<PAGE>
WARBURG, PINCUS EMERGING GROWTH FUND, INC.
Certificate of Secretary
I, the undersigned, do hereby certify that:
1. I am the duly elected Vice President and Secretary of
Warburg, Pincus Emerging Growth Fund, Inc., a Maryland Corporation (the
"Fund").
2. The prospectus and the statement of additional
information of the Fund filed pursuant to Rule 497(e) of the Securities Act of
1933, as amended (the "Act"), represent a fair and accurate English
translation of a Spanish version of the prospectus and the statement of
additional information not herein filed pursuant to Rule 306(a) of Regulation
S-T (ss. 232.306(a)) of the Act.
IN WITNESS WHEREOF, I have signed this Certificate and
affixed the corporate seal of the Fund on this 24th day of April, 1996.
WARBURG, PINCUS EMERGING
GROWTH FUND, INC.
By: /s/ Eugene P. Grace
Eugene P. Grace
Vice President and
Secretary
102068
<PAGE>
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WARBURG PINCUS FUNDS
============================================================================
============================================================================
PROSPECTUS
============================================================================
April 25, 1996
|_| Warburg Pincus Emerging Growth Fund
<PAGE>1
WARBURG PINCUS FUNDS
P.O. Box 9030
Boston, Massachusetts 02205-9030
Telephone Number: (800) 888-6878
April 25, 1996
Prospectus
Warburg Pincus Funds are a family of open-end mutual funds that offer investors
a variety of investment opportunities. One fund is described in this Prospectus:
Warburg Pincus Emerging Growth Fund seeks maximum capital appreciation by
investing in equity securities of small- to medium-sized domestic companies with
emerging or renewed growth potential.
NO LOAD CLASS OF COMMON SHARES
The Fund offers two classes of shares. A class of Common Shares that is "no
load" is offered by this Prospectus (i) directly from the Fund's distributor,
Counsellors Securities Inc., and (ii) through various brokerage firms including
Charles Schwab & Company, Inc. Mutual Fund OneSource(TM) Program; Fidelity
Brokerage Services, Inc. FundsNetwork(TM) Program; Jack White & Company, Inc.;
and Waterhouse Securities, Inc.
LOW MINIMUM INVESTMENT
The minimum initial investment in the Fund is $2,500 ($500 for an IRA or
Uniform Gifts to Minors Act account) and the minimum subsequent investment is
$100. Through the Automatic Monthly Investment Plan, subsequent investment
minimums may be as low as $50. See "How to Purchase Shares."
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Fund, contained in a Statement of Additional Information, has been filed with
the Securities and Exchange Commission (the "SEC") and is available to investors
without charge by calling Warburg Pincus Funds at (800) 927-2874. Information
regarding the status of shareholder accounts may be obtained by calling Warburg
Pincus Funds at (800) 888-6878. The Statement of Additional Information, as
amended or supplemented from time to time, bears the same date as this
<PAGE>2
Prospectus and is incorporated by reference in its 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.
----------------------------------------------------------------
THE FUND'S EXPENSES
The Warburg, Pincus Emerging Growth Fund (the "Fund")
currently offers two separate classes of shares: Common Shares and
Advisor Shares. For a description of Advisor Shares see "General
Information."
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)................................................ 0
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees................................................. .90%
12b-1 Fees...................................................... 0
Other Expenses.................................................. .36%
-----
Total Fund Operating Expenses (after fee waivers)+ ............. 1.26%
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.......................................................... $ 13
3 years......................................................... $ 40
5 years......................................................... $ 69
10 years......................................................... $152
- ----------------
+ Management Fees, Other Expenses and Total Fund Operating Expenses for the
Emerging Growth Fund are based on actual expenses for the fiscal year ended
October 31, 1995.
The expense table shows the costs and expenses that an
investor will bear directly or indirectly as a Common Shareholder of the Fund.
Certain broker-dealers and financial institutions also may charge their clients
fees in connection with investments in the Fund's Common Shares, which fees are
not reflected in the table. The Example should not be considered a
representation of past or future expenses; actual Fund expenses may be greater
or
<PAGE>3
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%.
FINANCIAL HIGHLIGHTS
(for a Common Share outstanding throughout each period)
The following information regarding the Fund for the three
fiscal years or period ended October 31, 1995 has been derived from information
audited by Coopers & Lybrand L.L.P., independent auditors, whose report dated
December 14, 1995 appears in the Fund's Statement of Additional Information. The
information for the two prior fiscal years has been audited by Ernst & Young
LLP, whose report was unqualified. Further information about the performance of
the Fund is contained in the Fund's annual report, dated October 31, 1995,
copies of which may be obtained without charge by calling Warburg Pincus Funds
at (800) 927-2874.
<TABLE>
<CAPTION>
For the
Period
January
21, 1988
(Commencement
of
Operations)
through
For the Year Ended October 31, October 31,
-----------
1995 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) (.06) (.10) (.03) .05 .13 .16 .07
Net Gains (Loss) from
Securities
(both realized and
unrealized)................ 7.64 .06 5.93 1.71 6.16 (2.32) 2.51 1.18
Total from Investment
Operations................. 7.59 .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 $29.97 $22.38 $23.74 $18.28 $16.97 $10.83 $13.58 $11.21
Total Return.................. 33.91% .16% 32.28% 9.87% 57.57% (16.90%) 24.20% 16.34%*
Ratios/Supplemental Data
Net Assets, End of Period
(000s)..................... $487,537 $240,664 $165,525 $99,562 $42,061 $23,075 $26,685 $10,439
Ratios to Average Daily Net
Assets:
Operating expenses......... 1.26% 1.22% 1.23% 1.24% 1.25% 1.25% 1.25% 1.25%*
Net investment income
(loss)..................... (.58%) (.58%) (.60%) (.25%) .32% 1.05% 1.38% 1.10%*
Decrease reflected in
above operating expense
ratios due to
waivers/reimbursements... .00% .04% .00% .08% .47% .42% .78% 3.36%*
Portfolio Turnover Rate....... 84.82% 60.38% 68.35% 63.35% 97.69% 107.30% 100.18% 82.21%
- -------
*Annualized.
</TABLE>
<PAGE>4
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks maximum capital appreciation. The Fund's
objective is a fundamental policy and may not be amended without first obtaining
the approval of a majority of the outstanding shares of the Fund. Any investment
involves risk and, therefore, there can be no assurance that the Fund will
achieve its investment objective. See "Portfolio Investments" and "Certain
Investment Strategies" for descriptions of certain types of investments the Fund
may make.
The Fund is a 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 obligations) and
preferred stocks that are not convertible into common stock for the purpose of
seeking capital appreciation. The interest income to be derived may be
considered as one factor in selecting debt securities for investment by Warburg,
Pincus Counsellors, Inc., the Fund's investment adviser ("Warburg"). Because the
market value of debt obligations can be expected to vary inversely to changes in
prevailing interest rates, investing in debt obligations may provide an
opportunity for capital appreciation when interest rates are expected to
decline. The success of such a strategy is
<PAGE>5
dependent upon Warburg's ability to accurately forecast changes in interest
rates. The market value of debt obligations may also be expected to vary
depending upon, among other factors, the ability of the issuer to repay
principal and interest, any change in investment rating and general economic
conditions. 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 Warburg. Bonds rated in the fourth highest grade may have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. Subsequent to
its purchase by the Fund, an issue of securities may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require sale of such securities, although Warburg will
consider such event in its determination of whether the Fund should continue to
hold the securities.
When Warburg believes that a defensive posture is warranted,
the Fund may invest temporarily without limit in investment grade debt
obligations and in domestic and foreign money market obligations, including
repurchase agreements.
Money Market Obligations. The Fund is authorized to invest, under normal market
conditions, up to 20% of its total assets in domestic and foreign short-term
(one year or less remaining to maturity) and medium-term (five years or less
remaining to maturity) money market obligations and for temporary defensive
purposes may invest in these securities without limit. These instruments consist
of obligations issued or guaranteed by the U.S. government or a foreign
government, their agencies or instrumentalities; bank obligations (including
certificates of deposit, time deposits and bankers' acceptances of domestic or
foreign banks, domestic savings and loans and similar institutions) that are
high quality investments or, if unrated, deemed by Warburg to be high quality
investments; commercial paper rated no lower than A-2 by S&P or Prime-2 by
Moody's or the equivalent from another major rating service or, if unrated, of
an issuer having an outstanding, unsecured debt issue then rated within the
three highest rating categories; and repurchase agreements with respect to the
foregoing.
Repurchase Agreements. The Fund may invest in repurchase
agreement transactions with member banks of the Federal Reserve System and
certain non-bank dealers. Repurchase agreements are contracts under which the
buyer of a security simultaneously commits to resell the security to the seller
at an agreed-upon price and date. Under the terms of a typical repurchase
agreement, 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
<PAGE>6
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. Warburg, acting under the supervision of the
Fund's Board of Directors (the "Board"), monitors the creditworthiness of
those bank and non-bank dealers with which the Fund enters into repurchase
agreements to evaluate this risk. A repurchase agreement is considered to be a
loan under the Investment Company Act of 1940, as amended (the "1940 Act").
Money Market Mutual Funds. Where Warburg believes that it
would be beneficial to the Fund and appropriate considering the factors of
return and liquidity, the Fund may invest up to 5% of its assets in securities
of money market mutual funds that are unaffiliated with the Fund, Warburg or the
Fund's co-administrator, PFPC Inc. ("PFPC"). As a shareholder in any mutual
fund, the Fund will bear its ratable share of the mutual fund's expenses,
including management fees, and will remain subject to payment of the Fund's
administration fees and other expenses with respect to assets so invested.
U.S. Government Securities. U.S. government securities in which the Fund may
invest include: direct obligations of the U.S. Treasury and obligations
issued by U.S. government agencies and instrumentalties, including instruments
that are supported by the full faith and credit of the United States,
instruments that are supported by the right of the issuer to borrow from the
U.S. Treasury and instruments that are supported by the credit of the
instrumentality.
Convertible Securities. Convertible securities in which the Fund may invest,
including both convertible debt and convertible preferred stock, may be
converted at either a stated price or stated rate into underlying shares of
common stock. Because of this feature, convertible securities enable an investor
to benefit from increases in the market price of the underlying common stock.
Convertible securities provide higher yields than the underlying equity
securities, but generally offer lower yields than non-convertible securities of
similar quality. The value of convertible securities fluctuates in relation to
changes in interest rates like bonds and, in addition, fluctuates in relation to
the underlying common stock.
<PAGE>7
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. For certain additional risks relating to the
Fund's investments, see "Portfolio Investments" and "Certain Investment
Strategies."
Investing in securities of emerging growth and small-sized
companies may involve greater risks since these securities may have limited
marketability and, thus, may be more volatile. Because small- and medium-sized
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. 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.
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, 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 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.
Non-Publicly Traded Securities; Rule 144A Securities. The Fund may purchase
securities that are not registered under the Securities Act of 1933, as amended
(the "1933 Act"), but that can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act ("Rule 144A Securities"). An
investment in Rule 144A Securities will be considered illiquid and therefore
subject to the Fund's limitation on the purchase of illiquid securities, unless
the Fund's Board determines on an ongoing basis that an adequate trading market
exists for the security. In addition to an adequate trading market, the Board
will also consider factors such as trading activity, availability of reliable
price information and other relevant information in determining whether a Rule
144A Security is liquid. This investment practice could have the effect of
increasing the level
<PAGE>8
of illiquidity in the Fund to the extent that qualified institutional buyers
become uninterested for a time in purchasing Rule 144A Securities. The Board
will carefully monitor any investments by the Fund in Rule 144A Securities. The
Board may adopt guidelines and delegate to Warburg the daily function of
determining and monitoring the liquidity of Rule 144A Securities, although the
Board will retain ultimate responsibility for any determination regarding
liquidity.
Non-publicly traded securities (including Rule 144A
Securities) may involve a high degree of business and financial risk and may
result in substantial losses. These securities may be less liquid than publicly
traded securities, and the Fund may take longer to liquidate these positions
than would be the case for publicly traded securities. Although these securities
may be resold in privately negotiated transactions, the prices realized on such
sales could be less than those originally paid by the Fund. Further, companies
whose securities are not publicly traded may not be subject to the disclosure
and other investor protection requirements applicable to companies whose
securities are publicly traded. The Fund's investment in illiquid securities is
subject to the risk that should the Fund desire to sell any of these securities
when a ready buyer is not available at a price that is deemed to be
representative of their value, the value of the Fund's net assets could be
adversely affected.
