<PAGE>1
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1995,
revised as of April 11, 1995
WARBURG PINCUS INTERNATIONAL EQUITY FUND
P.O. Box 9030, Boston, Massachusetts 02205-9030
For information, call (800) 888-6878
Contents
Page
Investment Objective . . . . . . . . . . . . . . . . . 2
Investment Policies . . . . . . . . . . . . . . . . . . 2
Management of the Fund . . . . . . . . . . . . . . . . 27
Additional Purchase and Redemption Information . . . . 36
Exchange Privilege . . . . . . . . . . . . . . . . . . 37
Additional Information Concerning Taxes . . . . . . . . 38
Determination of Performance . . . . . . . . . . . . . 40
Auditors and Counsel . . . . . . . . . . . . . . . . . 43
Miscellaneous . . . . . . . . . . . . . . . . . . . . . 44
Financial Statements . . . . . . . . . . . . . . . . . 44
Appendix -- Description of Ratings . . . . . . . . . . A-1
Report of Coopers & Lybrand L.L.P.,
Independent Auditors . . . . . . . . . . . . . . . . A-3
This Statement of Additional Information is meant to be read in
conjunction with the combined Prospectus for the Common Shares of Warburg
Pincus International Equity Fund (the "Fund"), Warburg Pincus Emerging Growth
Fund, Warburg Pincus Capital Appreciation Fund and Warburg Pincus Japan OTC
Fund, and with the Prospectus for the Series 2 Shares of the Fund, each dated
March 1, 1995, and is incorporated by reference in its entirety into those
Prospectuses. Because this Statement of Additional Information is not itself
a prospectus, no investment in shares of the Fund should be made solely upon
the information contained herein. Copies of the Fund's Prospectuses and
information regarding the Fund's current performance may be obtained by
calling the Fund at (800) 257-5614. Information regarding the status of
shareholder accounts may be obtained by calling the Fund at (800) 888-6878 or
by writing to the Fund, P.O. Box 9030, Boston, Massachusetts 02205-9030.
<PAGE>2
INVESTMENT OBJECTIVE
The investment objective of the Fund is long-term capital
appreciation.
INVESTMENT POLICIES
The following policies supplement the descriptions of the Fund's
investment objective and policies in the Prospectuses.
Additional Information on Investment Practices
Foreign Investments. Investors should recognize that investing in
foreign companies involves certain risks, including those discussed below,
which are not typically associated with investing in United States issuers.
Since the Fund will be investing substantially 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 other
foreign countries important to international trade and finance. Governmental
intervention may also play a significant role. National governments rarely
voluntarily allow their currencies to float freely in response to economic
forces. Sovereign governments use a variety of techniques, such as
intervention by a country's central bank or imposition of regulatory controls
or taxes, to affect the exchange rates of their currencies.
Many of the securities held by the Fund will not be registered with,
nor the issuers thereof be subject to reporting requirements of, the U.S.
Securities and Exchange Commission (the "SEC"). Accordingly, there may be
less publicly available information
<PAGE>3
about the securities and about the foreign company or government issuing them
than is available about a domestic company or government entity. Foreign
companies are generally not subject to uniform financial reporting standards,
practices and requirements comparable to those applicable to U.S. companies.
In addition, with respect to some foreign countries, there is the possibility
of expropriation or confiscatory taxation, limitations on the removal of funds
or other assets of the Fund, political or social instability, or domestic
developments which could affect United States investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably
from the United States 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 domestic 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 to the Fund of 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.
The interest payable on the Fund's foreign securities may be subject
to foreign withholding taxes, and while investors may be able to claim some
credit or deductions for such taxes with respect to their allocated shares of
such foreign tax payments, the general effect of these taxes will be to reduce
the Fund's income. Additionally, the operating expenses of the Fund can be
expected to be higher than that of an investment company investing exclusively
in domestic securities, since the expenses of the Fund, such as custodial
costs, valuation costs and communication costs, as well as the rate of the
investment advisory fees, though similar to such expenses of some other
international funds, are higher than those costs incurred by other investment
companies.
Japanese Investments. From time to time depending on current market
conditions, the Fund may invest a significant portion of its assets in
Japanese securities. Like any investor in Japan, the Fund will be subject to
general economic and political conditions in the country. In addition to the
considerations discussed above, these include future political and economic
developments, the possible imposition of, or changes in, exchange controls or
other Japanese governmental laws or restrictions applicable to such
investments, diplomatic developments, political or social unrest and natural
disasters.
The information set forth in this section has been extracted from
various governmental publications and other sources. The Fund makes no
representation as to the accuracy of the information, nor has the Fund
attempted to verify it. Furthermore, no representation is made that any
correlation exists between Japan or its economy in general and the performance
of the Fund.
<PAGE>4
Economic Background. Over the past 30 years Japan has experienced
significant economic development. During the era of high economic growth in
the 1960's and early 1970's the expansion was based on the development of
heavy industries such as steel and shipbuilding. In the 1970's Japan moved
into assembly industries which employ high levels of technology and consume
relatively low quantities of resources, and since then has become a major
producer of electrical and electronic products and automobiles. Moreover,
since the mid-1980's Japan has become a major creditor nation. With the
exception of the periods associated with the oil crises of the 1970's, Japan
has generally experienced very low levels of inflation.
Japan is largely dependent upon foreign economies for raw materials.
For instance, almost all of its oil is imported, the majority from the Middle
East. Oil prices therefore have a major impact on the domestic economy, as is
evidenced by the current account deficits triggered by the two oil crises of
the 1970's. Oil prices have declined mainly due to a worldwide easing of
demand for crude oil. The stabilized price of oil contributed to Japan's
sizeable current account surplus and stability of wholesale and consumer
prices since 1981. While Japan is working to reduce its dependence on foreign
materials, its lack of natural resources poses a significant obstacle to this
effort.
International trade is important to Japan's economy, as exports
provide the means to pay for many of the raw materials it must import.
Japan's trade surplus has increased dramatically in recent years, exceeding
$100 billion per year since 1991 and reaching a record high of $145 billion in
1994. Because of the concentration of Japanese exports in highly visible
products such as automobiles, machine tools and semiconductors, and the large
trade surpluses resulting therefrom, Japan has entered a difficult phase in
its relations with its trading partners, particularly with respect to the
United States, with whom the trade imbalance is the greatest. The United
States and Japan have engaged in "economic framework" negotiations to help
raise United States' share in Japanese markets and reduce Japan's current
account surplus but progress in the negotiations has been hampered by the
recent political upheaval in Japan. Any trade sanctions imposed upon Japan by
the U.S. as a result of the current friction or otherwise could adversely
impact Japan and the Fund's investments there.
<PAGE>5
The following table sets forth the composition of Japan's trade
balance, as well as other components of its current account, for the years
1989 to 1993.
CURRENT ACCOUNT
Trade
<TABLE>
<CAPTION>
Year Exports Imports Trade Balance Current Balance
---- ------- ------- ------------- ---------------
(U.S. dollars in millions)
<S> <C> <C> <C> <C>
1989 269,570 192,653 76,917 57,157
1990 280,374 216,846 63,528 35,761
1991 306,557 203,513 103,044 72,901
1992 330,850 198,502 132,348 117,551
1993 351,292 209,778 141,514 131,448
</TABLE>
Source: Financial Statistics of Japan (1993 ed. and June supp.), Institute
of Fiscal and Monetary Policy, Ministry of Finance of Japan
Economic Trends. The following tables set forth Japan's gross
domestic product, wholesale price index and consumer price index for the years
shown.
GROSS DOMESTIC PRODUCT (GDP)
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
GDP (yen billions)
(Expenditures) 468,769.0 463,850.0 451,296.9 24,537.2 396,197.0
Change in GDP
from Preceding
Year
Nominal terms 1.1% 2.8% 6.3% 7.2% 6.7%
Real Terms 0.1% 1.1% 4.3% 4.8% 4.7%
</TABLE>
Source: Financial Statistics of Japan (1993 ed. and June 1994 supp.),
Institute of Fiscal and Monetary Policy, Ministry of Finance of
Japan
<PAGE>6
WHOLESALE PRICE INDEX
<TABLE>
<CAPTION>
Change from
All Preceding
Year Commodities Year
---- ----------- -----------
<S> <C> <C>
(Base year: 1990)
1989 98.0 2.5
1990 100.0 2.0
1991 99.4 (0.6)
1992 97.8 (1.6)
1993 95.0 (2.9)
1994 93.0 2.1
</TABLE>
Source: Financial Statistics of Japan (1993 ed. and June 1994 supp.),
Institute of Fiscal and Monetary Policy, Ministry of Finance of
Japan; International Monetary Fund
CONSUMER PRICE INDEX
<TABLE>
<CAPTION>
Change from
Year General Preceding Year
---- ------- --------------
<S> <C> <C>
(Base Year: 1990)
1989 97.0 2.3
1990 100.0 3.1
1991 103.3 3.3
1992 105.0 1.6
1993 106.4 1.3
1994 107.1 0.7
</TABLE>
Source: Financial Statistics of Japan (1993 ed. and June 1994 supp.),
Institute of Fiscal and Monetary Policy, Ministry of Finance of
Japan; International Monetary Fund
Securities markets. There are eight stock exchanges in Japan. Of
these, the Tokyo Stock Exchange is by far the largest, followed by the Osaka
Stock Exchange and the Nagoya Stock Exchange. These exchanges divide the
market for domestic stocks into two sections, with newly listed companies and
smaller companies assigned to the Second Section and larger companies assigned
to the First Section.
<PAGE>7
The following table sets forth the number of Japanese companies
listed on the three major Japanese stock exchanges as of the end of 1993.
NUMBER OF LISTED DOMESTIC COMPANIES
<TABLE>
<CAPTION>
Tokyo Osaka Nagoya
------------------------------- ---------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
1st 2nd 1st 2nd 1st 2nd
Sec. Sec. Sec. Sec. Sec. Sec.
1,234 433 857 321 432 127
</TABLE>
Source: Tokyo Stock Exchange, Fact Book 1994
The following table sets forth the trading volume and value of
Japanese stocks on the eight Japanese stock exchanges for the years 1989 to
1994.
