" is computed by finding the average annual
change in the value of an initial $1,000 investment over the period and
assumes that all dividends and distributions are reinvested during the
period. The Advisor Shares average annual total return for the six-month
period ended April 30, 1995 was 14.98%, the average annual total return for
the one-year period ending October 31, 1994 was -.29% (-.33% without waivers)
and the average annual total return for the period commencing April 4, 1991
(initial issuance) and ending October 31, 1994 was 14.30% (14.28% without
waivers).
The Fund may advertise, from time to time, comparisons of the
performance of its Common Shares and/or Advisor Shares with that of one or
more other mutual funds with similar investment objectives. The Fund may
advertise average annual calendar-year-to-date and calendar quarter returns,
which are calculated according to the formula set forth in the preceding
paragraph, except that the relevant measuring period would be the number of
months that have elapsed in the current calendar year or most recent three
months, as the case may be. With respect to the Fund's Common Shares, the
Fund's actual total return for the calendar year and for the three-month
period ended on December 31, 1994 was -1.43% and 0.59%, respectively. With
respect to Advisor Shares, the Fund's actual total return for the calendar
year and for the three-month period ended December 31, 1994 was -1.86% and
0.46%, respectively. Investors should note that this performance may not be
representative of the Fund's total return in longer market cycles.
The performance of a class of Fund shares will vary from time to
time depending upon market conditions, the composition of the Fund's portfolio
and operating expenses allocable to it. As described above, total return is
based on historical earnings and is not intended to indicate future
performance. Consequently, any given performance quotation should not be
considered as representative of performance for any specified period in the
future. Performance information may be useful as a basis for comparison with
other
- ------------------------
* - The expression (1 + T) is being raised to the nth power.
<PAGE>35
investment alternatives. However, the Fund's performance will fluctuate,
unlike certain bank deposits or other investments which pay a fixed yield for
a stated period of time. Any fees charged by Institutions or other
institutional investors directly to their customers in connection with
investments in Fund shares are not reflected in the Fund's total return, and
such fees, if charged, will reduce the actual return received by customers on
their investments.
From time to time, reference may be made in advertising a class of
Fund shares to opinions of Wall Street economists and analysts regarding
economic cycles and their effects historically on the performance of small
companies, both as a class and relative to other investments. The Fund may
also discuss its beta, or volatility relative to the market, and make
reference to its relative performance in various market cycles in the United
States. In addition, the Fund may advertise evaluations of a class of Fund
shares published by nationally recognized financial publications, such as
Morningstar, Inc. or Lipper Analytical Services, Inc. Morningstar, Inc. rates
funds in broad categories based on risk/reward analyses over various time
periods.
AUDITORS AND COUNSEL
Coopers & Lybrand L.L.P. ("Coopers & Lybrand"), with principal
offices at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves
as independent auditors for the Fund. The financial statements for the fiscal
years ended October 31, 1993 and October 31, 1994 that appear in this
Statement of Additional Information have been audited by Coopers & Lybrand,
whose report thereon appears elsewhere herein and have been included herein in
reliance upon the report of such firm of independent auditors given upon their
authority as experts in accounting and auditing.
The financial statements for the periods beginning with commencement
of the Fund through October 31, 1992 have been audited by Ernst & Young LLP
("Ernst & Young"), independent auditors, as set forth in their report, and
have been included in reliance on such report and upon the authority of such
firm as experts in accounting and auditing. Ernst & Young's address is 787
7th Avenue, New York, New York 10019.
Willkie Farr & Gallagher serves as counsel for the Fund as well as
counsel to Counsellors, Counsellors Service and Counsellors Securities.
MISCELLANEOUS
As of August 31, 1995, the name, address and percentage of ownership
of each person (other than Mr. Furth, see "Management of the Fund") that owns
of record 5% or more of the Fund's outstanding shares were as follows:
<PAGE>36
Common Shares
Charles Schwab & Co., Inc., Reinvest Account, Attn: Mutual Funds
Dept., 101 Montgomery Street, San Francisco, CA 94104-4122 -- 13.08% and
Nat'l Financial Svs Corp., FBO Customers, P.O. Box 3908, Church Street
Station, New York, New York 10008-3908 -- 37.57%. The Fund believes that
these entities are not the beneficial owners of shares held of record by them.
Mr. Lionel I. Pincus, Chairman of the Board and Chief Executive Officer of
EMW, may be deemed to have beneficially owned 57.48% of the Common Shares
outstanding, including shares owned by clients for which Counsellors has
investment discretion and by companies that EMW may be deemed to control. Mr.
Pincus disclaims ownership of these shares and does not intend to exercise
voting rights with respect to these shares.
Advisor Shares
Connecticut General Life Ins. Co. on behalf of its separate accounts
55E 55F 55G c/o Melissa Spencer, M110, Cigna Corp., P.O. Box 2975, Hartford,
CT 06104-2975--100%.
FINANCIAL STATEMENTS
The Fund's financial statements for the fiscal year ended October
31, 1994 (audited) and for the period ended April 30, 1995 (unaudited) follow
the Report of Independent Auditors.
<PAGE>A-1
APPENDIX
DESCRIPTION OF RATINGS
Commercial Paper Ratings
Commercial paper rated A-1 by Standard and Poor's Ratings Group
("S&P") indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign designation. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating assigned
by Moody's Investors Services, Inc. ("Moody's"). Issuers rated Prime-1 (or
related supporting institutions) are considered to have a superior capacity
for repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics of issuers rated Prime-1 but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
Corporate Bond Ratings
The following summarizes the ratings used by S&P for corporate
bonds:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay interest and
repay principal.
AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB - This is the lowest investment grade. Debt rated BBB is
regarded as having an adequate capacity to pay interest and repay principal.
Although it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for bonds in this category than
for bonds in higher-rated categories.
<PAGE>A-2
To provide more detailed indications of credit quality, the ratings
from "AA" to "BBB" may be modified by the addition of a plus or minus sign to
show relative standing within this major rating category.
The following summarizes the ratings used by Moody's for corporate
bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations.
Factors giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime
in the future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Moody's applies numerical modifiers (1, 2 and 3) with respect to the
bonds rated "Aa" through "Baa". 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.
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Boards of Directors, Trustees and Shareholders of
Warburg Pincus Equity Funds:
We have audited the accompanying statements of net assets of the following
Warburg Pincus Funds (consisting of Warburg Pincus Capital Appreciation Fund
('Capital Appreciation Fund'), Warburg Pincus Emerging Growth Fund ('Emerging
Growth Fund') and Warburg Pincus International Equity Fund ('International
Equity Fund') and the accompanying statement of assets and liabilities including
the schedule of investments of Warburg Pincus Japan OTC Fund (with the Capital
Appreciation Fund, Emerging Growth Fund and International Equity Fund, the
'Warburg Pincus Equity Funds') as of October 31, 1994, and the related
statements of operations for the year (or period) then ended, and the statements
of changes in net assets and the financial highlights for each of the two years
(or period) in the period then ended. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial highlights of the Warburg Pincus Equity Funds
for each of the three years in the period ended October 31, 1992, except for the
Warburg Pincus Japan OTC Fund, which commenced operations on September 30, 1994,
were audited by other auditors, whose report dated December 15, 1992, expressed
an unqualified opinion.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1994 by correspondence with the custodians and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the Warburg Pincus Equity Funds as of October 31, 1994, and the results
of their operations for the year (or period) then ended, and the changes in
their net assets and their financial highlights for the two years (or period) in
the period then ended, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
December 12, 1994
40
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EMERGING GROWTH FUND
STATEMENT OF NET ASSETS
October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCK (92.5%)
BASIC INDUSTRIES
Chemicals (0.3%)
Celgene Corp. + 160,400 $ 1,082,700
------------
CAPITAL GOODS
Capital Equipment (1.3%)
Johnstown America Ind., Inc. + 194,000 3,831,500
------------
Computers (7.2%)
Auspex Systems, Inc. + 290,000 2,138,750
IVI Publishing, Inc. + 105,000 1,548,750
Norand Corp. + 136,700 5,365,475
Platinum Technology, Inc. + 242,000 5,354,250
Synopsys, Inc. + 164,500 7,587,563
------------
21,994,788
------------
Electronics (9.5%)
Altera Corp. + 125,000 4,929,688
Glenayre Technologies, Inc. + 86,500 5,384,625
Maxim Integrated Products, Inc. + 169,300 11,343,100
Xilinx, Inc. + 126,650 7,361,531
------------
29,018,944
------------
Office Equipment & Supplies (2.9%)
Nu-Kote Holdings, Inc. Class A + 181,500 3,380,438
Viking Office Products, Inc. + 175,000 5,425,000
------------
8,805,438
------------
CONSUMER
Business Services (10.4%)
Catalina Marketing Corp. + 110,500 5,621,688
Commerce Clearing House, Inc. Class A 18,000 310,500
Commerce Clearing House, Inc. Class B 135,300 2,266,275
GMIS, Inc. + 196,500 3,684,375
Norrell Corp. 170,900 3,332,550
On Assignment, Inc. + 251,000 3,514,000
QuickResponse Services, Inc. + 262,200 4,260,750
Solectron Corp. + 307,200 8,563,200
------------
31,553,338
------------
Consumer Durables (2.4%)
Automotive Industries Holding, Inc. Class A + 139,200 3,375,600
Hayes Wheels International, Inc. 165,200 3,882,200
------------
7,257,800
------------
Consumer Non-Durables (1.5%)
Nutramax Products, Inc. + 447,600 4,476,000
------------
Food & Beverages (1.0%)
Forschner Group, Inc. + 268,000 3,015,000
------------
</TABLE>
See Accompanying Notes to Financial Statements.