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
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 Warburg believes it to be in the best interests of the Fund. The Fund
will not consider portfolio turnover rate a limiting factor in making investment
decisions consistent with its investment objective and policies. High portfolio
turnover rates (100% or more) may result in dealer mark ups or underwriting
commissions as well as other transaction
<PAGE>9
costs, including correspondingly higher brokerage commissions. In addition,
short-term gains realized from portfolio turnover may be taxable to
shareholders as ordinary income. See "Dividends, Distributions and Taxes -
Taxes" below and "Investment Policies - Portfolio Transactions" in the
Statement of Additional Information.
All orders for transactions in securities or options on behalf
of the Fund are placed by Warburg with broker-dealers that it selects, including
Counsellors Securities Inc., the Fund's distributor ("Counsellors Securities").
The Fund may utilize Counsellors Securities in connection with a purchase or
sale of securities when Warburg believes that the charge for the transaction
does not exceed usual and customary levels and when doing so is consistent with
guidelines adopted by the Board.
CERTAIN INVESTMENT STRATEGIES
Although there is no intention of doing so during the coming
year, the Fund is authorized to engage in the following investment strategies:
(i) purchasing securities on a when-issued basis and purchasing or selling
securities for delayed delivery and (ii) lending portfolio securities. Detailed
information concerning the Fund's strategies and related risks is contained
below and in the Fund's Statement of Additional Information.
Foreign Securities. The Fund may 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 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
<PAGE>10
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Investment in foreign
securities will also result in higher operating expenses due to the cost of
converting foreign currency into U.S. dollars, the payment of fixed brokerage
commissions on foreign exchanges, which generally are higher than commissions on
U.S. exchanges, higher valuation and communications costs and the expense of
maintaining securities with foreign custodians.
Options, Futures and Currency Transactions. At the discretion of Warburg, the
Fund may, but is not required to, engage in a number of strategies involving
options, futures and forward currency contracts. These strategies, commonly
referred to as "derivatives," may be used (i) for the purpose of hedging against
a decline in value of the Fund's current or anticipated portfolio holdings, (ii)
as a substitute for purchasing or selling portfolio securities or (iii) to seek
to generate income to offset expenses or increase return. Transactions that are
not considered hedging should be considered speculative and may serve to
increase the Fund's investment risk. Transaction costs and any premiums
associated with these strategies, and any losses incurred, will affect the
Fund's net asset value and performance. Therefore, an investment in the Fund may
involve a greater risk than an investment in other mutual funds that do not
utilize these strategies. The Fund's use of these strategies may be limited by
position and exercise limits established by securities and commodities exchanges
and the NASD and by the Code.
Securities and Stock Index Options. 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; the Fund may also utilize up
to 2% of its assets to purchase U.S. exchange-traded and over-the-counter
("OTC") options. The purchaser of a put option on a security has the right to
compel the purchase by the writer of the underlying security, while the
purchaser of a call option has the right to purchase the underlying security
from the writer. In addition to purchasing and writing options on securities,
the Fund may also utilize up to 10% of its total assets to purchase
exchange-listed and OTC put and call options on stock indexes, and may also
write such options. A stock index measures the movement of a certain group of
stocks by assigning relative values to the common stocks included in the index.
The potential loss associated with purchasing an option is
limited to the premium paid, and the premium would partially offset any gains
achieved from its use. However, for an option writer the exposure to adverse
price movements in the underlying security or index is potentially unlimited
during the exercise period. Writing securities options may result in substantial
losses to the Fund, force the sale or purchase of portfolio securities at
inopportune times or at less advantageous prices,
<PAGE>11
limit the amount of appreciation the Fund could realize on its investments or
require the Fund to hold securities it would otherwise sell.
Futures Contracts and Related Options. The Fund may enter into
foreign currency, interest rate and stock index futures contracts and purchase
and write (sell) related options that are traded on an exchange designated by
the Commodity Futures Trading Commission (the "CFTC") or, if consistent with
CFTC regulations, on foreign exchanges. These futures contracts are standardized
contracts for the future delivery of foreign currency or an interest rate
sensitive security or, in the case of stock index and certain other futures
contracts, are settled in cash with reference to a specified multiplier times
the change in the specified index, exchange rate or interest rate. An option on
a futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract.
Aggregate initial margin and premiums required to establish
positions other than those considered by the CFTC to be "bona fide hedging" will
not exceed 5% of the Fund's net asset value, after taking into account
unrealized profits and unrealized losses on any such contracts. Although the
Fund is limited in the amount of assets that may be invested in futures
transactions, there is no overall limit on the percentage of Fund assets that
may be at risk with respect to futures activities.
Currency Exchange Transactions. The Fund will conduct its
currency exchange transactions either (i) on a spot (i.e., cash) basis at the
rate prevailing in the currency exchange market, (ii) through entering into
futures contracts or options on futures contracts (as described above), (iii)
through entering into forward contracts to purchase or sell currency or (iv) by
purchasing exchange-traded currency options. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future date
at a price set at the time of the contract. An option on a foreign currency
operates similarly to an option on a security. Risks associated with currency
forward contracts and purchasing currency options are similar to those described
in this Prospectus for futures contracts and securities and stock index options.
In addition, the use of currency transactions could result in losses from the
imposition of foreign exchange controls, suspension of settlement or other
governmental actions or unexpected events. The Fund will only engage in currency
exchange transactions for hedging purposes.
Hedging Considerations. The Fund may engage in options,
futures and currency transactions for, among other reasons, hedging purposes. A
hedge is designed to offset a loss on a portfolio position with a gain in the
hedge position; at the same time, however, a properly correlated hedge will
result in a gain in the portfolio position being offset by a loss in the
<PAGE>12
hedge position. As a result, the use of options, futures contracts and currency
exchange transactions for hedging purposes could limit any potential gain from
an increase in value of the position hedged. In addition, the movement in the
portfolio position hedged may not be of the same magnitude as movement in the
hedge. The Fund will engage in hedging transactions only when deemed advisable
by Warburg, and successful use of hedging transactions will depend on Warburg's
ability to correctly predict movements in the hedge and the hedged position and
the correlation between them, which could prove to be inaccurate. Even a
well-conceived hedge may be unsuccessful to some degree because of unexpected
market behavior or trends.
Additional Considerations. To the extent that the Fund engages
in the strategies described above, the Fund may experience losses greater than
if these strategies had not been utilized. In addition to the risks described
above, these instruments may be illiquid and/or subject to trading limits, and
the Fund may be unable to close out an option or futures position without
incurring substantial losses, if at all. The Fund is also subject to the risk of
a default by a counterparty to an off-exchange transaction.
Asset Coverage. The Fund will comply with applicable
regulatory requirements designed to eliminate any potential for leverage with
respect to options written by the Fund on securities and indexes; currency,
interest rate and stock index futures contracts and options on these futures
contracts; and forward currency contracts. The use of these strategies may
require that the Fund maintain cash or certain liquid high-grade debt
obligations or other assets that are acceptable as collateral to the appropriate
regulatory authority in a segregated account with its custodian or a designated
sub-custodian to the extent the Fund's obligations with respect to these
strategies are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency or by other portfolio positions or by
other means consistent with applicable regulatory policies. Segregated assets
cannot be sold or transferred unless equivalent assets are substituted in their
place or it is no longer necessary to segregate them. As a result, there is a
possibility that segregation of a large percentage of the Fund's assets could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
INVESTMENT GUIDELINES
The Fund may invest up to 10% of its total assets in
securities with contractual or other restrictions on resale and other
instruments that are not readily marketable ("illiquid securities"), including
(i) securities issued as part of a privately negotiated transaction between an
issuer and one or more purchasers; (ii) repurchase agreements with maturities
<PAGE>13
greater that seven days; (iii) time deposits maturing in more than seven
calendar days; and (iv) certain Rule 144A Securities. 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 reverse repurchase agreements and any other
borrowing 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 Board, subject to the limitations
contained in the 1940 Act. A complete list of investment restrictions that the
Fund has adopted identifying additional restrictions that cannot be changed
without the approval of the majority of the Fund's outstanding shares is
contained in the Statement of Additional Information.
MANAGEMENT OF THE FUND
Investment Adviser. The Fund employs Warburg as its investment adviser. Warburg,
subject to the control of the Fund's officers and the Board, manages the
investment and reinvestment of the assets of the Fund in accordance with the
Fund's investment objective and stated investment policies. Warburg makes
investment decisions for the Fund and places orders to purchase or sell
securities on behalf of the Fund. Warburg also employs a support staff of
management personnel to provide services to the Fund and furnishes the Fund with
office space, furnishings and equipment.
For the services provided by Warburg, the Fund pays Warburg a
fee calculated at an annual rate of .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, Warburg believes that
it is comparable to fees charged by other mutual funds with similar policies and
strategies. The advisory agreement between the Fund and Warburg provides that
Warburg will reimburse the Fund to the extent certain expenses that are
described in the Statement of Additional Information exceed applicable stated
expense limitations. Warburg and the Fund's co-administrators may voluntarily
waive a portion of their fees from time to time and temporarily limit the
expenses to be paid by the Fund.
Warburg is a professional investment counselling firm which
provides investment services to investment companies, employee benefit plans,
endowment funds, foundations and other institutions and individuals. As of
November 30, 1995, Warburg managed approximately $11.9 billion of assets,
including
<PAGE>14
approximately $6.2 billion of assets of twenty-three investment companies or
portfolios. Incorporated in 1970, Warburg is a wholly owned subsidiary of
Warburg, Pincus Counsellors G.P. ("Warburg G.P."), a New York general
partnership. E.M. Warburg, Pincus & Co., Inc. ("EMW") controls Warburg
through its ownership of a class of voting preferred stock of Warburg.
Warburg G.P. has no business other than being a holding company of Warburg and
its subsidiaries. Warburg's address is 466 Lexington Avenue, New York, New
York 10017-3147.
Portfolio Managers. The co-portfolio managers of the Fund
are Elizabeth B. Dater and Stephen J. Lurito. 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 Warburg
since 1978. Mr. Lurito has been a portfolio manager of the Fund since 1990.
He is a managing director of EMW and has been with Warburg since 1987, before
which time he was a research analyst at Sanford C. Bernstein & Company, Inc.
Co-Administrators. The Fund employs Counsellors Funds
Service, Inc. ("Counsellors Service"), a wholly owned subsidiary of Warburg,
as a co-administrator. As co-administrator, Counsellors Service provides
shareholder liaison services to the Fund including responding to shareholder
inquiries and providing information on shareholder investments. Counsellors
Service also performs a variety of other services, including furnishing
certain executive and administrative services, acting as liaison between the
Funds and their various service providers, furnishing corporate secretarial
services, which include preparing materials for meetings of the Board,
preparing proxy statements and annual, semiannual and quarterly reports,
assisting in other regulatory filings as necessary and monitoring and
developing compliance procedures for the Fund. As compensation, the Fund pays
Counsellors Service a fee calculated at an annual rate of .10% of the Fund's
average daily net assets.
The Fund employs PFPC, an indirect, wholly owned subsidiary of
PNC Bank Corp., as a co-administrator. As a co-administrator, PFPC calculates
the Fund's net asset value, provides all accounting services for the Fund and
assists in related aspects of the Fund's operations. As compensation, the Fund
pays PFPC a fee calculated at an annual rate of .10% of its 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.
Custodians. PNC Bank, National Association ("PNC") serves
as custodian of the assets of the Fund. Like PFPC, PNC is a subsidiary of PNC
Bank Corp. and its principal business address is Broad and Chestnut Streets,
Philadelphia, Pennsylvania 19101.
<PAGE>15
Transfer Agent. State Street Bank and Trust Company ("State
Street") acts as shareholder servicing agent, transfer agent and dividend
disbursing agent for the Fund. It has delegated to Boston Financial Data
Services, Inc., a 50% owned subsidiary ("BFDS"), responsibility for most
shareholder servicing functions. State Street's principal business address is
225 Franklin Street, Boston, Massachusetts 02110. BFDS's principal business
address is 2 Heritage Drive, North Quincy, Massachusetts 02171.
Distributor. Counsellors Securities serves as distributor of
the shares of the Fund. Counsellors Securities is a wholly owned subsidiary of
Warburg and is located at 466 Lexington Avenue, New York, New York 10017-3147.
No compensation is payable by the Fund to Counsellors Securities for
distribution services.