STOCK TRADING VOLUME & VALUE ON ALL STOCK EXCHANGES
(shares in millions; yen in billions)
<TABLE>
<CAPTION>
Year Volume Value
---- ------ -----
<S> <C> <C>
1989 . . . . . . . . . . . . . . . . . . . . 256,296 [Yen] 386,395
1990 . . . . . . . . . . . . . . . . . . . . 145,837 231,837
1991 . . . . . . . . . . . . . . . . . . . . 107,844 134,160
1992 . . . . . . . . . . . . . . . . . . . . 82,563 80,456
1993 . . . . . . . . . . . . . . . . . . . . 101,172 106,123
1994 . . . . . . . . . . . . . . . . . . . . 105,936 114,622
</TABLE>
Source: Tokyo Stock Exchange, Fact Book 1994; Tokyo Stock Exchange New York
<PAGE>8
Securities Indexes. The Tokyo Stock Price Index ("TOPIX") is a
composite index of all common stocks listed on the First Section of the Tokyo
Stock Exchange. TOPIX reflects the change in the aggregate market value of
the common stocks as compared to the aggregate market value of those stocks as
of the close on January 4, 1968.
The following table sets forth the high, low and year-end TOPIX for
each year from 1989 to 1994.
TOPIX
(January 4, 1968=100)
<TABLE>
<CAPTION>
Year Year-end High Low
---- -------- ---- ---
<S> <C> <C> <C>
1989 2,881.37 2,884.80 2,364.33
1990 1,733.83 2,867.70 1,523.43
1991 1,714.68 2,028.85 1,638.06
1992 1,307.66 1,763.43 1,102.50
1993 1,439.31 1,698.67 1,250.06
1994 1,559.09 1,712.73 1,445.97
</TABLE>
Source: Tokyo Stock Exchange, Fact Book 1994; Tokyo Stock Exchange
Currency Fluctuation. The Fund's investments in Japanese securities
will be denominated in yen and most income received by the Fund from such
investments will be in yen. However, the Fund's net asset value will be
reported, and distributions will be made, in U.S. dollars. Therefore, a
decline in the value of the yen relative to the U.S. dollar could have an
adverse effect on the value of the Fund's Japanese investments. The following
table presents the average exchange rates of Japanese yen for U.S. dollars for
the years shown:
Year Yen Per U.S. Dollar
---- -------------------
1994 102.18
1993 111.08
1992 126.79
1991 134.59
1990 145.00
1989 138.07
Source: Board of Governors of the Federal Reserve System, Federal Reserve
Bulletin
On February 17, 1995, the noon buying rate in New York for cable
transfers payable in Japanese yen was 97.48 per U.S. dollar.
<PAGE>9
Currency 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. The Fund,
therefore, may engage in currency exchange transactions to protect against
uncertainty in the level of future exchange rates. 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 conduct its currency exchange transactions either on a spot
(i.e., cash) basis at the rate prevailing in the currency exchange market, or
through entering into forward contracts to purchase or sell currency. If a
devaluation is generally anticipated, the Fund may not be able to contract to
sell the currency at a price above the devaluation level it anticipates. In
light of the requirements that the Fund must meet to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"), for a given year, the Fund currently intends to limit its gross
income from currency transactions to less than 10% of its gross income for
that taxable year.
Forward Currency Contracts. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are
entered into in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. The use of
forward currency contracts does not eliminate fluctuations in the underlying
prices of the securities, but it does establish a rate of exchange that can be
achieved in the future. In addition, although forward currency contracts
limit the risk of loss due to a decline in the value of the hedged currency,
at the same time, they also limit any potential gain that might result should
the value of the currency increase. The Fund's dealings in forward currency
exchange for hedging purposes 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 denominated or quoted in
the currency. The Fund may not position hedge with respect to a particular
currency to an extent greater than the aggregate market value (at the time of
making such sale) of the securities held in its portfolio denominated or
quoted in or currently convertible into that particular currency. If the Fund
enters into a forward currency transaction, cash or liquid high-grade debt
securities will be placed in a segregated account in an amount equal to the
value of the Fund's total assets committed to the consummation of the forward
contract. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account so that
the value of the account will equal the amount of the Fund's commitment with
respect to the contract. Hedging transactions may be made from any foreign
currency into U.S. dollars or into other appropriate currencies.
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 offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the
<PAGE>10
Fund will obtain, on the same maturity date, the same amount of the currency
which it is obligated to deliver. 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. Should forward prices
decline during the period between the Fund's entering into a forward contract
for the sale of a currency and the date it enters into an offsetting contract
for the purchase of the currency, the Fund will realize a gain to the extent
the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The cost to the Fund of engaging in currency transactions varies with
factors such as the currency involved, the length of the contract period and
the market conditions then prevailing. Because transactions in currency
exchange are usually conducted on a principal basis, no fees or commissions
are involved. The use of forward currency contracts does not eliminate
fluctuations in the underlying prices of the securities, but it does establish
a rate of exchange that can be achieved in the future. In addition, although
forward currency contracts limit the risk of loss due to a decline in the
value of the hedged currency, at the same time, they limit any potential gain
that might result should the value of the currency increase.
Foreign Currency Futures. As described below under "Futures Activities,"
the Fund may enter into foreign currency futures contracts and related
options.
While the values of currency futures and options on futures may be
expected to correlate with exchange rates, they will not reflect other factors
that may affect the value of the Fund's investments. A currency hedge, for
example, should protect a Yen- denominated bond against a decline in the Yen,
but will not protect the Fund against price decline if the issuer's
creditworthiness deteriorates. Because the value of the Fund's investments
denominated in foreign currency will change in response to many factors other
than exchange rates, a currency hedge may not be entirely successful to
mitigate changes in the value of the Fund's investments denominated in that
currency over time.
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.
<PAGE>11
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, Pincus Counsellors, Inc., the Fund's investment adviser
("Counsellors"), determines that the credit risk with respect to the
instrumentality does not make its securities unsuitable for investment by the
Fund.
Securities of Other Investment Companies. The Fund may invest in
securities of other investment companies to the extent permitted under the
Investment Company Act of 1940, as amended (the "1940 Act"). Presently, under
the 1940 Act, the Fund may hold securities of another investment company in
amounts which (a) do not exceed 3% of the total outstanding voting stock of
such company, (b) do not exceed 5% of the value of the Fund's total assets and
(c) when added to all other investment company securities held by the Fund, do
not exceed 10% of the value of the Fund's total assets.
Lending of Portfolio Securities. The Fund may lend portfolio securities
to brokers, dealers and other financial organizations that meet capital and
other credit requirements or other criteria established by the Fund's Board of
Directors (the "Board"). These loans, if and when made, may not exceed 20% of
the Fund's total assets taken at value. The Fund will not lend portfolio
securities to E.M. Warburg, Pincus & Co., Inc. ("EMW") or its affiliates
unless it has applied for and received specific authority to do so from the
SEC. Loans of portfolio securities will be collateralized by cash, letters of
credit or U.S. government securities, which are maintained at all times in an
amount equal to at least 100% of the current market value of the loaned
securities. Any gain or loss in the market price of the securities loaned
that might occur during the term of the loan would be for the account of the
Fund. From time to time, the Fund may return a part of the interest earned
from the investment of collateral received for securities loaned to the
borrower and/or a third party that is unaffiliated with the Fund and that is
acting as a "finder."
By lending its securities, the Fund can increase its income by continuing
to receive interest and any dividends on the loaned securities as well as by
either investing the collateral received for securities loaned in short-term
instruments or obtaining yield in the form of interest paid by the borrower
when U.S. government securities are used as collateral. Although the
generation of income is not an investment objective of the Fund, income
received could be used to pay the Fund's expenses and would increase an
investor's total return. The Fund will adhere to the following conditions
whenever its portfolio securities are loaned: (a) the Fund must receive at
least 100% cash collateral or equivalent securities of the type discussed in
the preceding paragraph from the borrower; (b) the borrower must increase such
collateral whenever the market value of the securities rises above the level
of such collateral; (c) the Fund must be able to terminate the loan at any
time; (d) 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; (e) the Fund may pay only reasonable custodian
fees in connection with the loan; and (f) voting rights on the loaned
securities may pass to the borrower, provided, however, that if a material
event
<PAGE>12
adversely affecting the investment occurs, the Board of Directors 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.
Repurchase Agreements. The Fund may engage in repurchase agreement
transactions by investing up to 20% of its total assets with respect to any
securities in which it invests. The Fund will enter into repurchase
agreements with member banks of the Federal Reserve System or 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 each repurchase agreement, the selling
institution will be required to maintain the value of the securities subject
to the repurchase agreement at not less than their repurchase price.
Repurchase 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 dispose of the underlying securities.
Futures Activities. The Fund may enter into foreign currency, interest
rate and stock index futures contracts and purchase and write (sell) related
options. Such contracts will be entered into on U.S. or foreign exchanges or
boards of trade approved by the Commodity Futures Trading Commission (the
"CFTC"). These transactions may be entered into for "bona fide hedging"
purposes as defined in CFTC regulations and other permissible purposes
including increasing return and hedging against changes in the value of
portfolio securities due to anticipated changes in interest rates, currency
values and/or market conditions. The ability of the Fund to trade in futures
contracts may be limited by the requirements of the Code applicable to a
regulated investment company.
The Fund will not enter into futures contracts and related options for
which the aggregate initial margin and premiums required to establish
positions other than those considered to be "bona fide hedging" by the CFTC
exceed 5% of the Fund's net asset value after taking into account unrealized
profits and unrealized losses on any such contracts it has entered into. The
Fund's long and short positions in futures contracts or options thereon
written by it must be collateralized with cash or certain liquid high-grade
debt securities held in a segregated account or otherwise "covered" in
accordance with SEC interpretations in order to eliminate any potential for
leveraging. There is no overall limit on the percentage of Fund assets that
may be at risk with respect to futures activities.