13
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EMERGING GROWTH FUND
STATEMENT OF NET ASSETS (CONT'D)
October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
COMMON STOCK (CONT'D)
<S> <C> <C>
Healthcare (11.3%)
FHP International Corp. + 130,000 $ 3,770,000
Haemonetics Corp. + 143,000 2,860,000
HealthCare Compare Corp. + 163,000 4,543,625
Healthsource, Inc. + 113,800 4,409,750
Incontrol, Inc. + 40,000 480,000
Integrated Health Services, Inc. + 163,850 6,676,888
Lincare Holdings, Inc. + 217,800 5,935,050
Mariner Health Group, Inc. + 130,000 2,941,250
Ventritex, Inc. + 112,001 2,912,025
------------
34,528,588
------------
Pharmaceuticals (1.9%)
Gilead Sciences, Inc. + 299,300 2,544,050
Medeva PLC ADR 122,800 1,412,200
Somatix Therapy Corp. + 351,440 1,757,200
------------
5,713,450
------------
Retail (5.7%)
Caldor Corp. + 180,600 5,169,675
Mac Frugal's Bargains Close-Outs, Inc. + 158,000 3,258,750
PetsMart, Inc. + 130,600 4,815,875
Rhodes, Inc. + 247,500 2,413,125
Sotheby's Holdings, Inc. Class A 138,200 1,675,675
------------
17,333,100
------------
ENERGY AND RELATED
Energy (6.0%)
Associated Natural Gas Corp. 217,258 8,282,961
Tesoro Petroleum Corp. + 315,000 2,953,125
Texas Meridian Resources Corp. + 301,500 4,145,625
Tom Brown, Inc. + 221,000 2,831,563
------------
18,213,274
------------
Oil Services (1.3%)
Oceaneering International, Inc. + 313,200 4,032,450
------------
FINANCE
Banks & Savings & Loans (1.8%)
Worthen Banking Corp. 192,743 5,517,268
------------
Financial Services (4.6%)
American Income Holding, Inc. 111,200 3,892,000
Foothill Group, Inc. Class A 188,100 2,821,500
Govett & Co. Ltd. ADR 108,500 2,576,875
Price (T. Rowe) Associates, Inc. 80,700 2,763,975
Reinsurance Group of America, Inc. 89,200 1,984,700
------------
14,039,050
------------
</TABLE>
See Accompanying Notes to Financial Statements.
14
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EMERGING GROWTH FUND
STATEMENT OF NET ASSETS (CONT'D)
October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
COMMON STOCK (CONT'D)
<S> <C> <C>
MEDIA
Communications & Media (2.2%)
Central European Media Enterprises Ltd. Class A + 128,000 $ 2,080,000
Infinity Broadcasting Corp. Class A + 157,450 4,782,543
------------
6,862,543
------------
Publishing (4.0%)
Central Newspapers, Inc. Class A 136,500 3,839,063
McClatchy Newspapers, Inc. Class A 159,400 3,706,050
Scholastic Corp. + 101,400 4,626,375
------------
12,171,488
------------
Telecommunications & Equipment (11.3%)
Arch Communications Group, Inc. + 185,000 4,185,625
California Microwave, Inc. + 125,500 3,890,500
Cellular Communications, Inc. Class A + 35,051 1,866,465
Cellular Communications International, Inc. + 40,000 1,810,000
International CableTelecommunications, Inc. + 106,700 3,307,700
Methode Electronics, Inc. Class A 411,000 7,809,000
Paging Network, Inc. + 206,400 6,966,000
Qualcomm, Inc. + 154,000 4,543,000
------------
34,378,290
------------
Transportation (5.7%)
American Freightways Corp. + 422,800 8,984,500
Landstar Systems, Inc. + 103,300 3,434,725
M.S. Carriers, Inc. + 213,700 5,021,950
------------
17,441,175
------------
MISCELLANEOUS
Aerospace & Defense (0.2%)
Tracor, Inc. + 50,000 493,750
------------
TOTAL COMMON STOCK (Cost $231,005,630) 281,759,934
------------
WARRANTS (0.0%)
Xoma Corp. 06/12/95 + (Cost $102) 102 102
------------
<CAPTION>
PAR
-----------
<S> <C> <C>
CORPORATE BONDS (0.7%)
Intelcom Group, Inc., Convertible, Subordinated Debenture 7.00%, due 10/30/98 + #
(Cost $2,070,000) $ 2,070,000 2,070,000
------------
UNITED STATES TREASURY OBLIGATIONS (3.3%)
U.S. Treasury Bill, 4.25%, due 12/01/94 (Cost $9,964,583) 10,000,000 9,964,583
------------
</TABLE>
See Accompanying Notes to Financial Statements.
15
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EMERGING GROWTH FUND
STATEMENT OF NET ASSETS (CONT'D)
October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
PAR VALUE
----------- ------------
SHORT-TERM INVESTMENTS (6.3%)
Repurchase agreement with PNC Securities Corp. dated 10/31/94 at
4.30% to be repurchased at $19,319,307 on 11/01/94. (Collateralized by
$19,725,000 U.S. Treasury Bill dated 09/15/94 at 4.99%, due 03/16/95,
with a market value of $19,320,638.) (Cost $19,317,000) $19,317,000 $ 19,317,000
------------
TOTAL INVESTMENTS AT VALUE (102.8%) (Cost $262,357,315*) 313,111,619
OTHER LIABILITIES IN EXCESS OF ASSETS (2.8%) (8,438,861)
------------
NET ASSETS (100.0%) (applicable to 10,754,302 Common Shares and 2,903,227 Series 2
Shares) $304,672,758
------------
------------
NET ASSET VALUE, offering and redemption price per Common Share ($240,663,733 [div]
10,754,302) $22.38
------
------
NET ASSET VALUE, offering and redemption price per Series 2 Share ($64,009,025 [div]
2,903,227) $22.05
------
------
</TABLE>
+ Non-income producing security.
# Restricted security.
* Cost For Federal income tax purposes is $262,396,699.
See Accompanying Notes to Financial Statements.
16
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
STATEMENTS OF OPERATIONS
For the Year or Period Ended October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warburg Pincus Warburg Pincus Warburg Pincus Warburg Pincus
Capital Appreciation Emerging Growth International Equity Japan OTC
Fund Fund Fund Fund*
-------------------- --------------- -------------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 1,956,407 $ 739,797 $ 15,187,073 $ 0
Interest 239,527 876,658 2,739,415 15,656
Foreign taxes withheld (1,168) (24,340) (1,836,587) 0
-------------------- --------------- -------------------- --------------
Total investment income 2,194,766 1,592,115 16,089,901 15,656
-------------------- --------------- -------------------- --------------
EXPENSES:
Investment advisory 1,172,857 2,234,376 9,879,319 13,176
Administrative services 300,806 451,159 1,722,729 8,138
Audit 24,264 27,121 65,628 15,000
Custodian/Sub-custodian 50,291 90,040 1,017,575 1,054
Directors/Trustees 10,000 10,000 11,000 1,250
Distribution 0 0 0 2,635
Insurance 15,532 15,918 32,972 0
Legal 25,034 31,983 47,493 0
Organizational 0 0 4,756 3,011
Printing 29,531 42,588 94,447 1,000
Registration 28,348 77,436 580,302 14,597
Shareholder servicing 53,002 226,626 593,276 0
Transfer agent 79,364 131,476 675,657 3,000
Miscellaneous 32,670 32,446 53,814 0
-------------------- --------------- -------------------- --------------
1,821,699 3,371,169 14,778,968 62,861
Less: fees waived and expenses
reimbursed (11,179) (100,408) 0 (52,320)
-------------------- --------------- -------------------- --------------
Total expenses 1,810,520 3,270,761 14,778,968 10,541
-------------------- --------------- -------------------- --------------
Net investment income (loss) 384,246 (1,678,646) 1,310,933 5,115
-------------------- --------------- -------------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS) FROM
INVESTMENTS AND FOREIGN CURRENCY RELATED
ITEMS:
Net realized gain (loss) from security
transactions 11,173,174 (5,721,525) 48,091,665 0
Net realized loss from foreign currency
related items 0 0 (2,772,944) (294,437)
Net increase (decrease) in unrealized
appreciation from investments and
foreign currency related items (9,106,613) 10,930,919 82,484,415 (35,099)
-------------------- --------------- -------------------- --------------
Net realized and unrealized gain
(loss) from investments and
foreign currency related
items 2,066,561 5,209,394 127,803,136 (329,536)
-------------------- --------------- -------------------- --------------
Net increase (decrease) in net
assets from operations $ 2,450,807 $ 3,530,748 $129,114,069 $ (324,421)
-------------------- --------------- -------------------- --------------
-------------------- --------------- -------------------- --------------
</TABLE>
* For the period September 30, 1994 (Commencement of Operations) through
October 31, 1994.
See Accompanying Notes to Financial Statements.