Warburg or its affiliates may, at their own expense, provide
promotional incentives to parties who support the sale of shares of the Fund,
consisting of securities dealers who have sold Fund shares or others, including
banks and other financial institutions, under special arrangements. In some
instances, these incentives may be offered only to certain institutions whose
representatives provide services in connection with the sale or expected sale of
significant amounts of Fund shares.
Directors and Officers. The officers of the Fund manage its
day-to-day operations and are directly responsible to the Board. The Board sets
broad policies for the Fund and chooses its officers. A list of the Directors
and officers of the Fund and a brief statement of their present positions and
principal occupations during the past five years is set forth in the Statement
of Additional Information.
HOW TO OPEN AN ACCOUNT
In order to invest in the Fund, an investor must first
complete and sign an account application. To obtain an application, an
investor may telephone Warburg Pincus Funds at (800) 927-2874. An investor
may also obtain an account application by writing to:
Warburg Pincus Funds
P.O. Box 9030
Boston, Massachusetts 02205-9030
Completed and signed account applications should be mailed
to Warburg Pincus Funds at the above address.
Retirement Plans and UGMA Accounts. For information (i)
about investing in the Fund through a tax-deferred retirement plan, such as an
Individual Retirement Account ("IRA") or a Simplified Employee Pension IRA
("SEP-IRA"), or (ii) about
<PAGE>16
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 the 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
purchaser will be effected at the Fund's net asset value determined for the next
business day after payment has been received. Checks or money orders that are
not in proper form or that are not accompanied or preceded by a complete account
application will be returned to the sender. Shares purchased by check or money
order are entitled to receive dividends and distributions beginning on the day
after payment has been received. Checks or money orders in payment for shares of
more than one Warburg Pincus Fund should be made payable to Warburg Pincus Funds
and should be accompanied by a breakdown of amounts to be invested in each fund.
If a check used for purchase does not clear, the Fund will cancel the purchase
and the investor may be liable for losses or fees incurred. For a description of
the manner of calculating the Fund's net asset value, see "Net Asset Value"
below.
By Wire. Investors may also purchase Common Shares in the Fund
by wiring funds from their banks. Telephone orders by wire will not be accepted
until a completed account application in proper form has been received and an
account number has been established. Investors should place an order with the
Fund prior to wiring funds by telephoning (800) 888-6878. Federal funds may be
wired to Counsellors Securities Inc. using the following wire address:
<PAGE>17
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 the Fund is $2,500 and the
minimum subsequent investment is $100, except that subsequent minimum
investments can be as low as $50 under the Automatic Monthly Investment Plan
described in the next section. For retirement plans and UGMA accounts, the
minimum initial investment is $500. The Fund reserves the right to change the
initial and subsequent investment minimum requirements at any time. In addition,
the Fund may, in its sole discretion, waive the initial and subsequent
investment minimum requirements with respect to investors who are employees of
EMW or affiliates or persons with whom Warburg has entered into an investment
advisory agreement. Existing investors will be given 15 days' notice by mail of
any increase in investment minimum requirements.
After an investor has made his initial investment, additional
shares may be purchased at any time by mail or by wire in the manner outlined
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 Fund are not normally issued.
<PAGE>18
Purchases Through Intermediaries. The Fund understands that
some broker-dealers (other than Counsellors Securities), financial institutions,
securities dealers and other industry professionals, including certain of the
programs discussed below, may impose certain conditions on their clients or
customers that invest in the Fund, which are in addition to or different than
those described in this Prospectus, and may charge their clients or customers
direct fees. Certain features of the Fund, such as the initial and subsequent
investment minimums, redemption fees and certain trading restrictions, may be
modified or waived in these programs, and administrative charges may be imposed
for the services rendered. Therefore, a client or customer should contact the
organization acting on his behalf concerning the fees (if any) charged in
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 Fund in accordance with their
agreements with clients or customers.
Common Shares of the Fund are available through the Charles
Schwab & Company, Inc. Mutual Fund OneSource(TM) Program; Fidelity Brokerage
Services, Inc. Funds-Network(TM) Program; Jack White & Company, Inc.; and
Waterhouse Securities, Inc. Generally, these programs do not require customers
to pay a transaction fee in connection with purchases. These and other
organizations that have entered into agreements with the Fund or its agent may
enter confirmed purchase orders on behalf of clients and customers, with payment
to follow no later than the Fund's pricing on the following business day. If
payment is not received by such time, the organization could be held liable for
resulting fees or losses.
Automatic Monthly Investing. Automatic monthly investing
allows shareholders to authorize the Fund to debit their bank account monthly
($50 minimum) for the purchase of Fund shares on or about either the tenth or
twentieth calendar day of each month. To establish the automatic monthly
investing option, obtain a separate application or complete the "Automatic
Investment Program" section of the account applications and include a voided,
unsigned check from the bank account to be debited. Only an account maintained
at a domestic financial institution which is an automated clearing house member
may be used. Shareholders using this service must satisfy the initial investment
minimum for the Fund prior to or concurrent with the start 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.
<PAGE>19
The failure to provide complete information could result in
further delays.
HOW TO REDEEM AND EXCHANGE SHARES
Redemption of Shares. An investor in the Fund may redeem
(sell) his shares on any day that the Fund's net asset value is calculated (see
"Net Asset Value" below).
Common Shares of the Fund may either be redeemed by mail or by
telephone. Investors should realize that in using the telephone redemption and
exchange option, you may be giving up a measure of security that you may have if
you were to redeem or exchange your shares in writing. If an investor desires to
redeem his shares by mail, a written request for redemption should be sent to
Warburg Pincus Funds at the address indicated above under "How to Open an
Account." An investor should be sure that the redemption request identifies the
Fund, the number of shares to be redeemed and the investor's account number. In
order to change the bank account or address designated to receive the redemption
proceeds, the investor must send a written request (with signature guarantee of
all investors listed on the account when such a change is made in conjunction
with a redemption request) to Warburg Pincus Funds. Each mail redemption request
must be signed by the registered owner(s) (or his legal representatives(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. (Easter time) on any business day. An investor making a telephone
withdrawal should state (i) the name of the Fund, (ii) the account number of the
Fund, (iii) the name of the investor(s) appearing on the Fund's records, (iv)
the amount to be withdrawn and (v) the name of the person requesting the
redemption.
After receipt of the redemption request by mail or by
telephone, the redemption proceeds will, at the option of the investor, be paid
by check and mailed to the investor of record or be wired to the investor's bank
as indicated in the account application previously filled out by the investor.
The Fund 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 Funds by telephone, an
investor may deliver the redemption request to Warburg Pincus Funds by mail at
the address show above under "How to Open an Account." Although the Fund will
redeem shares purchased by check before the check clears, payments of the
redemption proceeds will be delayed until such check has cleared, which may take
up to 15 days from the purchase date. Investors should consider purchasing
shares using a certified or bank check or money order if they anticipate an
immediate need for redemption proceeds.
<PAGE>20
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. Except as noted
above, redemption proceeds will normally be mailed or wired to an investor on
the next business day following the date a redemption order is effected. If,
however, in the judgment of Warburg, immediate payment would adversely affect
the Fund, the Fund reserves the right to pay the redemption proceeds within
seven days after the redemption order is effected. Furthermore, the Fund may
suspend the right of redemption or postpone the date of payment upon redemption
(as well as suspend or postpone the recordation of an exchange of shares) for
such periods as are permitted under the 1940 Act.
The proceeds paid upon redemption may be more or less than the
amount invested depending upon a share's net asset value at the time of
redemption. If an investor redeems all the shares in his account, all dividends
and distributions declared up to and including the date of redemption are paid
along with the proceeds of the redemption.
If, due to redemptions, the value of an investor's account
drops to less than $2,000 ($250 in the case of a retirement plan or UGMA
account), the Fund reserves the right to redeem the shares in that account at
net asset value. Prior to any redemption, the Fund will notify an investor in
writing that this account has a value of less than the minimum. The investor
will then have 60 days to make an additional investment before a redemption will
be processed by the Fund.
Telephone Transactions. In order to request redemptions by
telephone, investors must have completed and returned to Warburg Pincus Funds an
account application containing a telephone election. Unless contrary
instructions are elected, an investor will be entitled to make exchanges by
telephone. Neither the Fund nor its agents will be liable for following
instructions communicated by telephone that it reasonably believes to be
genuine. Reasonable procedures will be employed on behalf of the Fund to confirm
that instructions communicated by telephone are genuine. Such procedures include
providing written confirmation of telephone transactions, tape recording
telephone instructions and requiring specific personal information prior to
acting upon telephone instructions.
Automatic Cash Withdrawal Plan. The Fund offers investors an
automatic cash withdrawal plan under which investors may elect to receive
periodic cash payments of at least $250 monthly or quarterly. To establish this
service, complete the "Automatic Withdrawal Plan" section of the account
application and attach a voided check from the bank account to be credited.
<PAGE>21
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
the Fund for Common Shares of another Warburg Pincus Fund at their respective
net asset values. Exchanges may be effected by mail or by telephone in the
manner described under "Redemption of Shares" above. If an exchange request is
received by Warburg Pincus Funds prior to 4:00 p.m. (Eastern time), the exchange
will be made at the Fund's net asset value determined at the end of that
business day. Exchanges may be effected without a sales charge but must satisfy
the minimum dollar amount necessary for new purchases. Due to the costs involved
in effecting exchanges, the Fund reserves the right to refuse to honor more than
three exchange requests by a shareholder in any 30-day period. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
Currently, exchanges may be made with the following funds:
- Warburg Pincus Capital Appreciation Fund -- an equity fund
seeking long-term capital appreciation by investing
principally in equity securities of medium-sized domestic
companies;
- 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 tax;
- Warburg Pincus Post-Venture Capital Fund -- an equity fund
seeking long-term growth of capital by investing primarily in
equity securities of issuers in their post-venture capital
stage of development;
- 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
<PAGE>22
obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities;
- Warburg Pincus Fixed Income Fund -- a bond fund seeking
current income and, secondarily, capital appreciation by
investing in a diversified portfolio of fixed-income
securities;
- Warburg Pincus Global Fixed Income Fund -- a bond fund
investing in a portfolio consisting of investment grade
fixed-income securities of governmental and corporate issuers
denominated in various currencies, including U.S. dollars;
- Warburg Pincus Balanced Fund -- a fund seeking maximum total
return through a combination of long-term growth of capital
and current income consistent with preservation of capital
through diversified investments in equity and debt securities;
- Warburg Pincus Growth & Income Fund -- an equity fund
seeking long-term growth of capital and income and a
reasonable current return;
- Warburg Pincus Small Company Value Fund -- an equity fund
seeking long-term capital appreciation by investing primarily
in equity securities of small companies;
- Warburg Pincus International Equity Fund -- an equity fund
seeking long-term capital appreciation by investing primarily
in equity securities of non-United States issuers;
- Warburg Pincus Emerging Markets Fund -- an equity fund
seeking growth of capital by investing primarily in securities
of non-United States issuers consisting of companies in
emerging securities markets;
- Warburg Pincus Japan Growth Fund -- an equity fund seeking
long-term growth of capital by investing primarily in equity
securities of Japanese issuers; and
- Warburg Pincus Japan OTC Fund -- an equity fund seeking
long-term capital appreciation by investing in a portfolio of
securities traded in the Japanese over-the-counter market.
The exchange privilege is available to shareholders residing
in any state in which the Common Shares being acquired may legally be sold. When
an investor effects an exchange of
<PAGE>23
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) 927-2874.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions. The Fund calculates its dividends
from net investment income. Net investment income includes interest accrued and
dividends earned on the Fund's portfolio securities for the applicable period
less applicable expenses. The Fund declares dividends from its net investment
income and net realized short-term and long-term capital gains annually and pays
them in the calendar year in which they are declared, generally in November or
December. Net investment income earned on weekends and when the NYSE is not open
will be computed as of the next business day. Unless an investor instructs the
Fund to pay dividends or distributions in cash, dividends and distributions will
automatically be reinvested in additional Common Shares of the Fund at net asset
value. The election to receive dividends in cash may be made on the account
application or, subsequent, 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.
The Fund may be required to withhold for U.S. federal income
taxes 31% of all distributions payable to shareholders who fail to provide the
Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the U.S. Internal Revenue Service
that they are subject to backup withholding.