Futures Contracts. An interest rate futures contract provides for the
future sale by one party and the purchase by the other party of a certain
amount of a specific financial instrument (debt security) at a specified
price, date, time and place. A stock index futures contract is an agreement
between seller and buyer to deliver and take delivery respectively, of a
commodity which is represented by a multiplier times a stock price index at a
future specified date. The delivery is a cash settlement based on the
difference between the original transaction price and the final price of the
index at the termination of the contract. Stock indexes are capitalization
weighted indexes which reflect the market value of the firms listed on the
indexes. A foreign currency futures contract provides for the future sale by
one party
<PAGE>13
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. Foreign currency
futures are similar to forward currency contracts, except that they are traded
on commodities exchanges and are standardized as to contract size and delivery
date. In investing in such transactions, the Fund would incur brokerage costs
and would be required to make and maintain certain "margin" deposits.
One of the purposes of entering into a futures contract may be to protect
the Fund from fluctuations in value of its portfolio securities without its
necessarily buying or selling the securities. Of course, since the value of
portfolio securities will far exceed the value of the futures contracts sold
by the Fund, an increase in the value of the futures contracts could only
mitigate, but not totally offset, the decline in the value of the Fund's
assets. No consideration is paid or received by the Fund upon entering into a
futures contract. Upon entering into a futures contract, the Fund will be
required to deposit in a segregated account with its custodian an amount of
cash or cash equivalents, such as U.S. government securities or other liquid
high-grade debt obligations, equal to approximately 1% to 10% of the contract
amount (this amount is subject to change by the exchange on which the contract
is traded, and brokers may charge a higher amount). This amount is known as
"initial margin" and is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon termination of the
futures contract, assuming all contractual obligations have been satisfied.
The broker will have access to amounts in the margin account if the Fund fails
to meet its contractual obligations. Subsequent payments, known as "variation
margin," to and from the broker, will be made daily as the stock index,
interest rate or currencies underlying the futures contract fluctuates, making
the long and short positions in the futures contract more or less valuable, a
process known as "marking-to-market." At any time prior to the expiration of
a futures contract, the Fund may elect to close the position by taking an
opposite position, which will operate to terminate the Fund's existing
position in the contract.
Positions in futures contracts and options on futures contracts may be
closed out only on the exchange on which they were entered into (or through a
linked exchange). No secondary market for such contracts exists. Although
the Fund intends to enter into futures contracts only if there is an active
market for such contracts, there is no assurance that an active market will
exist for the contracts at any particular time. Most futures exchanges limit
the amount of fluctuation permitted in futures contract prices during a single
trading day. Once the daily limit has been reached in a particular contract,
no trades may be made that day at a price beyond that limit. It is possible
that futures contract prices could move to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and subjecting the Fund to substantial
losses. In such event, and in the event of adverse price movements, the Fund
would be required to make daily cash payments of variation margin. In such
circumstances, an increase in the value of the portion of the Fund's
securities being hedged, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the
price movements in a futures contract and thus provide an offset to losses on
the futures contract.
<PAGE>14
If the Fund has hedged against the possibility of an event adversely
affecting the value of securities held in its portfolio and that event does
not occur, the Fund will lose part or all of the benefit of the increased
value of securities which it has hedged because it will have offsetting losses
in its futures positions. Losses incurred in futures transactions and the
costs of these transactions will affect the Fund's performance. In addition,
in such situations, if the Fund had insufficient cash, it might have to sell
securities to meet daily variation margin requirements at a time when it would
be disadvantageous to do so. These sales of securities could, but will not
necessarily, be at increased prices which reflect the change in interest
rates, stock indexes or currency values, as the case may be.
Options on Futures Contracts. The Fund may purchase and write put and
call options on interest rate, foreign currency and stock index futures
contracts that are traded on an exchange designated by the CFTC or consistent
with CFTC regulations on foreign exchanges, and may enter into closing
transactions with respect to such options to terminate existing positions.
There is no guarantee that such closing transactions can be effected.
An option on an interest rate, currency or stock index futures contract,
as contrasted with the direct investment in such a contract, gives the
purchaser the right, in return for the premium paid, to assume a position in
an interest rate, currency or stock index futures contract at a specified
exercise price at any time prior to the expiration date of the option. Upon
exercise of an option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents
the amount by which the market price of the futures contract exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of
the option on the futures contract. The potential loss related to the
purchase of an option on futures contracts is limited to the premium paid for
the option (plus transaction costs). Because the value of the option is fixed
at the point of sale, there are no daily cash payments by the purchaser to
reflect changes in the value of the underlying contract; however, the value of
the option does change daily and that change would be reflected in the net
asset value of the Fund.
There are several risks relating to options on futures contracts. The
ability to establish and close out positions on such options will be subject
to the existence of a liquid market. In addition, the purchase of put or call
options will be based upon predictions as to anticipated trends in interest
rates and securities markets by Counsellors, which could prove to be
incorrect. Even if Counsellors' expectations are correct where options on
futures are used for hedging purposes, there may be an imperfect correlation
between the change in the value of the options and of the portfolio securities
hedged.
When-Issued Securities and Delayed-Delivery Transactions. The Fund may
utilize up to 20% of its total assets to purchase securities on a
"when-issued" basis or purchase or sell securities for delayed delivery (i.e.,
payment or delivery occur beyond the normal settlement date at a stated price
and yield). When-issued transactions normally settle within 30-45 days. The
Fund will enter into a when-issued transaction for the purpose of acquiring
portfolio securities and not for the purpose of leverage, but may sell the
securities before the
<PAGE>15
settlement date if Counsellors deems it advantageous to do so. The payment
obligation and the interest rate that will be received on when-issued
securities are fixed at the time the buyer enters into the commitment. Due to
fluctuations in the value of securities purchased or sold on a when-issued or
delayed-delivery basis, the yields obtained on such securities may be higher
or lower than the yields available in the market on the dates when the invest-
ments are actually delivered to the buyers.
When the Fund agrees to purchase when-issued or delayed-delivery
securities, its custodian will set aside cash, U.S. government securities or
other liquid high-grade debt obligations equal to the amount of the commitment
in a segregated account. Normally, the custodian will set aside portfolio
securities to satisfy a purchase commitment, and in such a case the Fund may
be required subsequently to place additional assets in the segregated account
in order to ensure that the value of the account remains equal to the amount
of the Fund's commitment. It may be expected that the Fund's net assets will
fluctuate to a greater degree when it sets aside portfolio securities to cover
such purchase commitments than when it sets aside cash. When the Fund engages
in when-issued or delayed-delivery transactions, it relies on the other party
to consummate the trade. Failure of the seller to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price considered
to be advantageous.
Options on Securities. The Fund may purchase put and call options on
stocks and debt securities that are traded on foreign as well as U.S.
exchanges, as well as over-the-counter ("OTC") options, to the extent
permitted by the policies of state securities authorities in states where
shares of the Fund are qualified for offer and sale. The Fund may utilize up
to 2% of its assets to purchase exchange-traded put and call options on stocks
and debt securities and may do so at or about the same time that it purchases
the underlying security or at a later time. In order to hedge against adverse
market shifts, the Fund may utilize up to 10% of its total assets to purchase
exchange-traded and OTC options on stock and debt securities. In addition,
the Fund may write covered call options on up to 25% of the stock and debt
securities in its portfolio.
The Fund realizes fees (referred to as "premiums") for granting the
rights evidenced by the call options it has written. A put option embodies
the right of its purchaser to compel the writer of the option to purchase from
the option holder an underlying security at a specified price at any time
during the option period. 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 at any time during the option
period.
The principal reason for writing covered call options on a security is to
attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. In return for a premium, the Fund
as the writer of a covered call option forfeits the right to any appreciation
in the value of the underlying security above the strike price for the life of
the option (or until a closing purchase transaction can be effected).
Nevertheless, the Fund as the call writer retains the risk of a decline in the
price of the underlying security. The size of the premiums that the Fund may
receive may be adversely
<PAGE>16
affected as new or existing institutions, including other investment
companies, engage in or increase their option-writing activities.
Options written by the Fund will normally have expiration dates between
one and nine months from the date written. The exercise price of the options
may be below, equal to or above the market values of the underlying securities
at the times the options are written. In the case of call options, these
exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. The Fund may write (a) in-the-money call
options when Counsellors expects that the price of the underlying security
will remain flat or decline moderately during the option period,
(b) at-the-money call options when Counsellors expects that the price of the
underlying security will remain flat or advance moderately during the option
period and (c) out-of-the-money call options when Counsellors expects that the
premiums received from writing the call option plus the appreciation in market
price of the underlying security up to the exercise price will be greater than
the appreciation in the price of the underlying security alone. In any of the
preceding situations, if the market price of the underlying security declines
and the security is sold at this lower price, the amount of any realized loss
will be offset wholly or in part by the premium received.
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. 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 transactions (sales by the Fund, prior to the exercise of options that it
has purchased, of options of the same series) in which the Fund may realize a
profit or loss from the sale. An option position may be closed out only where
there exists a secondary market for an option of the same series on a
recognized securities exchange or in the over-the-counter market. The Fund
expects to purchase and write options on securities only on U.S. securities
exchanges or in the over-the-counter market. In cases where the Fund has
written an option, it will realize a profit if the cost of the closing
purchase transaction is less than the premium received upon writing the
original option and will incur a loss if the cost of the closing purchase
transaction exceeds the premium received upon writing the original option.
Similarly, when the Fund has purchased an option and engages in a closing sale
transaction, whether the Fund realizes a profit or loss will depend upon
whether the amount received in the closing sale transaction is more or less
than the premium the Fund initially paid for the original option plus the
related transaction costs.
<PAGE>17
Although the Fund will generally purchase or write only those options for
which Counsellors believes there is an active secondary market so as to
facilitate closing transactions, there is no assurance that sufficient trading
interest will exist to create a liquid secondary market on a securities
exchange for any particular option or at any particular time, and for some
options no such secondary market may exist. A liquid secondary market in an
option may cease to exist for a variety of reasons. In the past, for example,
higher than anticipated trading activity or order flow or other unforeseen
events have at times rendered certain of the facilities of the Clearing
Corporation and various securities exchanges inadequate and resulted in the
institution of special procedures, such as trading rotations, restrictions on
certain types of orders or trading halts or suspensions in one or more
options. There can be no assurance that similar events, or events that may
otherwise interfere with the timely execution of customers' orders, will not
recur. In such event, it might not be possible to effect closing transactions
in particular options. Moreover, the Fund's ability to terminate options
positions established in the over-the-counter market may be more limited than
for exchange-traded options and may also involve the risk that securities
dealers participating in over-the-counter transactions would fail to meet
their obligations to the Fund. The Fund, however, intends to purchase
over-the-counter options only from dealers whose debt securities, as
determined by Counsellors, are considered to be investment grade. If, as a
covered call option writer, the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. In either case, the Fund would continue to be at market risk on the
security and could face higher transaction costs, including brokerage
commissions.