27
- --------------------------------------------------------------------------------
<PAGE>
- ------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warburg Pincus Warburg Pincus
Capital Appreciation Emerging Growth
Fund Fund
------------------------------ ----------------------------
For the Year Ended October 31, For the Year Ended
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income (loss) $ 384,246 $ 401,157 ($1,678,646) $(902,442)
Net realized gain (loss) from
security transactions 11,173,174 13,675,715 (5,721,525) 12,312,484
Net realized loss from foreign
currency related items 0 0 0 0
Net change in unrealized
appreciation (depreciation) from
investments and foreign currency
related items (9,106,613) 14,209,067 10,930,919 26,564,947
----------- ----------- ----------- -----------
Net increase (decrease) in net
assets resulting from
operations 2,450,807 28,285,939 3,530,748 37,974,989
----------- ----------- ----------- -----------
FROM DISTRIBUTIONS:
Dividends from net investment
income:
Common shares (419,337) (459,634) 0 0
Series 2 shares (27,724) (95) 0 0
Distributions in excess of net
investment income:
Common shares 0 0 0 0
Series 2 shares 0 0 0 0
Distributions from capital gains:
Common shares (12,899,141) (6,877,271) (10,576,150) (2,054,285)
Series 2 shares (852,608) (102,444) (1,639,316) (132,545)
----------- ----------- ----------- -----------
Net decrease from distributions (14,198,810) (7,439,444) (12,215,466) (2,186,830)
----------- ----------- ----------- -----------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 45,617,531 46,439,011 180,813,270 89,478,924
Reinvested dividends 13,809,167 7,199,391 12,758,387 2,166,694
Net asset value of shares redeemed (49,851,500) (24,352,588) (71,767,717) (40,840,041)
----------- ----------- ----------- -----------
Net increase in net assets from
capital share transactions 9,575,198 29,285,814 121,803,940 50,805,577
----------- ----------- ----------- -----------
Net increase (decrease) in net
assets (2,172,805) 50,132,309 113,119,222 86,593,736
NET ASSETS:
Beginning of period 169,687,298 119,554,989 191,553,536 104,959,800
----------- ----------- ----------- -----------
End of period $167,514,493 $169,687,298 $304,672,758 $191,553,536
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
28
- ------------------------------------------------------------------------------
<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warburg Pincus
Japan OTC
Fund
Warburg Pincus --------------
International Equity For the Period
Fund September 30, 1994
------------------------ (Commencement of
For the Year Ended October 31, Operations) through
1994 1993 October 31, 1994
----------- ----------- ----------------
<S> <C> <C> <C>
$1,310,933 $ 638,986 $ 5,115
48,091,665 1,176,172 0
(2,772,944) (48,647) (294,437)
82,484,415 63,734,670 (35,099)
----------- ----------- -------------
129,114,069 65,501,181 (324,421)
----------- ----------- -------------
(1,764,380) (242,119) 0
(218,961) (9,224) 0
(223,659) 0 0
0 0 0
(1,047,367) (995,091) 0
(129,979) (16,719) 0
----------- ----------- -------------
(3,384,346) (1,263,153) 0
----------- ----------- -------------
1,430,739,923 283,608,350 20,287,158
2,950,772 1,184,585 0
(249,050,078) (29,360,993) (185,101)
--------------- ----------- -------------
1,184,640,617 255,431,942 20,102,057
------------- ----------- ------------
1,310,370,340 319,669,970 19,777,636
422,905,163 103,235,193 101,000
-------------- ----------- -------------
$1,733,275,503 $422,905,163 $19,878,636
--------------- ------------ -------------
--------------- ------------ -------------
</TABLE>
See Accompanying Notes to Financial Statements.
29
- ------------------------------------------------------------------------------
<PAGE>
- ------------------------------------------------------------------------------
WARBURG PINCUS EMERGING GROWTH FUND
FINANCIAL HIGHLIGHTS
(For a Share of the Fund Outstanding Throughout Each Period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Shares Series 2 Shares
------------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended
For the Year Ended October 31, October 31,
------------------------------------------- -------------------------
1994 1993 1992 1991 1990 1994 1993 1992
------ ------ ------ ------ ------ ------ ------ -------
NET ASSET VALUE, BEGINNING OF PERIOD $23.74 $18.28 $16.97 $10.83 $13.58 $23.51 $18.19 $16.99
------ ------ ------ ------ ------ ------ ------ -------
Income from Investment Operations:
Net Investment Income (Loss) .00 (.10) (.03) .05 .13 .00 (.08) (.06)
Net Gain (Loss) on Securities (both
realized and unrealized) .00 5.93 1.71 6.16 (2.32) (.10) 5.77 1.62
------ ------ ------ ------ ------ ------ ------ -------
Total from Investment Operations .00 5.83 1.68 6.21 (2.19) (.10) 5.69 1.56
------ ------ ------ ------ ------ ------ ------ -------
Less Distributions:
Dividends from net investment income .00 .00 (.01) (.07) (.18) .00 .00 .00
Distributions from capital gains (1.36) (.37) (.36) .00 (.38) (1.36) (.37) (.36)
------ ------ ------ ------ ------ ------ ------ -------
Total Distributions (1.36) (.37) (.37) (.07) (.56) (1.36) (.37) (.36)
------ ------ ------ ------ ------ ------ ------ -------
NET ASSET VALUE, END OF PERIOD $22.38 $23.74 $18.28 $16.97 $10.83 $22.05 $23.51 $18.19
------ ------ ------ ------ ------ ------ ------ -------
------ ------ ------ ------ ------ ------ ------ -------
Total Return .16% 32.28% 9.87% 57.57% (16.90%) (.29%) 31.67% 9.02%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000s) $240,664 $165,525 $99,562 $42,061 $23,075 $64,009 $26,029 $5,398
Ratios to average daily net assets:y
Operating expenses 1.22% 1.23% 1.24% 1.25% 1.25% 1.72% 1.73% 1.74%
Net investment income (loss) (.58%) (.60%) (.25%) .32% 1.05% (1.08%) (1.09%) (.87%)
Decrease reflected in above expense
ratios due to waivers/reimbursements .04% .00% .08% .47% .42% .04% .00% .06%
Portfolio Turnover Rate 60.38% 68.35% 63.35% 97.69% 107.30% 60.38% 68.35% 63.38%
<CAPTION>
Series 2 Shares
-------------------------
<S> <C>
April 4, 1991
(Initial
Issuance)
through
October 31, 1991
----------------
NET ASSET VALUE, BEGINNING OF PERIOD $15.18
------
Income from Investment Operations:
Net Investment Income (Loss) .00
Net Gain (Loss) on Securities (both
realized and unrealized) 1.82
------
Total from Investment Operations 1.82
------
Less Distributions:
Dividends from net investment income (.01)
Distributions from capital gains .00
------
Total Distributions (.01)
------
NET ASSET VALUE, END OF PERIOD $16.99
------
------
Total Return 23.43%*
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000s) $275
Ratios to average daily net assets:
Operating expenses 1.74%*
Net investment income (loss) (.49%)*
Decrease reflected in above expense
ratios due to waivers/reimbursements .42%*
Portfolio Turnover Rate 97.69%
</TABLE>
* Annualized
See Accompanying Notes to Financial Statements.
TAX STATUS OF 1994 DIVIDENDS (Unaudited)
Dividends paid by the Fund taxable as ordinary income were as follows: Common
Shares -- $.25 per share; Series 2 Shares -- $.25 per share. Ordinary income
dividends qualifying for the dividends received deduction available to corporate
shareholders: Common Shares -- 28.76%; Series 2 Shares -- 38.49%.
Long-term capital gain dividends in the amount of $1.11 per share were paid on
both Common and Series 2 Shares.
Because the Fund's fiscal year is not the calendar year, amounts to be used by
calendar year taxpayers on their Federal return will be reflected on Form
1099-DIV and will be mailed in January 1995.
31
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS
October 31, 1994
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Warburg Pincus Equity Funds are comprised of Warburg Pincus Capital
Appreciation Fund (the 'Capital Appreciation Fund') and Warburg Pincus
International Equity Fund (the 'International Equity Fund') which are registered
under the Investment Company Act of 1940, as amended (the '1940 Act'), as
diversified, open-end management investment companies, and Warburg Pincus
Emerging Growth Fund (the 'Emerging Growth Fund') and Warburg Pincus Japan OTC
Fund (the 'Japan OTC Fund,' together with the Capital Appreciation Fund, the
International Equity Fund and the Emerging Growth Fund, the 'Funds') which are
registered under the 1940 Act as non-diversified, open-end management investment
companies.
Investment objectives for each Fund are as follows: the Capital
Appreciation Fund, the International Equity Fund and the Japan OTC Fund seek
long-term capital appreciation; the Emerging Growth Fund seeks maximum capital
appreciation.
The net asset value of each Fund is determined daily as of the close of
regular trading on the New York Stock Exchange. Each Fund's investments are
valued at market value, which is currently determined using the last reported
sales price. If no sales are reported, investments are valued at the last
reported bid price. In the absence of a quoted market value, investments are
valued at fair value as determined by or under the direction of the Fund's
governing Board. Short-term investments that mature in 60 days or less are
valued on the basis of amortized cost, which approximates market value.
The books and records of the Funds are maintained in U.S. dollars.
Transactions denominated in foreign currencies are recorded at the current
prevailing exchange rates. All assets and liabilities denominated in foreign
currencies are translated into U.S. dollar amounts at the current exchange rate
at the end of the period. Translation gains or losses resulting from changes in
the exchange rate during the reporting period and realized gains and losses on
the settlement of foreign currency transactions are reported in the results of
operations for the current period. The Funds do not isolate that portion of
gains and losses on investments in equity securities which are due to changes in
the foreign exchange rate from that which is due to changes in market prices of
equity securities.
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis. Dividends are recorded on the ex-dividend date.
Income, expenses (excluding class-specific expenses) and realized/unrealized
gains/losses are allocated proportionately to each class of shares based upon
the relative net asset value of outstanding shares. The cost of investments sold
is determined by use of the specific identification method for both financial
reporting and income tax purposes.
Dividends from net investment income are declared and paid semiannually for
all Funds. Distributions of net realized capital gains, if any, are declared and
paid annually. However, to the extent that a net realized capital gain can be
reduced by a capital loss carryover, such gain will not be distributed.
Each Fund intends to continue to comply with the special provisions of the
Internal Revenue Code available to investment companies and therefore no Federal
income tax provision is required.
Costs incurred by the Japan OTC Fund in connection with its organization
have been deferred and are being amortized over a period of five years from the
date the Japan OTC Fund commenced its operations.
34
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1994
- --------------------------------------------------------------------------------
Each Fund may enter into repurchase agreement transactions. Under the terms
of a typical repurchase agreement, each Fund acquires an underlying security
subject to an obligation of the seller to repurchase. The value of the
underlying security will be maintained at an amount at least equal to the total
amount of the purchase obligation, including interest. The collateral is in the
Fund's possession.