Taxes. The Fund intends to qualify each year as a "regulated
investment company" within the meaning of the Code. The Fund, it if qualifies as
a regulated investment company, will be subject to a 4% non-deductible excise
tax measured with respect to certain undistributed amounts of ordinary income
and capital gain. The Fund expects to pay such additional dividends and to make
such additional distributions as are necessary to avoid the application of this
tax.
Dividends paid from net investment income and distributions of
net realized short-term capital gains are taxable to investors as ordinary
income, and distributions derived from net realized long-term capital gains are
taxable to investors as long-term capital gains, in each case regardless of how
long the shareholder has held Fund shares and whether received in cash or
reinvested in additional Fund shares. As a
<PAGE>24
general rule, an investor's gain or loss on a sale or redemption of his Fund
shares will be a long-term capital gain or loss if he has held his shares for
more than one year and will be a short-term capital gain or loss if he has
held his shares for one year or less. However, any loss realized upon the sale
or redemption of shares within six months from the date of their purchase will
be treated as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gain during such six-month period with
respect to such shares. Investors may be proportionately liable for taxes on
income and gains of the Fund, but investors not subject to tax on their income
will not be required to pay tax on amounts distributed to them. The Fund's
investment activities, including short sales of securities, will not result in
unrelated business taxable income to a tax-exempt investor. 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.
General. Statements as to the tax status of each investor's
dividends and distributions are mailed annually. Each investor will also
receive, if applicable, various written notices after the close of the Fund's
prior taxable year with respect to certain dividends and distributions which
were received from the Fund during the Fund's prior taxable year. Investors
should consult their own tax advisers with specific reference to their own tax
situations, including their state and local tax liabilities.
NET ASSET VALUE
The Fund's net asset value per share is calculated as of the
close of regular trading on the NYSE (currently 4:00 p.m., Eastern time) on each
business day, Monday through Friday, except on days when the NYSE is closed. The
NYSE is currently scheduled to be closed on New Year's Day, Washington's
Birthday, Good Friday, Memorial Day (observed), Independence Day, Labor Day,
Thanksgiving Day and Christmas Day, and on the preceding Friday or subsequent
Monday when one of these holidays falls on a Saturday or Sunday, respectively.
The net asset value per share of the Fund generally changes each day.
The net asset value per Common Share of the Fund is computed
by adding the Common Shares' pro rata share of the value of the Fund's assets,
deducting the Common Shares' pro rata share of the Fund's liabilities and the
liabilities specifically allocated to Common Shares and then dividing the result
by the total number of outstanding Common Shares.
Securities listed on a U.S. securities exchange (including
securities traded through the NASDAQ National Market System) or foreign
securities exchange or traded in an over-the-counter market will be valued at
the most recent sale price when the valuation is made. Debt obligations that
mature in 60 days
<PAGE>25
or less from the valuation date are valued on the basis of amortized cost,
unless the Board determines that using this valuation method would not reflect
the investments' value. Securities, options and futures contracts for which
market quotations are not readily available and other assets will be valued at
their fair value as determined in good faith pursuant to consistently applied
procedures established by the Board. Further information regarding valuation
policies is contained in the Statement of Additional Information.
PERFORMANCE
The Fund quotes the performance of Common Shares separately
from Advisor Shares. The net asset value of Common Shares is listed in The Wall
Street Journal each business day under the heading "Warburg Pincus Funds." From
time to time, the Fund may advertise the average annual total return of its
Common Shares over various periods of time. These total return figures show the
average percentage change in value of an investment in the Common Shares from
the beginning of the measuring period to the end of the measuring period. The
figures reflect changes in the price of the Common Shares assuming that any
income dividends and/or capital gain distributions made by the Fund during the
period were reinvested in Common Shares of the Fund. Total return will be shown
for recent one-, five- and ten-year periods, and may be shown for other periods
as well (such as from commencement of the Fund's operations or on a
year-by-year, quarterly or current year-to-date basis).
When considering average total return figures for periods
longer than one year, it is important to note that the annual total return for
one year in the period might have been greater or less than the average for the
entire period. When considering total return figures for periods shorter than
one year, investors should bear in mind that the Fund seeks long-term
appreciation and that such return may not be representative of the Fund's return
over a longer market cycle. The Fund may also advertise aggregate total return
figures of its Common Shares for various periods, representing the cumulative
change in value of an investment in the Common Shares for the specific period
(again reflecting changes in share prices and assuming reinvestment of dividends
and distributions). Aggregate and average total returns may be shown by means of
schedules, charts or graphs and may indicate various components of total return
(i.e., change in value of initial investment, income dividends and capital gain
distributions).
Investors should note that total return figures are based on
historical earnings and are not intended to indicate future performance. The
Fund's Statement of Additional Information describes the method used to
determine the total return. Current total return figures may be obtained by
calling Warburg Pincus Funds at (800) 927-2874.
<PAGE>26
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 of common stocks; or
(iii) other appropriate indexes of investment securities or with data developed
by Warburg derived from such indexes. The Fund may include evaluations of the
Fund published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as The Wall Street Journal,
Investor's Daily, Money, Inc., Institutional Investor, Barron's, Fortune,
Forbes, Business Week, Mutual Fund Magazine, Morningstar, Inc. and Financial
Times.
In reports or other communications to investors or in
advertising, the Fund may also describe the general biography or work experience
of the portfolio managers of the Fund and may include quotations attributable to
the portfolio managers describing approaches taken in managing the Fund's
investments, research methodology underlying stock selection or the Fund's
investment objective. In addition, the Fund and its portfolio managers may
render periodic updates of Fund activity, which may include a discussion of
significant portfolio holdings and analysis of holdings by industry, country,
credit quality and other characteristics. The Fund may also discuss measures of
risk, the continuum of risk and return relating to different investments and the
potential impact of foreign stocks on a portfolio otherwise composed of domestic
securities. Morningstar, Inc. rates funds in broad categories based on
risk/reward analyses over various time periods. In addition, the Fund may from
time to time compare the expense ratio of its Common Shares to that of
investment companies with similar objectives and policies, based on data
generated by Lipper Analytical Services, Inc. or similar investment services
that monitor mutual funds.
GENERAL INFORMATION
Organization. The Fund was incorporated on November 12, 1987
under the laws of the State of Maryland under the name "Counsellors Emerging
Growth Fund, Inc." On October 27, 1995 the Fund amended its charter to change
its name to "Warburg, Pincus Emerging Growth Fund, Inc."
The Fund's charter authorizes the Board to issue three billion
full and fractional shares of capital stock, $.001 par value per share, of which
one billion shares are designated Advisor Shares. Under the Fund's charter
documents, the Board has the power to classify or reclassify any unissued shares
of
<PAGE>27
the Fund into one or more additional classes by setting or changing in any one
or more respects their relative rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption. The Board may similarly classify or reclassify any class of its
shares into one or more series and, without shareholder approval, may increase
the number of authorized shares of the Fund.
Multi-Class Structure. The Fund offers a separate class of
shares, the Advisor Shares, pursuant to a separate prospectus. Individual
investors may only purchase Advisor Shares through institutional shareholders of
record, broker-dealers, financial institutions, depository institutions,
retirement plans and financial intermediaries. Shares of each class represent
equal pro rata interests in the Fund and accrue dividends and calculate net
asset value and performance quotations in the same manner. Because of the higher
fees paid by the Advisor Shares, the total return on such shares can be expected
to be lower than the total return on Common Shares. Investors may obtain
information concerning the Advisor Shares from their investment professional or
by calling Counsellors Securities at (800) 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 Director of the Fund
may be removed from office upon the vote of shareholders holding at least a
majority of the Fund's outstanding shares, at a meeting called for that purpose.
A meeting will be called for the purpose of voting on the removal of a Board
member at the written request of holders of 10% of the outstanding shares of the
Fund. John L. Furth, a Director and Trustee 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 November 30, 1995 because they may be
deemed to possess or share investment power over shares owned by clients of
Warburg 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 or investment made through the
Automatic Investment Program). The Fund will also send to its investors a
semiannual report and an audited annual report, each of which includes a list of
the investment securities held by the Fund and a statement of the performance of
the Fund.
<PAGE>28
SHAREHOLDER SERVICING
Common Shares may be sold to or through institutions,
including insurance companies, financial institutions and broker-dealers, 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 fees by the
Fund, Counsellors Securities, Counsellors Service or any of their affiliates for
transfer agency, administrative, accounting, shareholder liaison and/or other
services provided to their clients or customers that invest in the Fund's Common
Shares. Organizations that provide recordkeeping or other services to certain
employee benefit plans and qualified and other retirement plans that include the
Fund as an investment alternative and registered representatives (including
retirement plan consultants) that facilitate the administration and servicing of
shareholder accounts may also be paid a fee. Fees paid vary depending on the
arrangements and the amount of assets held by an institution's clients or
customers and/or the number of plan participants investing in the Fund. Warburg,
Counsellors Securities, Counsellors Service or any of their affiliates may, from
time to time, at their own expense, pay certain fund transfer agent fees and
expenses related to clients and customers of their institutions and
organizations. In addition, these institutions may use a portion of their
compensation to compensate the Fund's custodian or transfer agent for costs
related to accounts of their clients or customers.
---------------------------
No person has been authorized to give any information or to
make any representations other than those contained in this Prospectus, the
Statement of Additional Information or the Fund's official sales literature in
connection with the offering of shares of the Fund, and if given or made, such
other information or representations must not be relied upon as having been
authorized by the Fund. This Prospectus does not constitute an offer of the
Common Shares of the Fund in any state in which, or to any person to whom, such
offer may not lawfully be made.
<PAGE>
TABLE OF CONTENTS
The Fund's Expenses................................
Financial Highlights...............................
Investment Objective and Policies..................
Portfolio Investments..............................
Risk Factors and Special Considerations............
Portfolio Transactions and Turnover Rate...........
Certain Investment
Strategies.......................................
Investment Guidelines..............................
Management of the Fund.............................
How to Open an Account.............................
How to Purchase Shares.............................
How to Redeem and Exchange
Shares...........................................
Dividends, Distributions
and Taxes........................................
Net Asset Value....................................
Performance........................................
General Information................................
Shareholder Servicing..............................
WARBURG PINCUS FUNDS
[ ]Warburg Pincus
Emerging Growth Fund
===============================================================================
PROSPECTUS
===============================================================================
April 25, 1996
SPEMG-1-0496
<PAGE>1
STATEMENT OF ADDITIONAL INFORMATION
April 25, 1996
- --------------------------------------------------------------------------
WARBURG PINCUS EMERGING GROWTH FUND
P.O. Box 9030, Boston, Massachusetts 02205-9030
For information, call (800) 888-6878
- --------------------------------------------------------------------------
Contents
Page
----
Investment Objective................................................1
Investment Policies.................................................2
Management Of The Fund.............................................23
Additional Purchase And Redemption Information.....................29
Exchange Privilege.................................................30
Additional Information Concerning Taxes............................31
Determination Of Performance.......................................34
Auditors And Counsel...............................................35
Miscellaneous......................................................36
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 Prospectus for the Common Shares of Warburg Pincus
Emerging Growth Fund (the "Fund"), and with the Prospectus for the Advisor
Shares of the Fund, each dated April 25, 1996, as amended or supplemented from
time to time, and is incorporated by reference in its entirety into those
Prospectuses. Because this Statement of Additional Information is not itself a
prospectus, no investment in shares of the Fund should be made solely upon the
information contained herein. Copies of the Fund's Prospectuses and information
regarding the Fund's current performance may be obtained by calling the Fund at
(800) 927-2874. Information regarding the status of shareholder accounts may 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.
INVESTMENT POLICIES
The following policies supplement the descriptions of the
Fund's investment objectives and policies in the Prospectuses.
Options, Futures and Currency Exchange Transactions
Securities Options. The Fund may write covered call options
on stock and debt securities and may purchase U.S. exchange-traded and
over-the-counter ("OTC") put and call options.
The Fund realizes fees (referred to as "premiums") for
granting the rights evidenced by the options it has written. A put option
embodies the right of its purchaser to compel the writer of the option to
purchase from the option holder an underlying security at a specified price for
a specified time period or at a specified time. In contrast, a call option
embodies the right of its purchaser to compel the writer of the option to sell
to the option holder an underlying security at a specified price for a specified
time period or at a specified time.
The principal reason for writing covered options on a security
is to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. In return for a premium, the Fund as
the writer of a covered call option forfeits the right to any appreciation in
the value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). Nevertheless,
the Fund as a 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.