Securities exchanges generally have established limitations governing the
maximum number of calls and puts of each class which may be held or written,
or exercised within certain time periods by an investor or group of investors
acting in concert (regardless of whether the options are written on the same
or different securities exchanges or are held, written or exercised in one or
more accounts or through one or more brokers). It is possible that the Fund
and other clients of Counsellors and certain of its affiliates may be
considered to be such a group. A securities exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose certain other sanctions. These limits may restrict the number of
options the Fund will be able to purchase on a particular security.
In the case of options written by the Fund that are deemed covered by
virtue of the Fund's holding convertible or exchangeable preferred stock or
debt securities, the time required to convert or exchange and obtain physical
delivery of the underlying common stock with respect to which the Fund has
written options may exceed the time within which the Fund must make delivery
in accordance with an exercise notice. In these instances, the Fund may
purchase or temporarily borrow the underlying securities for purposes of
physical delivery. By so doing, the Fund will not bear any market risk, since
the Fund will have the absolute right to receive from the issuer of the
underlying security an equal number of shares to replace the borrowed stock,
but the Fund may incur additional transaction costs or interest expenses in
connection with any such purchase or borrowing.
<PAGE>18
Additional risks exist with respect to certain of the securities for
which the Fund may write covered call options. If the Fund writes covered
call options on mortgage-backed securities, the mortgage-backed securities
that it holds as cover may, because of scheduled amortization or unscheduled
prepayments, cease to be sufficient cover. If this occurs, the Fund will
compensate for the decline in the value of the cover by purchasing an
appropriate additional amount of mortgage-backed securities.
In addition to writing covered options for other purposes, including
generating current income, the Fund may enter into options transactions as
hedges to reduce investment risk, generally by making an investment expected
to move in the opposite direction of a portfolio position. A hedge is
designed to offset a loss on a portfolio position with a gain on the hedged
position; at the same time, however, a properly correlated hedge will result
in a gain on the portfolio position being offset by a loss on the hedged
position. The Fund bears the risk that the prices of the securities being
hedged will not move in the same amount as the hedge. The Fund will engage in
hedging transactions only when deemed advisable by Counsellors. Successful
use by the Fund of options will be subject to Counsellors' ability to predict
correctly movements in the direction of the stock underlying the option used
as a hedge. Losses incurred in hedging transactions and the costs of these
transactions will affect the Fund's performance.
OTC Options. The Fund may purchase OTC options or dealer options or sell
covered OTC options. Unlike exchange-listed options where an intermediary or
clearing corporation, such as the Clearing Corporation, assures that all
transactions in such options are properly executed, the responsibility for
performing all transactions with respect to OTC options rests solely with the
writer and the holder of those options. A listed call option writer, for
example, is obligated to deliver the underlying stock to the clearing
organization if the option is exercised, and the clearing corporation is then
obligated to pay the writer the exercise price of the option. If the Fund
were to purchase a dealer option, however, it would rely on the dealer from
whom it purchased the option to perform if the option were exercised. If the
dealer fails to honor the exercise of the option by the Fund, the Fund would
lose the premium it paid for the option and the expected benefit of the
transaction.
Listed options generally have a continuous liquid market while dealer
options have none. Consequently, the Fund will generally be able to realize
the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when the Fund writes a
dealer option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the
dealer to which the Fund originally wrote the option. Although the Fund will
seek to enter into dealer options only with dealers who will agree to and that
are expected to be capable of entering into closing transactions with the
Fund, there can be no assurance that the Fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. The
inability to enter into a closing transaction may result in material losses to
the Fund. Until the Fund, as a covered dealer call option writer, is able to
effect a closing purchase transaction, it will not be able to liquidate
securities (or other assets) used to cover the written option until the option
expires or is exercised. This requirement may impair the Fund's ability to
sell
<PAGE>19
portfolio securities or currencies at a time when such sale might be
advantageous. In the event of insolvency of the other party, the Fund may be
unable to liquidate a dealer option.
The Board of Directors of the Fund has amended investment limitation
number 12 of the Fund to permit the determination by the Board on an ongoing
basis that an adequate trading market exists for the security.
Stock Index Options. The Fund may utilize up to 10% of its total assets
to purchase exchange-listed and OTC put and call options on stock indexes, and
may write options on such indexes to hedge against the effects of market-wide
price movements. A stock index measures the movement of a certain group of
stocks by assigning relative values to the common stocks included in the
index, fluctuating with changes in the market values of the stocks included in
the index. Some stock index options are based on a broad market index such as
the New York Stock Exchange ("NYSE") Composite index, or a narrower market
index such as the Standard & Poor's 100. Indexes may also be based on a
particular industry or market segment.
Options on stock indexes are similar to options on stock except that (a)
the expiration cycles of stock index options are monthly, while those of stock
options are currently quarterly, and (b) 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 (i) 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 (ii) a fixed "index multiplier."
Receipt of this cash amount will depend upon the closing level of the stock
index upon which the option is based being greater than, in the case of a
call, or less than, in the case of a put, the exercise price of the index and
the exercise price of the option expressed in dollars times a specified
multiple. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. The writer may offset its position
in stock index options prior to expiration by entering into a closing
transaction on an exchange or it may let the option expire unexercised.
The effectiveness of purchasing or writing stock index options as a
hedging technique will depend upon the extent to which price movements in the
portion of a securities portfolio being hedged correlate with price movements
of the stock index selected. Because the value of an index option depends
upon movements in the level of the index rather than the price of a particular
stock, whether the Fund will realize a gain or loss from the purchase or
writing of options on an index depends upon movements in the level of stock
prices in the stock market generally or, in the case of certain indexes, in an
industry or market segment, rather than movements in the price of a particular
stock. Accordingly, successful use by the Fund of options on stock indexes
will be subject to Counsellors' ability to predict correctly movements in the
direction of the stock market generally or of a particular industry. This
requires different skills and techniques than predicting changes in the price
of individual stocks.
<PAGE>20
There can be no assurance that the use of these portfolio strategies will
be successful. When the Fund writes an option on a stock index, the Fund will
establish a segregated account with its custodian containing cash, U.S.
government securities and other liquid high-grade debt obligations in an
amount equal to the market value of the option and will maintain the account
while the option is open. The aggregate value of the securities underlying
the calls or puts on stock indexes written by the Fund, determined as of the
date the options are sold, when added to the securities underlying the calls
on securities written by the Fund, may not exceed 25% of the Fund's net
assets.
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,
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. 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.
Non-Publicly Traded and Illiquid Securities. The Fund may not invest
more than 10% of its total assets, in the aggregate, in illiquid securities,
including repurchase agreements which have a maturity of longer than seven
days, time deposits maturing in more than seven days and securities that are
illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale. Repurchase agreements subject to demand
are deemed to have a maturity equal to the notice period.
<PAGE>21
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.
The SEC has adopted Rule 144A which allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to
the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act for resales of certain
securities to qualified institutional buyers. Counsellors anticipates that
the market for certain restricted securities such as institutional commercial
paper will expand further as a result of this new regulation and the
development 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.
Counsellors will monitor the liquidity of restricted securities in the
Fund under the supervision of the Board of Directors. In reaching liquidity
decisions, Counsellors may consider, inter alia, the following factors: (a)
the unregistered nature of the security; (b) the frequency of trades and
quotes for the security; (c) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (d) dealer
undertakings to make a market in the security and (e) 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 30% of its total assets.
Counsellors may borrow for temporary or emergency purposes, including to meet
portfolio redemption requests so as to permit the orderly disposition of
portfolio securities or to facilitate
<PAGE>22
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 Limitations
The investment limitations numbered 1 through 11 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 (a) 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 (b)
more than 50% of the outstanding shares. Investment limitations 12 through 16
may be changed by a vote of the Fund's Board of Directors at any time.
The Fund may not:
1. Purchase the securities of any issuer if as a result more than 5% of
the value of the Fund's total assets would be invested in the securities of
such issuer, except that this 5% limitation does not apply to U.S. government
securities and except that up to 25% of the value of the Fund's total assets
may be invested without regard to this 5% limitation.
2. 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 30% of the value of the Fund's total
assets at the time of such borrowing and (b) enter into futures contracts; or
mortgage, pledge or hypothecate any assets except in connection with any bank
borrowing and in amounts not in excess of the lesser of the dollar amounts
borrowed or 10% of the value of the Fund's total assets at the time of such
borrowing. Whenever borrowings described in (a) exceed 5% of the value of the
Fund's total assets, the Fund will not make any 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.
3. 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.
4. Make loans, except that the Fund may purchase or hold publicly
distributed fixed-income securities, lend portfolio securities and enter into
repurchase agreements.
<PAGE>23
5. 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.
6. Purchase or sell real estate, real estate investment trust
securities, 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. The entry into forward foreign currency exchange contracts
is not and shall not be deemed to involve investing in commodities.
7. Make short sales of securities or maintain a short position.
8. 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.
9. 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.
10. Purchase more than 10% of the voting securities of any one issuer,
more than 10% of the securities of any class of any one issuer or more than
10% of the outstanding debt securities of any one issuer; provided that this
limitation shall not apply to investments in U.S. government securities.
11. 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.
12. 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, (a) repurchase agreements with
maturities greater than seven days and (b) time deposits maturing in more than
seven calendar days shall be considered illiquid securities.
13. 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.
<PAGE>24
14. Purchase or retain securities of any company if, to the knowledge of
the Fund, any of the Fund's officers or Directors or any officer or director
of Counsellors individually owns more than 1/2 of 1% of the outstanding
securities of such company and together they own beneficially more than 5% of
the securities.