As of November 1, 1993, or inception, in the case of the Japan OTC Fund,
each Fund implemented AICPA Statement of Position 93-2 -- Determination,
Disclosure and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. Adoption of this
standard results in the reclassification to paid-in capital of permanent
differences between tax and financial reporting of net investment income and net
realized gain (loss). The change has had no material effect on paid-in capital
or other components of the net assets of any of the Funds at November 1, 1993 or
inception, as the case may be. Distributions to shareholders and net asset
values were not affected by this change.
2. INVESTMENT ADVISER, CO-ADMINISTRATORS AND DISTRIBUTOR
Warburg, Pincus Counsellors, Inc. ('Counsellors'), a wholly owned
subsidiary of Warburg, Pincus Counsellors G.P. ('Counsellors G.P.'), serves as
each Fund's investment adviser. For its investment advisory services,
Counsellors receives the following fees based on each Fund's average daily net
assets:
<TABLE>
<CAPTION>
FUND ANNUAL RATE
- --------------------------------- ----------------------------------
<S> <C>
Capital Appreciation .70% of average daily net assets
Emerging Growth .90% of average daily net assets
International Equity 1.00% of average daily net assets
Japan OTC 1.25% of average daily net assets
</TABLE>
For the period or year ended October 31, 1994, investment advisory fees,
waivers and reimbursements were as follows:
<TABLE>
<CAPTION>
GROSS NET EXPENSE
FUND ADVISORY FEE WAIVER ADVISORY FEE REIMBURSEMENTS
- ------------------------------------------- ------------ --------- -------------- ------------
<S> <C> <C> <C> <C>
Capital Appreciation $1,172,857 $ (11,179) $1,161,678 0
Emerging Growth 2,234,376 (100,408) 2,133,968 0
International Equity 9,879,319 0 9,879,319 0
Japan OTC 13,176 (13,176) 0 $(39,144)
</TABLE>
SPARX Investment & Research, USA, Inc. ('SPARX USA') serves as
sub-investment adviser for the Japan OTC Fund. From its investment advisory fee,
Counsellors pays SPARX USA a fee at an annual rate of .625% of the average daily
net assets of the Japan OTC Fund. No compensation is payable by the Japan OTC
Fund to SPARX USA for its sub-investment advisory services.
35
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1994
- --------------------------------------------------------------------------------
Counsellors Funds Service, Inc. ('CFSI'), a wholly owned subsidiary of
Counsellors, and PFPC Inc. ('PFPC'), an indirect, wholly owned subsidiary of PNC
Bank Corp. ('PNC'), serve as each Fund's co-administrators. For its
administrative services, CFSI currently receives a fee calculated at an annual
rate of .10% of each Fund's average daily net assets. For the period or year
ended October 31, 1994, administrative services fees earned by CFSI were as
follows:
<TABLE>
<CAPTION>
FUND CO-ADMINISTRATION FEE
- ------------------------------------------- ------------------------------
<S> <C>
Capital Appreciation $133,255
Emerging Growth 202,895
International Equity 871,165
Japan OTC 1,054
</TABLE>
Counsellors Securities Inc. ('CSI'), also a wholly owned subsidiary of
Counsellors, serves as each Fund's distributor. No compensation is payable by
the Capital Appreciation Fund, the Emerging Growth Fund or the International
Equity Fund to CSI for distribution services. For distribution services with
respect to the Common Shares of the Japan OTC Fund, CSI receives a fee at the
annual rate of .25% of the Japan OTC Fund's average daily net assets
attributable to the Common Shares; no compensation is payable to CSI with
respect to the Fund's Series 2 Shares. For the period ended October 31, 1994,
CSI earned $2,635 in distribution fees.
3. INVESTMENTS IN SECURITIES
For the period or year ended October 31, 1994, purchases and sales of
investment securities (excluding short-term investments) were as follows:
<TABLE>
<CAPTION>
FUND PURCHASES SALES
- ----------------------------------------------------------- -------------- ------------
<S> <C> <C>
Capital Appreciation $ 89,218,905 $ 82,854,233
Emerging Growth 245,154,617 138,723,249
International Equity 1,224,880,044 155,267,110
Japan OTC 13,713,446 0
</TABLE>
At October 31, 1994, the net unrealized appreciation from investments for
those securities having an excess of value over cost and net unrealized
depreciation from investments for those securities having an excess of cost over
value (based on cost for Federal income tax purposes) was as follows:
<TABLE>
<CAPTION>
NET UNREALIZED
UNREALIZED UNREALIZED APPRECIATION
FUND APPRECIATION DEPRECIATION (DEPRECIATION)
- ----------------------------------- ------------ ------------- --------------
<S> <C> <C> <C>
Capital Appreciation $ 34,034,231 $ (4,091,250) $ 29,942,981
Emerging Growth 59,051,417 (8,336,497) 50,714,920
International Equity 198,971,180 (57,952,506) 141,018,674
Japan OTC 254,382 (299,413) (45,031)
</TABLE>
36
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1994
- --------------------------------------------------------------------------------
4. FORWARD FOREIGN CURRENCY CONTRACTS
The International Equity Fund and the Japan OTC Fund may enter into forward
currency contracts for the purchase or sale of a specific foreign currency at a
fixed price on a future date. Risks may arise upon entering into these contracts
from the potential inability of counterparties to meet the terms of their
contracts and from unanticipated movements in the value of a foreign currency
relative to the U.S. dollar. Each Fund will enter into forward contracts
primarily for hedging purposes. The forward currency contracts are adjusted by
the daily exchange rate of the underlying currency and any gains or losses are
recorded for financial statement purposes as unrealized until the contract
settlement date.
At October 31, 1994, the Japan OTC Fund had the following open forward
foreign currency contract and had recorded an unrealized gain of $11,591:
<TABLE>
<CAPTION>
SETTLEMENT CURRENCY CURRENCY
DATE BOUGHT SOLD
- --------- ----------------------- --------------------------
<S> <C> <C>
11/30/94 14,000,000 U.S. Dollars 1,351,700,000 Japanese Yen
</TABLE>
5. SERIES 2 SHARES
The Emerging Growth Fund, the International Equity Fund and the Japan OTC
Fund are each authorized to issue three billion full and fractional shares of
capital stock, $.001 par value per share, of which one billion shares are
designated Series 2 Shares. The Capital Appreciation Fund is authorized to issue
an unlimited number of full and fractional shares of beneficial interest, $.001
par value per share, of which one billion shares are classified as Series 2
Shares. Series 2 Shares are identical to Common Shares in all respects except
that Series 2 Shares are sold to institutions ('Service Organizations') that
perform certain distribution, shareholder servicing, accounting and/or
administrative services for their customers who are beneficial owners of Series
2 Shares. Series 2 Shares bear the fees paid pursuant to a distribution plan
adopted by each Fund in an amount not to exceed .75 of 1.00% (on an annualized
basis) of the average daily net asset value of the shares held by the
institutions for the benefit of their customers and enjoy certain exclusive
voting rights on matters relating to those fees.
With respect to Series 2 Shares, Service Organizations earned the following
shareholder servicing fees for the year ended October 31, 1994:
<TABLE>
<CAPTION>
FUND SHAREHOLDER SERVICING FEES
- ----------------------------------------------- --------------------------
<S> <C>
Capital Appreciation $ 53,002
Emerging Growth 226,626
International Equity 593,276
</TABLE>
37
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
October 31, 1994
- --------------------------------------------------------------------------------
Transactions in shares of each Fund were as follows:
<TABLE>
<CAPTION>
CAPITAL APPRECIATION FUND EMERGING GROWTH FUND
Common Shares Series 2 Shares Common Shares Series 2 Shares
------------------------ ----------------------- ------------------------- ------------------------
For the Year Ended October 31, For the Year Ended October 31,
------------------------------------------------- ---------------------------------------------------
1994 1993 1994 1993 1994 1993 1994 1993
----------- ----------- ----------- ---------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold 2,958,494 2,705,720 290,193 588,424 6,133,751 3,295,313 2,233,737 871,054
Shares issued to
shareholders on
reinvestment of
dividends 920,210 535,112 61,526 7,739 506,720 101,352 80,473 6,644
Shares redeemed (3,126,497) (1,710,437) (460,020) (38,003) (2,859,413) (1,870,167) (517,898) (67,545)
----------- ----------- ----------- ---------- ------------ ----------- ----------- -----------
Net increase
(decrease) in
shares
outstanding 752,207 1,530,395 (108,301) 558,160 3,781,058 1,526,498 1,796,312 810,153
----------- ----------- ----------- ---------- ------------ ----------- ----------- -----------
----------- ----------- ----------- ---------- ------------ ----------- ----------- -----------
Proceeds from sale
of shares $41,570,590 $38,018,578 $ 4,046,941 $8,420,433 $132,922,995 $71,149,417 $47,890,275 $18,329,507
Reinvested
dividends 12,945,690 7,096,852 863,477 102,539 11,015,146 2,034,149 1,743,241 132,545
Net asset value of
shares redeemed (43,449,501) (23,821,721) (6,401,999) (530,867) (61,126,667) (39,393,274) (10,641,050) (1,446,767)
----------- ----------- ----------- ---------- ------------ ----------- ----------- -----------
Net increase
(decrease) from
capital share
transactions $11,066,779 $21,293,709 $(1,491,581) $7,992,105 $ 82,811,474 $33,790,292 $38,992,466 $17,015,285
----------- ----------- ----------- ---------- ------------ ----------- ----------- -----------
----------- ----------- ----------- ---------- ------------ ----------- ----------- -----------
</TABLE>
6. NET ASSETS
Net Assets at October 31, 1994, consisted of the following:
<TABLE>
<CAPTION>
CAPITAL APPRECIATION FUND EMERGING GROWTH FUND
Common Shares Series 2 Shares Total Common Shares Series 2 Shares Total
------------- --------------- ------------ ------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Capital contributed, net $118,516,377 $ 8,060,714 $126,577,091 $199,119,705 $60,627,302 $259,747,007
Accumulated net investment
income (loss) 0 0 0 0 0 0
Accumulated net realized
gain (loss) from security
transactions 10,795,522 198,899 10,994,421 (3,706,511 ) (2,122,042) (5,828,553)
Net unrealized appreciation
(depreciation) from
investments and foreign
currency related items 30,034,085 (91,104) 29,942,981 45,250,539 5,503,765 50,754,304
------------- --------------- ------------ ------------- --------------- ------------
Net assets $159,345,984 $ 8,168,509 $167,514,493 $240,663,733 $64,009,025 $304,672,758
------------- --------------- ------------ ------------- --------------- ------------
------------- --------------- ------------ ------------- --------------- ------------
</TABLE>
7. CAPITAL LOSS CARRYOVER
At October 31, 1994, the Emerging Growth Fund has a capital loss carryover
of $5,789,170 expiring in 2002 to offset possible future capital gains of the
Fund.