In the case of options written by the Fund that are deemed
covered by virtue of the Fund's holding convertible or exchangeable preferred
stock or debt securities, the time required to convert or exchange and obtain
physical delivery of the underlying common stock with respect to which the Fund
has written options may exceed the time within which the Fund must make delivery
in accordance with an exercise notice. In these instances, the Fund may purchase
or temporarily borrow the underlying securities for purposes of physical
delivery. By so doing, the Fund will not bear any market risk, since the Fund
will have the absolute right to receive from the issuer of the underlying
security an equal number of shares to replace the borrowed securities, but the
Fund may incur additional transaction costs or interest expenses in connection
with any such purchase or borrowing.
<PAGE>3
Additional risks exist with respect to certain of the
securities for which the Fund may write covered call options. For example, if
the Fund writes covered call options on mortgage-backed securities, the
mortgage-backed securities that it holds as cover may, because of scheduled
amortization or unscheduled prepayments, cease to be sufficient cover. If this
occurs, the Fund will compensate for the decline in the value of the cover by
purchasing an appropriate additional amount of mortgage-backed securities.
Options written by the Fund will normally have expiration
dates between one and nine months from the date written. The exercise price of
the options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. The Fund may write (i) in-the-money call
options when Warburg, Pincus Counsellors, Inc., the Fund's investment adviser
("Warburg"), expects that the price of the underlying security will remain flat
or decline moderately during the option period, (ii) at-the-money call options
when Warburg expects that the price of the underlying security will remain flat
or advance moderately during the option period and (iii) out-of-the-money call
options when Warburg expects that the premiums received from writing the call
option plus the appreciation in market price of the underlying security up to
the exercise price will be greater than the appreciation in the price of the
underlying security alone. In any of the preceding situations, if the market
price of the underlying security declines and the security is sold at this lower
price, the amount of any realized loss will be offset wholly or in part by the
premium received. To secure its obligation to deliver the underlying security
when it writes a call option, the Fund will be required to deposit in escrow the
underlying security or other assets in accordance with the rules of the Options
Clearing Corporation (the "Clearing Corporation") and of the securities exchange
on which the option is written.
Prior to their expirations, put and call options may be sold
in closing sale or purchase transactions (sales or purchases by the Fund prior
to the exercise of options that it has purchased or written, respectively, of
options of the same series) in which the Fund may realize a profit or loss from
the sale. An option position may be closed out only where there exists a
secondary market for an option of the same series on a recognized securities
exchange or in the over-the-counter market. When the Fund has purchased an
option and engages in a closing sale transaction, whether the Fund realizes a
profit or loss will depend upon whether the amount received in the closing sale
transaction is more or less than the premium the Fund initially paid for the
original option plus the related transaction costs. Similarly, in cases where
the Fund has written an option, it will realize a profit if the cost of the
closing purchase transaction is less than the premium received upon writing the
original option and will incur a loss if the cost of the closing purchase
transaction exceeds the premium received upon writing the original option. The
Fund may engage in a closing purchase transaction to realize a profit, to
prevent an underlying security with respect to which it has written an option
from being called or put or, in the case of a call option, to unfreeze an
underlying security (thereby permitting its sale or the writing of a new option
on the security prior to the outstanding option's expiration). The obligation of
the Fund under an option it has written would be terminated by a closing
purchase transaction, but the Fund would not be deemed to own an
<PAGE>4
option as a result of the transaction. So long as the obligation of the Fund
as the writer of an option continues, the Fund may be assigned an exercise
notice by the broker-dealer through which the option was sold, requiring the
Fund to deliver the underlying security against payment of the exercise price.
This obligation terminates when the option expires or the Fund effects a
closing purchase transaction. The Fund can no longer effect a closing purchase
transaction with respect to an option once it has been assigned an exercise
notice.
There is no assurance that sufficient trading interest will
exist to create a liquid secondary market on a securities exchange for any
particular option or at any particular time, and for some options no such
secondary market may exist. A liquid secondary market in an option may cease to
exist for a variety of reasons. In the past, for example, higher than
anticipated trading activity or order flow or other unforeseen events have at
times rendered certain of the facilities of the Clearing Corporation and various
securities exchanges inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of orders
or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. Moreover,
the Fund's ability to terminate options positions established in the
over-the-counter market may be more limited than for exchange-traded options and
may also involve the risk that securities dealers participating in
over-the-counter transactions would fail to meet their obligations to the Fund.
The Fund, however, intends to purchase over-the-counter options only from
dealers whose debt securities, as determined by Warburg, are considered to be
investment grade. If, as a covered call option writer, the Fund is unable to
effect a closing purchase transaction in a secondary market, it will not be able
to sell the underlying security until the option expires or it delivers the
underlying security upon exercise. In either case, the Fund would continue to be
at market risk on the security and could face higher transaction costs,
including brokerage commissions.
Securities exchanges generally have established limitations
governing the maximum number of calls and puts of each class which may be held
or written, or exercised within certain time periods by an investor or group of
investors acting in concert (regardless of whether the options are written on
the same or different securities exchanges or are held, written or exercised in
one or more accounts or through one or more brokers). It is possible that the
Fund and other clients of Warburg and certain of its affiliates may be
considered to be such a group. A securities exchange may order the liquidation
of positions found to be in violation of these limits and it may impose certain
other sanctions. These limits may restrict the number of options the Fund will
be able to purchase on a particular security.
Stock Index Options. The Fund may purchase and write
exchange-listed and OTC put and call options on stock indexes. A stock index
measures the movement of a certain group of stocks by assigning relative values
to the common stocks included in the index, fluctuating with changes in the
market values of the stocks included in the index. Some stock index options are
based on a broad market index, such as the NYSE Composite Index, or a narrower
market index such as the Standard & Poor's 100. Indexes may also be based on a
particular industry or market segment.
<PAGE>5
Options on stock indexes are similar to options on stock
except that (i) the expiration cycles of stock index options are monthly, while
those of stock options are currently quarterly, and (ii) the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive a cash "exercise settlement amount" equal to (a) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the underlying
index on the date of exercise, multiplied by (b) a fixed "index multiplier."
Receipt of this cash amount will depend upon the closing level of the stock
index upon which the option is based being greater than, in the case of a call,
or less than, in the case of a put, the exercise price of the index and the
exercise price of the option times a specified multiple. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount. Stock index options may be offset by entering into closing
transactions as described above for securities options.
OTC Options. The Fund may purchase OTC or dealer options or
sell covered OTC options. Unlike exchange-listed options where an intermediary
or clearing corporation, such as the Clearing Corporation, assures that all
transactions in such options are properly executed, the responsibility for
performing all transactions with respect to OTC options rests solely with the
writer and the holder of those options. A listed call option writer, for
example, is obligated to deliver the underlying stock to the clearing
organization if the option is exercised, and the clearing organization is then
obligated to pay the writer the exercise price of the option. If the Fund were
to purchase a dealer option, however, it would rely on the dealer from whom it
purchased the option to perform if the option were exercised. If the dealer
fails to honor the exercise of the option by the Fund, the Fund would lose the
premium it paid for the option and the expected benefit of the transaction.
Listed options generally have a continuous liquid market while
dealer options have none. Consequently, the Fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when the Fund writes a
dealer option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to which the Fund originally wrote the option. Although the Fund will seek to
enter into dealer options only with dealers who will agree to and that are
expected to be capable of entering into closing transactions with the Fund,
there can be no assurance that the Fund will be able to liquidate a dealer
option at a favorable price at any time prior to expiration. The inability to
enter into a closing transaction may result in material losses to the Fund.
Until the Fund, as a covered OTC call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) used to cover the written option until the option expires or is
exercised. This requirement may impair the Fund's ability to sell portfolio
securities or, with respect to currency options, currencies at a time when such
sale might be advantageous. In the event of insolvency of the other party, the
Fund may be unable to liquidate a dealer option.
<PAGE>6
Futures Activities. The Fund may enter into foreign currency,
interest rate and stock index futures contracts and purchase and write (sell)
related options traded on exchanges designated by the Commodity Futures Trading
Commission (the "CFTC") or consistent with CFTC regulations on foreign
exchanges. These transactions may be entered into for "bona fide hedging"
purposes as defined in CFTC regulations and other permissible purposes including
hedging against changes in the value of portfolio securities due to anticipated
changes in currency values, interest rates and/or market conditions and
increasing return.
The Fund will not enter into futures contracts and related
options for which the aggregate initial margin and premiums (discussed below)
required to establish positions other than those considered to be "bona fide
hedging" by the CFTC exceed 5% of the Fund's net asset value after taking into
account unrealized profits and unrealized losses on any such contracts it has
entered into. The Fund reserves the right to engage in transactions involving
futures contracts and options on futures contracts to the extent allowed by CFTC
regulations in effect from time to time and in accordance with the Fund's
policies. There is no overall limit on the percentage of Fund assets that may be
at risk with respect to futures activities. The ability of the Fund to trade in
futures contracts and options on futures contracts may be limited by the
requirements of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable to a regulated investment company.
Futures Contracts. A foreign currency futures contract
provides for the future sale by one party and the purchase by the other party of
a certain amount of a specified non-U.S. currency at a specified price, date,
time and place. An interest rate futures contract provides for the future sale
by one party and the purchase by the other party of a certain amount of a
specific interest rate sensitive financial instrument (debt security) at a
specified price, date, time and place. Stock indexes are capitalization weighted
indexes which reflect the market value of the stock listed on the indexes. A
stock index futures contract is an agreement to be settled by delivery of an
amount of cash equal to a specified multiplier times the difference between the
value of the index at the close of the last trading day on the contract and the
price at which the agreement is made.
No consideration is paid or received by the Fund upon entering
into a futures contract. Instead, the Fund is required to deposit in a
segregated account with its custodian an amount of cash or cash equivalents,
such as U.S. government securities or other liquid high-grade debt obligations,
equal to approximately 1% to 10% of the contract amount (this amount is subject
to change by the exchange on which the contract is traded, and brokers may
charge a higher amount). This amount is known as "initial margin" and is in the
nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. The broker will have access to
amounts in the margin account if the Fund fails to meet its contractual
obligations. Subsequent payments, known as "variation margin," to and from the
broker, will be made daily as the currency, financial instrument or stock index
underlying the futures contract fluctuates, making the long and short positions
in the futures contract more or less valuable, a process known as
"marking-to-market." The Fund will also incur brokerage costs in connection with
entering into futures transactions.
<PAGE>7
At any time prior to the expiration of a futures contract, the
Fund may elect to close the position by taking an opposite position, which will
operate to terminate the Fund's existing position in the contract. Positions in
futures contracts and options on futures contracts (described below) may be
closed out only on the exchange on which they were entered into (or through a
linked exchange). No secondary market for such contracts exists. Although the
Fund intends to enter into futures contracts only if there is an active market
for such contracts, there is no assurance that an active market will exist at
any particular time. Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the day. It is possible that futures contract prices could move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions at an advantageous
price and subjecting the Fund to substantial losses. In such event, and in the
event of adverse price movements, the Fund would be required to make daily cash
payments of variation margin. In such situations, if the fund had insufficient
cash, it might have to sell securities to meet daily variation margin
requirements at a time when it would be disadvantageous to do so. In addition,
if the transaction is entered into for hedging purposes, in such circumstances
the Fund may realize a loss on a futures contract or option that is not offset
by an increase in the value of the hedged position. Losses incurred in futures
transactions and the costs of these transactions will affect the Fund's
performance.
Options on Futures Contracts. The Fund may purchase and write
put and call options on foreign currency, interest rate and stock index futures
contracts and may enter into closing transactions with respect to such options
to terminate existing positions. There is no guarantee that such closing
transactions can be effected; the ability to establish and close out positions
on such options will be subject to the existence of a liquid market.
An option on a currency, interest rate or stock index futures
contract, as contrasted with the direct investment in such a contract, gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract at a specified exercise price at any time prior to the
expiration date of the option. The writer of the option is required upon
exercise to assume an offsetting futures position (a short position if the
option is a call and a long position if the option is a put). Upon exercise of
an option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied 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.
<PAGE>8
Currency Exchange Transactions. The value in U.S. dollars of
the assets of the Fund that are invested in foreign securities may be affected
favorably or unfavorably by changes in exchange control regulations, and the
Fund may incur costs in connection with conversion between various currencies.