15. 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.
16. Invest in oil, gas, or mineral leases.
The Fund may make commitments more restrictive than the restrictions
listed above so as to permit the sale of Fund shares in certain states.
Should the Fund determine that any such commitment is no longer in the best
interest of the Fund and its shareholders, the Fund will revoke the commitment
by terminating the sale of Fund shares in the state involved. If a percentage
restriction is adhered to at the time of an investment, a later increase or
decrease in the percentage of assets resulting from a change in the values of
portfolio securities or in the amount of the Fund's assets will not constitute
a violation of such restriction.
Portfolio Valuation
The Prospectuses discuss the time at which the net asset value of the
Fund is determined for purposes of sales and redemptions. The following is a
description of the procedures used by the Fund in valuing its assets.
Securities listed on a U.S. securities exchange (including securities
traded through the NASDAQ National Market System) or on a foreign securities
exchange will be valued on the basis of the closing value on the date on which
the valuation is made or, in the absence of sales, at the mean between the
closing bid and asked prices. Other U.S. over-the-counter securities, foreign
over-the-counter securities and securities listed or traded on certain foreign
stock exchanges whose operations are similar to the U.S. over-the-counter
market will be valued on the basis of the bid price at the close of business
on each day, or, if market quotations for those securities are not readily
available, at fair value, as determined in good faith pursuant to consistently
applied procedures established by the Board. A security which is listed or
traded on more than one exchange is valued at the quotation on the exchange
determined to be the primary market for such security. In determining the
market value of portfolio investments, the Fund may employ outside
organizations (a "Pricing Service") which may use a matrix or formula method
that takes into consideration market indexes, matrices, yield curves and other
specific adjustments. The procedures of Pricing Services are reviewed
periodically by the officers of the Fund under the general supervision and
responsibility of the Board, which may replace any such Pricing Service at any
time. Short-term obligations with maturities of 60 days or less are valued at
amortized cost, which
<PAGE>25
constitutes fair value as determined by the Board. The amortized cost method
of valuation may also be used with respect to debt obligations with 60 days or
less remaining to maturity. All other securities and other assets of the Fund
will be valued at their fair value as determined in good faith pursuant to
consistently applied procedures established by the Board. In addition, the
Board or its delegates may value a security at fair value if it determines
that such security's value determined by the methodology set forth above does
not reflect its fair value.
Trading in securities in certain foreign countries is completed at
various times prior to the close of business on each business day in New York
(i.e., a day on which the New York Stock Exchange (the "NYSE") is open for
trading). In addition, securities trading in a particular country or
countries may not take place on all business days in New York. Furthermore,
trading takes place in various foreign markets on days which are not business
days in New York and days on which the Fund's net asset value is not
calculated. Because of the need to obtain prices as of the close of trading
on various exchanges throughout the world, calculation of the Fund's net asset
value may not take place contemporaneously with the determination of the
prices of certain portfolio securities used in such calculation. All assets
and liabilities initially expressed in foreign currency values will be
converted into U.S. dollar values at the prevailing rate as quoted by a
Pricing Service. If such quotations are not available, the rate of exchange
will be determined in good faith pursuant to consistently applied procedures
established by the Board. Events affecting the values of portfolio securities
that occur between the time their prices are determined and the close of
regular trading on the NYSE will not be reflected in the Fund's calculation of
net asset value unless the Board or its delegates deems that the particular
event would materially affect net asset value, in which case an adjustment may
be made.
Portfolio Transactions
Counsellors is responsible for establishing, reviewing and, where
necessary, modifying the Fund's investment program to achieve its investment
objective. Purchases and sales of newly issued portfolio securities are
usually principal transactions without brokerage commissions effected directly
with the issuer or with an underwriter acting as principal. Other purchases
and sales may be effected on a securities exchange or over-the-counter,
depending on where it appears that the best price or execution will be
obtained. The purchase price paid by the Fund to underwriters of newly issued
securities usually includes a concession paid by the issuer to the
underwriter, and purchases of securities from dealers, acting as either
principals or agents in the after market, are normally executed at a price
between the bid and asked price, which includes a dealer's mark-up or
mark-down. Transactions on U.S. stock exchanges and some foreign stock
exchanges involve the payment of negotiated brokerage commissions. On
exchanges on which commissions are negotiated, the cost of transactions may
vary among different brokers. On most foreign exchanges, commissions are
generally fixed. There is generally no stated commission in the case of
securities traded in domestic or foreign over-the-counter markets, but the
price of securities traded in over-the-counter markets includes an undisclosed
commission or mark-up. U.S. government securities are generally purchased
from underwriters or dealers, although certain
<PAGE>26
newly issued U.S. government securities may be purchased directly from the
U.S. Treasury or from the issuing agency or instrumentality.
Counsellors will select specific portfolio investments and effect
transactions for the Fund. Counsellors seeks to obtain the best net price and
the most favorable execution of orders. In evaluating prices and executions,
Counsellors will consider the factors it deems relevant, which may include the
breadth of the market in the security, the price of the security, the
financial condition and execution capability of a broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on
a continuing basis. In addition, to the extent that the execution and price
offered by more than one broker or dealer are comparable, Counsellors may, in
its discretion, effect transactions in portfolio securities with dealers who
provide brokerage and research services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934, as amended) to the Fund and/or
other accounts over which Counsellors exercises investment discretion.
Research and other services received may be useful to Counsellors in serving
both the Fund and its other clients and, conversely, research or other
services obtained by the placement of business of other clients may be useful
to Counsellors in carrying out its obligations to the Fund. The fee to
Counsellors under its advisory agreement with the Fund is not reduced by
reason of its receiving any brokerage and research services.
Investment decisions for the Fund concerning specific portfolio
securities are made independently from those for other clients advised by
Counsellors. Such other investment clients may invest in the same securities
as the Fund. When purchases or sales of the same security are made at
substantially the same time on behalf of such other clients, transactions are
averaged as to price and available investments allocated as to amount, in a
manner which Counsellors believes to be equitable to each client, including
the Fund. In some instances, this investment procedure may adversely affect
the price paid or received by the Fund or the size of the position obtained or
sold for the Fund. To the extent permitted by law, Counsellors may aggregate
the securities to be sold or purchased for the Fund with those to be sold or
purchased for such other investment clients in order to obtain best execution.
During the fiscal years ended October 31, 1992, October 31, 1993 and
October 31, 1994, the Fund paid an aggregate of approximately $451,525,
$963,744 and $3,525,445, respectively, in commissions to broker-dealers for
execution of portfolio transactions. The fiscal 1993 and 1994 commission
figures were a result of sharp increases in the volume of share-related
activity as the Fund received a large inflow of capital. No portfolio
transactions have been executed through Counsellors Securities Inc.
("Counsellors Securities"), the Fund's distributor, since the commencement of
the Fund's operation.
Any portfolio transaction for the Fund may be executed through
Counsellors Securities if, in Counsellors' judgment, the use of Counsellors
Securities is likely to result in price and execution at least as favorable as
those of other qualified brokers, and if, in the transaction, Counsellors
Securities charges the Fund a commission rate consistent with those charged by
Counsellors Securities to comparable unaffiliated customers in similar
<PAGE>27
transactions. All transactions with affiliated brokers will comply with Rule
17e-1 under the 1940 Act.
In no instance will portfolio securities be purchased from or sold to
Counsellors or Counsellors Securities or any affiliated person of such
companies. In addition, the Fund will not give preference to certain
institutions with whom the Fund enters into distribution or shareholder
servicing agreements ("Agreements") concerning the provision of distribution
services or support services to customers ("Customers") who beneficially own
the Fund's Common Stock, par value $.001 per share, designated Common Stock -
Series 1 (the "Series 1 Shares") or Common Stock - Series 2 (the "Series 2
Shares"). See the Prospectuses, "Shareholder Servicing."
The Fund may participate, if and when practicable, in bidding for the
purchase of securities for the Fund's portfolio directly from an issuer in
order to take advantage of the lower purchase price available to members of
such a group. The Fund will engage in this practice, however, only when
Counsellors, in its sole discretion, believes such practice to be otherwise in
the Fund's interest.
Portfolio Turnover
The Fund does not intend to seek profits through short-term trading, but
the rate of turnover will not be a limiting factor when the Fund deems it
desirable to sell or purchase securities. The Fund's portfolio turnover rate
is calculated by dividing the lesser of purchases or sales of its portfolio
securities for the year by the monthly average value of the portfolio
securities. Securities with remaining maturities of one year or less at the
date of acquisition are excluded from the calculation. The decrease in the
Fund's portfolio turnover rate for the fiscal year ended October 31, 1993 was
due to the large growth in Fund assets.
Certain practices that may be employed by the Fund could result in high
portfolio turnover. For example, options on securities may be sold in
anticipation of a decline in the price of the underlying security (market
decline) or purchased in anticipation of a rise in the price of the underlying
security (market rise) and later sold.
MANAGEMENT OF THE FUND
Officers and Board of Directors
The names (and ages) of the Fund's directors and officers, their
addresses, present positions and principal occupations during the past five
years and other affiliations are set forth below.
<PAGE>28
Richard N. Cooper* (60) . . . . Director
Harvard University Professor at Harvard University;
1737 Cambridge Street Director or Trustee of CNA
Cambridge, Massachusetts 02138 Financial Corporation, Circuit City Stores,
Inc. (retail electronics and appliances) and
Phoenix Home Life Insurance Co.
Donald J. Donahue (70) . . . . Director
99 Indian Field Road Chairman of Magma Copper Company since
Greenwich, Connecticut 06830 January 1987; Director or Trustee of Northeast
Utilities, GEV Corporation and Signet Star
Reinsurance Company; Chairman and Director of
NAC Holdings from September 1990-June 1993.
Jack W. Fritz (67) . . . . . . Director
2425 North Fish Creek Road Private investor; Consultant
P.O. Box 483 and Director of Fritz Broadcasting, Inc. and
Wilson, Wyoming 83014 Fritz Communications (developers and operators
of radio stations); Director of Advo, Inc.
(direct mail advertising).
* Indicates a Director who is an "interested person" of the Fund as defined
in the 1940 Act.