38
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND JAPAN OTC FUND
Common Series 2
Shares Shares
Common Shares Series 2 Shares ------------- ---------------
---------------------------- ------------------------- For the Period
For the Year Ended October 31, September 30, 1994
------------------------------------------------------- (Commencement of Operations)
1994 1993 1994 1993 through October 31, 1994
-------------- ------------ ------------ ----------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
64,218,907 15,914,077 7,956,088 2,510,712 2,025,697 15
147,031 89,544 6,879 1,957 0 0
(11,861,720) (2,060,764) (795,406) (16,861) (18,605) 0
-------------- ------------ ------------ ----------- ------------- ---------------
52,504,218 13,942,857 7,167,561 2,495,808 2,007,092 15
-------------- ------------ ------------ ----------- ------------- ---------------
-------------- ------------ ------------ ----------- ------------- ---------------
$1,275,306,263 $244,888,526 $155,433,660 $38,719,824 $20,287,008 $ 150
2,820,903 1,158,643 129,869 25,942 0 0
(233,614,600) (29,121,414) (15,435,478) (239,579) (185,101) 0
-------------- ------------ ------------ ----------- ------------- ---------------
$1,044,512,566 $216,925,755 $140,128,051 $38,506,187 $20,101,907 $ 150
-------------- ------------ ------------ ----------- ------------- ---------------
-------------- ------------ ------------ ----------- ------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND JAPAN OTC FUND
Common Shares Series 2 Shares Total Common Shares Series 2 Shares Total
-------------- --------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
$1,368,158,592 $ 180,212,108 $1,548,370,700 $19,924,176 $ 1,150 $19,925,326
4,309,014 429,089 4,738,103 0 0 0
34,680,906 4,327,914 39,008,820 (11,574) (17) (11,591)
126,723,436 14,434,444 141,157,880 (35,099) 0 (35,099)
-------------- --------------- -------------- ------------- ------ -----------
$1,533,871,948 $ 199,403,555 $1,733,275,503 $19,877,503 $ 1,133 $19,878,636
-------------- --------------- -------------- ------------- ------ -----------
-------------- --------------- -------------- ------------- ------ -----------
</TABLE>
39
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EMERGING GROWTH FUND
STATEMENT OF NET ASSETS
April 30, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCK (91.5%)
BASIC INDUSTRIES
Metals & Mining (0.4%)
Pegasus Gold Inc. 120,000 $ 1,455,000
------------
CAPITAL GOODS
Capital Equipment (1.1%)
Applied Power Inc. Class A 157,800 4,161,975
------------
Computers (13.3%)
Auspex Systems, Inc. + 290,000 3,008,750
Cognex Corp. + 215,500 6,465,000
Continuum Co., Inc. 25,500 841,500
Filenet Corp. + 117,400 3,932,900
HBO & Co. 106,400 4,867,800
Network General Corp. + 145,000 3,788,125
Norand Corp. + 110,700 3,376,350
Platinum Technology, Inc. + 418,500 8,370,000
Synopsys, Inc. + 190,000 10,307,500
System Software Associates, Inc. 265,500 6,670,688
------------
51,628,613
------------
Electronics (10.8%)
Altera Corp. + 90,600 7,327,275
Glenayre Technologies, Inc. + 134,250 8,256,375
Maxim Integrated Products, Inc. + 281,600 10,208,000
Mentor Graphics Corp. 255,000 4,303,125
Microchip Technology, Inc. + 161,900 4,573,675
Xilinx, Inc. + 92,250 7,080,188
------------
41,748,638
------------
Office Equipment (0.8%)
Boise Cascade Office Products 136,000 3,179,000
------------
Office Equipment & Supplies (3.1%)
Nu Kote Holdings, Inc. Class A + 151,500 4,166,250
Viking Office Products, Inc. + 287,000 7,892,500
------------
12,058,750
------------
CONSUMER
Business Services (9.0%)
American Management Systems, Inc. 188,000 3,971,500
Catalina Marketing Corp. + 95,500 4,488,500
Checkpoint Systems, Inc. 142,000 2,999,750
GMIS, Inc. + 207,000 4,502,250
Itron, Inc. + 140,000 3,535,000
Norrell Corp. + 149,900 3,597,600
On Assignment, Inc. + 160,500 3,069,563
QuickResponse Services, Inc. + 241,200 4,492,350
Solectron Corp. + 141,200 4,147,750
------------
34,804,263
------------
Consumer Durables (1.0%)
Allen Group, Inc. 172,000 3,891,500
------------
</TABLE>
See Accompanying Notes to Financial Statements.
8
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EMERGING GROWTH FUND
STATEMENT OF NET ASSETS (CONT'D)
April 30, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCK (CONT'D)
Consumer Non-Durables (1.7%)
Nutramax Products, Inc. + 430,100 $ 3,494,563
Westpoint Stevens Inc. 178,500 3,235,313
------------
6,729,876
------------
Consumer Services (1.9%)
Devry Inc. + 102,800 3,932,100
ITT Education Services 243,700 3,320,413
------------
7,252,513
------------
Leisure & Entertainment (0.8%)
Carmike Cinemas Inc. Class A + 136,900 3,046,025
------------
Pharmaceuticals (2.3%)
AL Pharmaceuticals Inc. Class A 90,700 2,165,463
Gilead Sciences, Inc. + 361,800 5,427,000
Somatix Therapy Corp. + 351,440 1,186,111
------------
8,778,574
------------
Retail (2.1%)
Copart Inc. 35,000 713,125
PetsMart, Inc. + 143,600 4,792,650
Rhodes, Inc. + 277,500 2,740,313
------------
8,246,088
------------
ENERGY AND RELATED
Energy (4.1%)
Barrett Resources Corp. + 178,100 4,185,350
Tesoro Petroleum Corp. + 392,000 3,871,000
Texas Meridian Resources Corp. + 366,500 4,489,625
Tom Brown, Inc. + 227,000 3,206,375
------------
15,752,350
------------
Healthcare (12.1%)
Genzyme Corp. 75,000 3,206,250
Haemonetics Corp. + 193,000 2,991,500
Healthcare Compare Corp. + 250,000 7,515,625
Healthsource, Inc. + 146,000 5,237,750
Incontrol, Inc. + 105,000 958,125
Integrated Health Services, Inc. + 152,850 5,292,431
Lincare Holdings, Inc. + 191,300 5,906,388
Mariner Health Group + 293,500 4,292,438
Ostex International, Inc. 190,000 1,686,250
Quorum Health Group, Inc. 185,000 3,815,625
Sun Healthcare Group Inc. + 240,500 5,802,063
------------
46,704,445
------------
Oil Services (3.1%)
Input/Output, Inc. + 192,900 6,534,488
Petroleum Geo Services 206,500 5,640,031
------------
12,174,519
------------
</TABLE>
See Accompanying Notes to Financial Statements.
9
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EMERGING GROWTH FUND
STATEMENT OF NET ASSETS (CONT'D)
April 30, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCK (CONT'D)
FINANCE
Banks & Savings & Loans (0.9%)
Roosevelt Financial Group, Inc. 207,000 $ 3,312,000
------------
Financial Services (5.4%)
CMAC Investment Corp. 26,800 991,600
Foothill Group, Inc. DE Class A 339,000 7,373,250
John Nuveen Co. Class A 127,000 2,841,625
Olympic Financial Limited 250,000 3,031,250
United Companies Financial Corp. 75,000 2,859,375
Vesta Insurance 115,000 3,838,125
------------
20,935,225
------------
MEDIA
Communications & Media (2.7%)
Central European Media Ent. + 320,500 3,926,125
Infinity Broadcasting Corp. Class A + 157,450 6,711,306
------------
10,637,431
------------
Publishing (1.8%)
Scholastic Corp. + 103,900 5,818,400
Wiley (John) & Sons Inc. 19,200 1,075,200
------------
6,893,600
------------
Telecommunications & Equipment (7.9%)
Arch Communications Group, Inc. + 195,000 3,412,500
California Microwave, Inc. + 183,000 5,695,875
International Cable Telecommunications, Inc. + 194,200 5,728,900
Methode Electronics, Inc. Class A 208,000 3,588,000
Mobile Telecommunications Technologies Corp. + 262,500 6,201,563
Paging Network, Inc. + 222,400 6,116,000
------------
30,742,838
------------
Transportation (2.3%)
American Freightways Corp. + 234,800 5,488,450
M.S. Carriers, Inc. + 135,200 3,278,600
------------
8,767,050
------------
MISCELLANEOUS
Miscellaneous (2.9%)
Medeva ADR 391,200 6,357,000
Tracor, Inc. + 302,500 3,932,500
Wellington Underwriting PLC ADR + 47,229 749,990
------------
11,039,490
------------
TOTAL COMMON STOCK (Cost $291,505,675) 353,939,763
------------
WARRANTS (0.0%)
Xoma Corp. 06/12/95 + (Cost $102) 102 102
------------
</TABLE>
See Accompanying Notes to Financial Statements.