Currency exchange transactions may be from any non-U.S. currency into U.S.
dollars or into other appropriate currencies. The Fund will conduct its currency
exchange transactions (i) on a spot (i.e., cash) basis at the rate prevailing in
the currency exchange market, (ii) through entering into futures contracts or
options on such contracts (as described above), (iii) through entering into
forward contracts to purchase or sell currency or (iv) by purchasing
exchange-traded currency options.
Forward Currency Contracts. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract as agreed
upon by the parties, at a price set at the time of the contract. These contracts
are entered into in the interbank market conducted directly between currency
traders (usually large commercial banks and brokers) and their customers.
Forward currency contracts are similar to currency futures contracts, except
that futures contracts are traded on commodities exchanges and are standardized
as to contract size and delivery date.
At or before the maturity of a forward contract, the Fund may
either sell a portfolio security and make delivery of the currency, or retain
the security and fully or partially offset its contractual obligation to deliver
the currency by negotiating with its trading partner to purchase a second,
offsetting contract. If the Fund retains the portfolio security and engages in
an offsetting transaction, the Fund, at the time of execution of the offsetting
transaction, will incur a gain or a loss to the extent that movement has
occurred in forward contract prices.
Currency Options. The Fund may purchase exchange-traded put
and call options on foreign currencies. Put options convey the right to sell the
underlying currency at a price which is anticipated to be higher than the spot
price of the currency at the time the option is exercised. Call options convey
the right to buy the underlying currency at a price which is expected to be
lower than the spot price of the currency at the time the option is exercised.
Currency Hedging. The Fund's currency hedging will be limited
to hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward currency with respect to
specific receivables or payables of the Fund generally accruing in connection
with the purchase or sale of its portfolio securities. Position hedging is the
sale of forward currency with respect to portfolio security positions. The Fund
may not position hedge to an extent greater than the aggregate market value (at
the time of entering into the hedge) of the hedged securities.
A decline in the U.S. dollar value of a foreign currency in
which the Fund's securities are denominated will reduce the U.S. dollar value
of the securities, even if their value in the foreign currency remains
constant. The use of currency hedges does not eliminate
<PAGE>9
fluctuations in the underlying prices of the securities, but it does establish
a rate of exchange that can be achieved in the future. For example, in order
to protect against diminutions in the U.S. dollar value of securities it
holds, the Fund may purchase currency put options. If the value of the
currency does decline, the Fund will have the right to sell the currency for a
fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on the U.S. dollar value of its securities that otherwise would
have resulted. Conversely, if a rise in the U.S. dollar value of a currency in
which securities to be acquired are denominated is projected, thereby
potentially increasing the cost of the securities, the Fund may purchase call
options on the particular currency. The purchase of these options could
offset, at least partially, the effects of the adverse movements in exchange
rates. The benefit to the Fund derived from purchases of currency options,
like the benefit derived from other types of options, will be reduced by
premiums and other transaction costs. Because transactions in currency
exchange are generally conducted on a principal basis, no fees or commissions
are generally involved. Currency hedging involves some of the same risks and
considerations as other transactions with similar instruments. Although
currency hedges limit the risk of loss due to a decline in the value of a
hedged currency, at the same time, they also limit any potential gain that
might result should the value of the currency increase. If a devaluation is
generally anticipated, the Fund may not be able to contract to sell a currency
at a price above the devaluation level it anticipates.
While the values of currency futures and options on futures,
forward currency contracts and currency options may be expected to correlate
with exchange rates, they will not reflect other factors that may affect the
value of the Fund's investments and a currency hedge may not be entirely
successful in mitigating changes in the value of the Fund's investments
denominated in that currency. A currency hedge, for example, should protect a
Yen-denominated bond against a decline in the Yen, but will not protect the Fund
against a price decline if the issuer's creditworthiness deteriorates.
Hedging. In addition to entering into options, futures and
currency exchange transactions for other purposes, including generating current
income to offset expenses or increase return, the Fund may enter into these
transactions as hedges to reduce investment risk, generally by making an
investment expected to move in the opposite direction of a portfolio position. A
hedge is designed to offset a loss in a portfolio position with a gain in the
hedged position; at the same time, however, a properly correlated hedge will
result in a gain in the portfolio position being offset by a loss in the hedged
position. As a result, the use of options, futures, contracts and currency
exchange transactions for hedging purposes could limit any potential gain from
an increase in the value of the position hedged. In addition, the movement in
the portfolio position hedged may not be of the same magnitude as movement in
the hedge. With respect to futures contracts, since the value of portfolio
securities will far exceed the value of the futures contracts sold by the Fund,
an increase in the value of the futures contracts could only mitigate, but not
totally offset, the decline in the value of the Fund's assets.
In hedging transactions based on an index, whether the Fund
will realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the
<PAGE>10
level of stock prices in the stock market generally or, in the case of certain
indexes, in an industry or market segment, rather than movements in the price
of a particular stock. The risk of imperfect correlation increases as the
composition of the Fund's portfolio varies from the composition of the index.
In an effort to compensate for imperfect correlation of relative movements in
the hedged position and the hedge, the Fund's hedge positions may be in a
greater or lesser dollar amount than the dollar amount of the hedged position.
Such "over hedging" or "under hedging" may adversely affect the Fund's net
investment results if market movements are not as anticipated when the hedge
is established. Stock index futures transactions may be subject to additional
correlation risks. First, all participants in the futures market are subject
to margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which would distort the normal relationship between
the stock index and futures markets. Secondly, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market also may cause temporary
price distortions. Because of the possibility of price distortions in the
futures market and the imperfect correlation between movements in the stock
index and movements in the price of stock index futures, a correct forecast of
general market trends by Warburg still may not result in a successful hedging
transaction.
The Fund will engage in hedging transactions only when deemed
advisable by Warburg, and successful use by the Fund of hedging transactions
will be subject to Warburg's ability to predict trends in currency, interest
rate or securities markets, as the case may be, and to correctly predict
movements in the directions of the hedge and the hedged position and the
correlation between them, which predictions could prove to be inaccurate. This
requires different skills and techniques than predicting changes in the price of
individual securities, and there can be no assurance that the use of these
strategies will be successful. Even a well-conceived hedge may be unsuccessful
to some degree because of unexpected market behavior or trends. Losses incurred
in hedging transactions and the costs of these transactions will affect the
Fund's performance.
Asset Coverage for Forward Contracts, Options, Futures and
Options on Futures. As described in the Prospectuses, the Fund will comply with
guidelines established by the U.S. Securities and exchange Commission (the
"SEC") with respect to coverage of forward currency contracts; options written
by the Fund on securities and indexes; and currency, interest rate and index
futures contracts and options on these futures contracts. These guidelines may,
in certain instances, require segregation by the Fund of cash or liquid
high-grade debt securities or other securities that are acceptable as collateral
to the appropriate regulatory authority.
For example, a call option written by the Fund on securities
may require the Fund to hold the securities subject to the call (or securities
convertible into the securities without additional consideration) or to
segregate assets (as described above) sufficient to purchase and deliver the
securities if the call is exercised. A call option written by the Fund on an
index may require the Fund to own portfolio securities that correlate with the
index or
<PAGE>11
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 or
forward contract, the Fund could purchase a put option on the same futures or
forward contract with a strike price as high or higher than the price of the
contract held. The Fund may enter into fully or partially offsetting
transactions so that its net position, coupled with any segregated assets
(equal to any remaining obligation), equals its net obligation. Asset coverage
may be achieved by other means when consistent with applicable regulatory
policies.
Additional Information on Other Investment Practices
Foreign Investments. The Fund may not invest more than 20% 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. The Fund may use
hedging techniques with the objective of protecting against loss through the
fluctuation of the value of the foreign currencies against the U.S. dollar,
particularly the forward market in foreign exchange, currency options and
currency futures. See "Currency Transactions" and "Futures Activities" above.
Many of the foreign securities held by the Fund will not be
registered with, nor the issuers thereof be subject to reporting requirements
of, the SEC. Accordingly, there may be less publicly available information about
the securities and about the foreign company or
<PAGE>12
government issuing them than is available about a domestic company or
government entity. Foreign companies are generally not subject to uniform
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies. In addition, with respect to some foreign
countries, there is the possibility of expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the Fund, political or
social instability, or domestic developments which could affect U.S.
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency, and balance of payments positions. The Fund may
invest in securities of foreign governments (or agencies or instrumentalities
thereof), and many, if not all, of the foregoing considerations apply to such
investments as well.
Securities of some foreign companies are less liquid and their
prices are more volatile than securities of comparable U.S. companies. Certain
foreign countries are known to experience long delays between the trade and
settlement dates of securities purchased or sold. Due to the increased exposure
of the Fund to market and foreign exchange fluctuations brought about by such
delays, and due to the corresponding negative impact on Fund liquidity, the Fund
will avoid investing in countries which are known to experience settlement
delays which may expose the Fund to unreasonable risk of loss.
U.S. Government Securities. The Fund may invest in debt
obligations of varying maturities issued or guaranteed by the United States
government, its agencies or instrumentalities ("U.S. Government Securities").
Direct obligations of the U.S. Treasury include a variety of securities that
differ in their interest rates, maturities and dates of issuance. U.S.
Government Securities also include securities issued or guaranteed by the
Federal Housing Administration, Farmers Home Loan Administration, Export-Import
Bank of the United States, Small Business Administration, Government National
Mortgage Association ("GNMA"), General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home
Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit Banks, Federal
Land Banks, Federal National Mortgage Association ("FNMA"), Maritime
Administration, Tennessee Valley Authority, District of Columbia Armory Board
and Student Loan Marketing Association. The Fund may also invest in instruments
that are supported by the right of the issuer to borrow from the U.S. Treasury
and instruments that are supported by the credit of the instrumentality. Because
the U.S. government is not obligated by law to provide support to an
instrumentality it sponsors, the Fund will invest in obligations issued by such
an instrumentality only if Warburg determines that the credit risk with respect
to the instrumentality does not make its securities unsuitable for investment by
the Fund.
Securities of Smaller Companies and Emerging Growth Companies.
The Fund's investments involves considerations that are not applicable to
investing in securities of established, larger-capitalization issuers, including
reduced and less reliable information about issuers and markets, less stringent
accounting standards, illiquidity of securities and markets, higher brokerage
commissions and fees and greater market risk in general.
In addition,
<PAGE>13
securities of emerging growth and smaller companies may involve greater risks
since these securities may have limited marketability and, thus, may be more
volatile.
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 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.
Securities of Other Investment Companies. The Fund may invest
in securities of other investment companies to the extent permitted under the
Investment Company Act of 1940, as amended (the "1940 Act"). Presently, under
the 1940 Act, the Fund may hold securities of another investment company in
amounts which (i) do not exceed 3% of the total outstanding voting stock of such
company, (ii) do not exceed 5% of the value of the Fund's total assets and (iii)
when added to all other investment company securities held by the Fund, do not
exceed 10% of the value of the Fund's total assets.
Lending of Portfolio Securities. The Fund may lend portfolio
securities to brokers, dealers and other financial organizations that meet
capital and other credit requirements or other criteria established by the
Fund's Board of Directors (the "Board"). These loans, if and when made, may not
exceed 20% of the Fund's total assets taken at value. The Fund will not lend
portfolio securities to affiliates of Warburg unless it has applied for and
received specific authority to do so from the SEC. Loans of portfolio securities
will be collateralized by cash, letters of credit or U.S. Government Securities,
which are maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would be for the account of the Fund. From time to time, the Fund may return a
part of the interest earned from the investment of collateral received for
securities loaned to the borrower and/or a third party that is unaffiliated with
the Fund and that is acting as a "finder."
By lending its securities, the Fund can increase its income by
continuing to receive interest and any dividends on the loaned securities as
well as by either investing the collateral received for securities loaned in
short-term instruments or obtaining yield in the form of interest paid by the
borrower when U.S. Government Securities are used as collateral. Although the
generation of income is not an investment objective of the Fund, income received
could be used to pay the Fund's expenses and would increase an investor's total
return. The Fund will adhere to the following conditions whenever its portfolio
securities are
<PAGE>14
loaned: (i) the Fund must receive at least 100% cash collateral or equivalent
securities of the type discussed in the preceding paragraph from the borrower;
(ii) the borrower must increase such collateral whenever the market value of
the securities rises above the level of such collateral; (iii) the Fund must
be able to terminate the loan at any time; (iv) the Fund must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions on the loaned securities and any increase in market value; (v)
the Fund may pay only reasonable custodian fees in connection with the loan;
and (vi) voting rights on the loaned securities may pass to the borrower,
provided, however, that if a material event adversely affecting the investment
occurs, the Board must terminate the loan and regain the right to vote the
securities. Loan agreements involve certain risks in the event of default or
insolvency of the other party including possible delays or restrictions upon
the Fund's ability to recover the loaned securities or dispose of the
collateral for the loan.