Mr. Cooper has consulting arrangements with Counsellors and an affiliate
of Counsellors. Although these relationships do not appear to require
designation of Mr. Cooper as an interested person, the Fund is currently
making such a designation in order to avoid the possibility that Mr.
Cooper's independence would be questioned.
<PAGE>29
John L. Furth* (64) . . . . . . Chief Executive Officer and Director
466 Lexington Avenue Vice Chairman and Director of EMW;
New York, New York 10017-3147 Associated with EMW since 1970; Chief
Executive Officer of 11 other investment
companies advised by Counsellors.
Thomas A. Melfe (63) . . . . . Director
30 Rockefeller Plaza Partner in the law firm of
New York, New York 10112 Donovan Leisure Newton & Irvine; Director of
Municipal Fund for New York Investors, Inc.
Alexander B. Trowbridge (65) . Director
1155 Connecticut Avenue, N.W. President of Trowbridge Partners, Inc.
Suite 700 (business consulting) from January 1990-
Washington, DC 20036 January 1994; President of the National
Association of Manufacturers from 1980-1990;
Director or Trustee of New England Mutual 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), Sun Resorts 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).
Richard H. King (50) . . . . . President and Portfolio Manager
466 Lexington Avenue Portfolio Manager or Co-Portfolio
New York, New York 10017-3147 Manager of other Warburg Pincus Funds;
Managing Director of EMW since 1989;
Associated with EMW since 1989; President of 3
other investment companies advised by
Counsellors.
* Indicates a Director who is an "interested person" of the Fund as defined
in the 1940 Act.
<PAGE>30
Arnold M. Reichman (46) . . . . 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; Executive Vice President or Vice
President and Secretary of 13 other investment
companies advised by Counsellors.
Eugene L. Podsiadlo (38) . . . Senior Vice President
466 Lexington Avenue Managing Director of EMW; Associated with
New York, New York 10017-3147 EMW since 1991; Vice President of Citibank,
N.A. from 1987-1991; Senior Vice President of
Counsellors Securities and 13 other investment
companies advised by Counsellors.
Eugene P. Grace (43) . . . . . Vice President and Secretary
466 Lexington Avenue Associated with EMW since April 1994;
New York, New York 10017-3147 Attorney-at-law from September 1989-April
1994; life insurance agent, New York Life
Insurance Company from 1993-1994; General
Counsel and Secretary, Home Unity Savings Bank
from 1991-1992; Vice President and Chief
Compliance Officer of Counsellors Securities;
Vice President and Secretary of 13 other
investment companies advised by Counsellors.
Stephen Distler (40) . . . . . 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 Treasurer and Chief Financial
Officer of 13 other investment companies
advised by Counsellors.
Howard Conroy (41) . . . . . . Vice President, Treasurer and Chief
466 Lexington Avenue Accounting Officer
New York, New York 10017-3147 Associated with EMW since 1992; Associated
with Martin Geller, C.P.A. from 1991-1992;
Vice President, Finance with Gabelli/
Rosenthal & Partners, L.P. from 1990-1992;
Vice President, Treasurer and Chief
Accounting Officer of 13 other investment
companies advised by Counsellors.
<PAGE>31
Karen Amato (31) . . . . . . . Assistant Secretary
466 Lexington Avenue Associated with EMW since 1987; Assistant
New York, New York 10017-3147 Secretary of 13 other investment companies
advised by Counsellors.
No employee of Counsellors or PFPC Inc., the Fund's co-administrator
("PFPC"), or any of their affiliates receives any compensation from the Fund
for acting as an officer or director of the Fund. Each Director who is not a
director, trustee, officer or employee of Counsellors, PFPC or any of their
affiliates receives an annual fee of $1,000, and $250 for each meeting of the
Board attended by him for his services as Director and is reimbursed for
expenses incurred in connection with his attendance at Board meetings.
Directors' Compensation
(for the fiscal year ended October 31, 1994)
<TABLE>
<CAPTION>
Total Total Compensation from
Compensation from all Investment Companies
Name of Director Fund Managed by Counsellors*
---------------- ----------------- ------------------------
<S> <C> <C>
John L. Furth None** None**
Richard N. Cooper $2,000 $36,500
Donald J. Donahue $2,000 $36,500
Jack W. Fritz $2,000 $36,500
Thomas A. Melfe $2,000 $36,500
Alexander B. Trowbridge $2,000 $36,500
</TABLE>
__________________________
* Each Director also serves as a Director or Trustee of 13 other investment
companies advised by Counsellors.
** Mr. Furth is considered to be an interested person of the Fund and
Counsellors, as defined under Section 2(a)(19) of the 1940 Act,
and, accordingly, receives no compensation from the Fund or any other
investment company managed by Counsellors.
<PAGE>32
Richard H. King, president and portfolio manager of the Fund, earned
a B.A. degree from Durham University in England. Mr. King has been a
portfolio manager of the Fund since its inception on May 2, 1989 and is also a
co-portfolio manager of Warburg, Pincus Japan OTC Fund and Warburg, Pincus
Emerging Markets Fund and portfolio manager of the International Equity
Portfolio of Warburg, Pincus Institutional Fund, Inc. From 1968 to 1982, he
worked at W.I. Carr Sons & Company (Overseas), a leading international
brokerage firm. He resided in the Far East as an Investment Analyst from 1970
to 1977, became Director, and later relocated to the U.S. where he became
founder and President of W.I. Carr (America), based in New York. From 1982 to
1984 Mr. King was a director in charge of the Far East equity investments at
N.M. Rothschild International Asset Management, a London merchant bank. In
1984 Mr. King became Chief Investment Officer and Director for all
international investment strategy with Fiduciary Trust Company International
S.A., in London. He managed an EAFE mutual fund (FTIT) 1985-1986 which grew
from $3 million to over $100 million during this two-year period.
Nicholas P.W. Horsley, associate portfolio manager and research
analyst of the Fund, is also a co-portfolio manager of Warburg, Pincus Japan
OTC Fund and Warburg, Pincus Emerging Markets Fund and an associate portfolio
manager and research analyst of the International Equity Portfolio of Warburg,
Pincus Institutional Fund, Inc. He joined Counsellors in 1993. From 1981 to
1984 Mr. Horsley was a Securities Analyst at Barclays Merchant Bank in London,
UK and Johannesburg, RSA. From 1984 to 1986 he was a Senior Analyst with BZW
Investment Management in London. From 1986 to 1993 he was a Director,
portfolio manager and analyst at Barclays deZoete Wedd in New York City. Mr.
Horsley earned B.A. and M.A. degrees with honors from University College,
Oxford.
Harold W. Ehrlich, associate portfolio manager and research analyst
of the Fund, is also an associate portfolio manager and research analyst of
Warburg, Pincus Emerging Markets Fund and the International Equity Portfolio
of Warburg, Pincus Institutional Fund, Inc. Prior to joining Counsellors, Mr.
Ehrlich was a senior vice president, portfolio manager and analyst at
Templeton Investment Counsel Inc. from 1987 to 1995. He was a research
analyst and assistant portfolio manager at Fundamental Management Corporation
from 1985 to 1986 and a research analyst at First Equity Corporation of
Florida from 1983 to 1985. Mr. Ehrlich earned a B.S.B.A. degree from the
University of Florida and earned his Chartered Financial Analyst designation
in 1990.
Vincent McBride, associate portfolio manager and research analyst of
the Fund, is also an associate portfolio manager of Warburg, Pincus Emerging
Markets Fund and the International Equity Portfolio of Warburg, Pincus
Institutional Fund, Inc. Prior to joining Counsellors in 1994, Mr. McBride
was an international equity analyst at Smith Barney Inc. from 1993 to 1994 and
at General Electric Investment Corp. from 1992 to 1993. He was also a
portfolio manager/analyst at United Jersey Bank from 1989 to 1992 and a
portfolio manager at First Fidelity Bank from 1987 to 1989. Mr. McBride
earned a B.S. degree from the University of Delaware and an M.B.A. degree from
Rutgers University.
<PAGE>33
As of January 31, 1995, directors and officers of the Fund as a
group owned of record 205,425 of the Fund's outstanding Common Shares. As of
the same date, Messrs. Pincus and Furth may be deemed to have beneficially
owned 23.82% and 23.76%, respectively, of the Fund's outstanding Common
Shares, including shares owned by clients for which Counsellors has investment
discretion and, in the case of Mr. Pincus, including shares owned by companies
that EMW may be deemed to control. Messrs. Pincus and Furth disclaim
ownership of these shares and do not intend to exercise voting rights with
respect to these shares. No directors or officers owned of record any Series
2 Shares.
Investment Adviser and Co-Administrators
Counsellors serves as investment adviser to the Fund, Counsellors
Funds Service, Inc. ("Counsellors Service") serves as a co-administrator to
the Fund and PFPC serves as a co-administrator to the Fund pursuant to
separate written agreements (the "Advisory Agreement," the "Counsellors
Service Co-Administration Agreement" and the "PFPC Co-Administration
Agreement," respectively). The services provided by, and the fees payable by
the Fund to, Counsellors under the Advisory Agreement, Counsellors Service
under the Counsellors Service Co-Administration Agreement and PFPC under the
PFPC Co-Administration Agreement are described in the Prospectuses. Each
class of shares of the Fund bears its proportionate share of fees payable to
Counsellors, Counsellors Service and PFPC in the proportion that its assets
bear to the aggregate assets of the Fund at the time of calculation. Prior to
March 1, 1994, PFPC served as administrator to the Fund and Counsellors
Service served as administrative services agent to the Fund pursuant to
separate written agreements.
Counsellors agrees that if, in any fiscal year, the expenses borne
by the Fund exceed the applicable expense limitations imposed by the
securities regulations of any state in which shares of the Fund are registered
or qualified for sale to the public, it will reimburse the Fund to the extent
required by such regulations. Unless otherwise required by law, such
reimbursement would be accrued and paid on a monthly basis. At the date of
this Statement of Additional Information, the most restrictive annual expense
limitation applicable to the Fund is 2.5% of the first $30 million of the
average net assets of the Fund, 2% of the next $70 million of the average net
assets of the Fund and 1.5% of the remaining average net assets of the Fund.