10
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EMERGING GROWTH FUND
STATEMENT OF NET ASSETS (CONT'D)
April 30, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR VALUE
----------- ------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (9.1%)
Repurchase agreement with State Street Bank & Trust Co. dated 04/28/95 at
5.87% to be repurchased at $35,167,194 on 05/01/95. (Collateralized by
$35,590,000 United States Treasury Note at 6.25%, due 08/31/96,
with a market value of $35,788,485.) (Cost $35,150,000) $35,150,000 $ 35,150,000
------------
TOTAL INVESTMENTS AT VALUE (100.6%) (Cost $326,655,777*) 389,089,865
LIABILITIES IN EXCESS OF OTHER ASSETS (0.6%) (2,138,389)
------------
NET ASSETS (100.0%) (applicable to 12,027,678 Common Shares and 4,135,207 Advisor
Shares**) $386,951,476
------------
------------
NET ASSET VALUE, offering and redemption price per Common Share
($289,225,986 [div] 12,027,678) $24.05
------
------
NET ASSET VALUE, offering and redemption price per Advisor Share**
($97,725,490 [div] 4,135,207) $23.63
------
------
</TABLE>
+ Non-income producing security.
* Cost for Federal income tax purposes is $326,695,161.
** Advisor Shares refer to Series 2 Shares herein and in the prospectus.
See Accompanying Notes to Financial Statements.
11
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
STATEMENTS OF OPERATIONS
For the Six Months Ended April 30, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warburg Pincus Warburg Pincus Warburg Pincus Warburg Pincus
Capital Appreciation Emerging Growth International Equity Japan OTC
Fund Fund Fund Fund
-------------------- --------------- -------------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 866,566 $ 385,287 $ 16,884,622 $ 92,394
Interest 417,191 777,120 6,035,578 52,639
Foreign taxes withheld (2,423) 0 (2,632,413) (13,859)
-------------------- --------------- -------------------- --------------
Total investment income 1,281,334 1,162,407 20,287,787 131,174
-------------------- --------------- -------------------- --------------
EXPENSES:
Investment advisory 572,180 1,428,874 8,871,020 141,840
Administrative services 163,480 317,528 1,516,613 53,847
Audit 11,486 11,348 25,098 9,837
Custodian/Sub-custodian 26,453 56,264 900,807 22,943
Directors/Trustees 4,960 4,960 4,960 3,720
Distribution 0 0 0 28,368
Insurance 7,467 7,935 20,767 2,266
Legal 13,889 13,785 24,437 12,397
Organizational 0 0 0 19,066
Printing 12,853 16,604 39,399 7,690
Registration 16,018 43,913 292,491 24,613
Shareholder servicing 20,418 188,426 532,559 0
Transfer agent 37,099 60,883 532,321 41,327
Miscellaneous 17,498 15,667 38,126 3,712
-------------------- --------------- -------------------- --------------
903,801 2,166,187 12,798,598 371,626
Less: fees waived and expenses
reimbursed 0 0 0 (258,152)
-------------------- --------------- -------------------- --------------
Total expenses 903,801 2,166,187 12,798,598 113,474
-------------------- --------------- -------------------- --------------
Net investment income (loss) 377,533 (1,003,780) 7,489,189 17,700
-------------------- --------------- -------------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS) FROM
INVESTMENTS AND
FOREIGN CURRENCY RELATED ITEMS:
Net realized gain (loss) from security
transactions 6,497,435 14,451,273 (53,266,705) (1,943,522)
Net realized gain (loss) from foreign
currency related items 0 0 3,272,321 (3,394,945)
Net increase (decrease) in unrealized
appreciation from investments and
foreign currency related items 3,936,137 11,679,784 (110,594,381) 70,023
-------------------- --------------- -------------------- --------------
Net realized and unrealized gain
(loss) from investments and
foreign currency related
items 10,433,572 26,131,057 (160,588,765) (5,268,444)
-------------------- --------------- -------------------- --------------
Net increase (decrease) in net
assets from operations $ 10,811,105 $25,127,277 $ (153,099,576) $ (5,250,744)
-------------------- --------------- -------------------- --------------
-------------------- --------------- -------------------- --------------
</TABLE>
See Accompanying Notes to Financial Statements.
21
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warburg Pincus Warburg Pincus
Capital Appreciation Emerging Growth
Fund Fund
----------------------------------- -----------------------------------
For the For the
Six Months Ended For the Six Months Ended For the
April 30, 1995 Year Ended April 30, 1995 Year Ended
(Unaudited) October 31, 1994 (Unaudited) October 31, 1994
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income (loss) $ 377,533 $ 384,246 $ (1,003,780) $ (1,678,646)
Net realized gain (loss) from security
transactions 6,497,435 11,173,174 14,451,273 (5,721,525)
Net realized gain (loss) from foreign currency
related items 0 0 0 0
Net change in unrealized appreciation
(depreciation) from investments and foreign
currency related items 3,936,137 (9,106,613) 11,679,784 10,930,919
---------------- ---------------- ---------------- ----------------
Net increase (decrease) in net assets
resulting from operations 10,811,105 2,450,807 25,127,277 3,530,748
---------------- ---------------- ---------------- ----------------
FROM DISTRIBUTIONS:
Dividends from net investment income:
Common shares 0 (419,337) 0 0
Advisor shares 0 (27,724) 0 0
Distributions in excess of net investment
income:
Common shares 0 0 0 0
Advisor shares 0 0 0 0
Distributions from capital gains:
Common shares (10,460,742) (12,899,141) 0 (10,576,150)
Advisor shares (575,892) (852,608) 0 (1,639,316)
---------------- ---------------- ---------------- ----------------
Net decrease from distributions (11,036,634) (14,198,810) 0 (12,215,466)
---------------- ---------------- ---------------- ----------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 39,742,671 45,617,531 111,724,784 180,813,270
Reinvested dividends 10,763,492 13,809,167 347,867 12,758,387
Net asset value of shares redeemed (27,720,617) (49,851,500) (54,921,210) (71,767,717)
---------------- ---------------- ---------------- ----------------
Net increase in net assets from capital
share transactions 22,785,546 9,575,198 57,151,441 121,803,940
---------------- ---------------- ---------------- ----------------
Net increase (decrease) in net assets 22,560,017 (2,172,805) 82,278,718 113,119,222
NET ASSETS:
Beginning of period 167,514,493 169,687,298 304,672,758 191,553,536
---------------- ---------------- ---------------- ----------------
End of period $190,074,510 $167,514,493 $386,951,476 $304,672,758
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
</TABLE>
See Accompanying Notes to Financial Statements.
22
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warburg Pincus Warburg Pincus
International Equity Japan OTC
Fund Fund
------------------------------------ ---------------------------------------
For the Period
For the For the September 30, 1994
Six Months Ended For the Six Months Ended (Commencement of
April 30, 1995 Year Ended April 30, 1995 Operations) through
(Unaudited) October 31, 1994 (Unaudited) October 31, 1994
---------------- ---------------- ---------------- -------------------
<S> <C> <C> <C>
$ 7,489,189 $ 1,310,933 $ 17,700 $ 5,115
(53,266,705) 48,091,665 (1,943,522) 0
3,272,321 (2,772,944) (3,394,945) (294,437)
(110,594,381) 82,484,415 70,023 (35,099)
---------------- ---------------- ---------------- -------------------
(153,099,576) 129,114,069 (5,250,744) (324,421)
---------------- ---------------- ---------------- -------------------
(5,808,212) (1,764,380) 0 0
(332,184) (218,961) 0 0
0 (223,659) 0 0
0 0 0 0
(42,332,078) (1,047,367) 0 0
(5,756,403) (129,979) 0 0
---------------- ---------------- ---------------- -------------------
(54,228,877) (3,384,346) 0 0
---------------- ---------------- ---------------- -------------------
826,097,889 1,430,739,923 17,783,234 20,287,158
49,503,945 2,950,772 0 0
(345,979,679) (249,050,078) (5,837,595) (185,101)
---------------- ---------------- ---------------- -------------------
529,622,155 1,184,640,617 11,945,639 20,102,057
---------------- ---------------- ---------------- -------------------
322,293,702 1,310,370,340 6,694,895 19,777,636
1,733,275,503 422,905,163 19,878,636 101,000
---------------- ---------------- ---------------- -------------------
$2,055,569,205 $1,733,275,503 $ 26,573,531 $19,878,636
---------------- ---------------- ---------------- -------------------
---------------- ---------------- ---------------- -------------------
</TABLE>
23
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EMERGING GROWTH FUND
FINANCIAL HIGHLIGHTS
(For a Share of the Fund Outstanding Throughout Each Period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Shares
---------------------------------------------------------------
For the Six
Months
Ended
April 30, For the Year Ended October 31,
1995 -----------------------------------------------
(Unaudited) 1994 1993 1992 1991 1990
----------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 22.38 $23.74 $18.28 $16.97 $10.83 $13.58
----------- ------ ------ ------ ------ ------
Income From Investment Operations:
Net Investment Income (Loss) (.05) .00 (.10) (.03) .05 .13
Net Gain (Loss) from Securities (both
realized and unrealized) 1.72 .00 5.93 1.71 6.16 (2.32)
----------- ------ ------ ------ ------ ------
Total From Investment Operations 1.67 .00 5.83 1.68 6.21 (2.19)
----------- ------ ------ ------ ------ ------
Less Distributions:
Dividends from net investment income .00 .00 .00 (.01) (.07) (.18)
Distributions from capital gains .00 (1.36) (.37) (.36) .00 (.38)
----------- ------ ------ ------ ------ ------
Total Distributions .00 (1.36) (.37) (.37) (.07) (.56)
----------- ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 24.05 $22.38 $23.74 $18.28 $16.97 $10.83
----------- ------ ------ ------ ------ ------
----------- ------ ------ ------ ------ ------
Total Return 15.62%* .16% 32.28% 9.87% 57.57% (16.90%)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000s) $289,226 $240,664 $165,525 $99,562 $42,061 $23,075
Ratios to average daily net assets:
Operating expenses 1.25%* 1.22% 1.23% 1.24% 1.25% 1.25%
Net investment income (loss) (.52%)* (.58%) (.60%) (.25%) .32% 1.05%
Decrease reflected in above expense
ratios due to waivers/reimbursements .00% .04% .00% .08% .47% .42%
Portfolio turnover rate 97.48%* 60.38% 68.35% 63.35% 97.69% 107.30%
<CAPTION>
Advisor Shares
----------------------------------------------------------------
For the Period
For the Six April 4, 1991
Months Ended For the Year Ended October (Initial Issuance)
April 30, 31, Through
1995 --------------------------- October 31,
(Unaudited) 1994 1993 1992 1991
------------ ------ ------ ------ ------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 22.05 $23.51 $18.19 $16.99 $15.18
------ ------ ------ ------ ------
Income From Investment Operations:
Net Investment Income (Loss) (.09) .00 (.08) (.06) .00
Net Gain (Loss) from Securities (both
realized and unrealized) 1.67 (.10) 5.77 1.62 1.82
------ ------ ------ ------ ------
Total From Investment Operations 1.58 (.10) 5.69 1.56 1.82
------ ------ ------ ------ ------
Less Distributions:
Dividends from net investment income .00 .00 .00 .00 (.01)
Distributions from capital gains .00 (1.36) (.37) (.36) .00
------ ------ ------ ------ ------
Total Distributions .00 (1.36) (.37) (.36) (.01)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $23.63 $22.05 $23.51 $18.19 $16.99
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total Return 14.97%* (.29%) 31.67% 9.02% 23.43%*
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000s) $97,725 $64,009 $26,029 $5,398 $275
Ratios to average daily net assets:
Operating expenses 1.75%* 1.72% 1.73% 1.74% 1.74%*
Net investment income (loss) (1.01%)* (1.08%) (1.09%) (.87%) (.49%)*
Decrease reflected in above expense
ratios due to waivers/reimbursements .00% .04% .00% .06% .42%*
Portfolio turnover rate 97.48%* 60.38% 68.35% 63.38% 97.69%
</TABLE>
* Annualized
See Accompanying Notes to Financial Statements.