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 of a warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to its expiration date.
<PAGE>15
Non-Publicly Traded and Illiquid Securities. The Fund may not
invest more than 10% of its total assets in non-publicly traded and illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market, repurchase agreements which have a maturity of longer
than seven days 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. Warburg anticipates that the market for certain restricted securities
such as institutional commercial paper will expand further as a result of this
regulation and use of automated systems for the trading, clearance and
settlement of unregistered securities of domestic and foreign issuers, such as
the PORTAL System sponsored by the National Association of Securities Dealers,
Inc.
An investment in Rule 144A Securities will be considered
illiquid and therefore subject to the Fund's limit on the purchase of illiquid
securities unless the Board or its delegates determines that the Rule 144A
Securities are liquid. In reaching liquidity decisions, the Board and its
delegates may consider, inter alia, the following factors: (i) the unregistered
<PAGE>16
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.
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
<PAGE>17
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.
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.
<PAGE>18
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 Warburg 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 aggregate of all Rule 144A Securities, non-publicly traded
and illiquid securities and securities of companies (including predecessors)
that have been in continuous operation for less than three years is limited to
15% of total assets. These and other non-fundamental investment limitations are
currently required by one or more states in which shares of the Fund are sold.
These may be more restrictive than the limitations set forth above. 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. In addition, the relevant state
may change or eliminate its policy regarding such investment limitations.
If a percentage restriction (other than the percentage
limitation set forth in No. 1 above) is adhered to at the time of an investment,
a later increase or decrease in the percentage of assets resulting from a change
in the values of portfolio securities or in the amount of the Fund's assets will
not constitute a violation of such restriction.
<PAGE>19
Portfolio Valuation
The Prospectuses discuss the time at which the net asset value
of the Fund is determined for purposes of sales and redemptions. The following
is a description of the procedures used by the Fund in valuing its assets.
Securities listed on a U.S. securities exchange (including
securities traded through the NASDAQ National market System) or foreign
securities exchange or traded in an over-the-counter market will be valued at
the most recent sale as of the time the valuation is made or, in the absence of
sales, at the mean between the bid and asked quotations. If there are no such
quotations, the value of the securities will be taken to be the highest bid
quotation on the exchange or market. Options or futures contracts will be valued
similarly. A security which is listed or traded on more than one exchange is
valued at the quotation on the exchange determined to be the primary market for
such security. Short-term obligations with maturities of 60 days or less are
valued at amortized cost, which constitutes fair value as determined by the
Board. Amortized cost involves valuing a portfolio instrument at its initial
cost and thereafter assuming a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. The amortized cost method of valuation may also be used
with respect to other debt obligations with 60 days or less remaining to
maturity. In determining the market value of portfolio investments, the Fund may
employ outside organizations (a "Pricing Service") which may use a matrix,
formula or other objective method that takes into consideration market indexes,
matrices, yield curves and other specific adjustments. The procedures of Pricing
Services are reviewed periodically by the officers of the Fund under the general
supervision and responsibility of the Board, which may replace a Pricing Service
at any time. Securities, option and futures contracts for which market
quotations are available and certain other assets of the Fund will be valued at
their fair value as determined in good faith pursuant to consistently applied
procedures established by the Board. In addition, the Board or its delegates may
value a security at fair value if it determines that such security's value
determined by the methodology set forth above does not reflect its fair value.
Trading in securities in certain foreign countries is
completed at various times prior to the close of business on each business day
in New York (i.e., a day on which the New York Stock Exchange (the "NYSE") is
open for trading). In addition, securities trading in a particular country or
countries may not take place on all business days in New York. Furthermore,
trading takes place in various foreign markets on days which are not business
days in New York and days on which the Fund's net asset value is not calculated.
As a result, calculation of the Fund's net asset value may not take place
contemporaneously with the determination of the prices of certain foreign
portfolio securities. Events affecting the values of portfolio securities that
occur between the time their prices are determined and the close of regular
trading on the NYSE will not be reflected in the Fund's calculation of net asset
value unless the Board or its delegates deems that the particular event would
materially affect net asset value, in which case an adjustment may be made. All
assets and liabilities initially expressed in foreign currency values will be
converted into U.S. dollar values at the prevailing rate as quoted by a Pricing
Service. If such quotations are not available, the rate of exchange
<PAGE>20
will be determined in good faith pursuant to consistently applied procedures
established by the Board.
Portfolio Transactions
Warburg is responsible for establishing, reviewing and, where
necessary, modifying the Fund's investment program to achieve its investment
objective. Purchases and sales of newly issued portfolio securities are usually
principal transactions without brokerage commissions effected directly with the
issuer or with an underwriter acting as principal. Other purchases and sales may
be effected on a securities exchange or over-the-counter, depending on where it
appears that the best price or execution will be obtained. The purchase price
paid by the Fund to underwriters of newly issued securities usually includes a
concession paid by the issuer to the underwriter, and purchases of securities
from dealers, acting as either principals or agents in the after market, are
normally executed at a price between the bid and asked price, which includes a
dealer's mark-up or mark-down. Transactions on U.S. stock exchanges and some
foreign stock exchanges involve the payment of negotiated brokerage commissions.
On exchanges on which commissions are negotiated, the cost of transactions may
vary among different brokers. On most foreign exchanges, commissions are
generally fixed. There is generally no stated commission in the case of
securities traded in domestic or foreign over-the-counter markets, but the price
of securities traded in over-the-counter markets includes an undisclosed
commission or mark-up. U.S. Government Securities are generally purchased from
underwriters or dealers, although certain newly issued U.S. Government
Securities may be purchased directly from the U.S. Treasury or from the issuing
agency or instrumentality.
Warburg will select specific portfolio investments and effect
transactions for the Fund and in doing so seeks to obtain the overall best
execution of portfolio transactions. In evaluating prices and executions,
Warburg will consider the factors it deems relevant, which may include the
breadth of the market in the security, the price of the security, the financial
condition and execution capability of a broker or dealer and the reasonableness
of the commission, if any, for the specific transaction and on a continuing
basis. Warburg may, in its discretion, effect transactions in portfolio
securities with dealers who provide brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to
the Fund and/or other accounts over which Warburg exercises investment
discretion. Warburg may place portfolio transactions with a broker or dealer
with whom it has negotiated a commission that is in excess of the commission
another broker or dealer would have charged for effecting the transaction if
Warburg determines in good faith that such amount of commission was reasonable
in relation to the value of such brokerage and research services provided by
such broker or dealer viewed in terms of either that particular transaction or
of the overall responsibilities of Warburg. Research and other services received
may be useful to Warburg in serving both the Fund and its other clients and,
conversely, research or other services obtained by the placement of business of
other clients may be useful to Warburg in carrying out its obligations to the
Fund. Research may include furnishing advice, either directly or through
publications or writings, as to the value of securities, the advisability of
purchasing or selling specific securities and the availability of securities or
purchasers or
<PAGE>21
sellers of securities; furnishing seminars, information, analyses and reports
concerning issuers, industries, securities, trading markets and methods,
legislative developments, changes in accounting practices, economic factors
and trends and portfolio strategy; access to research analysts, corporate
management personnel, industry experts, economists and government officials;
comparative performance evaluation and technical measurement services and
quotation services; and products and other services (such as third party
publications, reports and analyses, and computer and electronic access,
equipment, software, information and accessories that deliver, process or
otherwise utilize information, including the research described above) that
assist Warburg in carrying out its responsibilities. For the fiscal year ended
October 31, 1995, $52,194 of total brokerage commissions was paid to brokers
and dealers who provided such research and other services on portfolio
transactions of $869,304,258. Research received from brokers or dealers is
supplemental to Warburg's own research program. The fees to Warburg under its
advisory agreements with the Fund are not reduced by reason of its receiving
any brokerage and research services.
During the fiscal years ended October 31, 1993, October 31,
1994 and October 31, 1995, the Fund paid an aggregate of approximately $237,078,
$390,241 and $795,163, respectively, in commissions to broker-dealers for
execution of portfolio transactions. The increase in commission payments during
the 1994 and 1995 fiscal years was attributable to the increased size of the
Fund.
Investment decisions for the Fund concerning specific
portfolio securities are made independently from those for other clients advised
by Warburg. Such other investment clients may invest in the same securities as
the Fund. When purchases or sales of the same security are made at substantially
the same time on behalf of such other clients, transactions are averaged as to
price and available investments allocated as to amount, in a manner which
Warburg believes to be equitable to each client, including the Fund. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained or sold for the Fund.
To the extent permitted by law, Warburg may aggregate the securities to be sold
or purchased for the Fund with those to be sold or purchased for such other
investment clients in order to obtain best execution.
Any portfolio transaction for the Fund may be executed through
Counsellors Securities Inc., the Fund's distributor ("Counsellors Securities"),
if, in Warburg's judgment, the use of Counsellors Securities is likely to result
in price and execution at least as favorable as those of other qualified
brokers, and if, in the transaction, Counsellors Securities charges the Fund a
commission rate consistent with those charged by Counsellors Securities to
comparable unaffiliated customers in similar transactions. All transactions with
affiliated brokers will comply with Rule 17e-1 under the 1940 Act. 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 Warburg or Counsellors Securities or any affiliated person of such
companies. In addition, the Fund will not give preference to any institutions
with whom the Fund enters into distribution or
<PAGE>22
shareholder servicing agreements concerning the provision of distribution
services or support services. See the Prospectuses, "Shareholder Servicing."
Transactions for the Fund may be effected on foreign
securities exchanges. In transactions for securities not actively traded on a
foreign securities exchange, the Fund will deal directly with the dealers who
make a market in the securities involved, except in those circumstances where
better prices and execution are available elsewhere. Such dealers usually are
acting as principal for their own account. On occasion, securities may be
purchased directly from the issuer. Such portfolio securities are generally
traded on a net basis and do not normally involve brokerage commissions.
Securities firms may receive brokerage commissions on certain portfolio
transactions, including options, futures and options on futures transactions and
the purchase and sale of underlying securities upon exercise of options.
The Fund may participate, if and when practicable, in bidding
for the purchase of securities for the Fund's portfolio directly from an issuer
in order to take advantage of the lower purchase price available to members of
such a group. The Fund will engage in this practice, however, only when Warburg,
in its sole discretion, believes such practice to be otherwise in the Fund's
interest.
Portfolio Turnover
The Fund does not intend to seek profits through short-term
trading, but the rate of turnover will not be a limiting factor when the Fund
deems it desirable to sell or purchase securities. The Fund's portfolio turnover
rate is calculated by dividing the lesser of purchases or sales of its portfolio
securities for the year by the monthly average value of the portfolio
securities. Securities with remaining maturities of one year or less at the date
of acquisition are excluded from the calculation.
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.
<PAGE>23
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.
Richard N. Cooper (61) Director
Room 7E47OHB National Intelligence Counsel;
Central Intelligence Agency Professor at Harvard University;
930 Dolly Madison Blvd. Director or Trustee of Circuit City
McClain, Virginia 22107 Stores, Inc. (retail 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.
Wilson, Wyoming 83014 and Fritz Communications (developers
and operators of radio stations);
Director of Advo, Inc. (direct
mail advertising).
John L. Furth* (65) Chairman of the Board
466 Lexington Avenue Vice Chairman and Director of E.M.
New York, New York 10017-3147 Warburg, Pincus & Co., Inc. ("EMW");
Associated with EMW since 1970;
Director and officer of other
investment companies advised by
Warburg.
Thomas A. Melfe (63) Director
30 Rockefeller Plaza Partner in the law firm of Donovan
New York, New York 10112 Leisure Newton & Irvine; Director of
Municipal Fund for New York
Investors, Inc.
- --------------------
* Indicates a Director who is an "interested person" of the Fund as defined in
the 1940 Act.
<PAGE>24
Alexander B. Trowbridge (66) Director
1155 Connecticut Avenue, N.W. President of Trowbridge Partners,
Suite 700 Inc. (business consulting) from
Washington, DC 20036 January 1990- January 1994;
President of the National Association
of Manufacturers from 1980-1990;
Director or Trustee of New England
Mutual Life Insurance Co., ICOS
Corporation (biopharmaceuticals),
P.H.H. Corporation (fleet auto
management; housing and plant
relocation service), WMX Technologies
Inc. (solid and hazardous waste
collection and disposal), The Rouse
Company (real estate development),
SunResorts International Ltd. (hotel
and real estate management), Harris
Corp. (electronics and
communications equipment), The
Gillette Co. (personal care
products) and Sun Company Inc.