The advisory fee payable by the Fund is calculated at an annual rate
based on a percentage of the Fund's average daily net assets. See the
Prospectuses, "Management of the Fund." During the fiscal year ending October
31, 1992, Counsellors voluntarily waived $64,290 of the $1,020,876 in
investment advisory fees earned. For the years ending October 31, 1993 and
October 31, 1994, Counsellors earned $1,934,531 and $9,879,319, respectively,
in investment advisory fees. PFPC received $122,746, $227,714 and $851,564,
respectively, for the fiscal years ending October 31, 1992, October 31, 1993
and October 31, 1994, respectively. Counsellors Service received $54,456,
$97,928 and $871,165 during the fiscal years ending October 31, 1992, October
31, 1993 and October 31, 1994, respectively.
<PAGE>34
Organization of the Fund
The Fund was incorporated on February 9, 1989 under the laws of the
State of Maryland under the name "Counsellors International Equity Fund,
Inc.," and it is registered as a diversified open-end management investment
company under the 1940 Act. As of approximately February 28, 1992, the Fund
began doing business as "Warburg, Pincus International Equity Fund." The
Fund's charter authorizes the Board of Directors to issue three billion full
and fractional shares of common stock, $.001 par value per share. Common
Stock, Common Stock - Series 1 and Common Stock - Series 2 have been
authorized by the Fund's charter, although only shares of Common Stock and
Series 2 Shares have been issued by the Fund. When matters are submitted for
shareholder vote, each shareholder will have one vote for each share owned and
proportionate, fractional votes for fractional shares held. Shareholders
generally vote in the aggregate, except with respect to (a) matters affecting
only the shares of a particular class, in which case only the shares of the
affected class would be entitled to vote, or (b) when the 1940 Act requires
that shares of the classes be voted separately. There will normally be no
meeting of shareholders for the purpose of electing Directors unless and until
such time as less than a majority of the Directors holding office have been
elected by shareholders. The Directors will call a meeting for any purpose
upon the written request of shareholders holding at least 10% of the Fund's
outstanding shares.
All shareholders of the Fund, upon liquidation, participate ratably
in the Fund's net assets. Shares do not have cumulative voting rights, which
means that holders of more than 50% of the shares voting for the election of
Directors can elect all Directors. Shares are transferable but have no
preemptive, conversion or subscription rights.
Custodian and Transfer Agent
Fiduciary Trust Company International ("Fiduciary") is custodian of
the Fund's assets pursuant to a custodian agreement (the "Custodian
Agreement"). Under the Custodian Agreement, Fiduciary (a) maintains a
separate account or accounts in the name of the Fund, (b) holds and transfers
portfolio securities on account of the Fund, (c) makes receipts and
disbursements of money on behalf of the Fund, (d) collects and receives all
income and other payments and distributions on account of the Fund's portfolio
securities and (e) makes periodic reports to the Fund's Board of Directors
concerning the Fund's operations. Fiduciary is authorized to select one or
more foreign or domestic banks or trust companies to serve as sub-custodian on
behalf of the Fund, provided that Fiduciary remains responsible for the
performance of all its duties under the Custodian Agreement and holds the Fund
harmless from the acts and omissions of any sub-custodian. The principal
business address of Fiduciary is Two World Trade Center, New York, New York
10048.
PNC Bank, National Association ("PNC") also provides certain
custodial services generally in connection with purchases and sales of Fund
shares. PNC is an indirect
<PAGE>35
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") has agreed to
serve as the Fund's shareholder servicing, transfer and dividend disbursing
agent pursuant to a Transfer Agency and Service Agreement, under which State
Street (a) issues and redeems shares of the Fund, (b) 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, (c) maintains shareholder accounts and, if
requested, sub-accounts and (d) makes periodic reports to the Fund's Board of
Directors concerning the transfer agent's operations with respect to the Fund.
The principal business address of State Street is 225 Franklin Street, Boston,
Massachusetts 02110.
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 Series 2 Shares in consideration of the Fund's
payment, out of the assets attributable to the Series 2 Shares, of .50%, on an
annualized basis (up to a .25% annual service fee and a .25% annual
distribution fee), of the average daily net assets of the Series 2 Shares held
of record. See the Series 2 Shares Prospectus, "Shareholder Servicing." The
Fund's Series 2 Shares paid the Service Organization $593,276 in such fees for
the year ending October 31, 1994. The Fund may, in the future, enter into
additional Agreements with institutions ("Institutions") to perform certain
distribution, shareholder servicing, administrative and accounting services
for their Customers who are beneficial owners of Series 2 Shares. See the
Prospectuses, "Shareholder Servicing." The Fund's Agreements with
Institutions with respect to Series 2 Shares will be governed by a
Distribution Plan. The Distribution Plan requires the Board of Directors, 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 Series 2 Shares may charge a Customer one or more of the
following types of fees, as agreed upon by the Institution and the Customer,
with respect to the cash management or other services provided by the
Institution: (1) account fees (a fixed amount per month or per year); (2)
transaction fees (a fixed amount per transaction processed); (3) compensation
balance requirements (a minimum dollar amount a Customer must maintain in
order to obtain the services offered); or (4) 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 arrangements. A
Customer of such an Institution should read the relevant Prospectus and
Statement of Additional Information in conjunction with the Agreement and
other literature describing the services and related fees that would be
provided by an Institution to its Customers prior to
<PAGE>36
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 of
Directors, 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 of Directors 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 Series 2 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 Series 2 Shares of the Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of the Fund's shares is equal to the per share
net asset value of the relevant class of shares of the Fund. Information on
how to purchase and redeem Fund shares and how such shares are priced is
included in the Prospectuses under "Net Asset Value."
Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
NYSE is closed, other than customary weekend and holiday closings, or during
which trading on the NYSE is restricted, or during which (as determined by the
SEC) an emergency exists as a result of which disposal or fair valuation of
portfolio securities is not reasonably practicable, or for such other periods
as the SEC may permit. (The Fund may also suspend or postpone the recordation
of an exchange of its shares upon the occurrence of any of the foregoing
conditions.)
If the Fund's Board of Directors determines that conditions exist
which make payment of redemption proceeds wholly in cash unwise or
undesirable, the Fund may make payment wholly or partly in securities or other
property. If a redemption is paid wholly or partly in securities or other
property, a shareholder would incur transaction costs in disposing of the
redemption proceeds. The Fund intends to comply with Rule 18f-1 promulgated
under the 1940 Act with respect to redemptions in kind.
Automatic Cash Withdrawal Plan. An automatic cash withdrawal plan
(the "Plan") is available to shareholders who wish to receive specific amounts
of cash periodically. Withdrawals may be made under the Plan by redeeming as
many shares of the 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
<PAGE>37
withdrawal payments may reduce the shareholder's investment and ultimately
exhaust it. Withdrawal payments should not be considered as income from
investment in the Fund. All dividends and distributions on shares in the Plan
are automatically reinvested at net asset value in additional shares of the
Fund.
EXCHANGE PRIVILEGE
An exchange privilege with certain other funds advised by
Counsellors is available to investors in the Fund. The funds into which
exchanges can be made by holders of Common Shares currently are the Common
Shares of Warburg Pincus Cash Reserve Fund, Warburg Pincus New York Tax Exempt
Fund, Warburg Pincus New York Intermediate Municipal Fund, Warburg Pincus
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 Emerging
Growth Fund, Warburg Pincus Emerging Markets Fund and Warburg Pincus Japan OTC
Fund. Common Shareholders of the Fund may exchange all or part of their
Common Shares for shares of these or other mutual funds organized by
Counsellors in the future on the basis of their relative net asset values per
share at the time of exchange. Exchanges of Series 2 Shares may currently be
made with Series 2 Shares of Warburg Pincus Capital Appreciation Fund, Warburg
Pincus Emerging Growth Fund, Warburg Pincus Emerging Markets Fund and Warburg
Pincus Japan OTC 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
Series 2 Shares being acquired, as relevant, may legally be sold. Prior to
any exchange, the investor should obtain and review a copy of the current
prospectus of the relevant class of each fund into which an exchange is being
considered. Shareholders may obtain a prospectus of the relevant class of the
fund into which they are contemplating an exchange from Counsellors
Securities.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-current net
asset value of the relevant class and the proceeds are invested on the same
day at a price as described above, in shares of the relevant class of the fund
being acquired. Counsellors reserves the right to reject more than three
exchange requests by a shareholder in any 30-day period. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
shareholders.
<PAGE>38
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 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: (1) 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); (2) 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; (3) 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 (4)
diversify its holdings so that, at the end of each fiscal quarter of the Fund
(a) at least 50% of the market value of the Fund's assets is represented by
cash, U.S. government securities and other securities, with those other
securities limited, with respect to any one issuer, to an amount no greater in
value than 5% of the Fund's total assets and to not more than 10% of the
outstanding voting securities of the issuer, and (b) not more than 25% of the
market value of the Fund's assets is invested in the securities of any one
issuer (other than U.S. government securities or securities of other regulated
investment companies) or of two or more issuers that the Fund controls and
that are determined to be in the same or similar trades or businesses or
related trades or businesses. In meeting these requirements, the Fund may be
restricted in the selling of securities held by the Fund for less than three
months and in the utilization of certain of the investment techniques
described above and in the Fund's Prospectuses. As a regulated investment
company, the Fund will be subject to a 4% non-deductible excise tax measured
with respect to certain undistributed amounts of ordinary income and capital
gain required to be but not distributed under a prescribed formula. The
formula requires payment to shareholders during a calendar year of
distributions representing at least 98% of the Fund's taxable ordinary income
for the calendar year and at least 98% of the excess of its capital gains over
capital losses realized during the one-year period ending October 31 during
such year, together with any undistributed, untaxed amounts of ordinary income
and capital gains from the previous calendar year. The Fund expects to pay
the dividends and make the distributions necessary to avoid the application of
this excise tax.