25
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS
April 30, 1995 (Unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Warburg Pincus Equity Funds are comprised of Warburg Pincus Capital
Appreciation Fund (the 'Capital Appreciation Fund') and Warburg Pincus
International Equity Fund (the 'International Equity Fund') which are registered
under the Investment Company Act of 1940, as amended (the '1940 Act'), as
diversified, open-end management investment companies, and Warburg Pincus
Emerging Growth Fund (the 'Emerging Growth Fund') and Warburg Pincus Japan OTC
Fund (the 'Japan OTC Fund,' together with the Capital Appreciation Fund, the
International Equity Fund and the Emerging Growth Fund, the 'Funds') which are
registered under the 1940 Act as non-diversified, open-end management investment
companies.
Investment objectives for each Fund are as follows: the Capital
Appreciation Fund, the International Equity Fund and the Japan OTC Fund seek
long-term capital appreciation; the Emerging Growth Fund seeks maximum capital
appreciation.
The net asset value of each Fund is determined daily as of the close of
regular trading on the New York Stock Exchange. Each Fund's investments are
generally valued at market value, which is currently determined using the last
reported sales price. If no sales are reported, investments are valued at the
last reported bid price. In the absence of market quotations, investments are
generally valued at fair value as determined by or under the direction of the
Fund's governing Board. Short-term investments that mature in 60 days or less
are valued on the basis of amortized cost, which attempts to approximate market
value.
The books and records of the Funds are maintained in U.S. dollars.
Transactions denominated in foreign currencies are recorded at the current
prevailing exchange rates. All assets and liabilities denominated in foreign
currencies are translated into U.S. dollar amounts at the current exchange rate.
Translation gains or losses resulting from changes in the exchange rate during
the reporting period and realized gains and losses on the settlement of foreign
currency transactions are reported in the results of operations for the current
period. The Funds do not isolate that portion of gains and losses on investments
in equity securities which are due to changes in the foreign exchange rate from
that which are due to changes in market prices of equity securities.
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis. Dividends are recorded on the ex-dividend date.
Income, expenses (excluding class-specific expenses) and realized/unrealized
gains/losses are allocated proportionately to each class of shares based upon
the relative net asset value of outstanding shares. The cost of investments sold
is determined by use of the specific identification method for both financial
reporting and income tax purposes.
Dividends from net investment income are declared and paid semiannually for
all Funds. Distributions of net realized capital gains, if any, are declared
annually. However, to the extent that a net realized capital gain can be reduced
by a capital loss carryover, such gain will not be distributed. Income and
capital gain distributions are determined in accordance with Federal income tax
regulations which may differ from generally accepted accounting principles.
Each Fund intends to continue to comply with the special provisions of the
Internal Revenue Code available to investment companies and therefore no Federal
income tax provision is required.
28
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
April 30, 1995 (Unaudited)
- --------------------------------------------------------------------------------
Costs incurred by the Japan OTC Fund in connection with its organization
have been deferred and are being amortized over a period of five years from the
date the Japan OTC Fund commenced its operations.
Each Fund may enter into repurchase agreement transactions. Under the terms
of a typical repurchase agreement, a Fund acquires an underlying security
subject to an obligation of the seller to repurchase. The value of the
underlying security collateral will be maintained at an amount at least equal to
the total amount of the purchase obligation, including interest. The collateral
is in the Fund's possession.
2. INVESTMENT ADVISER, CO-ADMINISTRATORS AND DISTRIBUTOR
Warburg, Pincus Counsellors, Inc. ('Counsellors'), a wholly owned
subsidiary of Warburg, Pincus Counsellors G.P. ('Counsellors G.P.'), serves as
each Fund's investment adviser. For its investment advisory services,
Counsellors receives the following fees based on each Fund's average daily net
assets:
<TABLE>
<CAPTION>
FUND ANNUAL RATE
- --------------------------------- ----------------------------------
<S> <C>
Capital Appreciation .70% of average daily net assets
Emerging Growth .90% of average daily net assets
International Equity 1.00% of average daily net assets
Japan OTC 1.25% of average daily net assets
</TABLE>
For the six months ended April 30, 1995, investment advisory fees, waivers
and reimbursements were as follows:
<TABLE>
<CAPTION>
GROSS NET EXPENSE
FUND ADVISORY FEE WAIVER ADVISORY FEE REIMBURSEMENTS
- ------------------------------------------ ------------ ---------- ------------ --------------
<S> <C> <C> <C> <C>
Capital Appreciation $ 572,180 $ 0 $ 572,180 $ 0
Emerging Growth 1,428,874 0 1,428,874 0
International Equity 8,871,020 0 8,871,020 0
Japan OTC 141,840 (141,840) 0 116,312
</TABLE>
SPARX Investment & Research, USA, Inc. ('SPARX USA') serves as
sub-investment adviser for the Japan OTC Fund. From its investment advisory fee,
Counsellors pays SPARX USA a fee at an annual rate of .625% of the average daily
net assets of the Japan OTC Fund. No compensation is payable by the Japan OTC
Fund to SPARX USA for its sub-investment advisory services.
Counsellors Funds Service, Inc. ('CFSI'), a wholly owned subsidiary of
Counsellors, and PFPC Inc. ('PFPC'), an indirect, wholly owned subsidiary of PNC
Bank Corp. ('PNC'), serve as each Fund's co-administrators. For its
administrative services, CFSI receives a fee calculated at an annual rate of
.10% of each Fund's average daily net assets. For the six months ended April 30,
1995, administrative services fees earned by CFSI were as follows:
<TABLE>
<CAPTION>
FUND CO-ADMINISTRATION FEE
- ------------------------------------------- ------------------------------
<S> <C>
Capital Appreciation $ 81,740
Emerging Growth 158,764
International Equity 887,102
Japan OTC 11,347
</TABLE>
29
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
April 30, 1995 (Unaudited)
- --------------------------------------------------------------------------------
For the six months ended April 30, 1995, administrative services fees
earned by PFPC were as follows:
<TABLE>
<CAPTION>
FUND CO-ADMINISTRATION FEE
- ------------------------------------------- ------------------------------
<S> <C>
Capital Appreciation $ 81,740
Emerging Growth 158,764
International Equity 629,511
Japan OTC 42,500
</TABLE>
Counsellors Securities Inc. ('CSI'), also a wholly owned subsidiary of
Counsellors, serves as each Fund's distributor. No compensation is payable by
the Capital Appreciation Fund, the Emerging Growth Fund or the International
Equity Fund to CSI for distribution services. For distribution services with
respect to the Common Shares of the Japan OTC Fund, CSI receives a fee at an
annual rate of .25% of the Japan OTC Fund's average daily net assets
attributable to the Common Shares; no compensation is payable to CSI with
respect to the Fund's Advisor Shares. For the six months ended April 30, 1995,
CSI earned $28,368 in distribution fees.