(petroleum refining and marketing).
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
466 Lexington Avenue of the Fund
New York, New York 10017-3147 Managing Director of Warburg 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
New York, New York 10017-3147 Secretary of EMW; Associated with
EMW since 1984; Senior Vice
President, Secretary and Chief
Operating Officer of Counsellors
Securities; Officer of other
investment companies advised by
Warburg.
Eugene L. Podsiadlo(38) Senior Vice President
466 Lexington Avenue Managing Director of EMW; Associated
New York, New York 10017-3147 with EMW since 1991; Vice President
of Citibank, N.A. from 1987-1991;
Senior Vice President of Counsellors
Securities and officer of other
investment companies advised by
Warburg.
<PAGE>25
Stephen Distler (42) Vice President and Chief Financial
466 Lexington Avenue 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 other
investment companies advised by
Warburg.
Eugene P. Grace (44) Vice President and Secretary
466 Lexington Avenue Associated with EMW since April
New York, New York 10017-3147 1994; Attorney-at-law from September
1989-April 1994; life insurance
agent, New York Life Insurance
Company from 1993-1994; General
Counsel and Secretary, Home Unity
Savings Bank from 1991-1992; Vice
President and Chief Compliance
Officer of Counsellors Securities;
Vice President and Secretary of other
investment companies advised by
Warburg.
Howard Conroy (41) Vice President, Treasurer and Chief
466 Lexington Avenue Accounting Officer Associated with
New York, New York 10017-3147 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 other investment companies
advised by Warburg.
Karen Amato (32) Assistant Secretary
466 Lexington Avenue Associated with EMW since 1987;
New York, New York 10017-3147 Assistant Secretary of other
investment companies advised by
Warburg.
No employee of Warburg or PFPC Inc., the Fund's
co-administrator ("PFPC"), or any of their affiliates receives any compensation
from the Fund for acting as an officer or director of the Fund. Each Director
who is not a director, trustee, officer or employee of Warburg, PFPC or any of
their affiliates receives an annual fee of $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>26
Directors' Compensation
(for the fiscal year ended October 31, 1995)
<TABLE>
<CAPTION>
Total Total Compensation from
Name of Director Compensation from all Investment Companies
Fund Managed by Warburg*
---------------- ----------------- ------------------------
<S> <C> <C>
John L. Furth None** None**
Richard N. Cooper $2,000 $41,083
Donald J. Donahue $2,250 $43,833
Jack W. Fritz $1,750 $35,333
Thomas A. Melfe $2,250 $43,583
Alexander B. Trowbridge $2,250 $43,833
<FN>
- ------------------------
* Each Director also serves as a Director or Trustee of 15 other
investment companies advised by Warburg.
** Mr. Furth is considered to be an interested person of the Fund and
Warburg, 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 Warburg.
</TABLE>
As of November 30, 1995, directors and officers of the Fund
as a group owned of record 179,644 of the Fund's outstanding Common Shares. As
of the same date, Mr. Furth may be deemed to have beneficially owned 51.57% of
the Fund's outstanding Common Shares, including shares owned by clients for
which Warburg 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.
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 Warburg's investment management activities. Prior to
joining Warburg 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
<PAGE>27
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 from the University of Virginia and an
M.B.A. from The Wharton School, University of Pennsylvania.
Investment Adviser and Co-Administrators
Warburg serves as investment adviser to the Fund, Counsellors
Funds Service, Inc. ("Counsellors Service") and PFPC serve as co-administrators
to the Fund pursuant to separate written agreements (the "Advisory Agreement,"
the "Counsellors Service Co-Administration Agreement" and the "PFPC
Co-Administration Agreement," respectively). The services provided by, and the
fees payable by the Fund to, Warburg under the Advisory Agreement, Counsellors
Service under the Counsellors Service Co-Administration Agreement and PFPC under
the PFPC Co-Administration Agreement are described in the Prospectuses. See the
Prospectuses, "Management of the Fund." Each class of shares of the Fund bears
its proportionate share of fees payable to Warburg, Counsellors Service and PFPC
in the proportion that its assets bear to the aggregate assets of the Fund at
the time of calculation. 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.
Warburg agrees that if, in any fiscal year, the expenses borne
by the Fund exceed the applicable expense limitations imposed by the securities
regulations of any state in which shares of the Fund are registered or qualified
for sale to the public, it will reimburse the Fund to the extent required by
such regulations. Unless otherwise required by law, such reimbursement would be
accrued and paid on a monthly basis. At the date of this Statement of Additional
Information, the most restrictive annual expense limitation applicable to the
Fund is 2.5% of the first $30 million of the average net assets of the Fund, 2%
of the next $70 million of the average net assets of the Fund and 1.5% of the
remaining average net assets of the Fund.
During the fiscal years ended October 31, 1993, October 31,
1994 and October 31, 1995, Warburg earned $1,248,820, $2,234,376 and $3,824,061,
respectively, in investment advisory fees due it under the Advisory Agreement.
During the fiscal year ended October 31, 1994, Warburg voluntarily waived
$100,408 earned by it under the Advisory Agreement. During the fiscal years
ended October 31, 1993, October 31, 1994 and October 31, 1995, PFPC earned
$138,760 , $248,264 and $424,895, respectively, in administration or
co-administration fees. During the fiscal years ended October 31, 1993, October
31, 1994 and October 31, 1995 Counsellors Service earned $75,824, $202,895 and
$424,895, respectively, in administrative services fees or co-administration
fees.
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)
<PAGE>28
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 and securities depositories to serve as
sub-custodian on behalf of the Fund. PNC is an indirect wholly owned
subsidiary of PNC Bank Corp., and its principal business address is Broad and
Chestnut Streets, Philadelphia, Pennsylvania 19101.
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.
Organization of the Fund
The Fund's charter authorizes the Board to issue three billion
full and fractional shares of common stock, $.001 par value per share ("Common
Shares"), of which one billion shares are designated Common Stock - Series 1 and
one billion shares are designated Common Stock - Series 2 (the "Advisor Shares")
by the Fund's charter. Only Common Shares and Advisor Shares have been issued by
the Fund.
All shareholders of the Fund in each class, upon liquidation,
will participate ratably in the Fund's net assets. Shares do not have cumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Directors can elect all Directors. Shares are transferable
but have no preemptive, conversion or subscription rights.
Distribution and Shareholder Servicing
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 $531,359 in such fees for the year ended October 31, 1995.
<PAGE>29
The Fund may, in the future, enter into agreements
("Agreements") with institutional shareholders of record, broker-dealers,
financial institutions, depository institutions, retirement plans and financial
intermediaries ("Institutions") to provide certain distribution, shareholder
servicing, administrative and/or accounting services for their clients or
customers (or participants in the case of retirement plans) ("Customers") who
are beneficial owners of Advisor Shares. See the Advisor Prospectus,
"Shareholder Servicing." Agreements will be governed by a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the 1940 Act. 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 this Statement of Additional Information in
conjunction with the Agreement and other literature describing the services and
related fees that would be provided by the Institution to its Customers prior to
any purchase of Fund shares. Prospectuses are available from the Fund's
distributor upon request. No preference will be shown in the selection of Fund
portfolio investments for the instruments of Institutions.
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."
<PAGE>30
Under the 1940 Act, the Fund may suspend the right of
redemption or postpone the date of payment upon redemption for any period during
which the NYSE is closed, other than customary weekend and holiday closings, or
during which trading on the NYSE is restricted, or during which (as determined
by the SEC) an emergency exists as a result of which disposal or fair valuation
of portfolio securities is not reasonably practicable, or for such other periods
as the SEC may permit. (The Fund may also suspend or postpone the recordation of
an exchange of its shares upon the occurrence of any of the foregoing
conditions.)
If the Board determines that conditions exist which make
payment of redemption proceeds wholly in cash unwise or undesirable, the Fund
may make payment wholly or partly in securities or other investment instruments
which may not constitute securities as such term is defined in the applicable
securities laws. If a redemption is paid wholly or partly in securities or other
property, a shareholder would incur transaction costs in disposing of the
redemption proceeds. The Fund will comply with Rule 18f-1 promulgated under the
1940 Act with respect to redemptions in kind.
Automatic Cash Withdrawal Plan. An automatic cash withdrawal
plan (the "Plan") is available to shareholders who wish to receive specific
amounts of cash periodically. Withdrawals may be made under the Plan by
redeeming as many shares of the Fund as may be necessary to cover the stipulated
withdrawal payment. To the extent that withdrawals exceed dividends,
distributions and appreciation of a shareholder's investment in the Fund, there
will be a reduction in the value of the shareholder's investment and continued
withdrawal payments may reduce the shareholder's investment and ultimately
exhaust it. Withdrawal payments should not be considered as income from
investment in the Fund. All dividends and distributions on shares in the Plan
are automatically reinvested at net asset value in additional shares of the
Fund.
EXCHANGE PRIVILEGE
An exchange privilege with certain other funds advised by
Warburg is available to investors in the Fund. The funds into which exchanges
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 Small
Company Value Fund, Warburg Pincus Post-Venture Capital Fund, Warburg Pincus
International Equity Fund, Warburg Pincus Emerging Markets Fund, Warburg Pincus
Japan Growth 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 Warburg 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
<PAGE>31
made with Advisor Shares of Warburg Pincus Balanced Fund, Warburg Pincus
Capital Appreciation Fund, Warburg Pincus Emerging Markets Fund, Warburg
Pincus Growth & Income Fund, Warburg Pincus International Equity Fund, Warburg
Pincus Japan Growth Fund, Warburg Pincus Japan OTC Fund and Warburg Pincus
Post-Venture Capital 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. Warburg reserves the right to reject more than three
exchange requests by a shareholder in any 30-day period. The exchange privilege
may be modified or terminated at any time upon 60 days' notice to shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
The discussion set out below of tax considerations generally
affecting the Fund and its shareholders is intended to be only a summary and is
not intended as a substitute for careful tax planning by prospective
shareholders. Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund.
The Fund 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
<PAGE>32
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.
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.
<PAGE>33
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 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
<PAGE>34
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.
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 one-year period ended October 31,
1995 was 33.91%, the average annual total return for the five-year period ended
October 31, 1995 was 25.15% (25.06% without waivers) and the average annual
total return for the period commenced January 21, 1988 (commencement of
operations) and ended October 31, 1995 was 17.74% (17.37% 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 one-year period ended October 31, 1995 was 33.24%
and the average annual total return for the period commencing April 4, 1991
(initial issuance) and ended October 31, 1995 was 18.05%.
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
- ------------------------
* The expression (1 + T) is being raised to the nth power.
<PAGE>35
may be. Investors should note that this performance may not be representative
of the Fund's total return in longer market cycles.
The performance of a class of Fund shares will vary from time
to time depending upon market conditions, the composition of the Fund's
portfolio and operating expenses allocable to it. As described above, total
return is based on historical earnings and is not intended to indicate future
performance. Consequently, any given performance quotation should not be
considered as representative of performance for any specified period in the
future. Performance information may be useful as a basis for comparison with
other investment alternatives. However, the Fund's performance will fluctuate,
unlike certain bank deposits or other investments which pay a fixed yield for a
stated period of time. Any fees charged by Institutions or other institutional
investors directly to their customers in connection with investments in Fund
shares are not reflected in the Fund's total return, and such fees, if charged,
will reduce the actual return received by customers on their investments.
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.
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, 1994 and October 31, 1995 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 Warburg, Counsellors Service and Counsellors Securities.
<PAGE>36
MISCELLANEOUS
As of November 30, 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:
Common Shares
Charles Schwab & Co., Inc. ("Schwab"), Reinvest Account,
Attn: Mutual Funds Dept., 101 Montgomery Street, San Francisco, CA 94104-4122
- -- 18.32%. The Fund believes that Schwab is not the beneficial owner of
shares held of record by it. Mr. Lionel I. Pincus, Chairman of the Board and
Chief Executive Officer of EMW, may be deemed to have beneficially owned
51.57% of the Common Shares outstanding, including shares owned by clients for
which Warburg 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 audited financial statements for the fiscal year
ended October 31, 1995 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.
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.
<PAGE>A-2
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.