The Fund's transactions, if any, in foreign currencies, forward
contracts, options and futures contracts (including options and forward
contracts on foreign currencies)
<PAGE>39
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 (1) will require the Fund to mark-to-market certain
types of its positions (i.e., treat them as if they were closed out) and (2)
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 (1) 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, (2) the Fund will be able to use
substantially all of its losses for the fiscal years in which the losses
actually occur and (3) the Fund will continue to qualify as a regulated
investment company.
A shareholder of the Fund receiving dividends or distributions in
additional shares should be treated for federal income tax purposes as
receiving a distribution in an amount equal to the amount of money that a
shareholder receiving cash dividends or distributions receives, and should
have a cost basis in the shares received equal to that amount.
Investors considering buying shares just prior to a dividend or
capital gain distribution should be aware that, although the price of shares
purchased at that time may reflect the amount of the forthcoming distribution,
those who purchase just prior to a distribution will receive a distribution
that will nevertheless be taxable to them. Any loss realized on a sale or
exchange of a shareholder's shares will be disallowed to the extent the shares
disposed of are replaced, including replacement through the reinvesting of
dividends and capital gains distributions in the Fund, within a 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 (1) taxable
<PAGE>40
dividends and distributions and (2) the proceeds of any sales or repurchases
of shares of the Fund. An individual's taxpayer identification number is his
social security number. Corporate shareholders and other shareholders
specified in the Code are or may be exempt from backup withholding. The
backup withholding tax is not an additional tax and may be credited against a
taxpayer's federal income tax liability. Dividends and distributions also may
be subject to state and local taxes depending on each shareholder's particular
situation.
Investment in Passive Foreign Investment Companies
If the Fund purchases shares in certain foreign entities classified
under the Code as "passive foreign investment companies" ("PFICs"), the Fund
may be subject to federal income tax on a portion of an "excess distribution"
or gain from the disposition of the shares, even though the income may have to
be distributed as a taxable dividend by the Fund to its shareholders. In
addition, gain on the disposition of shares in a PFIC generally is treated as
ordinary income even though the shares are capital assets in the hands of the
Fund. Certain interest charges may be imposed on either the Fund or its
shareholders with respect to any taxes arising from excess distributions or
gains on the disposition of shares in a PFIC.
The Fund may be eligible to elect to include in its gross income its
share of earnings of a PFIC on a current basis. Generally, the election would
eliminate the interest charge and the ordinary income treatment on the
disposition of stock, but such an election may have the effect of accelerating
the recognition of income and gains by the Fund compared to a fund that did
not make the election. In addition, information required to make such an
election may not be available to the Fund.
On April 1, 1992 proposed regulations of the Internal Revenue
Service (the "IRS") were published providing a mark-to-market election for
regulated investment companies. The IRS subsequently issued a notice
indicating that final regulations will provide that regulated investment
companies may elect the mark-to-market election for tax years ending after
March 31, 1992 and before April 1, 1993. Whether and to what extent the
notice will apply to taxable years of the Fund is unclear. If the Fund is not
able to make the foregoing election, it may be able to avoid the interest
charge (but not the ordinary income treatment) on disposition of the stock by
electing, under proposed regulations, each year to mark-to-market the stock
(that is, treat it as if it were sold for fair market value). Such an
election could also 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 Series 2 Shares in advertisements or in reports and other
communications to shareholders. With respect to the Fund's Common Shares, the
Fund's average total return for the one-year period ended October 31, 1994 was
21.22%, the average annual total return for the five-year period ending
October 31, 1994 was 14.57% (14.39% without waivers) and the
<PAGE>41
average annual total return for the period commencing May 2, 1989
(commencement of operations) and ending October 31, 1994 was 15.80% (15.63%
without waivers). These figures are calculated by finding the average annual
compounded rates of return for the one-, five- and ten- (or such shorter
period as the relevant class of shares has been offered) year periods that
would equate the initial amount invested to the ending redeemable value
according to the following formula: P (1 + T)[*OMITTED GRAPHIC-SEE
FOOTNOTE] = 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 Series 2 Shares average
annual total return for the one-year period ended October 31, 1994 was 20.77%
and the average annual total return for the period commencing April 5, 1991
(initial issuance) and ending October 31, 1994 was 14.24% (14.21% without
waivers).
The Fund may advertise, from time to time, comparisons of the
performance of its Common Shares and/or Series 2 Shares with that of one or
more other mutual funds with similar investment objectives. The Fund may
advertise average annual calendar-year-to-date and calendar quarter returns,
which are calculated according to the formula set forth in the preceding
paragraph, except that the relevant measuring period would be the number of
months that have elapsed in the current calendar year or most recent three
months, as the case may be. With respect to the Fund's Common Shares other
than the Series 2 Shares, the Fund's actual total return for the calendar year
and for the three-month period ended on December 31, 1994 was 0.15% and 7.08%,
respectively (0.15% and 7.08% without waivers, respectively). With respect to
the Series 2 Shares, the Fund's actual total return for the calendar year and
for the three-month period ending December 31, 1994 was -0.26% and -7.19%,
respectively (-0.26% and -7.19% without waivers, respectively). Investors
should note that this performance may not be representative of the Fund's
total return in longer market cycles.
The performance of a class of Fund shares will vary from time to
time depending upon market conditions, the composition of the Fund's portfolio
and operating expenses allocable to it. As described above, total return is
based on historical earnings and is not intended to indicate future
performance. Consequently, any given performance quotation should not be
considered as representative of performance for any specified period in the
future. Performance information may be useful as a basis for comparison with
other 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 invest-
ments in Fund shares are not reflected in the Fund's total return, and such
fees, if charged, will reduce the actual return received by customers on their
investments.
- ---------------
* - The expression (1+T) is being raised to the nth power.
<PAGE>42
The Fund intends to diversify its assets among countries, and in
doing so, would expect to be able to reduce the risk arising from economic
problems affecting a single country. Counsellors thus believes that, by
spreading risk throughout many diverse markets outside the United States, the
Fund will reduce its exposure to country-specific economic problems.
Counsellors also believes that a diversified portfolio of international equity
securities, when combined with a similarly diversified portfolio of domestic
equity securities, tends to have a lower volatility than a portfolio composed
entirely of domestic securities. Furthermore, international equities have
been shown to reduce volatility in single asset portfolios regardless of
whether the investments are in all domestic equities or all domestic fixed-
income instruments, and research indicates that volatility can be
significantly decreased when international equities are added.
To illustrate this point, the performance of international equity
securities, as measured by the Morgan Stanley Capital International (EAFE)
Europe, Australia and Far East Index (the "MS-EAFE Index"), has equalled or
exceeded that of domestic equity securities, as measured by the Standard &
Poor's 500 Composite Stock Index (the "S & P 500 Index") in 14 of the last 23
years. The following table compares annual total returns of the MS-EAFE Index
and the S & P 500 Index for the calendar years 1972 through 1994.
MS-EAFE Index vs. S&P 500 Index
1972 - 1994
Annual Total Return
Year MS-EAFE Index S&P 500 Index
---- ------------- -------------
1972* 36.36 18.61
1973* -14.91 -14.92
1974* -23.61 -26.56
1975 35.39 37.07
1976 2.55 23.54
1977* 18.06 -7.20
1978* 32.62 6.37
1979 4.75 18.61
1980 22.58 32.27
1981* -2.27 -5.24
1982 -1.85 21.42
1983* 23.70 22.50
1984* 7.39 6.27
1985* 56.16 31.73
1986* 69.44 18.62
1987* 24.64 5.28
1988* 28.27 16.49
1989 10.54 31.61
<PAGE>43
Year MS-EAFE Index S&P 500 Index
---- ------------- -------------
1990 -23.44 -3.11
1991 12.13 30.36
1992 -12.17 7.60
1993* 32.60 10.06
1994* 7.78 1.28
_________________
* The MS-EAFE Index has outperformed the S&P 500 Index 14 out of the last
23 years.
The quoted performance information shown above is not intended to
indicate the future performance of the Fund.
From time to time, the Fund may advertise evaluations of a class of
Fund shares published by nationally recognized financial publications, such as
Morningstar Inc. or Lipper Analytical Services, Inc. Morningstar, Inc. rates
funds in broad categories based on risk/reward analyses over various time
periods. In addition, advertising or supplemental sales literature relating
to the Fund may describe the percentage decline from all-time high levels for
certain foreign stock markets. It may also describe how the Fund differs from
the MS-EAFE Index in composition.
AUDITORS AND COUNSEL
Coopers & Lybrand L.L.P. ("Coopers & Lybrand"), independent auditors
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 ending October 31, 1993 and October 31, 1994 that appear
in this Statement of Additional Information have been audited by Coopers &
Lybrand, whose report thereon appears elsewhere herein and have been included
herein in reliance upon the report of such firm of independent auditors given
upon their authority as experts in accounting and auditing.
The financial statements for the periods beginning with commencement
of the Fund through October 31, 1992 have been audited by Ernst & Young LLP
("Ernst & Young"), independent auditors, as set forth in their report and have
been included in reliance on such report and upon the authority of such firm
as experts in accounting and auditing. Ernst & Young's address is 787 7th
Avenue, New York, New York 10019.
Willkie Farr & Gallagher serves as counsel for the Fund as well as
counsel to Counsellors, Counsellors Service and Counsellors Securities.
<PAGE>44
MISCELLANEOUS
As of January 1, 1995, the name, address and percentage of ownership
of each person (other than Messrs. Pincus and 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 Department, 101 Montgomery Street, San Francisco, CA 94104-4122 --
29.31% and Nat'l Financial Services Corp., FBO Customers, 200 Liberty St., 1
World Financial Ctr., New York, NY 10281-1003 -- 5.39%. The Fund believes
that Schwab is not the beneficial owner of shares held of record by them.
Series 2 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 -- 100.00%.
FINANCIAL STATEMENTS
The Fund's financial statements for the fiscal year ending October
31, 1994 follow the Report of Independent Auditors.
<PAGE>45
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 has an
adequate capacity to pay interest and repay principal. Although they normally
exhibit adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for bonds in
higher-rated categories.
<PAGE>46
To provide more detailed indications of credit quality, the ratings from
"AA" to "BBB" may be modified by the addition of a plus or minus sign to show
relative standing within this major rating category.
The following summarizes the ratings used by Moody's for corporate bonds:
Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt edge." 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.