3. INVESTMENTS IN SECURITIES
For the six months ended April 30, 1995, purchases and sales of investment
securities (excluding short-term investments) were as follows:
<TABLE>
<CAPTION>
FUND PURCHASES SALES
- ------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Capital Appreciation $132,677,612 $117,699,248
Emerging Growth 191,272,370 144,738,127
International Equity 550,909,981 176,630,818
Japan OTC 23,632,862 13,544,562
</TABLE>
At April 30, 1995, the net unrealized appreciation from investments for
those securities having an excess of value over cost and net unrealized
depreciation from investments for those securities having an excess of cost over
value (based on cost for Federal income tax purposes) was as follows:
<TABLE>
<CAPTION>
NET UNREALIZED
UNREALIZED UNREALIZED APPRECIATION
FUND APPRECIATION DEPRECIATION (DEPRECIATION)
- --------------------------------- ------------ -------------- --------------
<S> <C> <C> <C>
Capital Appreciation $ 35,905,406 $ (2,026,288) $ 33,879,118
Emerging Growth 69,461,748 (7,067,044) 62,394,704
International Equity 174,273,357 (142,868,247) 31,405,110
Japan OTC 1,197,112 (1,147,261) 49,851
</TABLE>
4. FORWARD FOREIGN CURRENCY CONTRACTS
The International Equity Fund and the Japan OTC Fund may enter into forward
currency contracts for the purchase or sale of a specific foreign currency at a
fixed price on a future date. Risks may arise upon entering into these contracts
from the potential inability of counterparties to meet the
30
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
April 30, 1995 (Unaudited)
- --------------------------------------------------------------------------------
terms of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. Each Fund may enter into forward
contracts for hedging purposes or to increase income and total return. The
forward currency contracts are adjusted by the daily exchange rate of the
underlying currency and any gains or losses are recorded for financial statement
purposes as unrealized until the contract settlement date.
At April 30, 1995, the International Equity Fund had the following open
forward currency contract and had recorded an unrealized loss of $1,662,070:
<TABLE>
<CAPTION>
SETTLEMENT CURRENCY CURRENCY
DATE BOUGHT SOLD
- ---------- ------------------------ ---------------------------
<S> <C> <C>
06/21/95 55,000,000 U.S. Dollars 4,725,050,000 Japanese Yen
</TABLE>
At April 30, 1995, the Japan OTC Fund had the following open forward
currency contract and had recorded an unrealized gain of $13,751:
<TABLE>
<CAPTION>
SETTLEMENT CURRENCY CURRENCY
DATE BOUGHT SOLD
- ---------- ------------------------ ---------------------------
<S> <C> <C>
05/31/95 23,000,000 U.S. Dollars 1,922,340,000 Japanese Yen
</TABLE>
5. CAPITAL SHARE TRANSACTIONS; ADVISOR SHARES
The Emerging Growth Fund, the International Equity Fund and the Japan OTC
Fund are each authorized to issue three billion full and fractional shares of
capital stock, $.001 par value per share, of which one billion shares are
designated Advisor Shares. The Capital Appreciation Fund is authorized to issue
an unlimited number of full and fractional shares of beneficial interest, $.001
par value per share, of which one billion shares are classified as Advisor
Shares. Advisor Shares are identical to Common Shares in all respects except
that Advisor Shares are sold to institutions ('Service Organizations') that
perform certain distribution, shareholder servicing, accounting and/or
administrative services for their customers who are beneficial owners of Advisor
Shares. Advisor Shares bear the fees paid pursuant to a distribution plan
adopted by each Fund in an amount not to exceed .75% (on an annualized basis) of
the average daily net asset value of the shares held by the Service
Organizations for the benefit of their customers and enjoy certain exclusive
voting rights on matters relating to those fees.
With respect to Advisor Shares, Service Organizations earned the following
shareholder servicing fees for the six months ended April 30, 1995:
<TABLE>
<CAPTION>
FUND SHAREHOLDER SERVICING FEES
- ----------------------------------------------- --------------------------
<S> <C>
Capital Appreciation $ 20,418
Emerging Growth 188,426
International Equity 532,559
</TABLE>
31
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
WARBURG PINCUS EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
April 30, 1995 (Unaudited)
- --------------------------------------------------------------------------------
Transactions in shares of each Fund were as follows:
<TABLE>
<CAPTION>
CAPITAL APPRECIATION FUND EMERGING GROWTH FUND
Common Shares Advisor Shares Common Shares Advisor Shares
-------------------------- -------------------------- -------------------------- --------------------------
For the Six For the Six For the Six For the Six
Months Ended For the Months Ended For the Months Ended For the Months Ended For the
April 30, Year Ended April 30, Year Ended April 30, Year Ended April 30, Year Ended
1995 October 31, 1995 October 31, 1995 October 31, 1995 October 31,
(Unaudited) 1994 (Unaudited) 1994 (Unaudited) 1994 (Unaudited) 1994
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold 2,912,613 2,958,494 78,480 290,193 3,619,699 6,133,751 1,394,795 2,233,737
Shares issued to
shareholders on
reinvestment of
dividends 818,282 920,210 46,554 61,526 15,653 506,720 0 80,473
Shares redeemed (2,028,054) (3,126,497) (58,310) (460,020) (2,361,976) (2,859,413) (162,815) (517,898)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Net increase
(decrease) in
shares
outstanding 1,702,841 752,207 66,724 (108,301) 1,273,376 3,781,058 1,231,980 1,796,312
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Proceeds from
sale of shares $38,700,495 $41,570,590 $1,042,176 $ 4,046,941 $81,131,951 $132,922,995 $30,592,833 $47,890,275
Reinvested
dividends 10,187,616 12,945,690 575,876 863,477 347,867 11,015,146 0 1,743,241
Net asset value
of shares
redeemed (26,954,367) (43,449,501) (766,250) (6,401,999) (51,476,215) (61,126,667) (3,444,995) (10,641,050)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Net increase
(decrease) from
capital share
transactions $21,933,744 $11,066,779 $ 851,802 $(1,491,581) $30,003,603 $82,811,474 $27,147,838 $38,992,466
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
6. NET ASSETS
Net Assets at April 30, 1995, consisted of the following:
<TABLE>
<CAPTION>
CAPITAL APPRECIATION FUND EMERGING GROWTH FUND
Common Shares Advisor Shares Total Common Shares Advisor Shares Total
------------- -------------- ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Capital contributed, net $140,449,920 $8,912,717 $149,362,637 $228,499,590 $ 87,395,078 $315,894,668
Accumulated net investment
income (loss) 377,867 (334) 377,533 0 0 0
Accumulated net realized
gain (loss) from security
transactions 6,503,951 (48,729) 6,455,222 7,352,467 1,270,253 8,622,720
Net unrealized appreciation
(depreciation) from
investments and foreign
currency related items 33,776,938 102,180 33,879,118 53,373,929 9,060,159 62,434,088
------------- -------------- ------------ ------------- -------------- ------------
Net assets $181,108,676 $8,965,834 $190,074,510 $289,225,986 $ 97,725,490 $386,951,476
------------- -------------- ------------ ------------- -------------- ------------
------------- -------------- ------------ ------------- -------------- ------------
</TABLE>
32
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
Common Shares Advisor Shares
----------------------------- ---------------------------
For the Six For the Six
Months Ended For the Months Ended For the
April 30, Year Ended April 30, Year Ended
1995 October 31, 1995 October 31,
(Unaudited) 1994 (Unaudited) 1994
------------ -------------- ------------ ------------
<S> <C> <C> <C>
41,252,304 64,218,907 4,502,485 7,956,088
2,339,190 147,031 329,647 6,879
(19,160,200) (11,861,720) (224,062) (795,406)
------------ -------------- ------------ ------------
24,431,294 52,504,218 4,608,070 7,167,561
------------ -------------- ------------ ------------
------------ -------------- ------------ ------------
$745,654,489 $1,275,306,263 $80,443,400 $155,433,660
43,415,366 2,820,903 6,088,579 129,869
(341,896,486) (233,614,600) (4,083,193) (15,435,478)
------------ -------------- ------------ ------------
$447,173,369 $1,044,512,566 $82,448,786 $140,128,051
------------ -------------- ------------ ------------
------------ -------------- ------------ ------------
<CAPTION>
JAPAN OTC FUND
Common Shares Advisor Shares
----------------------------------- ----------------------------------
For the Period For the Period
For the Six September 30, 1994 For the Six September 30, 1994
Months Ended (Commencement of Months Ended (Commencement of
April 30, Operations) Through April 30, Operations) Through
1995 October 31, 1995 October 31,
(Unaudited) 1994 (Unaudited) 1994
------------- ------------------- ------------ -------------------
<S> <C> <C> <C>
2,027,520 2,025,697 0 15
0 0 0 0
(657,861) (18,605) 0 0
------------- ---------- - ---
1,369,659 2,007,092 0 15
------------- ---------- - ---
------------- ---------- - ---
$ 17,783,234 $20,287,008 $0 $ 150
0 0 0 0
(5,837,595) (185,101) 0 0
------------- ---------- - ---
$ 11,945,639 $20,101,907 $0 $ 150
------------- ---------- - ---
------------- ---------- - ---
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND JAPAN OTC FUND
Common Shares Advisor Shares Total Common Shares Advisor Shares Total
-------------- -------------- -------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
$1,815,331,961 $262,660,894 $2,077,992,855 $28,492,692 $1,028 $28,493,720
8,381,424 977,793 9,359,217 0 0 0
(54,458,264) (7,888,102) (62,346,366) (1,955,020) (93) (1,955,113)
27,448,056 3,115,443 30,563,499 34,958 (34) 34,924
-------------- -------------- -------------- ------------- ------ -----------
$1,796,703,177 $258,866,028 $2,055,569,205 $26,572,630 $ 901 $26,573,531
-------------- -------------- -------------- ------------- ------ -----------
-------------- -------------- -------------- ------------- ------ -----------
</TABLE>
33
- --------------------------------------------------------------------------------
STATEMENT OF DIFFERENCES
The divided by symbol will be expressed as ....................... [div]
